Public Key Podcast

Everything (Including Blockchain) is Bigger in Texas: Podcast Ep. 103

April 16, 2024 | by Chainalysis Team

Episode 103 of the Public Key podcast is here! We have all heard the saying “Everything Is Bigger in Texas”, but in today’s podcast we speak with Lee Bratcher (Founder & President, Texas Blockchain Council), who explains that one of the biggest things in Texas is the blockchain ecosystem, especially in the Bitcoin Mining operations. 

You can listen or subscribe now on Spotify, Apple, or Audible. Keep reading for a full preview of episode 103.

Public Key Episode 103: Unlocking the Potential of Blockchain in Texas 

Everything is Bigger in Texas. Especially blockchain technology and Bitcoin mining operations. 

Ian Andrews (CMO, Chainalysis) speaks to Lee Bratcher (Founder & President, Texas Blockchain Council), who is one of the pivotal figures making sure Texas a leader in Bitcoin, blockchain and digital asset innovation. 

Lee shares how he and the TBC are shaping Texas as a front-runner in blockchain policy and they both delve into the intricacies of blockchain technology including its governance, potential for solving societal problems and implications for property rights.

Lee highlights the energy economics of bitcoin mining in Texas and the pivotal shifts he has seen in digital asset regulation, with the advent of Bitcoin Spot ETFs.

This episode also breaks down the policy initiatives and legal battles the TBC has had with the U.S. Department of Energy over their emergency energy survey and data collection, as well as TBC’s recent amicus brief submission supporting Coinbase against the SEC. 

Quote of the episode

“Texas has just under half of all Bitcoin mining in the United States and nearing 20 percent of the global hash rate, actually, just in Texas.  And that’s really because Texas is an energy abundant state, but it’s so large that we have transmission problems.There’s just more energy than can be taken by the transmission lines. So it’s really about economics. The miners found extremely, extremely cheap energy and the beautiful part about it is they are soaking up this stranded and wasted energy.” – Lee Bratcher (Founder & President, Texas Blockchain Council)

Minute-by-minute episode breakdown

2 | Lee’s background and how he went from Army reserves to getting into cryptocurrency

4 | The concept of digital property rights and identification and its significance in society

6 | Texas Blockchain Council’s impact on changing the narrative around blockchain in Texas and suing the Federal Government

10 | Texas becomes a mining epicenter due to China’s blockage

14 | Filing an amicus brief to support Coinbase against the SEC

20 | DeFi Education Fund files preemptive lawsuit against the SEC 

22 | The North American Blockchain Summit aims to bring policymakers and regulators together with industry executives 

26 | Lee reflects on his interview with Balaji Srinivasan and how the share many profound perspectives

29 | Discussions on criminal activity in crypto and impact of Bitcoin spot ETFS

Related resources

Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.

Speakers on today’s episode

  • Ian Andrews * Host * (Chief Marketing Officer, Chainalysis) 
  • Lee Bratcher (Founder & President, Texas Blockchain Council)

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Transcript

Ian:

Hello and welcome to another episode of Public Key. This is your host, Ian Andrews. Today, I’m joined by Lee Bratcher, who’s the founder and president of the Texas Blockchain Council. Lee, welcome to the show.

Lee:

Ian, thanks for having me on. It’s a pleasure.

Ian:

Lee, I feel like you and I have known each other for a really long time because I get emails signed by you with regularity, you and the Blockchain Council, of course. But this is actually our first conversation, so we’re going to do all the introductions and get to know you live for the podcast. I’ve stalked your LinkedIn profile a little bit. You have I would describe as an unusual path to your current role. Maybe start with a little bit of background and how you got into this world of cryptocurrency.

Lee:

Yeah, it is a little unorthodox. So, out of college, went to Army Candidacy School, Officer Candidacy School with the US Army. I’m an Army Reserve Officer for the 75th Innovation Command, which supports Army Futures Command. So, I’ve been doing that for about 14 years. I was a political science professor at a small university here in Dallas called Dallas Baptist University. So, my research area was property rights, and then when I was at the Army War College in Pennsylvania, I found the Bitcoin white paper in say 2015, 2016.

