The Path To A Bitcoin ETF Approval In The USA – Bitwise CIO Matt Hougan Interview

Matt Hougan is the Chief Investment Office at Bitwise Asset Management. In this interview we discuss Bitwise’s different crypto funds such as Bitcoin, Ethereum, and the Top 10 Crypto fund which includes DeFi coins like Chainlink and Aave.

Matt talks about his extensive ETF background and how and when a Bitcoin ETF could be approved in the US. We touch on Bitcoin’s growth, adoption, and future plus DeFi, Crypto Regulations and the SEC Ripple XRP lawsuit. https://www.bitwiseinvestments.com/

https://twitter.com/Matt_Hougan

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Interview Transcription

Tony Edward: [00:00:10] Hi, everyone. Welcome back to the Thinking Crypto Channel. I have a very special guest with me, Matt Hougan, who’s the Chief Investment Officer at Bitwise Asset Management. Matt, it’s great to have you. 

Matt Hougan: Thanks for having me. I’m delighted to be here. 

Tony Edward: Matt, I certainly want to pick your brain on so many things because of your extensive ETF experience. So, let’s start with your background. Where are you from? Where did you grow up? 

Matt Hougan: Sure. I grew up in Washington, DC, in and around Virginia, Maryland, and DC, and then went to college in Maine. Lived much of my adult life in Maine where I got into the ETF industry after a few interesting career detours, and then moved out to California 10 years ago. So, that’s my geography in a nutshell. 

Tony Edward: Got it. And when did you first come across cryptocurrencies or Bitcoin as most folks would start off with? 

Matt Hougan: Sure. So, before crypto, I was in the ETF space as you mentioned. I was the CEO of a company called ETF.com. We created the first rating system in ETFs, we created the largest media site in ETFs, and we created the largest ETF conference, the sort of consensus of ETFs which was called Inside ETFs. And it was a couple thousand people down in Florida every year. And I bring that up because the first time I encountered Bitcoin and crypto in a real way was when we had the Winklevoss twins come speak in 2013. They had applied to list in ETF. And I think a lot of people who, like me come from traditional finance have a moment where there’s someone who they take seriously who says, “Look, don’t overlook this crypto thing. It’s real. Don’t overlook this Bitcoin thing. Take the time to learn about it.” And for me, it was their lawyer, Kathleen Moriarty, who was a famous person in ETF circles. She was the lawyer on the very first ETF. And she said, “Matt, I know it’s the Winklevoss twins. I know there’s this whole celebrity element. But what they’re working on is actually cool and interesting.” And that was the first moment I was intrigued. 

The second moment, and then I’ll pause, one of my early employees at ETF.com was Spencer Bogart, who’s a well-known venture capitalist part of blockchain capital. And he first became interested in Bitcoin and crypto while working at ETF.com and he started talking about it regularly. So, from the Winklevoss twins and Kathleen Moriarty to Spencer, I was hooked. And then after we sold the business, we sold ETF.com in 2015, and 2016 didn’t earn-out. Crypto was at the top of my list of the next places to build the next phase of my career in it. And I’ve been doing that for a handful of years now. 

Tony Edward: Wow. So, you’ve been at the genesis of the ETF movement and so forth, and obviously created something huge on your own. So, how does that, you know, if you were to look at crypto as it is right now and ETFs and the analogy of the two running side by side, what is your take? Give me your perspective. 

Matt Hougan: It’s so similar. People in crypto don’t know how similar it is. Back when ETFs were just getting started, I got involved in the early 2000s in ETFs, people didn’t know what they were. They call them EFTs. They weren’t well-liked. People said they would never amount to anything, they would never come to rival mutual funds. Also, people were worried about them. The Financial Times called them weapons of mass destruction. Believe it or not, there were congressional hearings, where they dragged people from the ETF industry in front of Congress and grilled them about whether ETFs were destroying American entrepreneurialism and would lead to socialism and disaster. So, they were vilified and they were outside the mainstream. And today, they’re sort of the mother’s milk of how people invest, right? They’re the fastest-growing segment of investment. They’re the core of most people’s portfolios. 

So, the lesson I’ve learned from that is that new disruptive innovations can often be looked at askance, can often be dismissed by very smart people, can often have people worried about their negative impacts on society. But that can flip very quickly. And the reason I bring that up is because what I see happening right now in crypto is we’re moving from this early adopter phase, where there was a small cadre of people who thought it was interesting, thought it might have big implications, but most people were skeptical, and some people thought it was outright bad and criminal. And we’re moving over this chasm to where it’s adopted from the mainstream. And I guess my message for the crypto people is it can happen quicker and more completely than you would imagine. And that’s what I experienced in ETFs. And I feel like we’re experiencing that right now at this moment in crypto, and it’s really exciting to me. 

