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Some Future Day evaluates technology at the intersection of culture & law.
Join Marc Beckman and his esteemed guests for insider knowledge surrounding how you can use new technologies to positively impact your life, career, and family. Marc Beckman is Senior Fellow of Emerging Technologies and an Adjunct Professor at NYU, CEO of DMA United, and a member of the New York State Bar Association’s Task Force on Cryptocurrency and Digital Assets.
Marc Beckman: [00:01:00] [00:02:00] Hi, Paul. It's great to see you. Thank you for joining me on some future day.
Paul Brody: Thanks for having me.
Marc Beckman: I have to ask you, I was looking at your impressive Ivy League background and I noticed that you have, um, I guess like an eclectic concentration in studies and it really caught my attention. Um, as you're aware, Nelson Mandela's family works strategically with me and they have such an, you know, an interesting impact on not just South Africa, but all of Africa.
So I was curious, like, what's your fascination? And, and also why back in, at the undergrad level, did you, did you start studying, um, Africa?
Paul Brody: beauty of a good like liberal arts education is your major isn't everything, right? You can take other classes. I took a class on African history. I thought it would be interesting. [00:03:00] And it was great. It was fascinating. It was interesting. So then I took another one. And then another one, and then my professor's like, you know, you really, you really seem to like this, you should probably go to Africa for a while, and I got a summer job in Africa, which turned into a year off, and when I came back, they're like, by the way, you now have enough credits and experience that, um, this can be counted as like a certificate for the university, so I was like, this is fantastic, I'm, I'm on with this, so it just, it just came from pursuing the things that I, I think are interesting, and I had a One of my passions is, is kind of, kind of global history and things like that.
And the other is technology. And I, I got my very first job, that summer internship that became a year off, was at the first mobile network operator in Nigeria. And it was this like perfect combination of my interest in African history with my fascination with technology. And they sort of came together.
Marc Beckman: That's really interesting. So back then, um, I, if, if I understand correctly, I could correct me if I'm wrong, but I think Nigeria was going through quite a bit of [00:04:00] change back then. I'm curious, like what was it like on the ground when you were living there? Did you go with friends or was just like, what year was this?
What was happening when you were on the ground in Nigeria?
Paul Brody: This was 1990. And I arrived about six weeks before a military coup and martial law, and it was, you know, It was a fascinating experience. We had, um, we had so many kind of, uh, strange experiences there. The weird thing is, like, you can watch CNN on satellite TV, and they'll be like, Oh, there's riots, and police are coming out with tear gas.
You look out the window, everything's fine. Like, people are walking around, it's kind of a regular day. I mean, you get the sense of, like, in really, really big cities, Really, you know, you can watch TV and you can have really no idea what it's still like for almost everybody in the city. Um, but I, I will tell you one, my most fun story about Nigeria.
So businesses there, I was working for the first mobile phone company. And during this, this, uh, early stage of [00:05:00] martial law, all the banks were closed, but we had to make payroll on Fridays. And I happened to know the station manager for Swissair and, uh, their office was a few blocks away from ours. And we were starting to freak out.
It was like Thursday and we had, we had no cash and we couldn't get to the bank. And I was like, I have an idea. And I went down the street to Swissair and keep in mind, I am a 21 year old summer intern, and I go to see the local station manager. I'm like, listen, I want to cut you a deal. You are getting, people are buying, people are giving you cash for airplane tickets that you can't deposit.
We need payroll for our people, and most of our people get paid in cash. How about I write you an IOU and you give me all your cash? And he's like, that sounds like a good idea. And the 21 year old intern walked back down the street in Lagos with the entire week's payroll in a briefcase and showed up in the CEO's [00:06:00] office.
He's like, I have made payroll for this week.
Marc Beckman: Winner. You're the winner.
Paul Brody: I win
Marc Beckman: He should have gave you equity in the company at that moment. You should have been granted like not just a raise, but, um, you know, 10 percent equity. There you go.
Paul Brody: I look back on that and I just think, you know, the beauty of being young and stupid is that you don't know what a ridiculous request it is. And you can just ask. And sometimes people say yes.
Marc Beckman: Paul, it's kind of interesting to me, um, as it relates to cryptocurrency and the concept of individual liberty and individual freedom. I realized that a lot of, and generally, I'm generally speaking now, but a lot of, uh, African, marketplace economies have suffered with inflation, have suffered through the years with, market manipulation because of the, governments that, have, you know, used their local currency and have created to a certain extent, inflationary measures and all.
So if you were going to fast forward to, um, today [00:07:00] and think back about, um, Nigeria, would you feel like there's real benefit in Africa by adopting cryptocurrencies to control, inflationary measures to stabilize economies and also to provide individuals with a certain amount of freedom?
Paul Brody: You know, that is, that is a really tough question for me because I think, uh, in general, um, so first of all, what a lot of emerging markets suffer from is just plain old bad governance, right? Too much regulation, right? Too much corruption. Poor governance is kind of a huge obstacle. And, uh, Poor governance especially is damaging when it infects the central bank, right?
So when central banks and governments pursue highly inflationary policies, it's really, really damaging. I think one of the cool things about cryptocurrencies is they have proven to be a bit of a check On the worst behavior of central banks, because it's given people a bit more of an alternative.
But even when I was living in Nigeria, people routinely walked around with [00:08:00] wads of US cash, US currency. And you know, that was, that was their inflation alternative was like, I'm just going to pay you in dollars. And I think that the toughest thing about the last 20 years is the entire world has moved to a digital currency ecosystem.
But if you are not a US person, right, a citizen, a resident, uh, uh, uh, an immigrant, it's really, really hard for you to actually get access to digital dollar. Um, I personally think, and this is a funny thing, so the other part of my education was, was economics. Ben Bernanke, the inventor of quantitative easing, which everybody in the world of cryptocurrency loves to demonize, was right.
He was totally right about quantitative easing, right? Inflation is much less damaging than deflation. And Bitcoin is an inherently deflationary system. And deflation is incredibly destructive. Deflation is what turned a big recession in the 1930s into the Great Depression. And it's what Ben Bernanke [00:09:00] avoided for us.
In 2008, by turning, by opening the kind of the money spigot, by throwing money out of the helicopter, he avoided a deflationary period in the United States. My big fear in the world of cryptocurrency is that Bitcoin in particular is a deflationary asset and the deflationary systems tend to produce really severe economic crises.