So, that really put me down a road of, okay, there can be digital scarcity. There are digital property rights. My research really turned to that and I started to organize different folks in the industry with elected officials, state and local and federal, and it required more regularity and more time. So, it eventually turned into the Texas Blockchain Council in 2019, and I quit my job to do it full time in 2020.

Ian:

Wow. The point of digital property rights is one that I think maybe slightly lost on people who read about the price of Bitcoin going up and down, and that’s their only participation in the ecosystem. But talk a little bit more about why that was interesting to you and what got you excited when you read the white paper and started to educate yourself more into the concept.

Lee:

Yeah. A foundational book was Hernando de Soto’s Mystery of Capital. Hernando de Soto is a Peruvian economist who’s famous for this concept that property rights and essentially our way of capitalism is not easily exportable. There are institutions that are learned over decades and centuries and you can’t really just create a playbook, because not any one person or group of people or even government is capable of replicating the shared cultural consciousness that’s required for robust property rights. So, there’s also some interesting concepts around other authors like Mancur Olson who writes about collective action problems. Essentially, we’ve never had a tool that allows us to solve some of these really complex social problems in the digital space.

What’s ironic is the digital implementation of these tools that we know as public blockchains that started with Bitcoin are actually more effective than what we’ve developed in the analog world from a governance perspective. They’re more perfectable, if you will. I think if those authors were still around today, they would be fascinated to see where we’ve come. Of course, we’re a long way from having all value transmitted on public ledgers, but at least I think we’ve crossed some pivotal junctures in that direction.

Ian:

Say more about how you envision governance working better on blockchain than it does in say the US system today. Because as an end user experience participating in a few DAOs, it feels really clunky to me. Not to say that the American system doesn’t often also feel clunky, but I’m just curious, I feel like you’ve maybe got a better vision to the future of where that’s going than I do as an end user.

Lee:

Well, I will say that I think it’s a long ways off on the public sector side, on the governance side. I think anything having to do with finance and business and economics, there’s just more incentives for faster adoption. So, take everything that I’m about to say with a huge grain of salt. I think it’s a long ways off on the public sector side just because there’s no incentives to push it forward. We have reasonably functioning, I mean reasonably functioning in some areas, systems of property rights, governance, rule of law, et cetera. But I do think it starts with digital identity. Every application that you see, if you follow that down logical path, you realize that you have to have digital identifiers, digital identity, self-sovereign digital identity, hopefully, right?

One in which the state actors are collaborative partners to be sure and still are the participants in identifying their citizens, but not one in which they are the ultimate in control, a Chinese model where a social credit score could be easily imposed and then things follow on from there. There’s a lot of innovative stuff. I think property administration, real world assets is a linkage between the private sector and the public sector, because there’s a lot of responsibility on the public sector with regard to real world assets, specifically real estate. Then you’ve got some things that are purely in the governmental realm like voting and things of that nature, which I do think are a long ways off, but there’s countries in the Baltic, Eastern Europe that are adopting it. Estonia is pretty far along and with some success, so that’s a minefield though for sure.

Ian:

Yeah. You wrote a paper back in 2018 that focused on blockchain and land registries. What’s your reflection as you look back six years later? Do you feel like the concepts you outlined in the paper, are we trending towards them? It feels like everyone wants to talk about real world assets and the crypto ecosystem and real estate being a part of that, I suppose, but do you feel like we’ve made progress?

Lee:

Yeah, I think we have. I think the thing holding us back on the tokenized private equity side is too many platforms, too many ATS, alternative trading systems, and there needs to be a way for people to just log into their account, their Charles Schwab-esque account. Of course, it’s not going to be Charles Schwab, but something similar and see all of these potential investment opportunities for accredited investors, these tokenized securities that are real estate, tokenized private equity essentially. So, that’s a huge problem. You need the liquidity and the eyeballs to make those deals profitable and work, otherwise the legal expense and expense of tokenizing an asset like real estate, commercial real estate just doesn’t pencil out.

