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Rafael Casas: [00:00:05] Welcome to Crypto with Accountants CWA powered by Bitwave where we talk with technologists and crypto enthusiasts as we discuss current events in economy, politics, technology and digital assets with thought leaders from around the world. Hosted by Pat White and Rafael Casas. Today we have a fantastic guest and personal friend, Dr. Sean Stein Smith. Many of you have probably already heard of him, but I'll give you a quick little rundown for those that haven't. Sean is an assistant professor at the city at the City University of New York, Lehman College. He serves on the advisory board of Wall Street Blockchain Alliance, where he chairs the Accounting Working Group. Sean sits on the advisory board of several other several other think tanks as well. Advisory to Crescent City Capital Crypto Asset Investment Fund, several bullet points and accolades that he has. I can go on and on, but he's visiting research Fellow at the American Institute of Economic Research, Top 100 Most Influential People in Accounting 40 under 40 in the Accounting profession from 2017 to 2022 by Practice Advisor, an outstanding young CPA of the Year award by a CPA in 2022. Sean, longtime friend, thank you so much for being here. We know you have an amazing and very busy schedule and we're just so happy to have you here. So welcome to Crypto with accountants.

Dr. Sean Stein Smith: [00:01:25] Absolutely. Rafael Happy to be here.

Rafael Casas: [00:01:27] And Pat, as always, it's awesome.

Pat White: [00:01:30] To Yeah, What's going on, buddy? Sean it's awesome to have you on on today, man. And we've known each other now for, for going on at least about four years, which is, is almost amazing. I mean, it's, uh, these crypto, crypto accounting yields long term relationships because it's going to war and, and coming back alive. Pretty much. That's how it feels most days. Yeah. Yeah. Sean, how did you. You know, just looking over your your resume here. So just out of curiosity, did you get into crypto first or did you get into accounting first? I'm sorry, into the Wall Street Blockchain Alliance.

Dr. Sean Stein Smith: [00:02:05] So I got into crypto and blockchain probably at the back half of 20 2015, early 2016. And then and then I joined the Wall Street Blockchain Alliance. I'd say I joined that probably during the first half of 20 2017, actually met Ron at a at a conference that, that I was on a panel at. And then after the panel started talking and everything sort of rolled forward on that point. Yeah, well, and Ron's just the nicest guy in the world, so it's easy to imagine getting getting sucked into the into the universe that way. What got you into crypto in 2015? So I was just finishing up my PhD work and, and so, you know, during that time I had no time for anything else. But, but during 2015, I was hearing about this whole blockchain thing, Bitcoin cryptographic money. And, and I was really, really interested in it. And so after I finished up doing my PhD research, I was able to sort of pop the hood on this whole blockchain thing. And then after I actually got some more knowledge on that, it really was like, Hey guys, wait a second. This whole blockchain idea is going to impact every aspect of accounting audit tax business at large. And so then I was able to build on that, get get more into Bitcoin. I was buying Bitcoin by, I guess Q2 2016 should have bought more back then. Obviously, but it's good [CROSSTALK] but yeah it was, it was your blockchain into bitcoin and then into crypto.

Pat White: [00:03:48] Got it. Super interesting. So, I mean, if you got in 2015, 2015 was right around when the Ethereum drop happened and things like that. So you've gotten a chance to sort of see the whole growth. I mean, that's from when there was only Bitcoin to now there's, you know, millions and millions of tokens spread across all the different ecosystems. What did you, you know, what sort of piqued your curiosity about blockchain and accounting? I know it's sort of a it's kind of a 101 question, but why did you think that it would change? Sure. And so and so really, the the big ways that I sort of thought and more and more knew, Right. That that blockchain was going to alter everything about the accounting, bookkeeping, auditing, all the rest. Is that basically the the core value add of a traditional audit, traditional in-house corporate accounting team is to organize data, verify it, confirm it, and to then to then make it understandable, right. Either to internal colleagues and management or to external clients. And so if you're able to have a traceable, transparent, unalterable record of those transactions in real time available to everybody who's a part of that network, that is a game changing evolution in how in how data, be it Bitcoin or any other type of information is managed, stored and then analyzed. And so, so that sort of light bulb moment, I went, Oh my God, it's going to upend everything. And it hasn't quite gotten there yet. But but all of us right here on this podcast, right, are really sort of trying to get that that message out. And how do you think how do you think blockchain has done versus kind of where we all think it's going to go eventually and where we are today and where we were in 2015? Like, how do you think how do you think we're we're doing? How do you think we're going along that along that path? You know, there have been some ups and some downs, right? There have been some ups and downs on the road.

Dr. Sean Stein Smith: [00:05:52] Yeah. And so I've been going around doing trainings, presentations, lectures at at all kinds of places, right? Colleges, accounting firms, policymakers. Really. I was starting that towards the end of 2016. And so and so from 2015 up until call it Q1 23, the whole conversation around blockchain has fortunately moved quite a quite a a bit forward, right? Pretty much everybody has a basic handle as to how it works and the opportunities it then creates. But I would say that that the biggest headwinds still aren't connected to blockchain. They are connected to crypto ftxs NFT frauds. Binance is a whole other conversation, but but all of those sort of bad, bad headlines and all of that directly connects to not having good accounting standards in the space. So it's almost like the, the audiences and the and the progress made in getting the accountants more comfortable and more sort of engaged with blockchain has been going forward, but at the same time it is being held back by those lack of, well, even like right now we're going through this period of, of, I don't know, reregulation or something like where suddenly the regulators, you know, we've we've all been crying for for focus to be brought to this for a long time.