Marc Beckman: with Bitcoin, it's still like, I know it's front and center in your world and, and in my world, but it's still just a small amount of people, um, here in the United States and, internationally using Bitcoin and other forms of cryptocurrency. So how, how realistic is that deflationary moment being triggered because of cryptocurrency?
Paul Brody: I don't think it's particularly, I don't think it's a particularly big risk, right? If you, you know, Bitcoin has been useful in the sense it's proved a bit of a check, and it's provided some people with an alternative that has given them access to digital [00:10:00] currency and payments in a non sort of hyperinflationary currency, and one that's not subject to sort of currency controls in particular country, right, which are often kind of can be really bad, but, if you look at what people have chosen to do on chain, they have voted with their money, and what they voted for is the U.
S. dollar. It's kind of amazing, but stablecoins, U.S. Dollar denominated stablecoins in particular, are now probably the majority of crypto and blockchain payments are done in stablecoins. The U.S. Dollar, I just did this analysis a couple months ago, the U.S. Dollar is something like 99 percent of all stablecoin payments on chain, which is much, much higher than, like, the U.
S. dollar is like, I forget the number exactly, it's 40 or 50 percent of kind of world payments, um, but it's 99 percent of on chain payments, so people have made it very clear, the U. The stablecoin that they want is the US dollar.
Marc Beckman: So just, again, for our audience, if you don't mind, can you just explain what a [00:11:00] stablecoin is exactly and then follow that up with why do you think people are, are, um, feeling comfortable getting into digital currency with a stablecoin versus perhaps a different form of, of currency, or at least stablecoin backing a different type of currency?
Paul Brody: So stablecoins got their name because if there's one thing that often characterizes Bitcoin, especially in the early days, it's instability, right? The price just kind of goes like this. And even now it's really quite drastic. And so, uh, what people wanted in particular was, okay, I have some assets in Bitcoin or on chain.
I would like to put them in, I haven't decided what to do with them. I don't maybe want to keep them in Bitcoin for a moment. But, or Ethereum, but I don't want to take it out of the network. And so hence. Uh, companies started creating these things called stable coins and stable coins are basically designed to be stable relative to the other kind of major currencies.
And what everybody started with was the U.S. [00:12:00] Dollar. And what a stable coin really is, is it's a digital token. It's valued at one dollar and it's backed by one dollar's worth, at least in theory. One dollar's worth of assets, and there's a bunch of different ways to do that. One is if you have a one dollar token on chain, you theoretically should have one dollar in a bank account somewhere.
That's the most conservative way to do it. Sometimes people have say, a dollar's worth of government bonds. or a dollar's worth of other assets. The problem with some of those other alternatives is that they're not guaranteed to remain the same value over time. Right? If the value of the bonds that had a dollar today plunged tomorrow, you'd have this problem where your dollar stable coin didn't have enough dollars behind it.
That's happened to quite a few of them. But in general, if you have U.S. Government bonds or actual dollars in the bank account, it's turned out to be a fairly safe Uh, investment where you can park your money and it won't change drastically in value.
Marc Beckman: Yeah, it's kind of [00:13:00] interesting to talk about stable coins this morning in particular, because I think it was about a year ago or so, I could be mistaken, but about a year ago or so, where we were watching, some banks really get hit hard that bet big in, uh, cryptocurrency. And I think even stable, some of the stable coins were.
teetering themselves. I think that was about a year ago now, Paul, right?
Paul Brody: Yeah, there were, there were several big bank failures, some of them related to U.S. Interest rates, uh, and sort of mismatch of assets and liabilities, and, and a couple related, um, to, to cryptocurrency as well, right? The, the cryptocurrency crash that took place about two years ago, really, you know, it took time to work its way through the system, but it took down quite a few entities, both, uh, In the digital ecosystem and a couple of real world banks that had bet heavily on the whole crypto and blockchain business ecosystem.
Marc Beckman: Yeah, I want to get back into, um, this a little bit later in our discussion as it relates to, [00:14:00] uh, the U.S. Government and regulation. But that moment in time, some of the pure crypto, um, individuals and pundits were looking at it like the United States government was trying to kind of squeeze, uh, cryptocurrency out of the markets.
I think they called it. Uh, Chokepoint 2. 0, right? And, um, we could get back into that, but you know, your background is really impressive. You really are one of the leaders as it relates to digital assets and cryptocurrency. I believe your title at EY is principal and global blockchain leader, but you're also the chair of the Enterprise Ethereum Alliance, also known as EEA.
Um, what is the EEA?
Paul Brody: So the EEA is really just an industry group. So, uh, Ethereum is, aside from Bitcoin, really the biggest blockchain out there. And it's in particular, whereas Bitcoin isn't really a programmable blockchain. Ethereum is. On Ethereum, you can write business [00:15:00] applications, you can create your own tokens, and we saw very early on that enterprises in particular would find blockchain technology useful, and if they did, it was almost certainly going to be on the Ethereum network, where you could create applications and custom assets and things like that.
The EEA is just really an industry group that allows us to get together and, first of all, meet up and chat with each other, so, uh, you know, we do networking functions, but also we work on things like interoperability standards, security standards, um, uh, lists of, uh, kind of supported technologies and things like that.
So we're trying to make it easier for enterprises to take advantage of this technology.
Marc Beckman: So the primary focus, or maybe the exclusive focus, is on Ethereum. So I'm curious, from your perspective, what do you think has been like the most innovative, innovative, um, uses of Ethereum and the Ethereum ecosystem? To date, I think it's fun to like [00:16:00] really highlight and go back in time as well and see, you know, where innovation has worked and, um, perhaps where innovation with Ethereum has been a little early.
Paul Brody: So if, if you go back to 2017, there was this explosion. of kind of innovative ideas. It was called the Initial Coin Offering Boom, the ICO boom. And hundreds of companies and startups wrote white papers. They're like, hey, I'm, I, you know, I think we can do all these really cool things. Um, and they, they then kind of in, in a really kind of strange boom market were able to raise crazy amounts of money for what were, in many cases, really half baked ideas.
Um, and fundamentally, If you think about any kind of business agreement, this is one of my favorite things I talk about, and I sound like a broken record for people who work with me, but every business agreement boils down to something very simple. I've got money, you've got stuff, we're going to exchange my money for your stuff under the terms of the agreement.