So, I think we’ll get there because that’s just the trajectory. I mean, BlackRock is tokenizing money market funds. It’ll happen. On the public sector side, which is really what I wrote about land registries, my hypothesis was that it’s not a technical problem. It is a political problem and a stakeholder management problem. Back in 2018 when I wrote the paper, all of the academics were saying, “No, public or private blockchains, neither one are capable technically of handling land registries.” Now in 2024, it’s almost laughable. Very clearly, it is technically feasible with a public or private chain, just there’s tradeoffs there. But what the holdup is there are stakeholders in this process that don’t want to see that happen, and it’s understandable. I think that just is going to require a lot of time.

Ian:

Maybe jump forward to today and let’s talk about your organization, Texas Blockchain Council. What made you take that leap into starting a full-time endeavor, not just a side act? Talk a little bit about what the organization’s focused on now in 2024.

Lee:

Yeah, we’re a 501(c)(6) trade association, so like your chambers of commerce essentially. We represent about 95 corporate members and several hundred individuals both on the advocacy and lobbying side and then also as a business development amplifier. So, we do focus on Texas, but we have inroads and relationships at the federal level. Also, I chair the US Blockchain Coalition, which is a group of about 40 state associations across the country of varying levels. Some of them are more mature and some of them are just getting started. So, we share best practices and work on collective policy together. So, we’ve gotten a couple wins under our belt. We’ve got two bills passed in 2021 and two more in 2023, putting Texas on the map.

When I started the Texas Blockchain Council in 2019, the Brookings Institute rated Texas as reactionary and really not digital asset friendly. So, we really changed the narrative there. Now, Texas is looked at as a bastion and Texas and Wyoming are two of the states that have really carved out that niche. We really respect what Wyoming’s done, and they’ve pioneered a lot of the things that we’ve worked on as well and what we’ve worked on it jointly with them. It’s been an interesting journey and now we’re getting into suing the federal government.

So, we just sued the federal government last month and they tucked tail and ran in pretty short order about two weeks. Not because we’re intimidating to the federal government by any means, but just because they didn’t have any legal ground to stand on and they’d made some errors in administrative procedure act type nuance.

Ian:

Talk about the matter at issue in case folks listening aren’t familiar with it.

Lee:

Sure. Yeah. So, Senator Warren put some pressure on the Department of Energy Secretary to conduct a study of Bitcoin mining across the US and they use the Energy Information Administration, which is under the Department of Energy to do this study. That administration typically studies generation and transmission. They very rarely differentiate on load, because load can be anything. It’s very subjective. So, what we found was that they made some errors in the way that they went about the study. They conducted an emergency survey. The last time they had conducted an emergency survey was during Hurricane Sandy and there was an actual emergency.

They also targeted a specific industry that they had never done before, and there was clear evidence on the record of Elizabeth Warren pressuring them to do this. So, it was clearly political and pretextual. So, we sued on procedural grounds and won there. We didn’t sue on substantive grounds, but there were some substantive concerns, because they were asking a lot of inappropriate questions that require these US companies to disclose private information that would’ve caused competitive harm. The EIA in their mandate is not permitted to cause competitive harm.

So, I think if they redo the survey and ask for energy consumption of Bitcoin mining, then that will be appropriate and we’ll respond accordingly. Probably ask them to do that for the entire data center industry and not just Bitcoin mining or digital asset mining, because AI compute is already larger than the digital asset mining.

Ian:

It has to be probably by a substantial amount I would expect given the growth.

Lee:

My back of the napkin math is that if you include hyperscalers and cloud with AI, it’s like 4X the size. Even if you don’t include the hyperscalers, it’s still larger but not four times as large.

Ian:

Talk about mining in Texas a little bit because there’s been a couple, I think, geopolitical changes that have made Texas from what I can tell an epicenter of mining. It started a few years ago when China blocked the practice, because I think we had an over concentration, particularly in the Bitcoin network operating from China, largely due to low energy prices. But when politicians in China shifted, said, “Okay, we’re not doing this anymore,” all of a sudden, a lot of these mining rigs got relocated. It seems like Texas was the beneficiary of that in terms of creating almost a new industry from scratch.