Pat White: [00:07:22] Something happens like of the regulators like oh my God crypto yeah Guess we should look at that and then completely over rotate in the other direction on it. But let me ask you one question because I this was sort of a funny thing that I saw where observations like, were you were you surprised? So given we're talking this kind of evolution of accounting and crypto as as kind of brethren here, were you surprised when FASB came out late last year saying that they were rethinking their standards? So I was pleasantly surprised that yeah, pleasantly surprised. I was pleasantly. But I was pleasantly surprised. Right, Right. Because people have been banging on the table for the FASB to be more engaged in this space. I actually coauthored a a letter to the FASB with Ron and a third individual back in the fall of 2019 asking to have crypto asset accounting added onto their work streams. And so they've finally got the ball rolling at the end of I think it was the end of 2021, right? They finally announced their plan to add this and they are planning to have a rule on the books basically for Bitcoin and for ether by the end of of 2023. So I was I was I was pleasantly surprised. But I'm also I'm also cautiously optimistic that after getting that first rule on the books, that's going to be a a lot easier to add follow up rules and follow up standards going forward. Because because it ends up being kind of a addendum rather than a full restart from zero.

Pat White: [00:09:04] Get people get consensus that way. I mean, I was I was surprised that they touched it. Honestly. I thought it was going to be 20, 24 before they reasonably got to it. So I was I was very surprised, very pleasantly surprised that they actually decided to pick it up in the 22 Q4 22. And I'll tell you there, Pat, that that that that actually I don't think too much of anything policy wise will happen during 2024 and even more so during the back half of 2024. Because I don't know if you've heard, but but at the end of 2024, we we we have this upcoming vote. I think it's for president coming up at the back half of of 2024. So I kind of doubt that any policy makers or any regulators are going to be proactively trying to upset anybody on either side during that back half. Hey, dude, literally anything during that period? Yeah, exactly. Well, which. Which, of course, is interesting because all of the regulations from the 20 the 2020 infrastructure bill, 2020, something like that, all they got delayed from 23. Some of them, some of them were targeted 24, but they all hit 24. So all the stuff that we see now, the cost basis, the 1099 days or 1099, you know, what would be traditionally a, you know, a 1099 from your brokerage. All of that is slated to be enforced in 2024. So it will be a very tumultuous year for crypto, even if no one talks about. Exactly. Exactly. There's down the lead up to the already plenty coming down the pipeline anyway.

Rafael Casas: [00:10:42] Yeah, there's a lot going on. I wanted to quickly touch on something, Pat, that you brought up, some of the questions you had with regards to like businesses and blockchain. I know Dr. Sean, you and I go way back meeting like account techs back in the day in Boston and going to all of your educational courses and you know, they've been amazing. And I think that's something that you're really known for the education side, you know, bringing that to the accounting profession and businesses. And, you know, you just recently came out with a book and wanted to kind of touch on that. You coauthored a book here, The Emerald Handbook of Blockchain for Business, and wanted to see if some of the things that you're talking about is that also covered in your book more in depth?

Pat White: [00:11:19] Um. Absolutely. And so obviously, as as any book author knows, by the time you actually get the book out to market, you're already out of date. Right. But but in the book itself, right. The right the the whole goal of the book is to try to emulate and to try to mirror myself and my excellent coauthors and my excellent coeditors, basically trying to bring some objective, rational examination on these topics, talking about blockchain applications for business, blockchain applications in the audit space, blockchain application for non-financial institutions, and then also trying to trying to have a have a have a productive conversation as to why certain things have not happened yet. Right? Like a like a crypto ETF, a Bitcoin ETF. Why are you know that one That one's closer. The Bitcoin very very close man the news yesterday that that's that is really interesting I was I wasn't that were talking about pleasantly surprised that was not something that I was expecting at all given given the current climate. I never thought that that was going to start. No and and and and it's honestly all I believe thanks to one one judge basically questioning the arguments made by the SEC during the actual trial. So yeah, I was pleasantly surprised. Absolutely. Yeah. And with good reason. I mean, the end of the day, it is really bizarre that we have ETFs for every commodity imaginable, including now, you know, we saw I was just going to say that.

Pat White: [00:12:53] I was just going to say that Pat which is just which, which is essentially I mean, that's essentially a derivative ETF. Like it's it's not, but it is. It's a derivative. It's a short, short, long strategy derivative ETF on something, which is I mean, it's like it's crazy to like have all these insane ETFs. But then like, no, no, no, we can't do Bitcoin. Yeah, no. And I was going to mention that, that it's absurd, right, that here in the US, the global leader in everything financial markets related that there's no even crypto ETF right. And that honestly if the SEC is all about investor protection then it actually makes total sense to have a have a crypto ETF have that regulated brought under their their oversight and then allow the US marketplace because people still do it. There's still mechanisms to do it right, the grayscale trust and things like that. They're just so much less regulated, so much more, so much so many fewer rules around it. And they actually cost a lot more for those investors who are able to even enter into that space. It's costing them five, ten times as much, right? Because that one runs about 50. Yeah, that one runs about 50%. Right? Which is a value of value versus versus true value, which is crazy like and an ETF could actually do like straight mirroring of that with, with real, you know, with real market adjusting end of day stuff.