[00:17:00] And on Ethereum, right, you can do all of it, because you can use a smart contract to define a custom token, money. You can use a smart contract to define a custom asset. It could be a real world asset, like a, uh, a bond, or a share of stock, or a car, or a piece of property. Or it could be an on chain asset, like a purely digital token.
And then you can also use a smart contract to define the interchange between the two. Like, if I give you so many dollars or I buy so many widgets, you will give me a discount starting on the 10th widget. You can basically do that.
Marc Beckman: It's programmable.
Paul Brody: both the stuff and the agreement. And because of that, you can basically build any kind of business agreement into this system and run it in a decentralized, Monopoly resistant manner.
And this is, this is something that people hugely underestimate the value of, but monopoly resistance is incredibly important. We can come back to that, but you can basically do any kind of business thing on Ethereum. [00:18:00] And in 2017, people came up with thousands of ideas, most of which were, some of them, I would say most of them, I read a lot of those white papers.
I read a lot of white papers in 2017. And they were really cool ideas, but the technology was really not mature enough to make them work. And so a lot of them flamed out, but we came up with a lot of cool stuff. And, and then stuff kind of emerges organically. Like we invested very funnily. So at EY, we invested in building around technology around non fungible tokens, because everything that the company makes Pretty much is non fungible, right?
Like, if you have a smartphone and, uh, when it comes off the production line, it might be identical to a million other smartphones, but the minute you open it up, it's unique and it's got a serial number. So it's a non fungible token, if you wanted to represent it on chain. Well, we thought NFTs were going to be hugely important to the whole industrial ecosystem.
We never imagined that people were going to make like digital trading cards and start making [00:19:00] little pieces of art and selling them for millions of dollars. A lot of this stuff is just how I think technology ecosystems work. You rarely have a really good idea beforehand of how everything is going to work later on as the technology matures.
Marc Beckman: when you talk about, um, this technology, let's, let's say like web three technology, right. For the sake of discussion purposes, um, I often hear that. And I often comment myself, to be honest, that it's, it's superior. It's better than where we are perhaps with, you know, where we've been with web2. so going to non fungible tokens specifically, I, I'm such a, I believe in NFTs, particularly as it relates to the utilitarian value of the utility value of them.
do you feel like there's been. any real development over the past couple of years with regards to the utility orientation of NFTs? Do you think that, that value proposition has been unlocked by corporations and if so, can you share some examples?
Paul Brody: [00:20:00] It really hasn't been unlocked and there's, there's actually a very good reason if you, if you look at the development of the whole Web3 ecosystem. It is stalled at the financial services level. So, so if it relates to moving money, creating like money tokens and money services, that's gone extremely well, right?
And, and there's probably some good reasons why online speculation or just speculative money tends to flow into these things. Very quickly, um, but ERC20's these fungible tokens, these money tokens, are incredibly popular, and I think the reason they're very popular is, uh, they're very simple to build, uh, and you, if you do it right, you can make a fair amount of money, uh, and they're fully programmable, and very importantly, they don't require privacy.
So, uh, um, startups can build these things without having to worry about privacy because blockchains, people think blockchains are based on encryption, they must enable privacy. They don't. Nothing that you do on a blockchain is private. [00:21:00] And that means that you can only do things that you're comfortable with everybody being able to figure out what you're doing.
If you're a business, that basically means almost nothing. The number of use cases that a business can pursue on a public blockchain without privacy is very small. It's not zero, but it's very small. And so, all the business applications depend on privacy, and privacy has been kind of the thing that I've been working hardest on for the 10 years that I've been in this business, is trying to figure out how to make privacy on chain work
Marc Beckman: So, what are the challenges? I, I really want to get, so you're just throwing in so much because I'm curious about scalability, I'm curious about privacy, but I also just want to, like, hover on the, um, issue of NFTs and effectiveness right now, like, it, you know, it, it, it saddens me, honestly, that you feel like it, really hasn't been addressed.
leverage to the fullest or at all yet, um, to the potential at [00:22:00] all. Um, one area that I love as a person that's in the fashion lifestyle marketing arena is the idea of building up a VIP membership and allowing for the individual that participates, who participates, who participates. To own that digital asset and then to continue to personalize it and unlock access to unique experiences, unique services, limited edition, merchandise, whatever it might be, we've seen three of the biggest loyalty programs in brick and mortar, web two, InBev, Starbucks and Nike roll into Web3 with nf, with with an NFT at the core of their loyalty programs.
But sadly, if I understand correctly, Starbucks just rolled, rolled out of it, right.
Paul Brody: Yeah, I'm not sure exactly what individual companies have done, and we generally don't sort of officially comment on, on those particular initiatives, if they're not something that we did, but,
Marc Beckman: But beyond Starbucks, like what, why, why can't we, um, roll [00:23:00] up, like, it seems like such a great utility value in, in building up VIP memberships. How come companies in the fashion lifestyle categories haven't been able to like really embrace this technology and, and, and scale it?
Paul Brody: So I think embracing and scaling are relatively easy, but I think people haven't always been super clear on what the value proposition of the purpose is. I actually think, uh, you know, at first people thought NFTs were going to be, um, industrial like we did, and then they turned out to be these, like, super high value art items like, uh, CryptoPunks.
Um, That's not really scalable, right? They sort of, those things are unique works of art. But I, I think eventually where we're going to settle into on the consumer side of NFTs is that these are your public digital kind of trophy shelf or, or showcase. So if you have a Birkin, And it comes with an NFT and it's visible in your NFT kind of folder.
You'll be able to see that, right? If it, you know, I, I like to do Ironman [00:24:00] races, right? I think I should get, they give you a little trophy at the end of the hour, a little participant, I shouldn't say trophy cause I don't win any of them, but they give you a little participate, you know, those little participation medals you get at the end.
I want one in my, you know, I want, I want an NFT version of that. And I think those will become very common, uh, over time, but it's a slow process for a variety of reasons. Number one, large companies are just fundamentally very conservative. They're very careful about. And their brand and their perception.
Number two, a lot of the momentum that existed kind of evaporated when the cryptocurrency price plunged.
And one of the things that's frustrating for me as I talk to clients all the time, I tell them, listen, the thing that you want to do has no bearing and is no way affected by the price of cryptocurrency.
Right? Or the regulatory standpoint of the collapse of FTX or anything else, right? But customers and companies tend to [00:25:00] attach a lot of significance to those prices. And it's really interesting. We see demand and all of those things going back up now that the price of cryptocurrency has gone back up. And it's not related.
