SALT TALKS

John Darsie: (00:07)

Hello, everyone and welcome back to SALT Talks. My name is John Darsie, I'm the Managing Director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology, and public policy. SALT Talks are a digital interview series with leading investors, creators and thinkers, and our goal on these SALT Talks is the same as our goal in our SALT Conference Series, which is to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. 

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John Darsie: (00:38)

We're very excited to bring you the next edition in our digital assets series of SALT Talks with Michael Novogratz and Ari Paul. First I'll introduce Mr. Novogratz. Michael Novogratz is the founder and CEO of Galaxy Digital. He was formerly a partner and President of Fortress Investment Group. But prior to Fortress, Mr. Novogratz spent 11 years at Goldman Sachs, where he was elected partner in 1998. Michael served on the New York Federal Reserve's Investment Advisory Committee on Financial Markets from 2012 to 2015, and he serves as the Chairman of the Bail Project and has made criminal justice reform a focus of his family's foundation. He also serves as the chairman of Hudson River Park Friends, and sits on the boards of NYU Langone Medical Center, the Princeton Varsity Club, Jazz Foundation of America and Artists for Peace and Justice.

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John Darsie: (01:29)

Just some editorialization from my perspective, Mike was one of the first major players from what I guess you could turn the legacy alternative investment universe to really dive headfirst into bitcoin and digital assets. We have to give him a lot of credit for that. 

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John Darsie: (01:44)

Ari Paul co-founded BlockTower Capital in 2017, and began his career in the financial services industry in 2006. Between 2006 and 2010, Ari was a trader and derivatives market maker at SUSquehanna International Group, and then a proprietary derivatives trader until 2013. Between 2013 and 2017, Ari served as the portfolio manager and risk manager for the University of Chicago's $8 billion endowment, where he managed a tail hedging strategy via long volatility investments. 

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John Darsie: (02:14)

In his role, Ari also worked with the Chief Risk Officer in risk management and analytics and performed research on the characteristics of endowment investments and asset classes, including researching cryptocurrency. Ari began his investment in cryptocurrency in 2014, and he's previously invested in exchange, traded crypto assets, initial coin offerings, initial coin offerings and other parts of the crypto and blockchain ecosystem.

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John Darsie: (02:39)

Hosting today's talk is Anthony Scaramucci, the Founder and Managing Partner of Skybridge Capital, a global alternative investment firm that recently invested several hundred million dollars into Bitcoin and launched a Bitcoin fund to allow other clients to access the market in a pure play format. Anthony is also the Chairman of SALT. With that, I'll turn it over to Anthony for the interview.

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Anthony Scaramucci: (03:01)

Also trade through Galaxy, right?

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John Darsie: (03:04)

Yeah. Is that you, Galaxy Digital, Michael Novogratz? 

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Michael Novogratz: (03:08)

That sure is, me. Thank you for that.

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Anthony Scaramucci: (03:10)

I'm going to start with you Novo, because Ari and I are just getting to know each other, but you and I are long lost friends, probably related somewhere, just given the level of flamboyance and fashion and all the other stuff that goes on. You are a legendary macro trader, you're a brilliant investor. You had a great celebrated career at Goldman, and then you went on to Fortress, but you had this aha eureka moment on Bitcoin. When did that happen, Michael? Why did it happen, and when did the light go on for you, where you became where you are in Bitcoin?

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Michael Novogratz: (03:48)

Well, listen, I started investing in Bitcoin, call it 2013. Originally, it was a speculative move. Someone called me up and said, "Hey, what do you think about this?" I didn't think anything about it. So, I looked into it, and realized it was a perfect asset for speculative frenzy, for people to get excited about. It was a new technology back then. It played right into the heart of people being frustrated with the government. We had the great financial crisis in '08, the European financial crisis in 2012. We were in the middle of QE, and people didn't trust banks, they didn't trust central banks, they didn't trust authority. 

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Michael Novogratz: (04:27)

That was this ethos of the Bitcoin community of Satoshis first white paper let's do a currency at that point, store of value now that lives beyond the borders of government. I was like, there are enough libertarians, hyperinflation people, people that want to live off the grid, the cypherpunks, all of these many communities were buying into this and the Chinese were buying. I thought it's a pretty easy thing, it's going to go higher. 

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Michael Novogratz: (04:57)

I bought a bunch when it was about $100, but really not with a religious zeal, thinking this would be a great speculative trading. Quite frankly, wanted to sell it at $1,000. One of my partners at the time, really didn't want to, and convinced me not to, through coercion. Went back down to $200, I thought, I told you so. I'm happy now at $36,000, $37,000 that I didn't sell. Partly, because when you sell your whole position, it's hard to ever buy the same amount back.

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Michael Novogratz: (05:31)

I really got my religion though, when I walked into the offices of a company called Consensus in Brooklyn, in Bushwick, Brooklyn, run by a guy named Joe Lubin who happened to be a college roommate. This was right after I left Fortress, late 2015, and they were just launching Ethereum. Ethereum, the token was trading at about 97 cents, maybe it had been in existence for four or five months. But he was starting this company, Consensus, and I walked in, and I saw this group of people, young and old, plotting out this financial revolution, plotting out, not just the finance revolution, a worldwide revolution. 

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Michael Novogratz: (06:10)

I realized that there was a religion to this stuff, that people were in it not just for the money, they run it for change, to rebuild the financial system in a more egalitarian way, in a more transparent way, in a fairer way. What we're seeing now called DeFi, they were talking about back then, but they were also talking about it for the music industry, for publishing, for almost every industry you can think about. 

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Michael Novogratz: (06:33)

That got me really thinking that there's a passion behind these communities that doesn't exist in very normal... Maybe it exists in the Tesla maniacs, but in general, you don't see people with four tattoos, while there are a lot of Bitcoin tattoos. They're purpose driven movements. That got me really excited because it aligned up with my social consciousness, the way I saw the world, and I was like, this is cool to be part of a revolution that wants to do good. 

