New York Banning Bitcoin Mining? | DC Blockchain summit 2022

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Kevin, let's start off with stable coins. So, this has been a huge topic of conversation recently. We saw Luna that was 60 billion dollars at its peak, that turned into a failure. So what can we do with the stablecoin ecosystem to continue to evolve it and ensure something like this doesn't happen again?

Yeah, it's a great question and very timely, given the last 10 days in this space. I would answer it this way: from the investment perspective, the promise for what a stable coin could be is so tremendous and such a huge opportunity that it's okay to experiment with different structures. It's also all right for one to go to zero because we're so nascent in this, and we're trying these new ideas. This was one that didn't work.

So maybe going forward, using algorithms may not be as popular as perhaps an asset-based stable coin. But I look at it this way: let's say I, when I do this, let's say I'm putting, I'm indexing for Europe right now, and I have, I'm putting an index together, I'm an indexer. We service sovereign and pension plans, and there are many people that do what I do. Let's say you're a sovereign fund and you're bringing in 250 million U.S. cash a day because you're an oil magnate or you're an oil country. You want to index that into the S&P, X oil, X airlines. We do that. We get paid for that.

So we see fund flows every day. Stable coins could be a huge tool for us. Think about it this way: I want to buy Nestle on the Zurich exchange. I have to take U.S. dollars out of New York; I have to send them over to Zurich ACH, three days. There are other ways to wire it, but if you're going to go bank to bank, there's a know your customer basis. It takes time. It can be done in 12 hours, but there are a lot of fees involved. Then I have to convert it into Swiss francs to trade it. I get clipped for two, three, four, five bips on that—no value added.

If I had a stable coin that both regulators agreed was a currency and a payment system, I could do that in two seconds at a fraction of the cost, buy whatever I want to buy, and then send it back the same way. That's worth a trillion dollars; that's how big the FX market is in a quarter—just the fees in that. Now, with that potential, I would love to see some policy, either the Hagerty Bill, which I read, or the Toomey Bill, which I read. Both of those make a lot of sense to me and get some policy around this so I could use it as a tool institutionally.

Yeah, absolutely. You know, speaking of that, you've been meeting with a lot of political leaders in North Dakota and other areas. I know there are other rural areas that have been overlooked for technology advancement. As we see the evolution of the mining opportunity for the digital asset ecosystem—building this critical infrastructure—how can these rural states leverage this to take advantage of bringing economic development and prosperity?

Yeah, that's—I mean, the mining space is in chaos right now because of ESG concerns. I mean, there's no other way to put it. The market capitalizations of the public miners, which used to be a proxy to the price of Bitcoin—a way for institutions to invest—you could buy a basket of these public miners—that proxy is gone. The stocks are down 60, 80 percent, whatever, and they won't be coming back until we resolve the ESG issue.

New York is a highlight of that; they're considering canceling a proof of work—that would be a bad outcome for New York; that's not a good idea. But it's frozen capital because New York, Tennessee Valley, Montana, North Dakota are ideal locations where you could put mining facilities under full mandate of hydroelectricity, where you wouldn't need a carbon audit. I think for miners and data centers, that's a huge opportunity. Turkey Point has just been recommissioned by Biden; that's a nuclear power facility in Florida. A lot of interest in that facility for providing power for data centers.

It's not just Bitcoin mining we're talking about here. The best outcome for stabilizing a data center is to lease it to miners during the period of stabilization and then convert it to a long-term lease with a Tesla, an Amazon, or a Microsoft. All of those giant behemoths, including the state governments, want clean, zero-carbon, ESG-compliant, Larry Fink-proof data centers. That's what they want.

Yeah, and as we continue to build out this digital asset infrastructure in the mining sector, there are a lot of people that think there’s the opportunity here where this becomes a benefit for national security, a better benefit for energy evolution, and creating true renewable innovation in the space. How do you think that we integrate these energy opportunities into the everyday business needs of these utility providers?

