By now you've heard of Bitcoin, the world's first and biggest cryptocurrency, and the blockchain its underlying technology and how together they have the potential to change everything from record-keeping to the global financial system

The blockchain is a radically transparent platform that allows people to trade with each other in a way that bypasses the need for traditional contracts and intermediaries Bitcoin is free market money that runs on the internet and isn't controlled by a political entity or central bank That sounds exciting as hell but if you're like me you struggle to understand exactly how a fully decentralized money and public ledger system are going to be implemented and brought to bear on everyday life So meet Caitlyn Long, one of ink magazines ten business leaders changing the world through tech You need a true fair free capital market in order to have a vibrant economy and we don't have that today and that's what we gain by blockchain

She's also a former managing director of Morgan Stanley and the current president of Symbian which is bringing blockchain technology to Wall Street You became interested in the Austrian School of Economics in 2008 during the financial crisis Why did it take the financial crisis to make you interested in the Austrian school Why did it what are its essential insights into kind of Bitcoin or blockchain technology? Sure I was in the industry for 16 years before the financial crisis happened And the system worked pretty well and even today it still does but that hiccup, I knew there was a bigger story than what we were reading in the mainstream press and it was ironically Tim Geithner's interviews that he gave very close together The first one in which he said interest rates were too low and that's why the mortgage market imploded and the second one he said we should lower interest rates even more So you had somebody who clearly was talking out of both sides of his mouth or didn't understand from minute to minute what was going on potentially both yeah I don't know but that's what got me curious and I started asking all of my big thinker friends who who were more thoughtful about the way the system really worked and one of them said start reading the Mises Daily Mail and you'll figure out how the Fed works because by that point I knew the Fed was at the center of of the financial system and there was something that just didn't quite make sense so I went deep down the rabbit hole so what what is it about the feds role that you think was central to the to the financial crisis and then how does the Austrian school kind of respond to that or you know clarify that for sure and by the way I didn't just go into Austrian school I looked at everything because I just didn't accept the mainstream explanation but but but what I figured out was that we didn't have a free market in money and the most important price in the economy that should absolutely never be tampered with is the price of borrowing money in other words the interest rates and specifically it's the money market rate of interest that should always be free because that's what gives entrepreneurs the red yellow green signals as to which in which sector to invest in and over what tenor to invest short term versus long term and so the Fed by manipulating interest rates and the money supply and things like that and it screws with we don't really know what money costs at any given point that's exactly right I do I am confident in saying that interest rates would be a lot higher today a lot then they would be if if we lived than they are today if we actually had a free market in money no question because you'd have to compensate savers for the risk so how do you know so what about the Austrian school appeals to you that there was an aha moment for me when I read an essay that had two graphs that described as a simple supply demand for for money and it showed that the disconnect the Hayekian triangle was really what it was in a simplistic form and it showed the disconnect and made me realize oh my gosh there's no question that supply and demand for borrowing money are out of whack and that rates should be higher and bye-bye rates being lower where we are subsidizing capital destruction and it just was coming out of course with a vengeance at that point but we're back at it we're doing the same thing today now the Austrians also tend to believe you know they hate fiat currency and they love the gold standard do you believe in a gold standard because you're a big Bitcoin watch-chain person and it seems like the gold bugs and the Bitcoin people don't get along very well yes it's so true it's fascinating because I'll be at Austrian events and folks will come running up to me how is this how did this work again and I think it's because the Bitcoin fits in them in the men's Aryan definition of money better than it fits in the Massassi and definition of money I'm really in the way yeah no that's yeah well like okay Karl with a came anger yeah wrote a tremendous essay in 2014 explaining how Bitcoin actually does fit with Mises regression theory of money and I think he's right that the value the use value of Bitcoin isn't just the coin itself it's that Bitcoin is intertwined with a payment system and so you've got the the unit of value a small be Bitcoin along with the payment system itself capital be Bitcoin and they're intertwined and that's that that's what the Austrians could use if they if they so chose and it's just that in the 19th century or 20 early 20th century was gold that performed that function right and then actually you asked earlier what what what should be money my answer is whatever the free market says money is so III don't necessarily advocate a return to the gold standard though is you and I were chatting before the interview there are some central banks that are finally stockpiling gold going exact opposite direction as as other central banks in the world and I find that fascinating because they understand that backing a fiat currency with real assets may someday have value even though today it's certainly not part of a zeitgeist of central banks to do that well let's let's talk about us and smart contracts because that's what one of the ways you describe it is that it's a smart contract company yes are in all contracts smart or at least for one of the people maybe the person writing it or the person