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Michael Novogratz: (07:07)

That's when I really plunged in. I bought a ton of Ethereum, it went up that year. 2017 became this amazing speculative bubble, and at that point, I was like, okay, we're going to start a company. We started Galaxy, really in early 2018, right as the bubble was popping. I knew it was a bubble, I talked about it being a bubble, I sold a lot of stuff. But I decided to start a company anyway, because I figured, this won't be a long burst. That the underlying people in this space aren't going to give up, and the underlying technology is real. 

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Michael Novogratz: (07:42)

Lo and behold, three years later, we're back to what feels like another frenzy. I would say, it's not the same as 2017 at all, just given the breadth of the players coming in and the amount of capital being put into the system and building new architecture. I think this is early innings of the real revolution, with 17 being the first tempest in a teapot, we'll look back on. But that's it. That's a long winded answer. Sorry about that.

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Anthony Scaramucci: (08:11)

No, it's cool. That's why I got you on. Ari, I want to ask you the same question, what got you passionate about crypto? Where did the brain click? I can tell you my moment in a second, but where did the brain click... By the way, Novo, I owe you a lot for that moment because you came to the SALT Conference, we're talking about it. I said, okay, if Mike's doing it, I have to do more research on this. But, Ari, go ahead.

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Ari Paul: (08:36)

When the financial crisis hit, I was a novice trader at the Susquehanna International Group and very interested in macro, certainly not with Mike's professional experience, but I was reading a lot of... I write people all the time, people like Nouriel Roubini I discovered in 2007. It was clear that the Fed's money printing wouldn't cause inflation right away. We were in such a deflationary world, but I literally thought at the time, in five to 10 years, the tradable lifetime is going to be betting on currency depreciation. That started me searching.

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Ari Paul: (09:12)

I'm not the fastest learner in the world, even though I came across Bitcoin in 2011, it didn't click for me that Bitcoin could be that asset. It wasn't until 2014 that things clicked on like okay, insofar as people whether or not we get inflation, whether or not we get extreme currency depreciation, fears of that will increase.

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Ari Paul: (09:32)

As an options trader, you can think of it almost like an option where if volatility increases, the option's more valuable, whether or not we end up finishing in the money. What we're seeing today is exactly that. Whether or not we end up getting inflation, people are much more concerned about it today. The idea of us having high single digit inflation in five, six years doesn't sound crazy anymore. I would say the first thing that had me looking... Obviously, I was looking for Bitcoin, I was looking for what is the play when central banks around the world quadrupled the money supply? I recognized it might take five years for that to start trickling in, given the velocity of money fell.

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Ari Paul: (10:08)

Bitcoin is so clearly that asset, having a fixed supply, total radical transparency. Well, one thing I'd say is that I don't think Bitcoin is competing as a technology, it really is an analogy, it's closer to something like a Lloyd's of London or JP Morgan in the sense that no one thinks JP Morgan's going to go away because of new competitors says we can undercut them on fees by 10%. It's competing on longevity, on adoption, on network effects. I'll stop there.

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Anthony Scaramucci: (10:41)

Novo, the volatility of Bitcoin is a major concern for skeptics. Why is Bitcoin so volatile, when you think about all the convergence of buying right now, and as it's making this transcending moment into the institutional class of investors? Why is it so-

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Michael Novogratz: (11:02)

Listen, in 2017, I would have told you that 99% of buying was retail. That number's coming down, but it didn't start coming down really till this year. Crypto was set up as an alternative to institution. It was set up to live outside of institutions. It played into this retail. But more importantly, the real big exchanges where there was great innovation over in Asia. You're talking about places like Binance and Bitfinex and BitMEX and WOBI. If you think about it, they played right into the Asian love of gambling, and set up what I'll call Macau 2.0. 

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Michael Novogratz: (11:51)

These are really big exchanges that offer up to 100 times leverage. Think about that, Anthony, I'm a rich guy, and when I go to Goldman Sachs or UBS and I want to borrow money to buy equities, maybe they give me two times leverage, and if I want to short something, I get no leverage. That's with a giant balance sheet. We have all these rules about how much leverage we let people take in the equity market, or even in the currency market. But in the crypto market, in all these exchanges, you get 100 to one leverage. That's near insanity.

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Michael Novogratz: (12:22)

What you have still is the remnants of this giant gambling class, mostly from Asia, but not all from Asia, this giant gambling class that has used this as an alternative to Macau. We're seeing now this transition from retail, into much deeper institutional hands, that over time, will mute volatility. You can see it, there's a great chart, Ari probably has it, of how fast coins are coming off exchanges. 

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Michael Novogratz: (12:55)

They're going somewhere, they're going into cold storage, institutional custody places. They're going into lending businesses, but they're moving off exchanges at a rapid pace. That tells me the shift is happening. Right now, Ethereum is trading at 190 vol. I was trying to buy some options last night, I was like, at 190 vol, that's a lot. Bitcoin's at 140, 150 vol. That's unsustainable. We are not going to be in this frenzy forever. There will be a blow off top at one point. You'll consolidate and things will calm down, people will lose some money, people will make some money. 

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Michael Novogratz: (13:37)

I've never seen markets literally trading in this kind of frenzy. I was going to buy some Ethereum last night, and I got a phone call. I was pricing up some options, the vol was too expensive. I got a phone call, it was a 30 minute phone call, I came back and it was up 7%. I go, "That's great." It's up another 7% since then. When you see price action like this, you know something special is happening, but you also have to be very careful.

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Anthony Scaramucci: (14:02)

Ari, you get to look at most of this landscape. Explain to our viewers the supply demand dynamics for Bitcoin today.

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Ari Paul: (14:14)

Sure. One thought on volatility, you can't go from being $1 to $30,000 without volatility, almost tautological. When Bitcoin first... An unusual thing, we're used to assets becoming liquid and tradable at a billion dollar market cap or at least 100 million. Bitcoin started trading when it hit a market cap of something like less than $5 million. You can't get from a $5 million market cap to a 300 billion, half trillion dollar market cap without incredible volatility over 11 years.