Tony Edward: Sure, sure. And yeah, we see a lot of pushback, there’s still a lot of — I just spoke to Jeremy Allaire Circle. He’s like, there’s cognitive dissonance with some folks. And change in human beings is always hard, and especially something that’s coming in disrupting finance and a lot of legacy systems. So, great to get your perspective there. So, I have to ask, what are you holding in your crypto portfolio? 

Matt Hougan: I hold almost exclusively Bitwise’s own funds. So, my largest position is in our crypto index fund. I’m an indexing guy through and through. Believe it or not, I used to edit an academic journal on index investing, which is probably the single most boring publication in the world. But I’m an indexing guy. So, most of my holdings are in our index fund as the top 10 crypto assets. We also have a standalone Bitcoin and Ethereum fund, I own those too. And then with about 1% of my portfolio, I have a small allocation to some DeFi assets through a direct wallet. But 99, 98% is our own funds because I’m confident that those are a good way to gain exposure to the space. 

Tony Edward: Awesome. Yeah, I’ve been reading up a lot and seeing a lot of news about your index funds. So, you mentioned the top 10, you have your Bitcoin and Ethereum specific. Do you guys by any chance offer custody services or anything along those lines? 

Matt Hougan: No. What we’re doing is acting between a bridge between sort of financial advisors, professional investors, and individuals who want to allocate but don’t have direct access to a custodian. So, we take in their cash, and we buy crypto assets, and then we store those assets at a regulated third-party custodian. Whether that’s a Coinbase or a Fidelity or another custodian. It’s a way of getting people who don’t have direct relationships with those custodians, the ability to allocate safely to the space, and to have professional trading and tax management, and tax reporting all integrated in. 

Tony Edward: Sure. And can you tell me about the recent regulatory verification filing for your Bitcoin fund? 

Matt Hougan: Yeah. One thing, so all of our funds are initially structured like many funds in crypto is private placements, which are available only to accredited investors. So, a select set of the community. And there’s some paperwork involved. What we did with our index fund was we applied and successfully listed it on OTCQX similar to GBTC. Right? Grayscale is a pioneer in the space, GBTC an incredible product, we did the same thing with our index fund. And that has benefits. It means you can buy in, in a brokerage account. Any investor can buy in. It also has risks as we know, those shares can trade to a premium to their net asset value. And that premium can be volatile. We did the same thing with our Bitcoin funds. So, we have a Bitcoin fund, we’ve been running as a private placement for accredited investors since 2018. As I mentioned, I own it personally. And we’ve applied to list that fund on OTCQX and we compete directly with GBTC. The primary difference is the fee would be lower, it’s one and a half percent. GBTC is at 2%. And some people like working specifically with Bitwise, because of the educational support we have. So, we’re hopeful we get that listing completed in the future. And we’re working on it as we speak.

Tony Edward: That’s awesome. I love competition and market and I love that you guys are doing this. So, would the vision be — I know you serve as a credit investor, but having these respective funds available in Charles Schwab and whatever may be in all these different outlets? 

Matt Hougan: That’s exactly right. That’s the great thing about putting them onto the OTCQX is that they’re available in traditional brokerage accounts; in Charles Schwab, in Fidelity, etc. And that is important to a large number of investors. Now, it’s not perfect. It’s not a traditional ETF that trades right at its net asset value, which we’re all hoping to get. And I know we’ll probably talk about that in the future, they can trade the premiums and discounts. But for people in those settings who understand that risk, and still want an easy way to allocate to an index strategy, it can be a solution for them. So, we’ve had a great response from the market, we’re really excited to have it out there. Part of the growth of any asset class, whether it’s equities, or bonds, or MLPs, or commodities, is the development of index strategies. It’s the same thing that’s been applied over time because not everyone has a particular view. Just like not everyone wants to buy only Tesla or Apple. A lot of people want to just allocate to the S&P 500. That’s going to be true in crypto as it moves into an institutional space and this fund lets people do that.

Tony Edward: That’s awesome. And can you tell me about the top 10? Because I certainly get the Bitcoin, I certainly get the Ethereum, but the top 10, which ones do you have in there? 

Matt Hougan: Yes, sure. So, Bitcoin and Ethereum are the largest, and the fund is heavily weighted to Bitcoin. It’s about 75% Bitcoin because we know Bitcoin’s dominance in the market is significant. It also has a significant position in ETH, as you mentioned. And then the other assets that are in their assets like Chainlink, like Bitcoin Cash, there’s some DeFi assets, Uniswap and Aave are also in there. Tezos is also in there. The real advantage to an investor is they don’t have to monitor the market on an ongoing basis. They don’t have to think like has DeFi emerged from this experimental idea into a mainstream asset? The index rebalances monthly. We watch it 24/7 365, so we’re able to bring Chainlink into the index, when it was first emerging as a major asset. We’re able to bring Uniswap and Aave into the index as they were first emerging. 