Well, assuming proof of work remains, and I think it will, I really do, we have to, in every generation of chips, make them more efficient, make them more energy-efficient, and throw off less heat. For example, the capital available—I mean, you think about a facility like the one I’m involved in in Norway, which is using excess hydropower. Instead of it going over the dam and never being returned into the economy, we’re capturing it in the form of a data center that’s mining Bitcoin right now. We pay tax; we support the community, we’re building up 300 megawatts there, and we are using power that is not being used.

There are many use cases, but at the same time, we’re trying to find the very best and most efficient productive way to mine that coin. The halving is coming, so we have to even get better at it, and that’s forcing the industry to do a much better job on technology but also figuring out a way to support communities. The stacks in Norway, heat hydroponic tomato stacks and a cannery have been built beside it by the Bitcoin miner there. So it’s become part of the community, and we’re not at war with the local government because we’re part of the local government—they’re, you know, shareholder in it.

I think that’s the new way to build these data centers and these mining facilities—figuring out jurisdictions that are pro-energy. If it’s nuclear power or if it’s hydro, it’s great. The United Arab Emirates is building a massive data center around a nuclear power plant. Upstate Quebec used to be upstate New York; no longer. That’s their problem, but it’s a shame that they’re not taking advantage of what they have.

Yeah, that’s a great point. Now I want to shift gears a little bit now and kind of move over to regulation. So I’ve heard you talk a lot about the opportunity to create thoughtful regulation in the digital asset space, and I would love to learn from your perspective: how can the United States become a leader in blockchain?

Well, a lot of people don’t want regulation, but let me make the base case for why everybody in this room wants it. Let’s just take the granddaddy asset, Bitcoin. Okay, let’s just start there. You may be excited that it’s at 800 billion market cap; that is absolutely a nothing burger in the context of financial services. It is a rounding error because the majority of wealth in the world is managed by sovereign wealth and pension plans, both stateside and around the world.

100 billion, 200 billion, one trillion-dollar mandates that do not own a single Bitcoin—not one. So, for all the excitement that we have in these conferences—and this is very important to discuss—it is so nascent; it is not even on the radar of these asset allocators. And they’re not going to put it on the radar until it gets cleared by the SEC in one way or another because the majority of their wealth is indexed into the S&P, the largest market on earth.

If you don’t have access to that because you’re somehow rogue, it’s not worth buying Bitcoin. It’s not worth buying Bitcoin at all because it’s a tiny fraction of what they’re trying to manage. Now, if we could get regulation, and I would argue if we could just regulate one coin at the beginning, let it be Bitcoin, and one stable coin, that would be fantastic. But staying on Bitcoin, here’s what would happen: I’m an indexer; I ask the sovereign wealth what allocation would you put into Bitcoin.

The typical mandate for those guys—we have 11 sectors of the S&P. Their rules are long only, no more than 20 in any one sector, no more than 5 in any one stock. So they may initiate their index of Bitcoin at 50 basis points. When you’re running a trillion-dollar mandate, that is a ton of money. All of a sudden, the demand for that asset Bitcoin becomes higher; the price goes up. But it gets better—if they bought it at, let’s say, thirty thousand dollars, and their mandate is they’re going to be a fifty percent—or let’s say one percent weight, and it goes to a two percent weight within 90 days, they sell it back down to one percent. Or if it drops, they buy it back up.

They are the eternal bid for the asset, and all of a sudden, the stability of Bitcoin—instead of having 50 swings every 12 months or more, that’s gone forever because there’s an underlying multi-trillion dollar bid for the asset. Now I don’t know why there’s a single person in this room that wouldn’t want that. So, I encourage limits, and I encourage Hagerty, and I encourage Toomey—all of these regulators—let’s get going here because the rest of the world is far advanced. Canadians already have an ETF in Bitcoin; they already have an Ethereum ETF. The Swiss have already licensed a dealer broker attached to a crypto exchange.

So is Canada; the UAE is doing the same thing with the ADGM. I run around the world trying to find places to put money to work; it’s everywhere else except the United States. What’s wrong with this picture? It’s broken; we got to fix it.