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Ari Paul: (14:47)

As we're in price discovery mode, and that's really what it is. One other angle to think about this, I was at the endowment world where we're constantly saying, man, it's so hard to get out. The world's best fund managers are really happy if they got a few percent points on $10 billion a year. We want to look at asset classes that are inefficient for various reasons. What we've seen, my basic thesis for crypto as a whole being a secular bull run, is it's not a set of market participants that are repricing the asset, it's a growing set of market participants every couple of years, where as the regulatory ambiguity fail falls away, as the operational burdens fall away as you get legitimate and name brand custodians like Fidelity. Basically, as new institution types, as pensions are able to buy the asset, suddenly, the number of market participants increases exponentially. 

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Ari Paul: (15:39)

We're in this price discovery mode with ripples of new types of market participants gaining access to the asset. It's not going to be a steady 1% every day, because when you're in a bull run, speculators see the 1% daily gains, they start adding leverage, it feels like free money, so then you get over, extended, then you correct. 

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Ari Paul: (15:57)

The supply demand dynamic today, as Mike noted, we've seen tons of Bitcoin moving off exchange. Every data point we have on this is massive institutional buying. US and quantitative data, things like inflows into Grayscale, which are inflows into the closed end vehicle. That was, I believe, $3.8 billion, in Q4, which was close to everything that had ever flown into Grayscale prior to that.

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Ari Paul: (16:26)

Anecdotally, a really interesting data point is we've been talking to a lot of billionaires in the financial world who are... It's such an interesting shift of mindset, they're now thinking defensively. They're thinking enough of their billionaire buddies have 10% of their net worth in Bitcoin, that if they don't, they're thinking, man, if Bitcoin does another 20X, I'm not invited to the parties anymore. I'm not in that rich club. Wherever they are in the hierarchy. 

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Ari Paul: (16:50)

Now they're thinking, I need a passive allocation, I need to have 10% of my net worth in this just to keep up, just in case. It's not about getting rich, it's now about staying rich. Those are very strong hand buyers, these are people who are looking to buy more on dips. These are people, they're not going to sell with a change in trend. The volatility is not going away. You can't have raging bull runs that take you 10X higher without volatility, the volatility will gradually fall. as it's institutionalized, broader market dissipation, we are seeing volatility gradually fall. But it's going to remain a volatile asset until it reaches maturity. That's still probably pretty far away.

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Anthony Scaramucci: (17:34)

I want to ask you guys a few rapid fire. These are yes or no questions. Then I got to turn it over to the millennial. It sucks for me, but it's part of his contract, this agent puts pressure on me, where Darsie has to ask some of these questions. Let's go over a couple of rapid fire questions, and there's short answers. Michael, where's Bitcoin on 12-31-21?

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Michael Novogratz: (18:00)

$65,000.

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Anthony Scaramucci: (18:02)

Ari, where's Bitcoin on 12-31?

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Ari Paul: (18:04)

At $85,000.

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Anthony Scaramucci: (18:06)

$85,000, okay. 

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Michael Novogratz: (18:07)

Like the Price is Right here. All right. 

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Anthony Scaramucci: (18:09)

Okay. We're going to keep going. Okay, Michael, yes or no, Goldman Sachs will have a Bitcoin fund in the next two years, yes or no? 

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Michael Novogratz: (18:19)

Yes. 

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Anthony Scaramucci: (18:20)

Ari?

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Ari Paul: (18:21)

Yes.

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Anthony Scaramucci: (18:22)

Okay. BlackRock, will BlackRock have a Bitcoin fund?

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Michael Novogratz: (18:26)

Yep.

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Ari Paul: (18:26)

Yep.

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Anthony Scaramucci: (18:28)

Okay. Gary Gensler, somebody we both know, Michael, maybe Ari knows him as well. We had the opportunity to work with him at Goldman, great guy. He's going to be the SEC chairman, is he going to be pro-Bitcoin, medium Bitcoin? Is he going to be the mama bear, baby bear, or papa bear of Bitcoin?

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Michael Novogratz: (18:45)

He is very knowledgeable on crypto. So, I think he's going to be a real positive for the space. He's going to be tough on banks. He's progressive. He's in my camp, not your camp. But he'll be very fair and very-

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Anthony Scaramucci: (19:01)

I might be in your camp now, no regrets. I know, this guy-

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Michael Novogratz: (19:05)

We're moving you over.

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Anthony Scaramucci: (19:06)

Yeah, he destroyed one of the major political parties, the Party of Lincoln, the guy took it out, put it in a paper shredder. But this is about Bitcoin, we're going to keep it on Bitcoin, not my political theories. Go ahead, Ari, what do you think of Gary?

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Ari Paul: (19:21)

The concern I think for the industry is that Gary views most tokens as likely securities. You have Bitcoin but then you have 300 other meaningful assets, real market cap, real value. The concern is that a lot of those had offerings that may have been unregistered security offerings. Ethereum is a great example of this where the SEC has said, not as an official statement, but they've had representatives say at conferences that they view it as grandfathered in, that they don't intend to go after Ethereum even though the initial offering may have been technically an unregistered security offering.

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Ari Paul: (19:53)

Concerned with Gensler, is that he may be much more aggressive on that front with other assets. Probably very pro-Bitcoin. As Mike said, he was a professor of blockchain, I believe at MIT. Very, very knowledgeable, but aggressive on the regulatory side. What the whole crypto world is paying attention to is how... We just had Mnuchin proposed rule out of the Treasury Department, governments are not going to ignore crypto. That's always been true. Satoshi Nakamoto wrote about this about how we want to grow quietly until we're ready to have government attention.

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Ari Paul: (20:29)

Cryptocurrency is now a stage where every government around the world is developing policies, every regulator is thinking about how this falls under the purview. The hope is that it's relatively light, sensible regulation. Gensler may be on the aggressive side.

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Anthony Scaramucci: (20:43)

Okay, Michael, the date that a crypto, let's say Bitcoin, the date that a Bitcoin ETF is approved?