Lee:

That’s right. Yeah. Texas has just under half of all Bitcoin mining in the United States and nearing 20% of the global hash rate actually just in Texas. That’s really because Texas is an energy-abundant state, but it’s so large that we have transmission problems. We don’t have the sufficient transmission networks to get our abundant energy, whether that’s wind, solar, or natural gas to the large population centers. So, particularly in West Texas, we have a ton of energy generation, but there’s not a lot of people that live out in West Texas and it’s prohibitively expensive to build a lot of generation out there. So, you can have negative energy prices on a really windy day when wind is generating a lot of energy. There’s just more energy than can be taken by the transmission lines.

So, it’s really about economics. The miners found extremely, extremely cheap energy, and the beautiful part about it is they are soaking up this stranded and wasted energy. You’ll never find a Bitcoin miner using energy when someone else couldn’t use energy, because they are so price sensitive and the Texas market is a deregulated market. So, that means that when demand goes up, price goes up correspondingly. Bitcoin miners are very allergic to high prices. We have a lot of data from ERCOT, not from us, but from the grid operator here that shows Bitcoin miners curtail during high prices. So, we’re not going to be on during that hot summer day at 5:00 PM when everyone’s cranking up their AC for two reasons. One, because we want to be good grid citizens and good corporate citizens, but two, we don’t want to pay those costs.

Ian:

Right. It’s a very interesting workload. If you look at it at a technical level, comparing to things that run in say any one of the hyperscale cloud providers like Amazon, Google, or Microsoft, most of the things there are applications that have to be on all the time. There’s end users who connect to it. I’m looking at a Google Docs app right now. If that goes away, my day is ruined. Bitcoin mining though, if you’re not operating those servers profitably, meaning the block reward for putting transactions on chain is less than what you’ve got to pay to operate that infrastructure, you’re going to turn it off.

I think a lot of people misunderstand that nuance and they assume that miners are just going to run these machines no matter what, 24 hours a day all day long. That would cost a lot of people a lot of money. It would be a very unprofitable business if they took that.

Lee:

It really would be, because prices in Texas can fluctuate from a few cents a kilowatt-hour to like thousands of dollars a megawatt hour. So, it is a unique dynamic. Most people have never looked at how grids work. Managing a grid is really tough and managing how much generation and consumption. You’ve got a lot of renewables in Texas, about a third of our grid is renewables. They fluctuate, and then you’ve got your usage. Your energy pull from consumers is also fluctuating.

Overnight, it’s very low. Midday, it’s low. In the mornings, it’s high. In the afternoons, it’s really high. So, it’s got this very variable pattern to it. Then you have seasonal pattern, so not an easy engineering feat, and our hats go off to grid operators across the country. They’re unsung heroes of electrical engineering.

Ian:

Absolutely. For the grid operator, they’ve got these really high, long-term capital investment problems. It costs a lot to build more generation capacity, and they also have to operate profitably. So, they don’t have a consumer in the middle of the night because we’re all asleep. We’re not running our TVs and our air conditioning, our computers. Weather changes can impact them. I think the Bitcoin mining has the ability to provide profitable demand in these off-peak hours that allows the grid operator to build generation capacity to the actual consumption peak high demand driven, not off mining, but off of all the other activity that’s going along. There’s economics in here.

We’ve had Jaime Leverton who was CEO at Hut 8 on the podcast previously and got into this topic as well, because she was facing a lot of political challenges in Canada. Folks just I think are missing a lot of the nuances here, and they just see, “Oh, this is energy consumptive, therefore terrible.” Talk a little bit about some of the work that you’re doing at the federal level. In the news this week as we’re recording, Coinbase versus the SEC has been a topic. You filed an amicus brief. Talk about your strategy there and what you’re trying to accomplish with that filing.