Rafael Casas: [00:14:15] Yeah that's super interesting. And actually on the same vein of current events, some crazy current events and hopefully not another black eye on the industry here, but Silvergate Capital for those listeners that may not have heard will liquidate after crypto collapse wipes out their bank. You know, they said Wednesday afternoon it's going to wind down operations and voluntarily voluntarily liquidate its bank after a collapse in the crypto market saw billions and deposits leave the bank. In recent months, there's been a lot of speculation as to what happened. Is it poor lending? You know, you actually had a great article in Forbes, Dr. Sean recently about scapegoats in this in this industry. And, you know, why they're they're looking for scapegoats as opposed to the underlying fundamental issues that are happening. So wanting to get you guys thoughts on that. You know, there's a lot of things in the background and a lot of scapegoats I see here.

Pat White: [00:15:06] So I'll go first there, Pat, You know, and and so the so the whole issue or the or the issues at Silvergate, I don't think really have had much to do with the overall crypto marketplace. Right. And and that from everything I've seen and I've been popping the hood on this story, basically starting back before the holidays. And and honestly, from everything that I've seen, there were there were two big, big things outside of the, you know, crypto is is bad headlines. Right outside of that, there were two main things. One is that more and more and more, there are more allegations, lawsuits, and there are class action lawsuits basically saying that that the management team at Silvergate, both at large and the two individuals in charge of Silvergate were actively involved in basically funneling money from FTX to Alameda Research. So one that that's a that's a big, big issue, has nothing to do, has nothing to do with the price of of of Bitcoin or anything else. And then two, it is a classic mismatch between assets and obligations. Anybody who's ever taken. Banking one on one. Right. Right. Understands that that the that the core risk of any bank is you have to is the bank management team has to manage their assets and obligations and the team at silvergate again as more evidence or information is actually brought out to the marketplace, it's more and more obvious that all of that had not really happened.

Pat White: [00:16:40] And then, yeah, sure, as I as I had customers trying to pull assets out, all of that then further inflamed those two underlying issues. Yeah, there are already partial partial reserves. Sean, I have a question for you, which maybe you don't and no problem, you don't know the answer to. This is very technocratic. Normally when a bank is unwinding, the FDIC will take them into receivership. Right. Even that, even a voluntary unwinding. Won't the FDIC get involved? Is the FDIC getting involved in this or was like was silvergate. Fdic insured? Is FDIC getting involved in this? Was this a weird structure? Like. I'm super curious about that. Excellent question, Pat. And I don't have an exact answer for you. But but but I have two things that could hopefully help your audience to get their own answers. One is that during the last week or so, the FDIC had been in talks with with the bank management team. So I would assume that even if they weren't directly covered, they were partially covered. And and I'm only I'm only putting that out there because actually and I forget when exactly, but during the last few months, Silvergate actually took out a A federal home bank loan I believe is the actual name for it in excess of $4 billion.

Pat White: [00:18:04] So so they had taken out this is this is where you you more all the executives of the bank mortgaged their houses for the for the bank here and that's how it should be. But I think I think but anyway off the record they're now after. Yeah. No no. Yeah. If there if there had been any justice after 2008 we would that would have been the new the new way to do know And so yeah, I'm not familiar with that instrument. It's so it's a mortgage so basically it is it is a loan extended to a banking institution to help backstop that bank. Originally, I believe it was developed after the oh seven meltdown. And so and so so I'm not entirely clear if the if the bank itself was was backed by the FDIC, because it's it's worth noting that all of us are talking about Silvergate because of its exposure to the crypto space. But actually, prior to just the last couple of years Silvergate, it was a normal bank, a normal trad A trad fi banking institution. So so there's probably some partial coverage, but I'm not quite sure as to the actual actual numbers right here. Yeah. And you know, funny part, their website is still up, so I guess that's good. But their website, their website's up, but with just a banner that says that it's they're going into liquidation.

Pat White: [00:19:23] Super super interesting. Yeah. The whole thing is is a real shame because honestly, Silvergate was one of the I think a lot of people have said it was sort of like the bedrock of the banking because one of the things that you do run into is it's it's actually not all that easy to get access to banking As a crypto company. You might not make it through risk. You might not make it through risk analysis. You might not be able to find someone that wants to to just that wants to deal with you at all. You know, we got lucky because we don't, you know, we're not really well, we are a crypto company, but like from the perspective of a bank in terms of are we are we compound like, are we actually doing defi like creating, you know, creating securities? We don't issue tokens, things like that at bitwidth. So we haven't had we did not have a huge amount of trouble getting a bank, although I still had to go to my personal banker who I'd known for years and get him to bring in the, you know, the VP to like, you know, sort of run the whole thing through. So it was like even for us, getting a bank was A unnecessarily relationship driven activity, you know what I mean? Like, which was really silly.

Pat White: [00:20:37] And so Silvergate was a really important part of the ecosystem. It was a place that people knew they could go and actually get a bank account. As a crypto company, how do you think that's going to change things? Well, it already is possibly right. And I and I do know that I guess around 4:00 PM Eastern Time yesterday, there were conflicting headlines coming out about Jp morgan and I believe Gemini either either canceling their their banking relationship or they're not. And so, yeah, I mean, there there is this crackdown out of the Fed out of the OCC as well basically trying to actively encourage banking institutions to either exit any any current business dealings with any crypto native companies and or to then try to not even engage at all in that space, which ultimately I think is really, really counterproductive. Right. That on the one hand, the biggest bank in the US and among the biggest in the world, Jp morgan has their own Onyx blockchain, has their own deposit token now and is actively pushing that for their commercial clients and their high net worth individuals. And on the other hand, the the, the banking regulators and the and the CEOs of many banking institutions are actively poo pooing basically anything to do with Bitcoin or other tokens. So I so I do think that that we are in that we are in store for a rough patch here in terms of trying to get banking relationships for the industry, which is unfortunate, b b because all that's ultimately going to happen is that by not having it here, it's only going to derive that capital and those people overseas, it'll happen somewhere.

