Tim:
The question of what defines a security has been huge in the blockchain community over the past year. How does Muirfield address this issue?

John: 
I’m excited about the project because Muirfield addresses that issue by acknowledging that it is, in fact, an issue. Acknowledging that regulatory requirements exist for a reason and working creatively within the construct as opposed to trying to – either blatantly or in spirit – get around regulations. I told Tom from the beginning I’m hyper interested in the evolution of capital markets within the regulatory framework that we currently have. We didn’t waste time in this process trying to figure out ways around regulatory constraints. We acknowledged why they exist and structured a product that works within them. I think some of the “revolution” being spoke of today is reminiscent of the tax avoidance “innovations” being sold in the 90s. And that didn’t end well.

I think from the very beginning Muirfield had an approach of not recreating the wheel, not trying to tell the SEC how they should consider us. Instead, hire really good advisers and really good regulatory consultants and create a product that actually fits within the current paradigm. And if things change in five years and if either Congress or the SEC releases a different regulatory construct that allows for lighter touch or different changes, than that’s fine, we’ll embrace that and go forward. But there was never a moment in this process where I felt there was an attempt to get around these rules, just work within them.

Tim: 
Ok, great. That’s awesome. How does blockchain technology affect compliance in that regard? Does it make it easier or more challenging? Anything to add on that?

John: 
Technology should make operations more efficient. Compliance, in large part, is just operations. There is an operational function around compliance – ensuring a document is valid by doing certain checks, etc. This operational component of compliance becomes more efficient with technology. But there’s also a judgment level of compliance, and that’s where it gets a little difficult. If you rely too much on technology, the judgment component becomes more susceptible to manipulation. Closed loop systems are prone to hacking. Linear certification paths can be hacked. Say your primary point of identification is fingerprints. Fingerprints can be falsified. If you don’t have some analog judgment baked in, then you’re more susceptible to manipulation.

Critics of RegTech will say that it makes companies overly reliant on technology and therefore opening themselves up manipulation. They’re not entirely incorrect to think the right answer is going to be a combination – leading tech, which blockchain is definitely a part of, but also not forgetting that both in terms of the susceptibility to human error as well as the reality that there will be people trying to subvert this tech, you need to have that human/analogue component baked in.

On the conference calls that I’ve been on with Tom, and where he’s done really well, is he’s married the leading-edge tech with sort of the old school approach to compliance, and to make sure that it’s embedded into the tech number one. And then secondly, we don’t become overly reliant on a closed end electronic system that is susceptible to manipulation.

Tim: 
Good answer. Yeah, I think that the Muirfield product, definitely overall, is more of a hybrid between a lot of things and dynamic in its ability to incorporate these new technologies among old structures, and obviously the human element is important too.

Moving on to the next question, do you have any ideas about the SEC’s long-term approach to cryptocurrencies? Or any insights around current regulations? Do you think more regulation will hurt or harm the industry?

John: 
I have a different view from most in the crypto world around the SEC. I think the SEC has been extraordinarily reasonable about this, and it’s frustrating because you talk to the community and half are like “oh my god they’re so heavy handed” and the other half’s like “oh they won’t make a decision”. So, everybody wants to blame the value of their token on something else other than their crappy token. Half say that the SEC is acting too quickly and too draconian and the other half are saying they’re not making the decision then there’s this gray area and that’s why nobody’s buying these things. Which is complete nonsense because there’s lots of asset classes that exist in a regulatory gray area that are very vibrant.

I think the SEC has been great. I think they give the right balance of thoughtfulness while maintaining protections. And I think through their enforcement actions they’re letting people know the direction. You don’t want the SEC today to release some massive new rule set or guidance because it’s not going to make sense, it’s impossible to make sense right now because this is a growing evolving sector. They’re very cognizant of the fact that the exuberance around cryptocurrency has driven investment into blockchain technology which I think they see value in. So, they’re not looking to destroy the ecosystem with some heavy-handed rule set because that would destroy all the investment into blockchain.

I think they’ve been very reasonable and thoughtful and hands off, while going in and hitting at least some bad actors, of which there are a lot. I don’t think any more than say the penny stock market, but there’s certainly a lot of very bad actors in the space. We can expect more of the same, which is a moderate, thoughtful approach that is particularly focused on protecting retail investors. I do not think we’ll see easy regulated access to retail for crypto anytime soon. I don’t think it’s a good thing if that were to happen because that’s going to accelerate regulation and protections because retail quite frankly probably shouldn’t be trading this today. It’s too volatile and complicated.