Now, of course, we could bring an asset into the index, which could then have a bad performance, that can happen too. But, for most investors, they want to make a simple bet if they’re working with us. And that simple bet is, crypto is going to be more important in the future than it is today. And I don’t know if it’s going to be Bitcoin and decentralized gold. I don’t know if it’s going to be Ethereum and layer one protocols. I don’t know if it’s going to be DAPS. I don’t know how it’s going to emerge. But what I do know is that moving money over the internet and having digital property rights is a once-in-a-generation technological advance. And I just want exposure to that. And that’s what the index lets them do. So, it has some great constituents, I have my personal favorites. But even for my own investing, I just want just general exposure to the index. 

Tony Edward: Sure. I love it. And I quick question, is it a fluid fund where — Okay. Let’s say Chainlink’s performing well, but then some other coin decide is not performing well, for whatever reason, you swap it out and bring in something else. 

Matt Hougan: 100%, yeah. Every month, we kick out assets that have fallen out of the top 10 and move in assets that have emerged into the top 10. So, yeah, always up-to-date, at least on a monthly basis with what’s going on in the market. 

Tony Edward: Got it. So, I have to ask, and I know these things are sometimes under NDAs and ready for PR release. Any hints to what we may or can expect from a Bitwise for the remainder of 2021? 

Matt Hougan: Sure, yeah. We have a very exciting product launch coming up this week. You can think of us as a Primary Index Provider, we have a large-cap index, we’re looking at different sector indexes. So, I think the market is maturing to the point where there may be some sector index products. We’re filing as you mentioned, to get the Bitcoin fund, a tradable on OTCQX. And then yeah, you can expect us to continue to work on a Bitcoin ETF as well. That’s a space that’s heating up and so we’re excited about that look. What Bitwise is about is finding ways for investors to gain exposure to all the exciting things that are happening in crypto in a rules-based fashion. And so that’s what we’re working on. 

Tony Edward: Awesome. So, you mentioned Bitcoin ETF, I definitely want to pick your brain on that. What do you think is the hold-up and do you think we could get an approval this year given, look, there’s administration changes, it’s better custody, there’s better price indexing and aggregation. But from your perspective, you have just a plethora of experience. What do you think has been the holdup for this past year? And could we get approval this year? 

Matt Hougan: Yeah. I’ll say two things that you hinted that one, a bunch of experience in the ETF space. And one thing crypto doesn’t — most people in crypto don’t know is ETFs take awhile. It took multiple years for the first bond ETF. People were skeptical we would ever get a gold ETF. Non-transparent active ETFs, which is how every active mutual fund in the world is run, took 11 years for the SEC to approve. So, it’s not unusual for the SEC to take its time and be very careful. The other thing you said which is very important is that the markets improved. Right? If you go back to 2013 when we had the Winklevoss speak at our conference, there wasn’t a regulated custodian. There wasn’t insurance on custody. There were arbitrage spreads that you could drive a truck through. There wasn’t clear liquidity and pricing. There weren’t established pricing providers. There wasn’t a CME Bitcoin futures market, which today is trading like $4 billion a day. So, the market has gotten much better. And that means we’re much closer than we ever have been before. The biggest remaining hurdle, the biggest one is the potential for market manipulation in the Bitcoin market and the ability to surveil that. 

Now, any market can be manipulated, right? We all saw what was going on with GameStop. Their famous stories about commodity markets being manipulated, but you need to be able to surveil it in order to have an ETF. And so what we’re working on, what Vanek is working on, what a number of other providers is working on is sort of showing that the market has matured enough that those market manipulation and surveillance concerns are taking care of. Will we get an ETF this year is a tough question. I do think you know with Gensler coming in as the commissioner, there’s a chance to sort of reset certainly at the end of terms, right, so the last few months of Clayton, it’s unusual for the SEC to make major steps forward because they want to see where the new thing is coming in. So, we’re at a reset phase. I’m optimistic that we’ll get one in the next two years. In the next — This year, I think it’s more or less a toss-up. I know that’s not helpful advice, but I think that’s true. There still is work to be done. But the good news is, there are people who are doing that work. We have multiple people dedicated to this, that are working nights and weekends trying to get that research ready. So, we’re really pushing. 

Tony Edward: Sure. And recently Hester Pierce, I think, just even last week, she was at a CoinDesk conference, if I’m not mistaken. She hinted at, look, she’s ready, they’re ready for a Bitcoin ETP. You know, does that mean anything? Or it’s just talks that we’re ready to maybe be a bit more active? 