Lee:

Yeah. Coinbase is really an actor that I think as an industry we all need to support, because they have spent a tremendous amount of money on compliance. Of course, going public was not cheap being the first exchange to go public. If Coinbase is unsuccessful, then we as an industry are set back tremendously. I’m not saying they need to be successful in this suit on every single count, but just in general in their endeavors against the SEC, we need to support them with all vigor. So, we did file an amicus brief along with Satoshi Action Fun. Essentially, well, we were supporting their lawsuit and their motion to dismiss we saw this week was granted on one count.

Of course, I think we all expected that it would not be granted a procedural item on the other counts, but we did see a win this week for them with the Coinbase wallet portion of the lawsuit being dismissed. Ian, you and I were talking before the show, that was pretty technical analysis and astute understanding of what was happening on a noncustodial wallet, digital wallet that Coinbase provides by the judge and by the judges.

Ian:

Yeah, tremendous analysis by the judge and whoever he met with, because it’s hard I think for the casual observer to look at a product like Coinbase Wallet and go, “Well, it says Coinbase. What do you mean that Coinbase isn’t operating that on behalf of their customers? Therefore, they must be a broker.” I think the ruling correctly identified that no, a Coinbase wallet while branded Coinbase is very clearly a noncustodial, meaning Coinbase is taking no possession of the digital assets contained in that wallet. The trades or asset purchases or any other activity conducted with the wallet is all directed by the user. The Coinbase is really not involved, which I think is tremendous actually.

One of the hardest things I think about the work you’re doing and anybody else who’s dealing with either the legal system or the political system around blockchain is like this stuff is incredibly technically complex even for you and I who probably spend an inordinate amount of time thinking about the space. So, I’m excited for that. What’s your prediction on where this case goes if you have one as they move? Because they’re going to move to trial on the other charges that the SEC filed now that the motion to dismiss has been denied on the other pieces. Any predictions?

Lee:

Well, I think they have a strong case. I did note that it’s going to be a jury trial, which I think might’ve been a little bit surprising, but they’ve got some of the top legal minds in the world. Eugene Scalia I know is one of their attorneys. They’ve got several others who are just absolutely brilliant, so I expect them to be successful on most counts, I think perhaps even all. The public sentiment is no longer. Maybe the jury is actually a good thing because it’s pretty clear to the casual observer that the SEC is not protecting investors. They’re essentially just a political arm of the federal government to try to pick winners and losers.

So, they’re really outside their depth here, but you never can discount the federal government. They have unlimited resources to prosecute these cases, and Chevron deference is still in place unless something’s happened in the last few days that I missed. I know that’s being challenged, but I am optimistic though.

Ian:

Yeah. One of the points that struck me, your amicus brief made this over and over, is 40% of people in United States own digital assets in some form. So, pretty close soon I would expect we’ll have a majority of Americans owning digital assets. It seems not in the public’s interest to shut down a company like Coinbase who, as you said, has gone to great lengths to be compliant, collaborate with law enforcement, try and root out bad actors that may be abusing the digital assets ecosystem. They seem like one of the good guys to me.

So, talk about this other case. I actually wasn’t familiar with this one until I started doing a little research for the show with DeFi Education Fund preemptively filing a suit against the SEC related to Beba Coin. This is a local Texas organization I think you’re familiar with. Talk a bit about what they’re doing, and then with the lawsuit, what the SEC is all about.

Lee:

Yeah, Beba is local. They’re very small, nascent organization. Essentially, there were airdropping tokens as a marketing tool and they’re actually selling limited edition apparel items and bags and things of that nature. So, the airdrops were free. The token has no value at this point in time or at least none that I’m aware of. So, they’re filing a preemptive action, pre-enforcement, if you will, to request a declaratory judgment on the SEC’s rulemaking process and asking the SEC to follow the Administrative Procedure Act in the way that they adopt guidance. For companies like this that are conducting a free airdrop, there’s clearly not a securities offering. There’s no money being changed in the changing hands here, so they’ve got a really good case. I think the airdrop is very clearly not a security, and the SEC is going to have their hands full with this one for sure.