If they wanted to, there’s enough just frauds, clear criminals, that they could spend all their time doing that. I don’t have an inside knowledge, but I think that the reason you occasionally see them going after someone who is not literally a criminal, maybe a someone operating in the gray area, is they want to remind people that that’s also a problem. Obviously, the public comments will filter out and then eventually, probably not in the next year or two, but eventually there will be either a congressional mandate or the SEC will release more substantive rules, but that’s not going to be for a while – the industry still has to evolve and stabilize.

John: 
In terms of “will more regulation hurt or harm the field,” I think that’s a bad way of thinking about it. Regulations are like death and taxes. It will neither hurt nor harm. It is what it is. We have elected as a society to have certain morals about financial markets. We protect retail. We try to have basically equal information flow. We have certain philosophies around how markets should function. That might change over time, in ten years we might not have insider trading laws. But, right now, what is our morality that the SEC is enforcing? And that’s what we have to function in. And whether or not it’s the OTC market or whether it’s a listed market, there’s an expectation that everyone is going to behave in a certain way. If the asset class is going to thrive, it’s going to thrive regardless of the regulatory environment within which it functions to some degree.

Perhaps the regulatory environment could mute or accelerate Alpha a bit, but, people buy what they want to buy. If assets are good, they buy them. They buy them in a regulated market or they buy them in an unregulated market. If people want drugs they buy drugs. People want stocks, they buy stocks. Marijuana stocks are robust in a very gray regulatory environment. The digital asset industry has to stop complaining about all the outside factors and see if they’re problem with selling their tokens is because something’s wrong with their tokens. Not because of the SEC or anybody else.

Tim: 
Many investors and managers get involved in private equity because the governance situation seems simpler. You don’t have as many shareholders to stay accountable to. Has that been your experience? How will blockchain change private equity governance?

John: 
I think to some degree you’re right. I think there’s less of a day to day compliance burden on private equity versus liquid markets. I think that’s certainly one of the reasons they get into it. The other reason is that people like having capital for longer periods of time. It’s really nice to not have to mark your book every day to market. Most asset managers would love that. For a long time when markets were tearing, and Alpha was easy to find, it was better to have a hedge fund because you got paid every year versus having to wait until you sell the assets. Now that things have reversed, and Alpha is really hard to find, you’re not getting paid as much on the hedge side and you’ve got an increased regulatory burden that exists since the financial crisis. So, everybody wants private equity. At least from the managers’ perspective.

So, in a low Alpha environment for liquid equities or instruments, then private equity is great. In a high Alpha environment, hedge funds are great. The pendulum has swung a little bit further towards heavier regulations in the listed market. If there was ever a big scandal in private equity where a bunch of private equity firms are revealed to not produce the IRR that they thought they would, and pension funds lose lots of money or are publicly embarrassed, we could see that swinging the other way. But for now, all things being equal, most people who manage a hedge fund would really like to be managing seven year locked up money in private equity.

The number of shareholders I don’t think is really an issue. As a hedge fund manager, you don’t really know how many shareholders you have until things are going badly – when things are going well, nobody cares. You can have 30 thousand of them. You don’t hear from them very often. There’s an IR function there, you hire an administrator that takes care of all of that. It becomes a problem in a low Alpha environment when you’re not making money or losing money, then yeah, having a thousand investors asking questions is problematic. On the flipside though, you can make an argument that it’s better to have a lot of investors because there’s a lower probability of them leaving you. If you only have 10 investors and if two leave, that’s a problem. If you have 150 or 500 investors, if two leave it’s not a problem. So, I don’t think that’s as big of an issue.

In terms of how blockchain will change private equity governance, I don’t think it’s just private equity governance. I think, in general, going back to my argument around compliance and governance, there’s an operational component and there’s a judgment component. For the operational component, which is ensuring documents are aligned, ensuring signatures are aligned, ensuring that processes are followed, blockchain can be incredibly useful. And whether permissioned or public, I don’t think it particularly matters because these are the types of decisions and events that don’t require low latency, which is an issue with public blockchains. It can be useful to create a permanent record and an immutable record of certain types of governance activity because when you have a problem later on, you want to be able to look back and say okay how did we handle this in the past. And there’s also some element of if we decide we’re going to behave in a certain way, if you can lock in those decisions going forward, that’s also really helpful.