Matt Hougan: Yeah, I mean, so on one extent it doesn’t mean much because Hester has been ready for — or Commissioner Pierce has been ready for an ETF for quite some time. On the other hand, speaking publicly about it pushes it forward. And every sort of brick in the wall moves us further up. I think an important thing for people to understand about the SEC relationship with crypto and also traditional financial relationship with crypto is that you can’t expect someone to approach crypto de novo. Like if you evaluated the crypto market today, you would see a market that insurance companies are buying and institutions are buying and Jane Street is trading and Fidelity is testing, and it’s well regulated. And you look at it de novo as like a relatively mature market. But people don’t come at things de novo. They’re anchored on sort of the ghost of crypto past. 

And even crypto people have to be honest, the ghosts of crypto past have some hairy things in them. They have Mt. Gox, they have Silk Road, they have these huge arbitrage spreads, they have the South Korean premium. They have relatively inefficient markets. I mean, if you’re anchored in that, getting all the way to this is a truly institutional asset, you can’t just go past the 50-yard line. You have to get to the 60, the 70, or the 80-yard line. Now, I do think we’re getting there. This market’s amazing. Bitcoin trades a penny wide spreads on a $45,000 handle. That’s the tightest spread for any financial instrument in the world. It’s actually tighter than Crude Oil Futures sometimes. So, it is a remarkable market. But I do think you have to understand where people are coming from and accept that it’s okay that they’re asking hard questions and they need to be convinced. We’re gonna get there, I think. 

Tony Edward: Sure. And you make a great point. You know, I think in the crypto market things do move very fast and we expect the traditional financial world and regulators to move at the same pace. But, unfortunately, that’s not the case. 

Matt Hougan: Yeah, yeah, that’s right. That’s right. And you know, I’m sure it’s true in markets that we don’t pay attention to it too. Like I’m not up to date on the latest in the CDS market in the same way I’m in crypto. So, you just have to understand where they’re coming from. And we’ve made huge profits, right. Just this weekend, Morgan Stanley, Morgan Stanley, putting out a three-page note about Bitcoin is a real asset class that everyone has to pay attention to. We couldn’t have imagined that two years ago. And yet, here it is today. So, we are making real progress. We are getting closer. And it’s really exciting. 

Tony Edward: So, I know you guys, you have your secret sauce, and you may not be able to disclose everything. Can you give us some hints as to what’s your strategy? What’s Bitwise’s strategy to help get this ETF approved? 

Matt Hougan: Yeah, sure. So, the beautiful thing about it is, is we’re not operating in the dark. So, the Winklevoss application, the Bitwise application, the Wilshire Phoenix application were all rejected. One interesting thing about ETF land is that is rare. Usually, what happens is people withdraw their applications if they’re going to be rejected. But us and the Winklevoss group, and Wilshire and others pushed it all the way to final. And as a result, the SEC wrote hundreds of pages explaining why they were rejected. And those 100 pages are like a treasure map that tells you what you have to show to get to the end. So, the secret sauce that we’re providing is just following that treasure map. Most of its focus on market manipulation, where price discovery occurs in Bitcoin, and proving that in a sort of academic fashion. And so we’re focused on that. And like I said, I think other people are focused on it as well. But it’s really important to realize, the SEC never said that they can’t approve an ETF. In fact, they were clear about what they needed to see in order to get there. And so you just have to follow the breadcrumbs and then if the data show meets the requirements, I feel confident that they’ll move forward with it. So, we’re working on it. 

Tony Edward: Awesome. Well, I’m fingers crossed. I’m hoping you guys get approved this year and the others as well. Now, there’s gonna be some new listeners listening to this interview or watching this interview. Can you explain maybe in layman’s terms, why an ETF is important and what you think it will do for Bitcoin in the future? 

Matt Hougan: Yeah, sure. I think it’s really important. Here’s the reason it’s important. The way crypto has evolved historically it’s not the reason most people think. Here’s why I think it’s important. The way crypto evolved historically, is there a set of sort of tech-friendly retail investors who feel comfortable buying in Coinbase, or Kraken or other accounts or owning their own private keys. And that market is well serviced today. There’s a set of large institutional investors who can go direct custodians, they can go direct to Fidelity or Coinbase custody and buy hundreds of millions of dollars in Bitcoin. And that market is well serviced today. But there is a fat middle and it’s about half of all wealth in America that runs money through financial advisors or family offices or self-directed through their own brokerage accounts. And those people aren’t comfortable with an app on their phone holding $100,000 in crypto. And they’re not large enough to have a direct relationship with a custodian. And that’s the market that needs an ETF. 