Pat White: [00:22:26] Yeah, there's, there's business here. There's demand for it. There's obviously consumer demand still for crypto. We've seen it with a few of our clients that we've, we've had clients that up got, got some sort of notice from some sort of regulatory body like. You know, wash their hands, laid off. Everybody in the US moved the founders out to Portugal and A rehiring all non US citizens like it's Is that really what we want? Like it's it's crazy to me to think about that is that is that really the goal of the US government here is to basically get is to turn Portugal into a worldwide financial powerhouse. You know all all the 16, all the 1600s, a little throwback here because because we had, you know, because happened and Ft itself was it was it was a traditional Wall Street issue. It wasn't a crypto, it wasn't a failing of crypto. It was a failing of a Jane Street trader doing this. It was just it was just it was just 2008 all over again. And yet kind of blame crypto.

Pat White: [00:23:27] Yeah. I mean as, as as far as I'm concerned the the collapse of FTX and all of the allegations that have that that have come out since it was the perfect reason. Right. For any policymaker, for anybody who was anti crypto, be they in the Senate, in the House or at various agencies. It was the perfect reason to then to then come out with a the A bat and to kneecap the entire industry, basically. Yeah, Yeah. So let's, let's take it back to that. Actually would love to get your opinions about if for whatever you're comfortable speaking about, obviously about FTX from kind of the accounting and controls perspective. And I'll I'll start the controversy out by saying something kind of funny like so one of the things that every every time there's one of these collapses, one of the things that comes out is that these businesses were using QuickBooks. I know, I know. It's almost it's almost ridiculous. But like, we have clients using QuickBooks that probably have I mean, probably the biggest buy money instances of QuickBooks in the world, like billions and billions of dollars in that they're that they're tracking in QuickBooks and it's it's not and so like my my part of it was that's so funny is like I don't think of it as malicious and I don't think of it as as lazy. It's that these companies went from like two people to 4000 people over the course of 16 months.

Pat White: [00:24:50] And like a normal NetSuite deployment takes six months. So like when between those two points, would they have time to to roll out NetSuite or SAP or something? But the other side of that, of course, is that was doing that with 150 entities. So guess so I guess they must have had 150 QuickBooks instances and and, and something. I mean there's like, you can't do that. That's not that's that that's self is not realistic. But like from an accounting perspective, from a controls perspective, like talk me through how you were thinking about this Ftxs collapse as it was happening, what you think important learnings are from it. Sure. And so and I, I first really started paying mind mind on the accounting and on the balance sheet issues at Ftxs I believe. I believe it was back on. No. November 3rd. And as that as that whole drama unfolded on Twitter, basically and, you know, and and pretty much it was it was it was a fun drama to I mean, honestly, it was a fun movie to watch. Like the allegations, the the counterpoint like there will be I think the joke that goes around is there will be a really good Netflix documentary starring Jonah Hill about this in the not too distant future. Probably. Probably.

Rafael Casas: [00:25:59] That's right. Dr. Shawn, you and I were actually on the panel. We were actually on the Wall Street Blockchain Alliance Working Group Call when the whole Twitter debacle was happening live. Yeah, So we were all just eating popcorn.

Pat White: [00:26:11] Watching, watching the meltdown happen in real time. Yeah. No. And so from. An accounting point of view. I mean, it was possibly the worst accounting setup that I've ever actually seen, Right? You know, everyone is is drawing comparisons from Ft to to Enron. Right. And yes, those are absolutely correct sort of parallels. But Enron, at the very least, had been an actual company. Ft Right. By all allegations. And again, you know, the the the actual court case is still ongoing. Right. But all allegations point to the entire enterprise from top to bottom, being run as at the very best, a unethical firm and at the very worst, a complete Ponzi scheme. And from A internal controls point of view, it was a mess, right? There was no external board. Basically, the entire company was managed by five people or 5 or 10 people, all of whom were actually dating each other, which is a humongous red red flag outside of any personal drama. But having all of those same people running the company, that's a that's a disaster. Yeah. You didn't see that in Texas in 1999, that's for sure. Yeah. No. And then, you know, and then all of these back doors that were that were hard coded into the operating code at Ft. That that should have been caught. And I won't touch on the auditors who were involved yet. You can always hop on hop on that that later. But you know from a from a control point of view. Well because they also there's also legal action. I mean there's legal action happening there. There's actions happening there. There's there's a lot of stuff happening happening there.