Ian:

Yeah, it’s such an interesting case where you have what amounts to a marketing promotion, which in my role I think about all the time. Its’s clearly not a securities offering. It’s not a case we saw with some of the ICOs back in 2017 where it was clearly, hey, take this token. It represents a share in the company that we’ve created. Those words were never used, but it was pretty straightforward and clear that was what a number of companies were trying to do. This seems like such a clearly different thing aside from the fact that in both cases, you have a digital asset token being created on a blockchain.

I hope that this one results in a clear win, because I think there’s a lot of people who would… We’ve seen organizations like Starbucks and a number of other big brands who have also created relatively similar types of offerings, I think, intended for customer attention or marketing promotions that really should not get swept up in the securities issues.

Lee:

Yeah, I agree. It’s sad that we have come to this, but I think the SEC has put their flag in the ground and we have to push them back in the courts. There’s really no other way.

Ian:

Yeah. Now, one of the things your organization, I think, has become famous for is an event called the North American Blockchain Summit. The most recent one just happened in the fall, but I think you’re already programming for the 2024 edition coming up in November. I haven’t had the opportunity to attend, but I’ve heard this is a fantastic event. A couple of my colleagues have attended previous ones. Talk a little bit about what you’re trying to do with that event and what we can expect coming up this year.

Lee:

Yeah, that’s a conference that we put on to bring in policy makers and regulators, have conversations within industry executives, bring the community together, the industry together, and be a little bit more, I think, cognizant of the political environment. So, it’s a little bit different than say a consensus or a Bitcoin Miami or Bitcoin Nashville this year where it has more of a festival vibe and there’s just a ton of folks there. Hopefully, our goal is to make it a little bit more cerebral and inject those policy conversations into the mix. So, this year, we’re doing it in Dallas at the George Bush Presidential Library. They’ve got a beautiful institute there behind the library where it’s a conference area and very stately.

You feel like you’re walking down the halls of the Department of State when you’re there. So, we’re excited about it. We’ve hosted folks anywhere from Vivek Ramaswamy, RFK Jr., several US senators like Senator Cruz, Senator Lummis, Senator Wyden, and we try to take a bipartisan approach. Of course, being from Texas, we understand that the Texas legislature and all statewide elected offices are held by Republicans and have generally had quite a good reception on that side of the aisle. I think we’re having a good reception on the other side of the aisle, but in specific parts of the Democratic Party and certainly not all. I think it actually ends up being more of an age thing than anything.

We found that Democrats and Republicans in Texas, when we did some surveying with some third-party surveying companies, that there are pretty much equally likely to be supportive from a sentiment analysis and also to own digital assets. The real distinguishing factor was age. Only 6% of people over the age of 65 own digital assets, whereas 50+% of people under the age of 30.

Ian:

Yeah, I’ve been bothered by it seems like digital assets in the last two years has shifted from a bipartisan issue to a Republican issue, at least at the national level. I’m less familiar with the situation in Texas, but it doesn’t on the face of it make sense if you think about the respective parties platforms, to be honest. If you take the Democratic platform as being pro-individual consumer protection, anti-big finance, if I summarize their position that way, it would seem like the cryptocurrency ecosystem would be a terrific opportunity to mute the impact or potentially even disrupt in the technology sense of the word big finance.

It drives some positive change and writes back to the retail side consumers, but somehow it seems like that’s been lost on the Democratic platform and we’ve run down this seemingly increasingly partisan path. I’m curious your thoughts on that.

Lee:

Yeah, it wasn’t inevitable. To your point, I think it could have been more bipartisan, it could have flipped the other way, but I think what we had that put us down this path was some pretty influential people at the top of either party that had their mind made up and they sent signals to other members of their party. Those signals were received in due course. I am thinking here of Senator Warren. She is so influential within the Democratic Party and very clearly had her mind made up early on for a number of different reasons. My main reason is she makes her living as an elected official, and I’m using that in a figurative sense, by railing against something.