And they need an ETF because it fits into their investing workflow. If they’re a financial advisor, it fits into their advisor workflow. And that is a just potentially huge market that wants to own crypto. We survey financial advisors, 30% of them think that we, based on the last survey, think Bitcoin will be worth over $100,000 in five years, 30%. Only 9% of them have any allocation to it. So, 30% think it’s going to be the best performing asset class in the world over the next five years. But less than a third of those people are allocated. The reason for that gap is it’s hard. They have to do a private placement with us with all this sort of paperwork. They have to send individual wires for every client. A Bitcoin ETF will make it very easy for any investor who wants to securely allocate crypto to do so. And that will open up the market to a large number of investors. You know, I think it’ll help bring in a more diverse set of investors. It’ll just be strongly positive for the Bitcoin ecosystem is my take.

Tony Edward: Yeah, absolutely. And I am super excited when that moment happens of the approval. I think we’ll certainly see some floodgates open up there. So, let’s talk about Bitcoin. It just rallied to 49,000, has a pullback right now. But what’s your take a given since your entry point into the market and how we’ve grown over time? 

Matt Hougan: Yeah, I think we’re at a really interesting point. I think we’re, I think as I said, we’re crossing this chasm from the early adopter market to the mainstream market. That’s what’s driving the price appreciation. It’s folks like corporations coming in and buying crypto, it’s insurance companies coming in buying crypto, it’s asset managers buying crypto, it’s some financial advisors buying crypto. We have all these sort of mainstream investors that are moving into the market. And that’s been what’s been it’s been driving up the price. You know, Mike, I continue to think that Bitcoin’s price is wrong. And when I say it’s wrong, what I mean is, there’s a world where the skeptics are right. Where it doesn’t amount to much, it doesn’t establish itself as digital gold, it’s not held by major institutions, not ever used in any sort of commerce. And in that world, the price should be much lower, right, it should be 1,000 bucks or something, it should be a play thing. 

And then there’s a world where it does establish itself as an institutional store of value that traditional mainstream investors hold, that institutions hold, that financial — And at that point, the price has to be higher, because there are more investors coming. The vast majority of investors are still on the sidelines. So, I think the price is wrong. It’s really at an interesting point, because we’re seeing if it can make that leap, right. Is Morgan Stanley’s new paper correct? Or is that just a blip? If it’s correct, I’m very bullish for crypto and its outlook. Obviously, I’m very bullish, I work at Bitwise. But that’s how I think about it. This is a very exciting moment. And the important thing is, that means the market is so much bigger than the early adopter market. I mean, it’s orders of magnitude larger. There’s still so many investors who are on the sidelines. 

Tony Edward: So, let’s say we continue to see that adoption and the Morgan Stanley’s of the world start jumping in; do you have a price prediction for this year a future bull runs? 

Matt Hougan: I’m bullish, I’m not allowed to get price predictions. But look, it’s really easy in Bitcoin to think about price. People get worried about valuation metrics and how to figure it out. It’s really very easy. The supply is fixed, you and I know it, everyone knows it, and so it’s just a question of incremental demand. And I guess my net view is there is a lot of demand still on the sidelines. And if we continue to see the sort of circumstances that bring that demand in, those circumstances are rising concerns about inflation, those circumstances are a regulatory environment that is still relatively pro-crypto, those circumstances are a relatively robust market that’s allowing people to take on sort of risk-sensitive positions, and the mainstream of the asset. If that continues, we’re still in a bull market, and we may still be in the early phases of a bull market. It’ll be volatile for sure, you and I know that. It’s always volatile, there’s always the potential for large drawdowns. People should size their positions appropriately. But there is so much still mainstream capital that’s sort of teetering on the edge of coming into the market. And if that continues, I’m very bullish. 

Tony Edward: Sure. And, look, I mean, something we just saw, which I don’t think a lot of people saw coming, but maybe they did if they watched or saw Michael Saylor’s conversation with Elan on Twitter. 1.5 billion of Tesla’s Treasury and MicroStrategy just held a conference, Bitcoin for Corporations, 7,000, I don’t know, CFOs or representatives from companies were there. Do you see that trend continuing? Maybe the Apples, the Googles of the world decided to do the same? 

Matt Hougan: Definitely, for two reasons. One, fundamental — well, three reasons actually. One, headline risk has been somewhat removed. We have an S&P 500 company with $1.5 billion of Bitcoin on the balance sheet. You can clearly do it and the equity has been rewarded. Right? So, that’s point two. So, far, companies doing this have been rewarding the market for doing it. And three, you have a lot of companies with a lot of cash, and there is a generalized increase in concern about the value of that cash, and people are looking for where they can avoid that risk with at least some portion of their balance sheet. And so I absolutely think we’re going to see many more corporations do this. Twitter was talking about it, right? I think it’s increasingly mainstream. And importantly, these are like Bitcoin sinks. Right? So, the Bitcoin is going in, and it’s not going anywhere. It’s kind of like GBTC, right? These are sinks for long-term holdings in Bitcoin. And it makes me very bullish. So, yeah, I think we’re just at the early phases of that. I think Saylor deserves a lot of credit. I think [inaudible 00:27:27] deserves a lot of credit, I think other people who are talking to corporations deserve a lot of credit. And it’s exciting. It’s exciting. 