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Michael Novogratz: (20:52)

Within 12 months.

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Anthony Scaramucci: (20:53)

Okay, Ari? 

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Ari Paul: (20:55)

I don't know, but I'm optimistic. I hope Mike's right.

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Anthony Scaramucci: (20:59)

Okay. All right. 

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Ari Paul: (21:01)

I'll say yes if I have to give-

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Michael Novogratz: (21:03)

Anthony, let me elaborate a little bit. The SEC's job is to protect the little guy, right? That's the SEC's job, protect the retail investor. They have allowed the Grayscale Trust, which is an amazing piece of business for Barry Silbert, and his team to grow to $25, $30 billion, where investors are paying high fees, they're being arbitraged everyday by hedge funds. Hedge funds put in Bitcoin, retail investors buy it 20%, 25% premium, 18% premium, it changes day to day.

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Michael Novogratz: (21:34)

You got retail paying high fees and buying at bad prices, but that was okay, the SEC let that go. But they wouldn't let an ETF go. They were just asked backwards on this whole thing. Chairman Clayton didn't really get it. I think Gary Gensler is far far more attuned to what his role is, and understanding the intricacies of crypto. 

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Michael Novogratz: (21:57)

We're going to have an ETF. It's going to make the Grayscale premium go from where it is, to probably negative. It's a giant closed end funnel. I wish I owned that closed end funnel. It's going to be there for a long, long time. But most closed end funds trade at a discount to NAV, and I think in time, Grayscale will, too. It will, once there's an ETF. I think that will be the big transition this year.

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Anthony Scaramucci: (22:22)

Okay. I got to tell you something, Ari, you got a really cool camera going, it's like you're coming in, you're coming out. I feel like Scorsese is directing the SALT Talk, but at any moment, just don't go into a whole Scarface mode or something like that, God forbid. Okay, go ahead, Darsie, I know you're dying to ask questions [crosstalk 00:22:42] it's been long Bitcoin since before it was invented. Go ahead. 

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John Darsie: (22:48)

Michael, I want to start with you. You mentioned earlier that the 2017 rally was driven a lot by retail investors. You said, I think 99%, you felt, was retail speculation, and now that percentage is shifting towards institutions. In your view, what is that percentage today, and what type of interests are you fielding from institutions? Whether it be pension endowments, large investment firms, insurance companies? What type of ventures are you fielding in Bitcoin today?

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Michael Novogratz: (23:18)

I think if you add high net worth into that bucket, which are many institutions themselves these days, listen, that's all our business because we were set up as an institutional business. I will tell you, Galaxy's mantra was we're going to be the bridge between crypto and institutions. Man, it was kind of lonely for a couple of years. Our business wasn't great until really it all shifted with COVID, and post COVID, we've had these two tailwinds. We've had this macro story because of the money printing, that is a beautiful tailwind for Bitcoin, the story that Ari was telling eloquently earlier.

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Michael Novogratz: (23:55)

You've also had the digitalization of everything, that from us doing this on Zoom, to the hyper acceleration of that, and that's really played into the Ethereum community, it's played into stable coins. All of us saying, shit, I wish they could have done the COVID checks directly as opposed to getting them in the mail, we should all have wallets, government should be able to direct payments through a payment system that's wallet based. 

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Michael Novogratz: (24:25)

We're going to have central bank issued digital currencies. They're coming in every single major country. What form they take, it'll be interesting, but they're coming in every major country. That whole process, I think has shifted the institutional mindset. First, it was all Bitcoin. Next, why I think Ethereum is going to double and I literally didn't think this till yesterday. I was walking, I was like, shit, all the smart hedge funds are going, "What's next? We're going to now look at Ethereum." Then the same thing with the other institutions. 

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Michael Novogratz: (24:57)

Then it's going to be decentralized finance, which really is the cool stuff. We're in this process now, of more and more smart people with real capital looking, understanding it. Ari and I aren't crazy, but we're not that much smarter than anybody else, we just got in early, and the same conclusions we make most likely are gonna be made by other people looking at it. 

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Michael Novogratz: (25:17)

I always thought in mercantile thinks 10 smart guys looking at a set of problems usually come up with the same answers. As we get more and more eyeballs on these solutions for things that don't work, you're going to have more people getting interested in investing.

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John Darsie: (25:32)

Right. Ari, just to build on that point from Michael, in terms of the interest you're seeing in the crypto world, is it focused on Bitcoin? Is it now include Ethereum, obviously, which has rallied a lot, even in the last week or so, or do you think people are going to continue to go further down the risk curve and look at alt coins, and other sort of venture opportunities in the digital asset space?

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Ari Paul: (25:55)

They're definitely going to move along the curve. What we've seen... Most of the money coming into the ecosystem comes into Bitcoin first, and that's always been true. I think we're in the sixth inning of a fairly classic bull cycle, and for the rest of this bull cycle, my prediction is alt coins in general outperform Bitcoin, and it's very similar across any asset class, where after you've had major wealth creation, people move along the risk curve, they want to find that next 10X.

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Ari Paul: (26:20)

Bitcoin is up more than 10X since March of last year, nine months up, more than 10X. People see a price tag of $36,000, $37,000, and they say, "Well, it's going to be hard to get another 10X out of that." They look at something like Ethereum, that just in the last 24 hours, actually made an all time high, and they say, "Well, okay, that's a much smaller asset, a few billion dollars going into that and the thing is going to triple." Then they keep moving down the risk curve. 

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Ari Paul: (26:46)

Basically, new money first goes to Bitcoin. Bitcoin's the safest, the most stable, the easiest to understand. And then as people get into the ecosystem, they learn a little more, they get more comfortable, they look out along the risk curve, and they look also for where they can add active alpha, that alpha for asset selection, alpha through just having other assets to market time.

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Ari Paul: (27:05)

I'm in a slightly different seat than Mike, in that we're active managers. We're not pitching gen passive allocation. We're not Grayscale, we're not trying to get people to just put money into Bitcoin. The people we're talking to naturally are interested in the full spectrum of opportunities.