And I've just kind of come to accept that It's like a, it's like a digital mood ring, right? The price of crypto is a digital mood ring. And when it's up, business people get excited about using the blockchain technology, whether it's, it depended on, on the price of crypto or not.
I'm optimistic that over time adoption will proceed, but it's never going to be as fast as people hope.
Marc Beckman: think, Paul, there's so much great utility in the NFTs. Like you mentioned a digital twin, I think was, was the concept behind the Birkenbag. And that would allow for a company to, um, create a, regardless of, of the brand, right? Like a, a digital twin where now you can capture first party data during a time period where the third party data is becoming increasingly difficult to ascertain.
You can communicate directly with your consumer, [00:26:00] um, by airdropping an NFT with a message that, you know, that consumer could maybe really be really happy to find in her wallet or his wallet. Um, you could also see what's happening as it relates to seasonal trends, right? Like if you bought that winter coat and you're The, um, you, you know, I see that as, as H& M, I see you bought a winter coat from us two years ago and I see you haven't bought any other winter coats or you don't have a digital twin.
It's time to, you know, think about buying a new winter coat and here are some new ideas and you know, that's so great, such great utility, but how do, how do the leaders of these major corporations understand that value proposition? How do we get the CMOs of, let's, let's stay focused on fashion for a minute.
Um, how do we get the CMOs of, you know, luxury, contemporary, street, mass fashion to understand like this is real, real value to your brand and your customer base and you should embrace it.
Paul Brody: So this question really goes to this crux of like, why bother doing anything on blockchain at all? And [00:27:00] I think that one of the really hard things for people to grasp around blockchain, if you want to spend time understanding it. And we can come back later to this question of like, how do you sell stuff?
But what's the value proposition? And, and the thing is this, all the things that you've just described can be done without a blockchain. There's nothing, there's only one thing that blockchains are fundamentally useful for, and it is to do any of those things in a decentralized manner. And this, what people have a hard time grasping is, what's the value of decentralization?
Now, human rights activists will tell you the value of decentralization is censorship resistance. It's much harder to centralize, control a decentralized network than it is a centralized one. A centralized network allows you to have kind of a, you know, censor, you know, information that goes through the network.
There's a business equivalent to censorship [00:28:00] resistance, which is monopoly resistance, right? We actually, a lot of business people don't appreciate that we are living. In the golden age of digital monopoly. And the reason for that is that basically all digital marketplaces are natural monopolies. Once you get an advantage and your product is mature enough, it's almost impossible for anybody to catch up.
And we see this dynamic playing out. It over and over again in e commerce, uh, in, in ride sharing, in, in kind of, uh, apartment or beach kind of place sharing, right? Uh, in, uh, all kinds of like, uh, in, in online auctions, right? Over and over again, we see these digital monopolies or near monopoly organizations emerging.
And what happens is. Once they become a digital monopoly or a dominant or an extremely dominant player with market power, they start changing up the terms. What used to be just a very friendly, helpful, you know, infrastructure that took a modest cut to [00:29:00] connect the buyer and seller, suddenly keeps kind of adding on the fees and eventually you wake up and you're kind of a hostage in this digital ecosystem. And, uh, all the things that you do in a fully decentralized network like Ethereum, which are based on open standards like tokens and smart contracts, those are monopoly resistant. You can't lock someone in to, uh, your solution on Ethereum because it is fundamentally an open platform. And people don't really appreciate how valuable that is often until it's too late, and they, when they approach a decentralized network, they think, oh, that sounds like chaos, and they forget that the internet that they use every day is a decentralized open network, and systems like Ethereum are really just building on this concept of open, decentralized, censorship resistance, and monopoly resistance.
Marc Beckman: these are companies that, um, average consumers like me are using every day. I'm, I'm breaking it down. It's Amazon, Uber, Airbnb, [00:30:00] eBay, like these types of companies that have access to modern hotels.
Not just, um, all of my data, but I rely on them to such an extent now, literally all the time, that I'm happy to give them more and more data. what becomes the risk from these monopolies as it relates to, the centralization and data? Like, for example, why, why are consumers Like including myself, by the way, like, why am I so comfortable using my Gmail to log into the entire world and have them track with all my data?
with a decentralized approach, I have a little bit more privacy because it's, um, I guess, I guess that content is distributed across several computers, right, in web three on blockchain. But on the centralized piece, if there's a data breach from Airbnb or from Amazon, personally, I'm. in trouble. So what, what's the mindset there beyond just the financial piece of it?
What's the mindset? Why don't consumers understand the value proposition of, [00:31:00] of decentralization as it relates to moving your data away from a company like an Amazon?
Paul Brody: I think it's too much. Consumers don't understand. I think it's too much for them to understand kind of the danger opposed by their data, right? people scroll through the terms and conditions and they click okay. And so I think Um, I think it's, it's much too late to sort of go back and re engineer that or get consumers to really care about it.
They just don't. And even in the world of crypto and blockchain, there are lots of people who say they care about privacy, but they don't actually do anything, uh, substantial in there. And I'll give you a really good example. There are 40 layer 2 network blockchains that run on top of the Ethereum ecosystem that are for scaling purposes. There's only one that's focused on privacy, and it's the one that we built at Ernst Young and donated the code into the public [00:32:00] domain. That's it. The other 39, they're all completely public, open, and transparent. And you know, for an ecosystem with this many developers and people who say they care about privacy, it's kind of surprising to me how little substantial investment there has been in privacy.
We are doing it because, whereas consumers tend to click okay and just give their data away. Enterprises read the terms and conditions and they're like, I'm not giving that data away. That's too valuable. That's a strategic asset and I cannot afford to give that away.
Marc Beckman: So there's this, um, dynamic between centralization and I think habits of individuals versus decentralization occurring even in the blockchain realm. Right. So, and you see this even in the financial sector, right? So like I'll comfortably use a, what I think is, um, well, I would categorize as a centralized financial platform, like Coinbase or Binance, right, uh, versus peer to peer [00:33:00] trading.
And we'll continue to see that. Because of comfort and habit across web three. Is that fair to assume?
Paul Brody: So I think people can, people are, people People often confuse, what is a central market operator with kind of a large trusted corporate entity. So, whether it's a big exchange. Or an audit firm like EY, uh, we're large corporations and, uh, we'd like to think that our brand earns us some trust because we're inside of a regulatory framework.