Tony Edward: And I recently spoke to the Mayor of Miami and I didn’t see this one coming. Like I got Michael Saylor and the companies and so forth. But what do you think is going to happen if cities across the United States even just states themselves start adopting Bitcoin, and look, some central banks around the globe? This seems like it’s going to go crazy. The possibilities here maybe endless I don’t know. 

Matt Hougan: Yeah, I think Suarez is amazing and really forward-thinking and doing a great job for his city in terms of attracting the crypto economy there. You know, what you’re pointing to is something that’s really interesting to me. And I come from a mainstream financial background. So, a few years ago, I was skeptical of many of these really out of consensus ideas like central banks holding Bitcoin, or governments holding Bitcoin, or corporations holding Bitcoin because they were worried about inflation. Those weren’t things you could say with a straight face at a traditional finance conference two years ago. You probably could at crypto, but not at a Credit Suisse conference. Now, it’s not the case that that’s going to happen, but certainly, the possibility that it’s happened has widened. So, the range of potential outcomes has widened significantly to the point where you have to accept the possibility that central banks could be holding Bitcoin in a few years. You have to accept the possibility that significant trunks of international trade could be settled in crypto assets like Bitcoin at some point. And you’re already seeing it with early adopters like Miami. 

So, it’s really fascinating to see these ideas that were outlandish a few years ago suddenly become mainstream. And as you mentioned, the potential implications are really, really significant. Look, I don’t think a lot of people grasp how big the potential market is, right? So, if you think about the history of the internet, history of the internet has been figuring out how to do new things with the internet since Albert created it in the 70s. We figured out how to send text over the internet, that created email, how to do media over the internet, and that created the World Wide Web, how to do voice over the internet created VoIP phones, commerce over the internet, you got Amazon. This is money. Money is a really big market. And so what you’re speaking to is just the size and scope of that market. And as you start to think that’s in play, it’s really exciting. Now, it doesn’t have to happen. There’s huge risks, it could all go wrong. There are plenty of reasons why it won’t play out. But those outlandish ideas are starting to be considered less outlandish. And that’s being baked into the price. It’s part of the reason we’re seeing the prices that we’re seeing today. 

Tony Edward: Sure. Yeah, it seems the taboo factor has gone away. So, on that note, let’s talk about some of the potential risks. And there’s fud out there about Tether. And, look, you see this, Christine Lagarde of the IMF saying, “Well, no, central banks are not going to hold Bitcoin, and no, no, no, this and we’re going to regulate it.” What are your thoughts on those situations? I know I just threw a bunch of stuff at you there. 

Matt Hougan: Yeah, that’s great. I think the Tether’s story is just unfortunate, but I don’t spend that much time worrying about it. I wish it would go away. I wish there wasn’t Tether in the world. But we have it. I don’t think it’s an existential risk in any way. It’s just an odd risk. You know, one of the real risks that I think about, when I think about crypto, not Bitcoin but crypto broadly, regulation is the risk. You think of something like DeFi, which is one of the most exciting corners of the market right now, one of the most promising risky areas of the market, regulatory decisions could determine whether that’s a huge market, or very truncated and maybe even a failed market. It is subject to that regulatory risk in the same way, I would say that Bitcoin was subject to regulatory and sort of existential binary risks in 2015. You know, 2013, 2014, there were many places where Bitcoin was hanging by a regulatory thread or an institutional thread. Could it be deemed as security? That would have been disastrous, right? Could Silvergate cut off banking services? Like it’s very hard to do banking back then.We’ve removed that from Bitcoin by and large, but other parts of the market, I think are subject to that risk. For Bitcoin, yeah, there’s regulatory risks. That’s probably the primary risk. I’m just personally of the view that it’s relatively attenuated, and that people are optimizing to embrace the growth of it as a growth engine for a new economy, but it’s definitely worth being concerned about. 

Tony Edward: Sure. Yeah, I could certainly see some strict regulations come on board. But, you know, I also think back to Brian Brooks, I know he’s out now of the OCC. He went on CNBC and said, “Hey, no one’s going to ban Bitcoin.” But sure, they’re going to regulate it, I’m sure they’re going to tax the hell out of it and all of that. So, it almost seems like the genie is out of the bottle with even though they regulate it, they can’t stop it now. 