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Michael Novogratz: (27:22)

Yeah. Let me clarify, I would say 85% of the new institutional money, 90% of the institutional money that comes into the space this year, is going to come into bitcoin. Be very clear about that. Bitcoin's got a $700 billion market cap. That'll move the market. I actually think Bitcoin, like I said, could close to double from here, it would have been double on the year, from where we started the year. That's a lot of market cap to move, is adding another $700 billion or more. It doesn't take nearly as much money to move Luna Coin, or SushiSwap or YFI, or even Ethereum. Those coins, I think, potentially have more volatility, more upside, also more downside. Bitcoin's been de-risked in a lot of ways.

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John Darsie: (28:09)

Yeah, and that's our thesis at Skybridge, Bitcoin is our gateway drug, and for now, it's our exclusive focus, but it's something that, like you said, big institutions are going to look at the bellwether first. I just want to... Ari, if you could elaborate on-

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Anthony Scaramucci: (28:23)

You got to say gateway drug, or you're going to get Novogratz all excited when you say that. Gateway drug? That's the best metaphor you can come up with? Keep going. 

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Michael Novogratz: (28:34)

I'm drinking water out of a sake cup.

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Anthony Scaramucci: (28:37)

I know that's vodka hidden in an aquaponic, man. Don't start.

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John Darsie: (28:44)

Ari, I want to talk about the thesis behind why Bitcoin has been so strong. There's this macro argument that people are buying into bitcoin, because of money printing and inflation and things like that. But then there's also purely a supply, demand dynamic that exists where there's so much more buying of Bitcoin taking place, and it's a chicken and egg type situation. What do you think is the real biggest [inaudible 00:29:06] behind this massive rally that we've seen over the last several months?

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Ari Paul: (29:12)

I would call it billionaire FOMO. The virus, in Q4 in particular, something you could see, it was actually, it's an amazing pattern. If you bought Bitcoin during US business hours, and you sold it during Asia hours, you actually doubled Bitcoin's performance, even though it did a 3X in the quarter. You could see it in the market. It's TWAP, it was time weighted average price scaling in orders largely on Coinbase and other US exchanges. 

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Ari Paul: (29:39)

These were US institutions and US billionaires establishing large positions through OTC desks. We talked to some of these people, we know it anecdotally, you see sometimes public reports from for example, micro sale or micro strategy. That's what it's been, that was what was driving it, and the psychology was very much these ripples of word of mouth adoption. 

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Ari Paul: (30:02)

One billionaire is talking to four of his financial buddies, people like Novogratz, and it's yeah, I've now got 10%, 20% of my net worth in it, and I'm super convinced. I think it's going to double this year, it's the best risk adjusted place to have your money. As with all marketing, it's a number of touches. Once you hear that from three of your smartest billionaire friends who you respect, maybe you get converted. We've been seeing that. 

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Ari Paul: (30:24)

Then what's happened just very recently is finally Asia is getting in the game. That pattern of sell offs during Asia hours, finally stopped about a week ago, there's now a small kimchi premium, which is Bitcoin is trading at a premium in South Korea. This has been the pattern in every crypto bull cycle, by the way, it's basically usually starts off as US more savvy money, smarter money, and then you get US retail and Asia chasing the momentum. We're just now getting into that stage of more retail and Asia driving the rally.

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Michael Novogratz: (31:00)

Let me jump in, and chime in here for a second, because I think Ari hit on something that's important, but maybe didn't hit on it as hard as I want to. When you think about what's unique about Bitcoin, it's the first global speculative asset, really, period. We never had an asset as distributed as Bitcoin. But Bitcoin is owned by over 120 million people now. In every village, there's Bitcoiner trying to convince their friends that this is the cool thing.

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Michael Novogratz: (31:33)

If you're running Apple, or Tesla, you've got usually one guy out there as the salesman, who's selling this company, and who's telling the story of this company. In Bitcoin, I'm one of 15 people that seem to show up on CNBC, weekly, telling the Bitcoin story. There's podcasts galore, but there's people in every village in the damn world, who are bitcoiners, who feel like it's their job to proselytize, about why. 

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Michael Novogratz: (32:07)

We have never had an asset that has a retail base in Iran, or retail base in India, retail base in Africa, retail base in Korea, passionate retail basis, all over the world. What we're seeing is this viral effect, this networking effect that's accelerating. 

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Michael Novogratz: (32:29)

Ari told you about a really important network, The good old billionaire boys club. I was on an early call that a friend of mine set up and we looked around, and I was like, Jesus, there's like 30 of the richest guys I've ever seen on this call. From that call, a lot of them ended up getting involved in the crypto space. Some with us, many not with us. 

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Michael Novogratz: (32:52)

You have these mini ecosystems, but they're developing everywhere. That's the power of this community and asset, is the power of decentralization. There's not a CEO of Bitcoin. I like to think I am sometimes, but I am absolutely not CEO of Bitcoin. I used to call myself the Forrest Gump of Bitcoin. There isn't a CEO, and there are different people. Michael Saylor has had an amazing effect this year, he's popped up, it's his moment. There's different people at different times that are having influence in different communities.

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Michael Novogratz: (33:25)

Michael is doing, I think it's next week, we're participating, a conference for literally 2,000 CFOs and CEOs of companies, to try to convince them to put some of their corporate cash in Bitcoin. Now, he's not going to give it to the majority of them, but he's going to convince some of them. Here's another guy building community. That's happening everywhere in this asset, which is pretty cool.

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John Darsie: (33:46)

Are there a lot of still, to use a bad metaphor, again, closeted Bitcoin bulls that haven't come out yet? You have people like Paul Tudor Jones and Stan Druckenmiller and Bill Miller. There was a lot of names that people would say wow, when they realize how invested people are in Bitcoin.