That's a very different dynamic than a marketplace that is controlled by a single entity and has the power to change the rules for all the entities. You can like your particular cryptocurrency exchange, you can say like, I think these guys are good, but if they don't treat you right, you can go somewhere else.
However, if you're a ride sharing company, you really don't have any choice, if you're a ride sharing driver, and you don't like the way the dominant market operator treats you, you don't have any choices. [00:34:00] That's the difference. So, I think, um, you know, people talk about TradFi or, or, uh, CeFi, centralized finance, um, they, they're not making what I think is a very important distinction, which is that large enterprises in a highly competitive market, I think, are, are fine because you have choice.
Right, you can choose who you want to trust, or you can do it yourself, right, versus a central market operator in a dominant system has an immense amount of power. And that power, uh, I wouldn't say it gets used for evil, but it gets used for profit maximization and profit maximization in a monopoly environment is value destroying for the economy as a whole.
Marc Beckman: So, Paul, you argue that, crypto really isn't, um, entirely private, but aren't there some parts of it that really do create a better layer of privacy than, you know, the, the traditional, [00:35:00] uh, marketplace and ecosystem or the legacy marketplaces and ecosystems?
Paul Brody: I would say probably not. I would say very much not. In fact, uh, in some ways, if you bank with a traditional company or you have your health care in a traditional environment, you have some legal protections for privacy, uh, and you can take some action. Uh, on a blockchain, if you transact, your, your transaction data is all sort of public by default.
And it's a little bit like the early days of the internet, where you had an IP address, 9. 16. 35. 42. Well, you might think nobody knows who that is, but trust me, do enough transactions to that IP address, we'll figure out who you are. It's the same in the world of crypto
Marc Beckman: but we've seen a certain level of, um, pseudonymous, um, transactions. I, I, I follow you. I agree with what you're saying. I mean, that happened a lot also with like the NFT digital artwork craze. People were able to follow what people like Gary Vee were doing and were
Paul Brody: NFTs, you can't, NFTs, you cannot [00:36:00] hide at all, right? You know, it's, uh, it's, uh, it's like, um, you know, a fungible token, there are mixers where you can have some level of privacy. Think about fungible tokens are like a glass of water. You throw that glass of water, you dump the water into a swimming pool, no one will know where it went.
Right, and somebody else can pull out a glass of water on the other side. If you've communicated with them off chain, you've said, I've given them kind of the code to pull out the equivalent glass of water, they can do that. You have privacy. Those are, those are highly anonymous systems, and they are fantastic.
For money laundering, and it's why regulators really, really hate them. Um, you know, we're, for example, at EY, we're building privacy technology that's quite different. It allows for privacy, but not anonymity. So, people will know that you are making a transaction, but you won't be disclosing the details of that transaction.
NFT is like, an NFT is like throwing a rubber ducky in the pool. You can follow that rubber ducky anywhere, right? There's absolutely no privacy. Um, [00:37:00] so I think there, there's a limited amount of privacy, but it's very easily reverse engineered unless you go to the lengths of, of doing something like using a mixer like Tornado Cash and that will get you a lot of unwelcome attention from regulators.
Marc Beckman: Why? Actually, let's back up. What is a mixer? Right. I think that will help, um, explain, give some context. Amen. We could get into why that, that might be a red flag.
Paul Brody: So a mixer is basically a, um, it's basically the equivalent of like a swimming pool for water, right? You can, you can put water in and other people, you can put cups of water in, right? And other people can take cups of water out. uh, it's very difficult to know if I gave you a special password to take some water out of the pool, it's very difficult for somebody on the outside looking in saying, wow, Paul put in four cups of water and Mark put in three cups of water and [00:38:00] Bob took out one cup of water.
Well, is Paul paying Bob or is there somebody else in this mix, right? It's called a mixture because it's designed to make the transfer of money untraceable.
Marc Beckman: So it's money laundering.
Paul Brody: It can be used for money laundering. It has. Like a lot of technologies, it has legitimate applications, and I particularly do not like it when people say if you have nothing to hide, you have nothing to fear.
I think privacy is kind of a fundamental human right. However, I am also very much opposed to this idea. I do not agree with the idea that money is speech. I do not agree with the idea that, your right to spend money is somehow unlimited, right? It is, it represents society's resources as well, and so I'm not quite on board with what I would say is a very extremist or ultra libertarian, uh, view of like the ability to have privacy on chain.
Um, I think there, there needs to be, there needs to, you should have a reasonable [00:39:00] expectation of privacy and that regulators and, and, and authorities should have the reasonable ability to pursue bad actors and to identify.
Marc Beckman: So how do ZK Proofs then, uh, fit into this equation? Like bringing it into, um, like beyond tech, into like real life, real world application. Let's say a high profile celebrity, Madonna, wants to buy a new home in San Francisco, but doesn't want the, uh, Um, the seller to know that it's her because they'll realize she has deep, she has deep pockets and potentially they could charge her more.
Um, and also she doesn't want the public to know that she's buying a piece of property to protect her family and her privacy. is there a way where she can? Show proof of solvency, protect her personal identity, and transfer both the, um, title of the house as well, the deed of the house as well as the funds in a way so that the seller never knows that it's her and the public doesn't have to know that it's her.
Paul Brody: [00:40:00] Yeah. So there is, there is a technology, there's a type of math called the zero knowledge proof. It's almost like it kind of breaks your brain when you really think about it. Now, let me take a moment to explain what is zero knowledge proof is and then all the cool things you can do with it. So zero knowledge proof, uh, is basically, uh, it's, it's a, it's a type of math that allows you to prove something is true without revealing any of the underlying data.
And I will give you an example. Let's say that, um, I am colorblind and you hand me a red ball and a green ball. And I look at them and I'm like, well, I, I can't tell the difference. They look the same to me. I'm colorblind. Right. Uh, and you say, Paul, trust me. There are two different colors. Right. Right. And you can prove it to me.
And the way you can prove it to me is, is you can say, Paul, put your hands behind your back and either swap them or don't and bring them back around. I need to buy a red or green ball so I can do this for real. And, and I will tell you whether or not you changed the position of the [00:41:00] balls. And if you do that three times, you've proven to me beyond a reasonable doubt that in fact, these two balls, one that I have in each one of my hands are different colors.