Matt Hougan: I think that’s absolutely right. And you know, one thing people point to is the government seizing gold in the US in the 30s. But people need to realize a very different situation, the dollar was pegged to gold. The US government was short of gold, they needed gold. So, that was a desperate measure to maintain the gold, the dollar fiat peg. I do think it is — the lawyers are sitting on my shoulder, extraordinarily unlikely that the government will ban Bitcoin. I don’t even know quite what that would mean. And generally speaking, at this point, I still think there’s a regulatory under [inaudible 00:33:08]. I mean, one of the stories of the past few years is increased regulation, increased enforcement has been good for the market. Enforcement against the ICO space, good for the market. Right? 

Crackdowns in general against unregulated exchanges or trading venues, good for the market. They arrested the CFO of Binance. I mean, not of Binance of BitMEX. Right? And the market held steady in the rally. In general, if we want institutional money to come into the market, it has to be relatively well regulated. Now, could there be regulatory overreach? Of course. But, generally speaking, I’m of the view that sound smart regulation is going to be great for this market and accelerate it significantly. 

Tony Edward: Yeah, absolutely. I think things that have come out, have helped this space. You know, the only thing I think there was major pushback on was Mnuchin’s wallet regulation. But other than that, regulating the ICOs and going after the bad actors, that’s helped the market mature, for sure, to your point. 

Matt Hougan: That’s absolutely true. And now we have all these regulators coming in who are more or less experts in this space, right? Gensler taught a course on blockchain, a number of the other appointees are experts in this space. People are often confused, like, why this wave of crypto blockchain experts are coming into the government. And the reason is, this is the most exciting area of finance. So, if you care about finance, of course, over the last four years, you’ve been learning about this, reading about this, becoming an expert in this. And for that reason, I think, the sort of risk that was exposed in Mnuchin’s last-minute mark is attenuated. Because I think there’s a better understanding that this is something with a great deal of promise that needs to be protected and some sharp edges that need to be rounded off, and that’s what we should all be looking forward to. So, I think the fact that we’ve gotten this far without that sort of excessive clampdown means it’s less likely to occur. Of course, it could occur. You can never predict regulations, but I’m feeling positive about it. 

Tony Edward: Yeah, absolutely. And you mentioned earlier speaking of wallet regulations, certainly, the top 10 index funds that you guys have include some DeFi cryptos. So, talk to me about DeFi, and where you see it maybe in the next three or five years. 

Matt Hougan: I think it’s the most exciting and risky areas of crypto. I love it because it A, is providing real services to the crypto economy right now, at scale, right? [inaudible 00:35:37] trading $30 billion, Aave doing multi 100 million dollar flash loans. I mean, these are real projects doing real things. And the other thing I love about it is it’s very easy for me to see how this crosses sort of the blood-brain barrier between crypto and the rest of the economy. You can easily imagine price Oracle’s bringing in prices from the sort of traditional economy and allowing those to operate in the crypto setting. And we’re not quite there yet, but it’s so easy to see that pathway. So, I see it as a fundamental challenge to the legacy financial system and therefore, one of the most exciting opportunities I’ve ever seen in my career. 

Now, the flip side of that is these are very new protocols. But this is a space that didn’t exist a year ago. And so do I think there’ll be blow-ups? Yes. Do I think they’ll be hacks? Yes. Are there enormous risks? Yes. Do the valuations make sense today? I don’t know. But, I think this is a story with decade-long legs. And I think the term decentralized finance, which has only been used in the Wall Street Journal four times so far, I think, will be used 400 times in the next couple of years, because I think it’s a very big deal. Really exciting and I love watching it develop and turn. 

Tony Edward: Absolutely. So, I do want to ask you, as we wrap up on the additional questions here, I want to get your take if you read on it, the SEC Ripple XRP lawsuit and you know, Jay Clayton, on his way out. What are your thoughts on that? Because I do believe it has implications for the rest of the market, depending on the outcome, because — [crosstalk] 

Matt Hougan: It definitely has implications, absolutely. And of course, we don’t know how it’s going to come out. Right? So, I should say our index had XRP in it before that lawsuit was filed, it was removed and we announced that. Our index has a rule about removing assets that are “undue” risk of being deemed as security. I think a lawsuit in the view of our index committee made it an undue risk. It’s not an opinion that it is a security. So, I can’t opine on whether it is or is not. But I think what it’s done is it’s helped put a stake in the ground. Look, we know a few things about security status and it’s very important. The SEC has explained that Bitcoin, not a security. Easy to define because there’s no pre-mine, fair distribution initially, really decentralized. It’s also explained that Ethereum may have been a security but is no longer a security. Hugely important and amazingly brave regulatory interpretation, right, to talk about how that can evolve, had huge implications for the growth of the crypto space. That was a point where if the decision had gone the other way, it could have had really negative effects on crypto. 