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Michael Novogratz: (34:02)

Less than 10% of the people that would be notable names, who have bought it, have bought it publicly, which doesn't make a lot of sense, they should all be public, because it will help drive adoption. But a lot of people revere their privacy. I don't happen to be one of those people. But lots of people. Even in the insurance company, there's one insurance company that's come out and said they bought Bitcoin, but I know of three insurance companies that have.

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Michael Novogratz: (34:33)

Listen, one person is a crazy man. He might wear dragon sweatshirts and a funny hat. But by the time you have three or four, it's a movement. We already have a movement in the insurance business, but we just don't know it yet.

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John Darsie: (34:47)

Right. Ari, I'm going to play devil's advocate now for a couple of questions here on our video segment, but there's an accusation out there, and I think it's one of the more common and credible accusations, at least at one point it was, that people have dug into the reality of it and there's some skepticism around the accusation. But that Bitcoin has manipulated using Tether and using other stable coins, and really this is a bunch of Bitcoin whales that are trading with each other and helping to manipulate the price higher. What do you say to people who argue that the price of Bitcoin and other cryptocurrencies is manipulated? I'll let you answer it too, Michael.

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Ari Paul: (35:24)

Yes, two years ago, most Bitcoin volume was on offshore unregulated exchanges that did play a lot of games that the reported volumes were probably 10X the real volumes. What's happened recently is a couple of these [inaudible 00:35:38] things. The US... Which department was it? BitMEX, which was one of the largest exchanges, the principals were indicted by the US government, and that caused a lot of volume to flow away from BitMEX. Also, BitMEX in Black Thursday, when Bitcoin crashed, they mishandled it, so a lot of money flew to regulated US space, very reputable exchanges. CME futures are now... Mike, what's the daily volume on that now? Do you know on CME?

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Michael Novogratz: (36:07)

It's a ton.

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Ari Paul: (36:08)

I would say it's $4 billion a day on CME futures now, massive. OKX had some principles arrested in China, and that led similarly to a lot of volume flowing into places like Coinbase. We have price discovery happening to the many billions of dollars a day in Bitcoin on regulated exchanges that are CME futures. I think we trust that those are not manipulated any differently than any other CME future, for example. As for the stable coins, for Tether, Tether is a pool right now of about $26 billion, it's relatively opaque, and it historically was the on ramp for Asia to buy bitcoin. 

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Ari Paul: (36:45)

A lot of these exchanges to avoid really... Basically, if you're an exchange that touches Fiat, you have massive regulatory hurdles. If you don't touch Fiat, you fall under a much lighter regulatory regime. A lot of the highest volume exchanges chose not to touch Fiat. Well, how do you buy bitcoin on those exchanges then? You need a stable coin.

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Ari Paul: (37:03)

Tether was the original stable coin. That was how the highest volume exchanges, if you wanted to get money on, you would first buy Tether. Tether's opaque, because basically, the banks that serve Tether don't really want to be public. One is Deltec, but there's a few that don't, because they're afraid it will just put them in regulatory crosshairs, even if they're not doing anything illegal. 

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Ari Paul: (37:24)

For example, I had a bank account shut down because I transferred money from that bank to Coinbase. Totally legal transaction. Coinbase is a regulated US entity, the bank shut down my account because they just don't want to deal with compliance around crypto. It's easy to see why a lot of banks would not be public, but they're holding $5 billion of Tether's money. 

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Ari Paul: (37:43)

I think it is a legitimate concern, in the sense that I can't prove that nothing funny is going on, it's too opaque. With that said, all the criticisms that have been circulated are very weak. Most of it is very easy to explain. For example, people point out that Tether transactions happen in round numbers. They batch, like many entities, they just batch transactions daily. People have pointed out a correlation between Tether printing and Bitcoin rising. Well, of course, it's the on ramp. People give $100 million to Tether, they convert the Tether, they send the Tether to other machines and buy Bitcoin. Of course, you would expect there to be a high correlation. Tether printing is generally bullish, because it's an on ramp that people use to buy Bitcoin.

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Ari Paul: (38:24)

My best guess at the moment is that Tether is legitimate. I don't think it's manipulating anything. With that said, it is a systemic risk.

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John Darsie: (38:33)

Michael, do you have any reaction to that? Or what are other risks in your mind that are real, and maybe-

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Michael Novogratz: (38:39)

I think Ari nailed it, and it would be nice if there was an audit on Tether, there really isn't. We looked at it, to be fair, years ago, they had a partner who wanted to get rid of it at one point because it was dragging down Bitfinex. Bitfinex was a very profitable exchange for them. The thought was, sell it to someone in the US who could then bring the regulators in and make sure it was legit and clean. I was very excited about it, I thought it was a cool business. I wish I'd gotten into the stable coin business. I'm jealous. 

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Michael Novogratz: (39:15)

Of course, he ended up being pushed out of their ownership group and they kept it. Listen, the guys that own Bitfinex, the guys that own Tether are really crafty, aggressive, cowboy businessmen, who have lived outside the grid in some ways. That doesn't give you great confidence. That said, they have so much to lose by screwing this thing up, that you hope that... Listen, there's been quasi audits done. I remember a guy who was an ex head of the FBI, came in and they hired him to do a quasi audit, and he believed that they had the right backing. 

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Michael Novogratz: (39:56)

But right now, in some ways, it doesn't matter till it matters. People see tether as a legitimate store of value. What would be really fascinating is if you can create something that then drifts away from being backed, that people just trust anyway, then all of a sudden you've got [inaudible 00:40:14] and then you've made a money printing machine. That's the fear, because no one believes that's the case right now. If they're doing that, man, they're good. 

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Michael Novogratz: (40:25)

It is the one systemic risk in the system, if there was something that blew up. Look, it's only $25 million, but right now, it still provides a lot of the grace for how all these exchanges work. It would be a real win for places like Coinbase and Kraken, and the more established, the regulated places or US places, it would hit bitcoin price temporarily. But things would then I think, just regroup.

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John Darsie: (40:52)

Right. Michael, what are you worried about? You talk about Tether being one of the systemic risks with Bitcoin and crypto, what other risks are you worried about, related to that asset class? 