Even though I still don't know what red or green look like or which one is red or green. So that is a zero knowledge proof in real life. And it turns out that you can scale up zero knowledge proofs to do tons of cool things like transfer money, prove identity, answer yes or no questions like Do you have enough money?
Uh, are you over the age of 21 or 18 or whatever? Like, you can do all kinds of cool things and for the last eight years at EY, we've been taking this technology and industrializing it so that companies can do business with each other. They can have smart contracts with each other and they can do it all on a monopoly resistant public blockchain with full business privacy.
Marc Beckman: Right. So, [00:42:00] essentially, that ZK proof is validating a particular, um, statement, right? So that the two parties can contract with, you know, under the veil, let's say, of more privacy. So, in that instance, could that high profile celebrity, could Madonna, take advantage of, uh, the blockchain ecosystem and protect her identity?
To prove solvency and to transfer ownership of the home and transfer the, um, the monies that are owed to purchase the home.
Paul Brody: Yes, absolutely. That infrastructure doesn't really exist yet, but it is technically possible and people are sort of, you know, various people are working on trying to build it out. it's running up against, uh, lots of complexity in terms of, like, how do you implement it in such a way that it's reliable?
Um, how do you do it in a way that Uh, regulators feel comfortable that if they need truthful information, they can get it, but that people's privacy is not unnecessarily [00:43:00] compromised. We're still in the very early stages of this, right? We, today, with the, the work that we have done, companies can do things like trade inventory and implement smart contracts on chain.
What, uh, we have, we have built our solution, the one that we donated to the public domain, we built it with some restrictions. At the moment. So you can only use it if you're an enterprise and, uh, you must have a verified enterprise identity certificate issued by one of the digital internet certificate authorities, what's called an X.
509 certificate in order to use it. We wanted to make it. It's a very powerful privacy technology, but we wanted to make it unattractive to bad actors. Bad actors don't just want privacy, they want anonymity. And that is the one thing that we sort of really can't provide.
Marc Beckman: How, um, frequent are bad actors using blockchain and cryptocurrency now? And like, to what percentage? I had a friend just this week, uh, you know, it's funny, [00:44:00] a friend from college that I haven't spoke With since college, she sees that I do a lot of work in the crypto and tech space. And she reached out to me and she's like, why aren't we tracing back all of these cryptocurrency transfers to Hamas?
Right. That became a big subject. And I was like, well, you know, to be honest with you, most of the, uh, financing that they have is through fiat currency. And, you know, this kind of like scaled up to Congress. So like, what are we seeing? Ballpark, if you know at all, like what, what percentage of use from these bad actors, whether it's, you know, the drug business or terrorism or, you know, the dark web, right?
Like how much crypto is really being used for those purposes today?
Paul Brody: Honestly, I really don't know, right? It is really hard to know. our kind of mission, right, we do, we do kind of core technology, we do things like financial statement audits. Our, my goal in particular is at EY, I want to create all the tools. That are available for companies that want to be fully legal and [00:45:00] regulated.
Right. And, and my goal is to kind of make blockchain safe and reliable, for, uh, law abiding enterprises to operate more efficiently and. Uh, it's really hard to know. It's a little, it's a little bit like asking me, like, how much bad stuff is going on the internet or how big is the dark web? There are other firms that, that have specialized in this.
One is a company called Chainalysis, for example. Um, they, they do try to gather some data. It's really hard. Um, but to be fair, I do fully agree with you. Like, everything that I have seen makes me believe that actually, The vast majority of money laundering and other things are already kind of going in the traditional banking sector, like the blockchain ecosystem today is not big enough to even accommodate the volume of stuff that's going on in the, in the global economy.
Marc Beckman: And Paul, wouldn't we be able to follow that digital currency into having a good sense of who holds that digital wallet if it's a bad actor anyway?
Paul Brody: It's not easy to do so. [00:46:00] If you're a genuinely bad actor and you're relatively sophisticated, you can, you can sort of launder your money through, uh, exchanges that don't ask for KYC or you can move it through mixers. There's, there's a variety of tools available. What's funny. is how many people who steal money don't bother to do that, right?
And every now and again you'll get the story of like, somebody who stole a hundred million dollars like ten years ago and it's been sitting in a wallet untouched and people have been waiting for somebody to do something with that wallet and finally they start moving it and then they get busted because they're not really good at it.
Uh, you know, a lot of people don't really understand how crypto works and because they don't really understand it, They think it's much more private than it is, um, they, they, they think that they can kind of do things that they really can't and probably television and movies don't really uh, contribute to a deep understanding of the technology.
Marc Beckman: Yeah. Yeah. So something that's interesting to me is the United States government and state level, um, regulation, [00:47:00] um, crypto sector in particular. The reason that it's interesting to me, Paul, is because I've been watching other marketplaces, um, really Um, embrace regulation. And then as a result, investment in dollars are flowing into those economies.
Entrepreneurs are being innovative, new jobs are being created. And I feel that here in the United States, there's just a tremendous amount of uncertainty. Still lingering as it relates to regulation. And as a result, we've lost out on investment coming through, um, maybe PE firms or venture capital, uh, you know, private individuals.
Entrepreneurs, I think have had a chilling effect on innovation here in the United States because of their uncertainty and fear CZ, uh, this week, he's going to jail, uh, for what, four months or something. So I'm wondering from your perspective, you have such an interesting. perspective as it relates to regulation in particular.
Um, are you seeing these markets, Dubai, [00:48:00] uh, now Europe in general, really start to flourish more than the United States because they're embracing regulation and doing it the right way?
Paul Brody: Yes, and uh, in particular, the poster child for this right now is the European Union. Everybody, you know, it's so funny, like crypto, Twitter, and Twitter in general, people on Twitter, they, they often, they're like, America innovates and Europe regulates. It turns out that actually a level playing field and good regulation is pretty good for business.
And, you know, for the first time, you know, I've been in the blockchain business for 10 years. I've been running this, this, you know, business at EY for 8 years. This year is the first year in our history that our business in Europe is bigger than our business in the U.S.
Marc Beckman: Wow.
Paul Brody: For is large, talking about the general, the overall business for
right? Not all of EY, or the blockchain business of
Marc Beckman: Okay. Okay. Oh, that says a lot. Can you just back up again and say it again then? I'm sorry, I wasn't [00:49:00] following.