There wasn’t really somebody who had really taken up the cause to rail against crypto, digital assets, et cetera, and there was an opportunity, a political opportunity for her. She’s twisted the narratives to make sense for her platform and her political beliefs. So, I agree, it wasn’t a foregone conclusion. I do think that those signals sent from various folks greatly influenced the trajectory. You’ve got people like Ritchie Torres, and you’ve got Democrats at the national level. Even Democrats here in Texas, some of our bills are carried by Democrats who are innovative and they believe in decentralization.

They have aligned values, and it really doesn’t cut across. Even politics in general, of course, the two-party system is unfairly putting people into buckets for sure, but certainly in digital assets as well, it certainly has the tendency to do that.

Ian:

Maybe based on the survey data you brought up a moment ago, we just need to move to the next generation of politicians. As we age out some of the folks in office now, we’ll naturally have a broader base to be proponents for digital assets. Yeah.

Lee:

I think that is very clear. It all goes back to incentives and people that are younger in office have longer time horizons and they have just different relationships with industry. People who are older have established relationships and shorter time horizons, and both of those things work against the older elected officials being… Now, it’s not a rule, it just is a trend. There are some elected officials that are generations ahead of us that are incredibly well-read on this issue. So, by no means is it universal, but it is certainly a trend that we found.

Ian:

Now I have to ask you about the interview you did with Balaji Srinivasan. He is such an epic character in the industry that we’re both a part of. What led to that conversation and what was the experience like being on the interviewer side of talking to Balaji?

Lee:

Yeah, it was an honor certainly. We connected on Twitter DMs as most good conversation start, and he was familiar with our work. Of course, we’re obviously familiar with him and his concept, the network state and his past work as I believe maybe the first CIO or CTO at Coinbase. I don’t know if he was the first, but very early and certainly been a legend since. We, I think, connected on a few concepts that gave me an end to ask for an interview and conducted that interview the morning of our North American Blockchain Summit. It was like midnight his time in Singapore, and I was in my hotel room about to head over to the conference. So, not the most professional interview that we’ve done, but certainly appreciate his wisdom.

I think he sees things far in advance and many steps ahead of the way that most people, including myself, are viewing things. It causes him to perhaps sound a little bit outlandish to the average person, but those of us that maybe are in this space can see how profound his thoughts are. I think in the years to come, many of those will be born out.

Ian:

Yeah, I think a lot of people see his bet that he made about the price of Bitcoin I think going to a million dollars. I don’t think it quite got there, although we’ve seen a nice appreciation recently in digital assets. I think most of us are happy about, but they see that outlandish behavior on social media and they think that’s what he’s all about. I think he’s actually such a deep thinker. There’s a lot behind that that I would encourage people to dig in, go listen to the interview you did, and read some of his writing if you’re interested in the space.

Lee:

Yeah, I second that.

Ian:

One of the things that I picked up on in your background, both the military service but also working as a police officer, and a lot of the work that we do at Chainalysis is on the catching the bad guys who are abusing digital asset platforms. I’m curious how you think about that. I mean, you must encounter that as an objection as you’re working to educate lawmakers or you’re talking to various parts of government. What do you see as the right message to carry forward to those audiences when it comes to illicit activity in cryptocurrency?

Lee:

Yeah, we are grateful for organizations like Chainalysis. I interviewed on our podcast Gurvais Grigg, who’s I believe you all’s CTO for North American for the public sector. He has an FBI background and brings just tremendous experience to Chainalysis. We essentially are equipped with data from you guys and others that help us craft a narrative that is slowly taking root. I think the media has not been helpful in that because they have a much larger microphone and a much larger distribution than trade associations like us.

But we use those tools and we say, “Hey, we’re not going to tell you that there’s zero criminal activity happening on public blockchains, but what we will tell you is to look at the data and make a determination for yourself as to what trajectory, what direction, what trend lines the data show in criminal activity and what trend lines you see in traditional finance.” Neither are immaculate, but I would venture that most people after looking at the data will see the trend lines and say, “Hey, digital assets are more transparent.” There will probably always be some level of criminal activity on any… I mean, not probably.