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Michael Novogratz: (41:02)

Listen, whenever you're trading at 170 vol... Ethereum options are 190 vol offered last night. Whenever things are moving this fast, people make mistakes, mistakes get really costly. There's a lot of leverage in this Grayscale arbitrage, where people borrow coins, put them on Grayscale, wait six months and then sell them to the retail buyer. There's a tremendous amount of leverage in that space. If there was an ETF announced tomorrow, ETF announced tomorrow, which is not going to happen, but if it was, theoretically, that premium collapses, there are hedge funds and other businesses, that would be shit out of luck. 

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Michael Novogratz: (41:47)

Again, that's bad for the overall system when somebody notable blows up, it always scares people, what else could happen? Some of that's going to happen, because we're trading at 190 vol, that's just the way the world works. You keep your fingers close to the keyboard, and you keep your radar on. We're in a hyper bull market right now, and it's always hard to ride the bull.

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John Darsie: (42:16)

Yep. How about you, Ari, what are you concerned about?

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Ari Paul: (42:25)

I have a risk manager background. I always have a long, long list of concerns. I'd say at the moment though, I think Mike and I are in the same page of our analysis of you have money flowing in that is strong hands that are buying for the long term that are looking at dips as opportunities. I agree, I think if Tether were to collapse tomorrow, basically in any hyper vol bull runs, you get big pullbacks, you get 30% pullbacks on the way, and those are always terrifying. Those always happen because of a headline and the headline's usually real, it's usually something actually happens that's scary, you fall 30%, and then everyone remembers, wait, we think this thing's higher in two years, so why wouldn't we be buying the step? 

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Ari Paul: (43:06)

I would say, Tether is up there. You have a lot of smaller scale risks. In DeFi, for example, there's constant hacks and exploits of the smart contracts. If you're in DeFi, if you own assets, that could be systemically dangerous to Ethereum, if you've had a much larger scale, if you have billion dollars taken out of DeFi, for example. 

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Ari Paul: (43:27)

Other than that, I don't think there's anything imminent on the regulatory front. But I am a little bit concerned that now we have Democrats controlling Congress. We have seen some legislation that's pretty adverse coming from the AOC crowd. So far, it's fringe, it doesn't look like it has congressional support. But as this bull market plays out, under a Democratic administration, Democratic Congress, I think we're likely to face some onerous regulation that may prove challenging, may create some of those dips that are then a good trading opportunities for people like Mike and I. 

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Ari Paul: (44:00)

I don't really have existential concerns, currently. I'll say this though, every time crypto has gone up 10X, it becomes much scarier to a new level of sovereign entity. 2013 was, well, Bitcoin is being used on Silk Road, the FBI cares about it being used to buy drugs. Then 2017, it was wow, ICOs are bigger than seatstay financing and traditional finance. Now, the SEC cares. Well, this bull market, we're getting to a scale that central banks care, that saw the Treasury Department's care. I think at least in some parts of the world, we will see more meaningful pushback, and it's hard to predict how that will play out, and I think that's probably at least six months away, it's probably another 100% rally in Bitcoin, first. But at some point, that'll be a risk.

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John Darsie: (44:43)

I'm going to ask-

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Michael Novogratz: (44:43)

Let me ask one thing. One thing that's driven me crazy is and I wouldn't call myself a progressive or certainly center left, is that the progressive, you have this legislation that Rashida Tlaib put out. Bitcoin and crypto at its core, the reason I got in it is that it's progressive. The banking system has not been progressive, the banking system charges huge fees to people with no money and smaller fees and gives great access to people with money. The way the whole IPO game is played is, the richer you are, the more you make free on the IPO game. 

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Michael Novogratz: (45:23)

In some ways, that group of politicians have it backwards. I've made it my mission this year, at one point to sit down with AOC and, and some of the other dams and try to help them understand that, we're on their side. I got into this, basically for that reason. It's some way bizarre. 

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Michael Novogratz: (45:44)

Now, listen, part of it is, it would help if there was more diversity in crypto, both gender diversity and racial diversity, and I'm gonna try to do my own side of it there. Crypto felt like it's a bros club. If you looked at my Twitter, it was 85% male. That needs to change the setting, to win over some of the progressives, but also just it needs to change because if you really want to rebuild things in a more equitable way, you can't just have white males as the only guys participating, at least within the US context.

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John Darsie: (46:20)

Yeah. It's interesting, you're starting to see some athletes become aware of crypto and there's a couple, Russell Okung, who is a left tackle for the Carolina Panthers getting paid in Bitcoin. Spencer Dinwiddie is trying to tokenize himself, he's a guard for the Brooklyn Nets. It is exciting to see a broader coalition of people getting into the space.

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John Darsie: (46:39)

The final question I want to ask you both about is central bank digital currency. We had Marty Chavez, former Goldman CTO and Chief Information Officer on here, talking very expansively about the potential benefits of central bank digital currencies. Could you explain that to our audience, who's less familiar? Mike, I'll go with you first, and what does that mean, if we do get central bank digital currencies, what does it mean for Bitcoin, which is a truly distributed, globalist digital currency? 

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Michael Novogratz: (47:07)

A central bank digital currency basically is just a digital rendition of the dollar, or the Euro, or what's coming first is the Chinese Renminbi. How those systems are set up, can vary immensely. If you're in China, it's going to be completely centralized, the Chinese are going to control the blockchain, which means they're going to control and understand every bit of data. It helps them with understanding the macro, real time data in their country, but it also is an unbelievable invasion of privacy, how every penny is spent. 

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Michael Novogratz: (47:45)

If you want to control your population, a good way to control them is understanding where their money goes. There are other systems. What's unique about blockchain is it's distributed, no one owns the database, but everybody shares it. A lot of the ones that in the West are being built on the Ethereum blockchain, which is decentralized. You can have, in a perfect world, just a much more efficient payment system without giving up all your privacy. 