Pat White: [00:28:01] And of course, like Armanino who's like only tangentially involved, like they I mean, they totally exited the space after this also. I mean, it was a complete mess from anything to do with the bookkeeping controls. Any sophomore year college accounting student could have told you that there were all all of these issues at Ft. X And then also there is this whole thing as to, well, how did funds get transferred from me as an external user of FTX? I deposit money into FTX and then an unknown to me. Those funds are then transferred to Alameda. How did that happen and how was that not it wasn't even that you would send your funds to Alameda because they were still the ones that the ACH relationship and then they would just never send their money or or either they would send the money on or they would never send the money off from top to bottom. I mean, it's going to be a a case study, Netflix special doctoral research for decades as to how this whole thing so as as sort of a as sort of a researcher, I am kind of curious as sort of a researcher like do you tend to put a lot of the blame? I mean, outside of the five, ten individuals that ran the company, but like, do you tend to put a lot of the blame directly on the fact that there was no board? Or do you is that maybe scapegoating it a little bit? I mean, it is weird, but there was no board. It was weird that at a company that at a company that had attracted almost $2 billion of of external capital from the from the space had had no board, had no CFO.

Pat White: [00:29:43] And on top of that, had no audits done. I mean, so I don't I don't place the blame on the board because there was no board. Right. Pat But but I would but you have to have a board. I would say that obviously it is the individuals in charge of of FTX have to be held to account on this. And also there are going to have to be some questions asked. And I don't know how how how realistic this is. There are going to have to be hard questions asked of those external VCs P funds who gave SBF almost $2 billion of capital and. Apparently didn't ask any questions. I think I think I got I think I got a really pissed off at me because I was at a panel and I asked him if he how how culpable he holds the VCs for the action as opposed to that. He didn't really like that question too much. But I mean, that's my my take on this 100% is this is the VCs fault. Like literally it's it is essentially mean. Gosh, I don't know it's criminal that they that they did not demand a board. Now it's easy to say that 2020 when everyone was fighting for these these deals but also like they should not have I mean guess they I guess they reap what they sow in some ways, right? They didn't demand a board. They were scrambling to do whatever it would take to get this deal done. And then they lost all their money. So I guess. Yeah.

Rafael Casas: [00:31:08] And there was an interesting, um, go ahead, Rafael. Two piece to that really quickly about the board, because Chamath from All in Podcasts kind of talked about that, that he was approached, you know, to be an investor and they had given them a bunch of stipulations and guidance, you know, before we invest. One of the things was, you know, you create a board and he said they'd come back a week later and they basically told them to kick rocks. So but, you know, much, much more vile words. But, but yeah, they, they knew what they were doing. Language. Yeah.

Pat White: [00:31:42] Do you so do you think is there is there anything that uh. Gosh. I mean, what is what are your lessons from like, again, as a researcher, as a as a philosopher about accounting philosophy? What are you about? What are the lessons we learn here? Because like, I'm going to use that going forward. It's just one of those things like it's yeah, I mean, that's a new LinkedIn Yeah. Philosopher about accounting. I mean, that's the yeah, the PhDs in the space like that is it's the people who sort of think about this stuff at the existential, the meta level. Because honestly, like for me, I look at this and like there are, there are point you know, for instance FTX was not a big wave customer like yeah, I think that there are some great learnings for the universe there. They should they should have been. But, but I think I try to think about more general learnings here, and I'm sometimes stymied on it because it was just fraud and it was fraud committed during, you know, allegedly, again, innocent till proven guilty, but it was fraud committed during a market bubble. Like I kind of struggle myself to find the real deep learnings around this. So so in terms of the deep sort of takeaways here, Pat, it's really just to or at the most three three items here.

Pat White: [00:32:53] One is, is that there's never a excuse or a reason to have one person be the face of any industry. I don't care how new it is, how fast it is. No, no. And I mean. I mean. I mean. And that red. Red, number one. Right? That that is a picture perfect image of of regulatory capture. Having him advising senators, lawmakers, regulators on drafting policy that would directly influence his company. Can you imagine for just a second if the if the current CEO of ExxonMobil was was at the. A Agriculture Committee meetings, the EPA directly telling them how to write policy. That's absurd. One two is, is that if you for for us as people who are in the the accounting auditing advisory space, we have to know what what we're doing and we have to know that and we have to know what what we don't know. And that was a big, big issue at FTX. I think because FTX us had audits done and FTX Japan Now mind you, FTX Japan had directly because of the regulations there had to had to keep those assets in Japan at Japanese regulated financial institutions and customers of FTX Japan have been able to with with with the draw funds out of Japan for the last two and a half weeks. Ftx US customers probably aren't ever going to get anything back.

Pat White: [00:34:36] So one that, oh, you think I was on the impression that they would potentially but I but I honestly don't know I this is that purely that's honestly that's from the FUD that was was spreading not as opposed to the FUD about that was the FTX based on based on the bills bills that I've seen anecdotally for the lawyers handling the bankruptcy. I don't know don't know how much of it is is is actually going to be left like, yeah, they might be fully entitled to it, but whether they get it or not is an issue. And then and then and then three right. You know, there there was this bull bull market and there and there was this thing where on the where I don't think people in charge at any level took took crypto seriously right during 2019 2021. And so now as you so well put earlier Pat, we are reaping the impact of that that basically by ignoring crypto by in effect allowing it to operate offshore and then come into the US market. I mean we, we, all of us were a indirect cause of what happened at FTX, although the direct blame, if there is any blame for this fraud that is being alleged, still still lies directly with the management team and the external investors who invested. And mind you, that the whole job of a PE manager or a or a VC, their entire job and business model is to effectively vet investments.