signing it what do you mean by smart contracts Marc contract is a piece of code that autonomously runs and it's essentially an automated if-then statement what we interact with it might feel like a smart contract today something like online banking so on the 30th of the month the computer hits the atomic clock and says time to pay your utility bill if there's money in your account the bill gets paid and you don't intervene at all now that's not really a smart contract in the blockchain context because when you run that smart contract on a blockchain what happens is that the payment goes immediately to the payee right now you've got that sexy front end of online bill pay most users probably think they're actually paying their bill at the moment that they set that up or at the when the computer it's the atomic clock on the 30th of the month but in reality the payment is going through a spaghetti labyrinth behind the scenes before it ends up at the payee and they get it usually the next day and sometimes even longer depending upon if it's a foreign exchange payment so so smart contract is essentially autonomous computer programs it will feel like like an online bill pay that automates workflows that used to be manual but it's going to be on steroids relative to what we do today it'll be instantaneous or yeah there is latency the speed of light is the limitation on how fast it can move so there is latency there not always this means I think if I'm remembering the theory of relativity my twin who goes out to Alpha Centauri he'll owe me a lot of money by the time comes back and I'm an old man or he's an old man so another way of talking about this is that it's a distributed ledger system so explain how I mean that seems very close to the kind of smart contract but it said the payment will be put through the system and everybody will be able to account for it so I'm you know immediately yes essentially the golden ledger that's the ah of Bitcoin that is the payment system that Satoshi Nakamoto invented that enables multiple parties to see the same data at essentially the same time and trust that it's valid when we say essentially the same time we're talking milliseconds of latency but that's the ha that that multiple untrusting parties who may not even know each other and certainly don't necessarily trust each other can share one and only one copy of data and trust that it's valid right you spend a lot of time talking to risk managers and insurance companies last year you gave a speech to the National Association of Insurance Commissioners which sounds like the most boring conference of all time but where you said that black technology could fix and I'm courting you the lack of beneficial ownership tracking of securities by the securities industry now the content of the speech is really fascinating but are you saying that people in the stocks and bonds business don't really have any idea of who owns what that's exactly right okay and so like that's really scary right it is and it should be most people don't understand that yeah explain how how is it because like every I think everybody thinks they know who owns this or that right what we owned in our brokerage counts is an IOU from our Broker Dealer just like what we own in our bank account is an IOU from our bank we don't really own our bank deposits just like we don't really own the stocks the the company that owns stocks is a company called the DTC or technically a a subsidiary called CD and Company it's the biggest company that nobody has ever heard of and frankly it owns 99

9 percent of the securities outstanding and we think we have a capitalist system pause on that and think about that how difficult would it be for that entity to be taken over by a hostile actor pause on that but let's leave that aside and presume that doesn't happen so they literally it's a bookkeeping entity it's something called a Clearing House that was created back in the 70s by the SEC to try to allow netting of securities transactions in a in a market where where too many trades were happening to move the physical securities around fast enough and so they allowed for it's almost like the Wells Fargo stagecoaches back in the 1800s with payments instead of moving all the cash they just netted the Rises the incomes and out goes the debits and credits and just move the net amount of cash as a means by which to try to reduce risk in the system and at the time it helped but what we're stuck with now 40 years later is a market structure that requires all trades to clear through that central organization which is part of the reason why it takes a lot of time to clear trades how long does it take to clear a typical trick well we just went from T plus 3 to T plus 2 in other words trade date plus 2 days but of course technology would enable us essentially in real time to clear those trails I mean is it that people don't know who on something at any given moment in time or is it more kind of long-term than that well you know that well we think we bought this company but there are so many intermediaries that we're not really there that's right the accounting systems can get out of whack and it's a function of the latency and the number of intermediaries through which the transactions have to go and that's why the system occasionally does lose track of who really owns what I've encountered it in my in my business when I worked on the street working with a pension fund where there was securities lending happening that was unauthorized and they wouldn't have discovered it but for the fact we were working on a pension transaction and then of course there there are a number of instances where naked short-selling has been revealed but the most prominent one is the dole food case that just came out of the Delaware Chancery Court in February of this year there were thirty-six point seven million shares of dole food outstanding and forty-nine point two million applications with valid brokerage statements for those thirty six point seven million shares outstanding so that Delta between thirty six point seven and forty nine point two was just phantom shares that were created from the accounting system out of thin air Wow so it's like starting old time stock watering but this is fully within the system it's fully in the system it's it's fractional reserving within securities as opposed to fractional