And now we have a situation on maybe the other end, where it’s clear the SEC has concerns, where there’s too much centralized ownership, where there’s maybe too much centralized control. The reason it’s important is because there are a bunch of projects in the middle. And so what you’re going to see in the projects in the middle is I think, thinking about what are the lines to get below that requirement. And that’s going to lead towards more decentralization, it’s going to lead to smaller treasury holdings, it’s going to lead toward new ways of thinking about capital raises, and the timing between that and assets being on the market. And I think it’s an example of how the market is going to learn where the regulatory lines are. And I think we should all be hoping that we learn very clearly where those lines are because that will help the space evolve. So, it’s an interesting thing. I have no idea how it’s going to play out, but it definitely is going to push other projects to be closer to ETH, maybe than XRP was because it does show that that line is maybe not over here, it’s maybe more in the middle. 

Tony Edward: Sure. And then a point you brought up of things can change over time, maybe a project starts in their initial distribution, you definitely broke securities laws there, right? And then over time, it matures and it becomes more decentralized. And I think a lot of projects and/or coins in the market are going to have to make some adjustments, and they’ll probably fall in that bucket as well. 

Matt Hougan: I think that’s absolutely right. And again, just think about the amazing braveness of that regulatory interpretation. It is truly a remarkably nuanced, thoughtful take on security status. I’m a big fan of it. And I agree with what you’re saying. You’re going to have a lot of projects that are thinking about that and where they line up in that space. And that’s good, right? That’s good.

Tony Edward: Sure. Sure. I mean, we do have to abide by the laws. And yes, there’s some laws that need to be updated to digital assets and crypto. And maybe you find a common ground, right, in the middle of the road there. 

Matt Hougan: 100%. 

Tony Edward: So, I have to ask, because I know a lot of different companies now in the crypto space are thinking about this, and it’s kind of the traditional way of doing it. If you need things done, you have to lobby, you have to form alliances and packs, and whatever it may be. Is Bitwise doing anything from that standpoint to help push clear regulations? 

Matt Hougan: Sure. I mean, we’re a big fan of it. We’re members of the Digital Chamber of Commerce. And I think that is an area that crypto, in general, needs to pay more attention to. So, Bitwise and other providers, either indirectly through groups like the Chamber, or directly in terms of educating regulators, you know, trying to do our part. And it’s really important, people should be sending in comment letters, they should be providing commentary. This is our space. And if we want the regulations to evolve in the right way, we have to be contributing to the education and to the understanding. Can’t expect people who are regulating multiple industries to have the same level of nuanced understanding of what’s going on in crypto, and what’s important as we have from operating within. So, yeah, it’s an important part of what we do. And we look to do more of it as we scale into the future. 

Tony Edward: Awesome. That’s great to hear because we certainly need more of that. And I’m glad you guys are helping leading the charge there. So, I want to wrap it up with some quick rapid-fire questions. Like what’s your favorite food?

Matt Hougan: Raspberries. 

Tony Edward: Nice. Favorite musician or band? 

Matt Hougan: Oh, that’s a tough one. You know, over time, span of my life, I’ll go with Bruce Springsteen. Know you’re in New Jersey so I’m playing to the home crowd. Recently have been listening to a lot of Houndmouth, a lot of Lone Bellow, a lot of other chef soundtracks actually while I’ve been cooking, so those are some of my recent albums. 

Tony Edward: Very cool. Can’t go wrong with the boss. 

Matt Hougan: Exactly. 

Tony Edward: Favorite movie? 

Matt Hougan: Favorite movie? I think Good Will Hunting, big Good Will Hunting fan. 

Tony Edward: Awesome, great movie. What’s your favorite book? 

Matt Hougan: Yeah, a Heartbreaking Work of Staggering Genius, which is a phenomenal book. It’s the book that made me initially want to come to San Francisco, which was an important turning point in my life. So, Dave Eggers is a hero of mine, a champion of writing and literacy, and I still love that book today. 

Tony Edward: Awesome. And finally, when you’re not working at Bitwise, what are you doing for fun as far as a hobby? 

Matt Hougan: Yeah. I got Bitwise and own a few boards and three kids so that is a distant dream. But what I really love to do is hike. I really love to hike. I love hiking here in the Bay Area where I live. I used to live in Acadia National Park, and I love hiking there as well. So, hiking is what brings me joy and clarity. So, I do that when I can. 

Tony Edward: Awesome. Matt, just a pleasure chatting with you today. And certainly, fingers crossed that we get this Bitcoin ETF approval this year. And I appreciate you and all the things that Bitwise is doing for the market. 

Matt Hougan: Thanks for having me on and I’ll be working on that ETF. You can count on it. [00:43:41]

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