Pat White: [00:36:10] So so I don't I don't I don't buy that. Oh, it was a it was a bull market. There was a lot of pressure. That's your job. That's your whole business is to is to operate this way. So if you aren't up to it, exit the field. And honestly, VCs always operate in bull markets like you think about, right? Right now, the market shifted from from blockchain being the hot it's the hottest thing to now being the hottest thing. And I think and we just saw that company raise $54 million that does chatgpt for slides. So like and any bull market can have interesting interesting investments and and stuff like that. But I think that there is. Do you think, well, are we going to start to see any from less accounting, more controls Like I you know, it's not that there were not control frameworks to handle this. They ignored them. But it's also not like there are control frameworks for this stuff, right? Like, you know, the idea like all everything in crypto, the control frameworks are all based on traditional banking controls, which are pretty good, but have a couple of glaring lacks like glaring deficiencies. For instance, most banks don't actually custody their own securities, right? Most banks like TD Ameritrade uses DTCC and that's so they're like, we actually don't offer a lot of guidance outside of maybe like gold brokers and things like there's there's funny little parts of the world where people do custody real, real assets and not just sort of do a shared custody, but are we going to see real control structures start to come out around this? I certainly hope so, Pat.

Pat White: [00:37:44] Right. And that and that I would I would say that I'm encouraged by the fact that the AICPA, the FASB and the PC, AOB all now are trying to be more active in one sort of pointing out pointing out where those gaps are in the in the in the either control conversation or the audit conversation. But but I would say that that that yes. And and it's unfortunate that that it took the collapse of FTX and all of the other shock waves that are sort of indirect effects of that to then cause this competition to actually start happening. But I do think that over the next 12 to 18 months, there are going to be more and probably the internal control conversation will come faster as opposed to the audit conversation. Yeah. Do you think so? That would be I was going to say so that so the so the PCAOB will drive the audit conversation.

Pat White: [00:38:35] Is it going to be the big four that drive the control conversation or who who gets to who gets to kind of set the well, I mean. Well, you know, the the big four, I think sometimes have too much influence over these competitions. But it was the big four that originally I always joke because it's kind of funny that we talk about impairment as though it was law, but it was really just the big four that published that white paper that said we should do impairment on this stuff. And then that then literally led to the industry for the next seven years of what was happening. Yeah. So yeah, it's going to probably be the, the big four, I would say the say at the very most probably the, the top 20 firms. But it's going to be a probably a a collaboration between groups like the AICPA and the Big four, trying to talk to the FASB, trying to get some sort of even if it's a non authoritative standards, but to have some sort of objective framework out there into the marketplace. Yeah I think we'll see. Well are we going to see new asks come out that are really targeted directly around digital assets. I mean like the interesting question for of course coming off of the FASB news right now is you know even if we we remove impairment for Bitcoin and Ethereum, that's two out of 100 million tokens that we've covered.

Pat White: [00:39:53] And then an infinite number of nfts obviously like there's going to have to be some sort of control, like some sort of analysis frameworks to start to come out for this stuff, right? And what I would say there is that having the ASC out the door and published for Bitcoin and Ether, then it's going to be a lot easier from an accounting firm point of view or an audit point of view to then say, okay, fine, so we have no rules on the books for for a portion of this marketplace. Now it's a lot easier for me as the auditor to to go and say, well, for a newly issued or thinly traded crypto asset or token, I can use existing ASC codifications, whereas right now doing that makes sense. But, but didn't have any basis to then to then connect crypto into current assets. So I would say that that, that yes, having that first on the books will help and to it's going to be a lot easier to then add on to that or to expand it to include some of these other tokens. Probably not all of them but to at the very least sort of outline two, three, 4 or 5 broad, broad categories of tokenized assets. Yeah.

Rafael Casas: [00:41:02] Yeah. You guys have brought up some really good points. The Portugal point overseas and then some of the regulation because this actually falls in line with that recent article that I referenced earlier that you had just published on Forbes talked to Sean. You kind of have three really interesting points that I want you to dive deeper on. But it was like regulation. By edict pushing innovation overseas. And audits are still evolving, obviously. But were there any things that you kind of wanted to discuss a little bit further on that? Because it's it's it's all really interesting.

Pat White: [00:41:31] And what I would say, Rafael, thank you for the compliment, by the way. And and what I would say there is that in in any industry, trying to create rules via the court system is the worst possible way forward. Right. And that's not it's the worst possible way forward and that the best rules are are firm, flexible and a result of ongoing conversation. Right. Because any industry has to have rules. But how those rules are developed and then implemented. Right. There has to be time to implement these things too. That is a big part of it. And then too, as we are seeing, right, crypto is a global business. Pat, I'm sure you have you have firsthand knowledge of this. You know, it's a global business and the US is the center of it right now, but there's no guarantee to have us be at the center of it going forward. World's a big place. In fact, we're doing everything we possibly can to not have us be the center of A going forward. We're making it so much more more difficult, unfortunately. And I mean, the point about the point about regulation through through legal action is probably the single, the single biggest thing that annoys me about about everything right now is and this is one of those things that it crosses political divides. Like it is just one of those things that it is the worst way to run a country like it is the absolute like like communist Russia had regulation through legal action.