Paul Brody: So, so, four years ago, 80 percent of our revenue, kind of sales and revenue, were coming from the U.S. Market. This year, more than half our revenue will come from the European Union,
Marc Beckman: That says so much, Paul.
Paul Brody: it does, and, and the EU has, they passed this law, it's called the Markets and Cryptoassets Law, and it is, it starts to take effect in June, and it basically provides a regulatory framework for almost any kind of digital asset, and kind of, it means that you can have stable coins, and asset backed coins, and cryptocurrencies.
It sets out the rules for how banks should operate, how they can sell these things to consumers, what consumer rights have, What protection banks and cryptocurrency companies have to implement. Um, I won't lie, I mean, those protections and rules are absolutely great for our business, uh, because we're, you know, we build the technology and we're also, uh, depending on where you are in the ecosystem, we're also key understanding it.
You know, the rules, financial statement audits, so that part's been good for our business for sure, [00:50:00] but we see kind of this explosion of innovation because Europe has something in particular that's valuable, which is it not only has a good, and I'm not going to say perfect, but it's a good regulatory framework, and it's a large market.
however, I don't want to get excessively down on the U.S., right? I, you know, the U.S. Is a complex regulatory environment. Uh, but, we continue to see progress. People are in making investments. They are offering crypto and digital services, right? Uh, you know, Fidelity is a great example. You can buy crypto assets from them.
Uh, Robinhood just started selling crypto assets. I, I could go on a list of, you know, of names. People are continuing to move in this space in the U.S. PayPal, and they have a stablecoin, PYUSD, so it's happening in the U.S. Maybe not quite at the same kind of frenetic pace it's going on in Europe. I am hopeful, as an American, that we will kind of, you know, step up and catch up over time.
Marc Beckman: Paul, you know, you mentioned, uh, we got into smart contracts a little [00:51:00] bit earlier and one value proposition with regards to using a smart contract to essentially govern the nature of the relationship between two entities could also be, uh, regulation. Right? Like a smart contract could be effectively a self regulatory tool within the blockchain and cryptocurrency ecosystem and community.
Do you think that's feasible?
Paul Brody: absolutely. And this is actually the attraction for a lot of companies. Um, one of the things I like to joke about is companies are great at negotiating deals. They're terrible at keeping track of them, like five minutes after they've signed like a volume of Perseverance, they're like, wait, how much stuff have we bought?
When do I get my discount? Is there going to be a rebate? And the beauty of a smart contract is you don't have to remember, it does. Right. Uh, and, and we have actually, we just rolled out one of our first privacy enabled smart contract products. And what it basically does is it prevents buyers and sellers from having incorrect prices.
It pulls all the data in, and it basically tells you, this is what you owe [00:52:00] based on your agreement. And it's, it's very attractive because it makes it fully automatic. And it's also much faster than, than that kind of the manual version a lot of companies are doing. Um, we did this about five years ago from Microsoft.
Uh, for the Xbox video game network, but we didn't have privacy technology yet, so we couldn't deploy it on a public network. Now that the privacy tech has matured, we can do these kinds of self regulating automated contracts. And if it works for businesses, there's no reason why government regulations can't also be written into these kinds of smart contracts.
Marc Beckman: from, in my opinion, regulation of the cryptocurrency and digital asset market is important if we get it right. Because it could also trigger growth. It gives trust. We're seeing that now, for example, with the Bitcoin, the Bitcoin ETFs. Um, I'm curious in, in your professional opinion, how do you think certainty as a result of regulation.
Will impact [00:53:00] the dynamic between offshore and onshore digital assets. And maybe you could back up and kind of give some context to it as well. Like where are most of these assets sitting today? If we're going to look at, you know, the United States or Europe, are most of them offshore and then when regulation comes in, are they, are they coming back?
Like what's that dynamic like?
Paul Brody: So right now, almost all like cryptocurrency trading is basically done outside the United States. Uh, and, and by the way, really outside the EU, the biggest countries for, I think, cryptocurrency exchanges are like the Seychelles, the British Virgin Islands, other kind of offshore, uh, low tax, but also kind of, you know, very sort of.
Light touch regulatory environments. And, uh, that's great, right? It's facilitated, you know, some of them are better than others, but it's facilitated a lot of growth. The downside is, you know, as, uh, if you are a pension fund, or a, uh, [00:54:00] a big university endowment or something like that, you're often legally not allowed or your rules and your pension don't allow you to invest in offshore high risk or lightly regulated assets because you have, you're carrying a lot of legal responsibility for all the people, all the pensions that you are serving.
So until we have good regulation and until you can have things like an ETF that are traded on the stock exchange, you can't, if you're a big fund, invest in this stuff. Now that we're getting there, this opens up a lot of the world's assets. A lot of the world's assets can flow into cryptocurrency or digital currency.
It doesn't mean that the future is going to be all that way, but, um, right now, more than 90 percent of the world's Financial assets are onshore. They exist inside of big markets like the US and the European Union. And a lot of those are pension funds, endowments, and things like that. So as we get more regulation, it will change the nature of [00:55:00] who is buying crypto.
It doesn't mean there'll be less offshore money, but I think over time, onshore money, regulated money is going to become a highly regulated in country money is going to become by far kind of the dominant player in this whole ecosystem.
Marc Beckman: Yeah, so Paul, back earlier in the conversation, you referenced this crypto winter, right, where we're kind of bouncing back. You're seeing ETH, I think, this morning is almost at 3, 000, maybe it's at 2, 800 or so. So we're catching, and as we introduce these, let's say, and like, perhaps more secure types of tools, right, like through the ETFs and whatnot, more people All of them investing now.
So where would you say a safe place to start if you were an individual investor and you wanted to like, start to look at, at buying some ETH, where would, where would a good place, a good starting point for people to do the research and, and consider investing where, [00:56:00] where would you suggest they go?
Paul Brody: Uh, so I think a lot of the exchanges, the big exchanges like Coinbase, Kraken, and some of the others, they often have some pretty good educational programs. I wrote a book. I don't know if this was the explicit invitation for me to talk about my book. It's called Ethereum for Business, and it's got a bunch of chapters that sort of explain how blockchains work in general, how Ethereum works in particular.
Uh, they explain stablecoins and business agreements. Uh, it's not really, it's not an investment book. But it is a way to think about it. Um, and, and I would just say, uh, you know, if Ethereum cryptocurrency, these are still very new and relatively high risk. So I would never recommend. That people put like the majority of their savings into this kind of environment.