There will be on any value transfer platform, but what we can do is we can support organizations that work with law enforcement to make that as small part of the story as possible. Yeah, I think the biggest narrative is just showing the trend lines, and you guys do that with your yearly statistics and the data that you put out. So, we’re thankful to have that and equips us to have those conversations with elected officials.

Ian:

Yeah, terrific. What do you think about the Bitcoin spot ETFs? This has been the big news of the year, I think, for a lot of people in the cryptocurrency ecosystem.

Lee:

Yeah, I mean, I think it was a long time coming, and I feel bad for the Winklevoss twins who applied a decade ago. I do continue to hear from allies and friends both in the legislature elected officials and in traditional finance and family offices that the ETFs, of course, they’re an on-ramp, right? That’s clear to everybody, but it sends a message. It sends a message that we’ve turned a corner from where we were in 2022, and that was not a good year for digital assets from a narrative and reputational perspective. So, getting firms involved like BlackRock and Franklin Templeton and some of these Fidelity, these large asset managers, I think, scare some people in our community just because they are the epitome of traditional finance.

But what I would say is we’ve had enough time to mature as an industry to be prepared to onboard those caliber of companies. There’s not really any risk of co-option or of a BlackRock taking a stance that is antithetical to decentralization. So, I could be wrong in that, but my assessment is that we are far enough along and we’re sufficiently decentralized across layer ones that the layer ones that are going to be consequential for decades to come are quite robust. BlackRock is going to take advantage of that and make money off of that, which is great. That’s capitalism, but they’re going to sail down the path of least resistance while they make that money, which is the path that’s been set up by builders who’ve decentralization has been a key tenet in their philosophy.

Ian:

It’s great perspective. Maybe we get worried if BlackRock launches their own layer one chain. Maybe that’ll set off alarm bells, but I think short of that, it’s all goodness to have that pool of entrance into the ecosystem for all of us. Well, Lee, this has been a fantastic conversation. My traditional closing question, what are you excited about in 2024? What are you going to be spending time on? What should we look ahead for?

Lee:

I like to talk about this concept because it hasn’t happened yet, but it’s something that we’re thinking through. I keep putting it out there on interviews because I keep getting people emailing, saying, “Hey, we heard you on this interview talking about this concept.” I’ve got to give credit. There was another gentleman who brought it to me and I won’t say his name just to protect him, but the concept is that… This is one of many that we’re working on, including some of our amici briefs, if you will. The plural of amicus is such a funny word, but the concept is essentially getting more state and national adoption and understanding through almost a forcing function.

So, the concept is to establish a trust and the benefactor of the trust in our case would be the State of Texas, the rainy day fund, or something within the comptroller’s jurisdiction. We have a bullion depository here in Texas, which is unique amongst most states. We brought our gold back from New York, and it’s here locally in Texas.

Ian:

I did not know that.

Lee:

So the idea is that the benefactor would be the state, and the state would take possession of the trust only at which point they’re willing to self-custody in cold storage, whatever assets the trust holds. So, we will have people donate assets to the trust. Maybe you’re donating a Bitcoin or half a Bitcoin or two Bitcoin or whatever, and you’re on the board of the trust if you make a donation of certain size. Then the state has to wait until they’re willing to take possession of these funds. It’s really not going to be a lot of money. It’s going to be an inconsequential amount of money for a state the size of Texas with close to 25% of the national GDP, but it would be an incredible thought, almost like an educational exercise.

Imagine if the bullion gold depository in Texas had treasures and ledgers in it. So, that’s something that I’m excited about and we’ve got a lot of other initiatives that we’re working on in the legislature from a policy perspective, but that’s a fun one that I like to put out there that hopefully won’t bore people to tears. You don’t want me talking about our plans for the next legislative session, because it might put people to sleep.

Ian:

I’m all for it. Let’s get some hardware wallet devices in the gold depository right alongside all the gold bullion. Lee, this has been fantastic. Thanks for taking the time today.

Lee:

Yeah, thanks for having me, Ian.

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