Pat White: [00:42:57] I mean, now their legal action was like harsher than ours. It was more like gun action. But it's like that. That is the kind of thing that that, you know, undeveloped, like underdeveloped countries do, not the world's superpower that has the most to gain or lose from digital assets and completely like dusting your hands and absconding from actually taking responsibility for doing real regulation here is it's it's criminal in my mind. Like it really is just such a a mess from the regulators. Absolutely. And and I mean there there is no evidence that. I can see so far that any of that is on the route to evolving or ultimately changing anytime soon. Big Daddy Gensler Yeah, I mean, he's he's treating every token, every, every crypto asset as a equity instrument. And in his public comments, he's been very adamant about that even though he's he's probably wrong I would say right and that and there are certainly crypto assets that that do fall under that umbrella but but most of them don't 100% of them don't you know and and the whole audit point, Rafael, is that now the whole proof of reserves conversation that it was fascinating to watch how quickly that concept went from being this sort of magical tool to being completely destroyed in the in the marketplace conversation and that ultimately proof of reserves.

Pat White: [00:44:33] It's a great first draft, right? It's an excellent first draft as to how to integrate audit practices into a stablecoin issuers crypto marketplaces or any crypto operators. But it's a it's a first draft that at best only highlights half of the whole conversation, highlights the assets, but it's not really focusing on one obviously the the obligations and then two, how easy is it for those customers, investors, users to get access to those assets? And all of that really hasn't been addressed yet. So do you think that the concept of proof of reserves or we usually when we talk about we call it like polar proof of liabilities and reserves, because it's that's in order to you really have to have both to make it an interesting topic. Do you think it's sort of dead on arrival and bumping up against PCAOB standards and it's you know, because it's a what do they what do they call those actions? That's a it's a non it's a non audit action. Right. Because it's something you really shouldn't be sharing non standard. Forgot the term for it. But do you think like this this concept is kind of dead on arrival or do you think we actually will see it mature into something that's that's usable over the next few years? What I would say there is is is the actual name is is dead or DOA, But the idea of it.

Pat White: [00:45:54] Right. Basically trying to audit cryptographic assets and to do so using the underlying blockchain to identify total assets versus obligations that is 100% going to stay and evolve. But the but the actual name proof of reserves is definitely DOA or or at the very best outcome. It's going to be on the back burner for the next half year or so. But that. Yeah. Or longer. I mean. Well, it's one of those things. It's the thing is that it's not a bad it's, it's not a bad thing in general. Right. This idea of actually doing attestations for your holdings that are provable on chain is actually a really amazing I mean, I would love if my bank if my bank actually had something like that for how much money they have and what they're like, what they're actually sitting on in terms of their fractional reserves. I'm sure. I'm sure the FDIC sees it, but they don't often share that kind of stuff with their their lowly their lowly customers. So there's there's there's something beautiful there about transparency that I really like. But I don't know, like, I don't know if it actually turns into something. Like I said, you know it the idea it's an excellent first first draft right of how to audit blockchain based assets. But but it's a first draft, right. And there's going to have to be more more added to it.

Pat White: [00:47:15] And that is going to have to be be tweaked. Anybody who's ever written anything, coded, anything knows that that that a first draft is always a good start. But there's always quite a bit of work left. Yeah. Yeah. Well, I have a question. As we're, as we're wrapping things up here, I have a question to get us to, to end on a, on a happier note because I always like to make sure we're ending on a happy note instead of an FT note. So from from your book, The Emerald Handbook of Blockchain for Business, one of the questions I would have would be and this is sort of a general question, but what are you excited about? Like, what are the really cool use cases, business centric use cases, things like that that you are excited about? What do you think's going to come over the next, you know, next nine months for through 2023? What are you expecting to see happen in blockchain? Like what are the cool stuff? What's cool stuff? So off the top I am most excited about anything that's non payment related, right? That's what I'm most amped about and that's and that really two things come to mind. One is this, one is this idea of how to integrate blockchain based record keeping and transparency into health care records. Right? Because health care records, it's always been an issue. Back to 2005, it was a big deal having to.

Pat White: [00:48:34] To take those records out of paper form. But there are tens of thousands of people here in the US who die every single year due to paperwork errors in in the health care system. And anybody who's ever had to go go to any doctor for any medication or or or outpatient treatment knows how complicated it can be. So trying to integrate that and obviously, as we're post-COVID, health care is obviously a a sort of front burner issue for everybody. Health care is a nightmare right there, man. Dude, health care, I, I have never been more frustrated with something in my entire life than trying to get a what I had to do. Oh, I had to get it. I had to get a doctor's appointment last week and, like, and I, I, I, I use UCSF like, UCSF is one of the top medical providers in the entire world. Like it is consistently one of the highest ranked hospital systems. And it was still like it was like six months out to get just a primary care checkup and like it is insane what we're going through in health care right now. Now, I think a lot of those problems are not tied to necessarily the record keeping part of it. But we do have there's sort of a top to bottom rethinking of how we do health care in America that absolutely we have to be going through right now.

Pat White: [00:49:48] Absolutely right. And so, yeah. And so while I wouldn't say that that having blockchain will then address everything, it'll go a long way towards trying to fix some of those inefficiencies and costs too, which it's nipping at all the different inefficiencies. Yeah. It's finding all the different efficiencies and, and costs. It's starting to nip them down so that we can do good things like hire more nurses, pay them more, like all the things that get better results demonstrably. And record keeping is not one of those things I think, that is necessarily tied to that. It's super interesting that you carved out payments because I actually am really excited about payments in 2023 from crypto because in a world where we are really everyone's belt tightening, everyone is doing this sort of deep analysis about, uh, you know, cutting costs and all this kind of stuff. If you can send millions of dollars around the world for essentially $0.07 on Polygon, yeah, that's there is real with instant settlement, there's real value there. Like that's, that's really magical kind of stuff in a world of cost cutting. So. But you're are you, are you just sick of talking about payments or do you actually think that there's that there's some some fundamental issues with payments. So right now so I am I am totally optimistic on the future of of tokenized payments.