Tim: 
You have significant experience in both private equity and other financial products like commodities and hedge funds. Does time in those fields affect how you’re thinking about the newly emerging crypto markets?

John: 
Yes, absolutely, and specifically the commodities world. I try not to analogize what we’re doing now with the past because it’s always a little bit different, but it’s also a little bit the same. I remember 10 years ago the push was to ‘future-ize’ everything. I had all these people coming to me when I was head of strategy at NYMEX and would for example want to create a future on Jack Welsh, the CEO. Where the future will be tied to the EBITDA of the company he oversees. Effectively, you could go long or short the CEO. The same thing was pitched for NFL players’ careers, you create futures on the sponsorship revenue that would be generated by the NFL player. Future-ize everything – and that we can make everything liquid and everything will be tradeable, and futures are really easy, and you pay 5 percent, and there’s leverage involved, they’re cheaper than equities and they’re in a lower regulatory environment. Does that sound familiar? It’s exactly the tokenize everything argument.

So, when I hear the tokenize everything argument I get flashbacks to the future-ize everything argument. And here’s the thing, it’s good in theory, but whether it’s futures or tokens or an even cheaper and efficient way to transfer risk, wonderful, that is evolution of capital markets. But you lose me at the everything part of that phrase because not everything should to be liquid. There’ll be a reckoning around the fact that not everybody wants to buy and sell all these assets regularly. If you have a shitty product, if nobody wants to buy your thing, simply making it easier to buy is not going to solve your problem. I bought a co-op in New York this year. An awful, horrific process. Billions of dollars transact every year in New York City in co-ops because people want to buy co-ops. If you made the co-op buying process much more efficient, that would be great. And perhaps some amount of additional people would want to engage that market – but it wouldn’t quadruple suddenly. There aren’t a bunch of people going, “I really want to buy a co-op. I have the financial means to buy a co-op, but you know what, I just don’t want to deal with the bullshit.”

This notion that by decreasing the friction of a transaction you magically create liquidity in everything, is naïve nonsense. Now with that being said, if you have a product that people want to transact, if you have a valuable product with intrinsic value like a private equity fund with real assets behind it, an operating history, if you can improve the process of buying that LP interest for example, which is a very difficult negotiating process, it will have impact and increase the liquidity of that of that instrument. But it won’t work on everything.

Tim: 
How do you see blockchain affecting the broader traditional investment world over time?

John: 
When Tom came to meet me, I said that I’m a cynical enthusiast. Don’t put me on your advisory board if you want a digital asset “the U.S. dollar will be gone in five years” fanboy… I’m just not that guy. I believe in innovation. I absolutely believe that blockchain, just like AI, is going to have a valid functioning role in capital markets. But I’m not in this camp of it’s going to change everything.

I think it’s going to really improve the plumbing. In the short term. What I mean by that is there are a lot of people on Wall Street whose job is to just compare two spreadsheets. And all of those jobs are going to go away. Just like how lower level customer service jobs will be gone via AI. And the error rates will drop, and costs will go down because you won’t have to pay those salaries anymore. Now the thing about those error rates is that they’re probably pretty low already. That’s the thing about these legacy analog systems is that they actually work really well – but they’re costly and they’re cumbersome.

So [with these new technologies], you have more throughput. Times will go from t+3 to t+1 to t+one hour and it’ll be cheaper because people will be laid off. That’s the harsh reality of the short-term effect of blockchain. It’s going to improve the plumbing. And the result will be increased speeds and decreased costs. And that’s what we’ve been moving towards anyway since the advent of straight-through processing and traditional databases. You’ll see employment in the financial services sector continue to drop. Hopefully those people will retrain and go on to even more productive and satisfying jobs. That transition is innovative. That’s actually how the world changes.

Take autonomous driving. Everyone’s can’t wait until steering wheels go away. I just can’t wait until cars adjust on the street to free up parking spots. Or every single car has integrated GPS… That is world changing. Because then you have traffic decreasing, which is a massive problem around the world, increasing productivity… Those two “simple stupid” things that everyone kind of rolls their eyes at, if those happen in the next five to 10 years, that makes the world a significantly better place. Maybe I’m wrong and maybe in five years that we’ll live in a decentralized trustless society, but I think the short-term impact is going to be for low-level trust-based functions to improve efficiency by removing jobs. And we need to be ok with that.