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Michael Novogratz: (48:17)

Right now, for me to send you money, I have Venmo, I can Venmo you money up to 1,500 bucks, I think it's the limit. That's kind of like a crypto, but it's a centralized, closed system, I can't send Venmo overseas, I can't send you $100,000 on Venmo or $10,000, on Venmo. Venmo will be replaced, most likely by a system and it might be on the Facebook system, setting their version of a dollar stable coin back and forth to people. But it's crazy that I can send you a photo of me, dressed in a wig with high heels on, and I can set up on one of 19 different apps, with privacy, with anything I want, but I can't send you $10 if you're living in Europe. That's all going to change.

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John Darsie: (49:06)

Ari, can you talk about your views on the DeFi movement and where that's going?

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Ari Paul: (49:11)

Yeah. central bank digital currencies are going to conquer the world by storm, because they're attracted to basically everyone and everything. The IRS loves it because you get perfect tax compliance, Treasury Department loves it because you get real time economic information. FBI loves it, for obvious reasons. I think it very clearly dramatically increases demand for decentralized alternatives. Because if I tell you that everything that you do with Fiat is now going to be completely transparent to your government, as well as we now know foreign governments. We know that the SolarWinds hack, basically anything you give to the US government, you have to assume is public, is going to be on the dark net for anyone to buy. 

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Ari Paul: (49:48)

If I tell you that, all of your financial transactions you do with Fiat are going to be completely transparent to basically anyone who wants it. Isn't your next step to say, oh, man, what else can I do? What's the alternative to that? 

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Ari Paul: (50:02)

We're going to see central bank digital currencies rolled out worldwide, and I think it's going to largely replace the current system, and simultaneously, we're going to see a huge growth in demand for decentralized alternatives. I think that will be both Bitcoin, possibly privacy coins, coins that are optimized around maintaining privacy, as well as on the more complex financial transaction side. That's where DeFi comes in.

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Ari Paul: (50:26)

Just like people want financial privacy on their monetary moves, they also want that on their stock trades, they also want that on the real estate transactions, and DeFi is more efficient, removes a lot of middlemen. As Mike said, it's much more egalitarian. You don't have the gatekeepers. You don't have the punitive fees to get paid that the crazy bank overdraft games banks play with their low income customers. All of that gets removed. You have total transparency and you have privacy. 

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Ari Paul: (50:57)

The rollout of central bank digital currencies is, I think, the catalyst that makes cryptocurrency mainstream as currency. 

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Michael Novogratz: (51:03)

Yep. I agree with Ari.

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John Darsie: (51:06)

China had that aha moment where they went from thinking about banning cryptocurrency, thinking, wow, this could actually be a really powerful tool for us to achieve our goals, as you mentioned, Mike, in authoritarian ways. 

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Michael Novogratz: (51:19)

[crosstalk 00:51:19] This is where the big debate has to happen, because crypto in a centralized fashion is a dystopian nightmare. Think about it, everyone's expanding data, which China already has. Everything that's spent on; Alipay, or [inaudible 00:51:39] goes to a central clearing house. I know you're pregnant before you know you're pregnant by what you're shopping for. I know, you're gay, I know whatever I want to know, I can know, by your shopping patterns. 

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Michael Novogratz: (51:52)

If I decide I don't like gay people like the president of Brazil, who's been very vocal about his anti-gay stance. In a centralized digital cryptocurrency, you can hit a button and just make the money go away, it's programmable money. It's a really dangerous line on where that privacy, where that data gets held, who holds it, how long it lasts. 

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Michael Novogratz: (52:19)

Literally, the data collected from the central bank digital currencies, that's really where the smart regulation and thought process has to come on how these things get set up, or we're headed to a world that I don't want to be a part of.

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Ari Paul: (52:31)

That's so key, I want to emphasize it, that it's not just transparency, but it's control. China, with a... Currently, if basically any government wants to financially censor citizens, they have to do it manually. It's like, let's create a list, let's give that list to different banks [inaudible 00:52:47] But imagine if an algorithm could say, you posted something unpatriotic to social media, all of your assets are frozen, and it's done algorithmically, and you have no recourse and it was effortless for some bureaucrat in China to save 10 million people, all of their assets are frozen. 

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Ari Paul: (53:04)

That's the world we're headed to, in at least many parts of the world, and I think very clear how that's going to increase demand for alternatives.

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John Darsie: (53:11)

Right. I think it's one reason why Bitcoin continues to be the big winner, Bitcoin and other truly distributed global digital currencies continue to be the big winner in this movement. Thank you so much, Michael Novogratz from Galaxy Digital, and Ari Paul from BlockTower, two of the leading players in the space. Thank you so much for joining us on SALT Talks. We look to have you both with us at future SALT conferences in person, which I know Mike has been to many times and a great contributor to SALT, and we hope to have you, Ari, as well.

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Michael Novogratz: (53:41)

Ari, good seeing you.

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Ari Paul: (53:41)

Thanks for the invitation.

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Michael Novogratz: (53:43)

Be well. Thanks, guys.

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John Darsie: (53:44)

Thanks, Mike, and thank you to everybody who tuned in to today's SALT Talk, the latest in our series on digital assets and cryptocurrency. We look forward to having very regular conversations about these topics, which I think are on the vanguard of the type of innovation that we'd like to cover here on SALT Talks. But just a reminder, if you missed any of this talk, or you want to watch any of our previous talks with people like Michael Saylor who was referenced earlier, in this SALT Talk, you can go to salt.org\talks\archive, and view our entire archive of previous episodes of SALT Talks. 

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John Darsie: (54:15)

You can sign up for all of our future webinars at salt.org\talks. Please spread the word about SALT Talks. We love growing our community and we've gotten a great chance to do it digitally. During the pandemic, we had to cancel our conferences, but these SALT Talks have allowed us to build a global audience. We've been very excited about that. So, please spread the word, and please follow us on social media. We're on Twitter, Facebook, LinkedIn, and Instagram. 

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John Darsie: (54:39)

On behalf of the entire SALT team, this is John Darsie, signing off for today from SALT Talks. We'll see you back here again tomorrow.

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