Pat White: [00:51:02] I just don't think here in the US given the regulatory environment that there's that there's going to be too much forward progress made during the rest of of 2023. And so that's why I was like outside of payments, I'm personally Pat, I am all about cheaper, faster, instantaneous payments. I'm all on that train. I just don't think that that's going to be too much publicly talked about it. I do think, though, that any any major institution. Right to your point is is definitely going to be having a hard look at how to integrate those options and how to get those savings going forward. I just don't think there is going to be too much publicly talked about it. Yeah, I mean that's the thing is it's yeah, maybe that's a really good way to say is like I don't think there will be a lot of public about it but you will start to see like my my thing is I think you will absolutely start to see the banks using this for international payments and transfers. You'll start to see more and more sidestepping around the traditional ACH and SEPA networks, like just purely for instant settlement, if for no other reason than purely for instant settlement. And it still is like it still is something that we want. Like I, I joke about this quite a bit that, you know, if, if I wasn't doing Bitwave as a startup, you know I would be working on a bank where you could send usdc and then wire out USD that exact same like like five minutes later.

Pat White: [00:52:24] Like that's still is a dream for me. I mean, we get paid something like 15 to 20% of our customers pay us in crypto. And it's crazy to me that I have to send it to Kraken, trade it, wire it back to myself in order to use it to wire out. And it's just it's just so incredibly silly. And Silvergate was probably the closest thing they were getting pretty close to actually having that shoot. So I'm sorry, but I am. I'm like genuinely curious. But yeah, so I'm excited about about payments. Okay, so you like, you like record keeping on the blockchain, which I'd say is healthcare titles, things like that. What else? What else are you looking forward to this year in the blockchain world? Additional area that I'm really amped about is how to better integrate zero knowledge proofs into our personal data, right? And so, so a quick anecdote that I always use is that I use apps constantly for everything, right? Uber, Netflix, like all kinds of apps on this thing. Too many probably. And every company has all of this information about me, 95% of which they don't actually need. And so if there is. A way to only have me. Rafael. Pat only have to give up the exact information or the correct answer to the question being asked of us by this company and only give out that portion of our personal ID that is a real, real, real game changer.

Pat White: [00:53:53] And and just that's a quick anecdote. I am a big fan in anything to protect the personal information of an individual because I had my identity stolen back in 2018 and it took me a solid year to work through all the paperwork. Police reports, banks credit cards had to be canceled. It was a whole thing. And so and so after after that point, any time, any time that I see any tool or option to improve how to protect our personal data, I mean, that is always something that that I'm really, really amped about. Yeah, that's, that's yeah. And even even looking different ways to protect your identity with on chain stuff. So I mean like with private keys and things like that is, is well it's, yeah, it's hard to imagine it happening anytime soon and I think I'm also with you on Zxzw in general because Xk's are going to be one of the major. I mean, because we talked about accounting for this stuff. The the end result of a lot of the like when we finally get to a world where where accountants are being replaced by blockchain, like the thing that people are scared about, which is definitely not happening anytime soon.

Pat White: [00:55:01] But the place we find the other. One of the major hurdles to that is that a lot of people just don't want their revenue on the blockchain like it is. It is still today. It is very difficult. Like we go through pretty extreme lengths to protect the various to kind of obfuscate the different revenue streams that we have on the blockchain. Like it's it's non-trivial to kind of do it. And so we so xk's will get us to the point where it's easier to have fully audited, you know, high levels of confidence, but obfuscated business activity on the blockchain, which really is required before we get true business adoption 100%. All this stuff we're doing up to this fun is it's fun and games, but you Exxon's never going to do this until until they could send mean I say this jokingly but not jokingly like until they could send like $1 million to, you know, some corrupt dictatorship to buy oil rights without it being public knowledge on the blockchain. They're never going to adopt this stuff. But the second they could do that, this would change the nature of their business quite a bit. So that might have been a little bit too harsh on Exxon. So sorry guys, I take it all back. But it is. But but. But private like secured, obfuscated transactions are incredibly important. So the rise of zrx is absolutely a part of that. Absolutely.

Rafael Casas: [00:56:12] And this has been a really good conversation. And we're wrapping up the time here. And again, Dr. Sean, thank you so much for being here. This has been an amazing conversation. Pat has always you know, we're one thing that I want to make sure that our listeners can how do they get a hold of you? How do they get a hold of your new book? If you can let us know that information, that'd be awesome.

Pat White: [00:56:30] Yeah, sure. So I'm on social media at Sean Stephen-smith everywhere. Twitter LinkedIn, Instagram. I'm all over social media constantly. You guys see me probably too much. And and as far as any any books that I write, they're all available both on the Emerald site and they're all up on Amazon also so easy to buy share post whatever.

Rafael Casas: [00:56:54] So awesome. I'll look to link that out once this once this comes out again, thank you so much Appreciate you all the listeners and we're going to have some more amazing guests lined up and just so stay tuned. But thank you all for joining us. We'll talk to you soon.

Pat White: [00:57:08] All right. All right, Sean, It was amazing, buddy. Always good to catch up with you, man. Excited to see you soon. Hopefully we'll see you in, like, consensus or something like that. And great chat. All right. Bye. Thank you so much. It was a blast.