Tim: 
Yeah. Really good. Okay. And I think we’ve already pretty much covered that last question. Unless there’s anything that you wanted to follow up on with NYMEX or anything relating to your past experiences in traditional finance.

John: 
The one comment I’ll make about NYMEX is that I was there when we went from open outcry to electronic trading. That was a huge paradigm shift. That was massive. And when you talk about these big shifts, like to blockchain technology, the one thing that everybody forgets is the switching costs. If you’re coming to me with an absolutely better solution, but that solution results in a 5 percent improvement, you better calculate the value of that 5 percent versus the switching costs

Everybody made fun of U.S. banks because they didn’t have chips in their cards until really late. You go to Europe ten years ago they had chips in their cards. But it cost a buck to a buck fifty to put a chip in a card and ship it. If you’re JP Morgan and you have 150 million cardholders, and you examine fraud rates versus the expected increase in protection, it wasn’t economic for some time. They’re not dumb. They know it was better technology – but there was a has a huge cost associated with switching.

When I went to the floor of the NYMEX and I saw open outcry and guys screaming and yelling and making hand signals – and this was 2005 – I thought it was insane. This is crazy. This is archaic, stupid stuff. But then you go and you dig in and you’re like wow, there are almost no errors. This crazy system actually works very well.

And I’ll never forget a trader on the floor – and of course they were conflicted, and they didn’t want to change because they were making money – but this one old trader said to me, “You know John, there’s a reason the design of the spoon hasn’t changed since the Stone Age. It works.” And yes, it’s a self-serving comment and of course you should push for progress. But he’s not wrong.

So, when I hear ‘throw out the entire FIX and SWIFT engines and replace them with blockchain’, it’s hard to take seriously. You have to give a more compelling reason then “this is better technology” because the existing stuff works. And it works really well. When somebody says we’re going to do a stable coin and tie it to the U.S. dollar. Why? What problem are you solving besides creating a new derivative and increasing the amount of friction it takes to get to the U.S. dollar?

“We’ve built this thing, blockchain, and it’s great, and therefore you all have to accept it in every form” is a really stupid argument. Switching costs aren’t just economic, they are cultural, they’re social. You can’t assume everybody who doesn’t want to switch is a Luddite or conflicted. There’s an equal chance your idea is not as compelling as you think it is.

They are sometimes very valid reasons for holding on to legacy systems. And if you’re not getting traction – it’s not the SECs fault, it’s not people “don’t get it”. People in blockchain should never say the words ‘they don’t get it’ anymore. Because it’s stupid and offensive and they do get it. There are very smart people who think blockchain is overrated. So, they get it. It’s just about improving your product offering.

Tim: 
Absolutely. That was fantastic. Actually, one more thing. I didn’t write this question down, but I was reading through our white paper and it talked about an independent director on Muirfield’s board representing the tokenholders interests and giving them confidence and voice in company oversight. Can you touch on that?

John: 
Yes, and this goes back to the combination of digital and analog. Set up a really good governance structure. A lot of it can be hard coded into the token. That’s great, but the value of bringing in a senior director that has power and has influence, who’s solely there to protect the interests of the limited partners, the tokenholders, that’s injecting an analog component.

And that’s ceding power and control to some degree. Which is tough to do when you are the investment manager.

You ever hear that phrase used in the crypto world, ‘code is law’? I hate that phrase, it’s the stupidest phrase in the world. It’s stupid even on its own merit – meaning it doesn’t mean what they think it means because what they’re trying to imply is code immutable and the blockchain is immutable that makes it perfect law. But the law changes, it evolves… Otherwise you and I would still be fined for owning more than six chickens. It’s a stupid, stupid phrase that stupid people say. Code is not law. Code is the opposite of law. Law is thoughtful, and mutable and allows for judgement and exceptions. Law is analog to a very large degree. So, I think in bringing in somebody – Tom didn’t have to do that, that’s not typical in the private equity world, quite frankly. It’s typical in the hedge fund world, not in the private equity world. – For him to go and say I’m going to bring in an outsider who may disagree with me. And whose sole job is to look after the interests of investors. That’s certainly best in class. Not a lot of private equity firms do that.