I'm, I'm, I myself am quite careful and conservative, uh, partly because my entire job depends on this technology. So if things go bad, I don't want to be both [00:57:00] bankrupt and unemployed, but, um, I think, you know, you have to think about your portfolio of retirement assets. and your, your long term savings and, and be cautious.
This falls into the high risk emerging technology bucket.
Marc Beckman: So, Paul, I know that, Ethereum moved from proof of work to proof of stake a while ago now, really because of, uh, concerns surrounding climate change and energy consumption. I'm curious from your perspective, if that's been effective and what other ethical concerns or, um, socially oriented concerns should we be, uh, thinking about as it relates to, um, either Ethereum or cryptocurrency in general?
Paul Brody: So, I mean, first of all, on the proof of work, proof of stake transition, hugely successful. I, I've seen numbers that show that Ethereum's energy consumption has declined by 99%. Uh, since that transition. So that, that's enormously effective. Um, personally, I wrote a column about this in CoinDesk a [00:58:00] couple of years ago, but I think from an ethical perspective, I don't think we spend enough time thinking about what are the morally valuable and useful ways to use technology.
And, Um, I, I will give you a couple of examples. One of the things that really bothers me is when people engage in what I would call like social justice washing. You'll hear people all the time, you've heard the expression, greenwashing. Well, in the world of crypto, people will talk about the importance of banking, the unbanked as if cryptocurrency was a solution to that.
It's not right? The, this whole banking, the unbanked thing. is a regulatory issue. It's not like big banks don't want people to sign up in their millions for new accounts. It's that in many cases, regulatory hurdles have prevented people from doing that. And if you look at places that have been wildly successful in banking the unbanked, They haven't done it with cryptocurrency or blockchain.
[00:59:00] They did it with centralized systems and government reform of regulatory environment. India's UPI scheme is a great example. In East Africa, you have MPesa which is a mobile payments platform. Brazil's done an incredible job, again, with their kind of digital payments platform. These things are nothing to do with blockchain.
And saying that we, you know, blockchain is good for the world because it banks and banks is really kind of. You know, it's kind of greenwashing the whole thing, right? It's, it's, it's, it's not, it's, it's really not the main driver or, or the use case. That's one thing that really bothers me. The other thing that, that really frustrates me is a narrative about how we need blockchain because, um, you know, the traditional big media platforms are censoring extremist voices.
Well, I don't want to work on a technology to make it easy for you to share your bigoted, racist, sexist, homophobic opinions [01:00:00] with the world. Like, that is not my, I am not here for you to do that. I do not care about it. Uh, and I don't even agree with the hypothesis that there's some terrible crisis going on here.
Uh, these digital media platforms that exist are privately owned corporations. You have a right to free speech. You do not have a right to a digital platform to share your hateful views. And I don't feel the need to work on something to make that easy. All
Marc Beckman: Good. Good. I
Paul Brody: right, that's me on my soapbox.
Marc Beckman: No, it's a good soapbox and I'm with you a hundred percent, Paul. So last thing, you've, you know, you've obviously spent an enormous amount of time today and provided incredible insights surrounding blockchain and crypto and digital assets, but every guest that comes on some future day gets into this routine.
We end every show where I start a sentence with the name of the show and then We allow for our guests to kind of look into the future. So if you're game, I'd love to do [01:01:00] that with you right now. All right. So in some future day, our next generation will be using blockchain technology and cryptocurrency too.
Paul Brody: Basically run all business to business transactions. The global plumbing. of the, the, the business world will be on Ethereum, and the way that companies will transact with each other, it will be using digital tokens and smart contracts, uh, it will be decentralized, uh, it will be monopoly resistant. It will be easy to use and it will create not just a more efficient global business ecosystem, but also one that is fairer because it is monopoly resistant and it is easy for small business, businesses to do the things today that only large businesses can do, which are complex, multi company.
Business integrations.
Marc Beckman: That's awesome. Paul, how far away do you think we are from that?
Paul Brody: [01:02:00] So this is maybe the interesting thing for me is it all these big revolutions take time. And one of the things I talk a lot about when I give kind of big speeches is everybody needs to adjust their time thing. They all think it's like three years or five years. It's 20 to 25 years. This is how long it takes for technology to be adopting, to be really kind of enter the mainstream adoption.
If you look at e commerce, it's a great example. Ecommerce railways, ERP, Um, uh, IP networking, sort of the internet, um, their mass adoption generally took about 25 years. And the reason for that is that every time we solve one problem, we run into a new one. And I'll give you a really good example from the early days of e commerce.
In the early days of e commerce, it was easy to set up a web browser, right? And eventually people figured out, Oh, I can't send my credit card number because the web browser doesn't have encryption. So then we added encryption. Then people realized, wait a minute, I want to buy stuff and there are digital online catalogs.
[01:03:00] But there's no pictures because online catalogs in the old days were for like industrial companies to buy stuff. It was easier to buy a pallet of toilet paper than a single package. And so we had to get pictures of stuff and we had to have online, you know, online sort of catalogs that work properly. Um, there are so many obstacles along the way.
Shipping companies have to completely kind of restructure themselves. You know, the UPS and FedExes of today are so different than they were 20 years ago, because now they mostly deliver packages to people's houses, right? We're going to encounter that all along the way as we transform this kind of global ecosystem, uh, into a blockchain friendly one.
So it's, it's a 25 year journey and some people will get there faster than others. And the thing that is very important and the thing you need to remember is the companies that did this best early on are still the ones that dominate the business. SAP, right, they built one of the first ERP systems, they're still the biggest player in this business.
Oracle, SAP, [01:04:00] Microsoft, um, Amazon, huge business that got in early, uh, you know, I think being at the beginning matters a tremendous amount, not because the market is huge, but because, uh, and they have this phrase at Amazon, which I think is brilliant, there's no compression algorithm for experience. The things that you learn, really implementing a technology and a product.
Our, that knowledge is, there's no way to speed run that process. Every company has to go through it, and the sooner you get into it, the faster you will come up that curve, and the more you will be in a position to lead that market.
Marc Beckman: Paul, thank you so much for being amazing today. Your time, your insight, everything is just excellent. I really appreciate getting to know you. Um, thank you so much.
Paul Brody: This has been a great conversation, um, uh, thank you for having me, appreciate it. [01:05:00]