We—and I know there’s a lot of other political agenda on before the midterms, and I’m sure Biden isn’t sitting there saying, “I wonder what Kevin O’Leary thinks about regulation on Bitcoin.” I mean, he doesn’t care because he’s got a lot of other issues, but we got to get this dealt with on the other side of the midterms.

I agree, and I think as we continue to get these regulations dealt with, we’re going to see huge institutional inflows of capital, and we’re already seeing that today. There’s more institutional adoption and interest than ever before in the crypto space, and you’ve even noted before that you think crypto will be the 12th sector of the S&P. Why do you think that?

Because of the productivity. You think about the number one sector of all sectors—the grandmother, grandfather of its currency and its financial services. No economy can operate without it. The productivity enhancement tools that are available now, as you contemplate higher-speed transactions—what Polygon is doing, aggregating on top of Ethereum, figuring out all these things—all these incredible teams.

And I look at it; you know, I’ve said this countless times, but it’s so apropos right now. Bitcoin is not a coin; it’s software. Ethereum is software. Solana, software. Helium is software. Polkadot is software. These are all software projects. The amount of intellectual capital going into these projects, these are the smartest coders in the world. They don’t want to go work in any of the other 11 sectors right now. You graduate from Waterloo, you graduate from MIT, you come out of Temple, and you’re a coder, you’re going one way—to blockchain. That’s where you want to be.

Now when you get that much intellectual capital working on something, and I’m an investor, I got to wet my beak—are you kidding? I know there are going to be incredible outcomes; I just don’t know which ones. So, I’ve spread across 32 positions right now. I’m sure the majority won’t work, but I only need a few. I mean, I own these things that are nascent, you know, beginnings, and I’m hoping that some of these ideas work out.

We haven’t even touched on NFTs yet. I mean, there’s so much going on here that you’ve got to spread your bets. You can’t just be a big chunk of Bitcoin or a big chunk of Ethereum. You know that you’ve done it very successfully; you’ve got the best performance record of any hedge fund. I mean, that’s good work.

I appreciate that. It’s so funny, though, because it’s the traditional Warren Buffett strategy that has allowed us to perform well—not opportunistic, too.

Absolutely, I get it. So in this line of thinking with investment, you know, you used to be very against crypto, and then there was a turning point where I think you really had this light bulb moment where you’re like, “Okay, this is happening, and there’s nothing stopping it.” Why is this such an amazing investment opportunity today?

My turning point—and I get that Pompeo video shoved in my, you know, what—every day from the CNBC interview. Every day he never lets me forget. But the turning point for me was getting a call from one of the analysts I work with that watches the OSC in Canada, where we have a lot of investments, saying they’re going to license the world’s first crypto exchange attached to a dealer broker. That just said, “Whoa!” I mean, that’s a game changer. A lot of people don’t understand what that means, but what it means is that every Canadian citizen in every province can open an account, transfer fiat currency—Canadian dollars—into it, and be completely 100 percent compliant on their own crypto exchange. They granted that in an order from the OSC. That changed everything for me.

I said, “Okay, what’s going to happen next?” Within weeks, the very first ETF was launched on the Toronto Stock Exchange. Then the Ethereum ETF raised five billion dollars in something like 48 trading hours. So that’s the beginning. Then I saw the Swiss; then I saw what happened in London, then the ADGM in UAE. It’s all happening moving forward, and nothing’s happening here. It’s a very strange, eerie situation that the U.S. wouldn’t lead on policy.

Now, I think with these senators you’ve seen here today and other policy makers coming, they get the joke. As an industry, we’ve got to feed them as much information as we can to get it right because a lot of this code—there’s something very wrong when the brightest minds out of MIT or Stanford are living on a Caribbean island. What is that like? What does that tell you?

That tells you that we don’t have the infrastructure here on policy to bring these geniuses back on our soil and all the jobs and wealth they’re creating. That’s just wrong; it’s 100 percent wrong, and we got to fix it.

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