reserve banking which is what the Austrian school was so you've written that the the biggest beneficiaries of blockchain technology are long only investors insurance companies pension funds mutual funds and mom-and-pop investors they're the biggest losers from today's lack of beneficial ownership tracking in the securities industry walk through how blockchain technology fixes this it restores the property right back to those of us who think we actually own what we think we own today but don't so I mean in that case of dole foods there's no way that there could be more shares outstanding then we're actually creative at the time because everything gets accounted for immediately or you know at the speed of light well and we also can track it we own it so if somebody is actually out there doing something with our securities that aren't authorized then we would know we would be able to see it this is one of the things I find fascinating about blockchain a Bitcoin and blockchain is that when it when Bitcoin really emerged one of the particularly on kind of dark websites like Silk Road and whatnot the idea that it was fully anonymous cash like transactions but in fact it's not it's the reverse of fully anonymous it is fully tied to specific individuals specific institutions specific moments in time you know is that does that trouble you at all a more accurate term does it trouble me it depends on the use case right because in it let's put it this way for those who are looking for better privacy in Bitcoin there are next-generation projects that have come out see cash Manero with much greater levels of anonymity but in the institutional world this is exactly the sort of thing that we want we want to be able to have clarity on who really owns what and so the shenanigans that have happened in the in the industry which have skimmed value off people's securities accounts on undetectably those sorts of shenanigans need to stop so within the institutional world that transparency is a good thing because guess what today we don't have it at all it's it's not nobody due until the very end there were that many extra shares of dole food out so this is and this is probably a stretch but this is kind of like there's going to be moments in the institutional investing world where we open the safe and it's like Geraldo Rivera going into Al Capone's vault and what we thought was stockpiled with good old-fashioned booze there's like nothing there no or there's you know a bunch of bears that are about to eat you or something well in the financial crisis as we were talking about earlier one of the things that clearly happened was the repo market seized and it was a it was a bank run it was not a bank run like we expected where people were lined up during the Depression you know around the block waiting to take their bank their money out of out of the bank and we realized what fractional reserve banking was this is fractional reserve banking in the Treasury bond market and it happened electronically it was a bank run electronically and there's an economist at the IMF who tried to get a handle on how many extra Treasury securities have been created out of thin air it just because of the way the accounting systems of Wall Street work and he calls it the velocity of collateral I won't go into the details about why he calls it that but in plain English what that means is how many times has one institution who owns a Treasury bond lent it to someone else who also reports that they own it who's lent it to someone else who also reports that they own it so you've got three and that's the number he came up with it used to be four now it's three institutions who are all reporting that they own the very same Treasury bond when there's really only one this is how the Fed is conducting monetary policy in today's day and age I think that the Austrian school is stuck in the old traditional banking system where it's all about money and m0 m1 m2 etc it's now being done through Treasury bonds in what's called rehypothecation and but it's exactly the same pattern where you're creating phantom assets that don't exist and allowing the accounting systems to get out of whack to do that you know Wall Street is famously averse to any sort of reform whether it's imposed by the government or it you know bubbles up through the markets I have you know how is it reacting to blockchain Bitcoin and associative technology because I was working running a business inside Morgan Stanley when I discovered Bitcoin and then discovered blockchain and believe it or not in the beginning I was I had kept my head down assuming like Jamie Dimon just recently said that you know anyone involved in Bitcoin would be fired that was my presumption that that was going to happen at that point in time but but shockingly what happened is as this got going the mainstream folks actually reached out to people like me and the different firms they found us through an internal Bitcoin forum the chief technology officer or Morgan Stanley reached out and said hey you know something about this come talk to me and I was running a business so he trusted me and I pulled me into a group of five people who vetted everything that came through Kenny can it be good if Morgan Stanley is interested in it I mean I mean is it just going to be co-opted into maintaining the status quo no well there are going to be attempts of that there are backdoor attempts of that right so there are a number of projects that are supported by the incumbents that have come out and admitted their blockchain inspired but in other words not not truly blockchain but but if you adhere to the principle of decentralization you can't have a central actor co-opted and that's what's so interesting about the approach of symbian to the marketplace we're looking for places within the market that are naturally decentralized and oh by the way guess what most markets are naturally decentralized most markets are naturally peer-to-peer when I'm paying my utility bill why does there have to be anybody into intermediating between my utility and me right so over time I think that decentralization will actually tip so what are what are markets then that you know say Wall Street is particularly interested in keeping decentralized or bringing decentralization back because it seems like Wall Street I mean the whole idea of you know we're talking in New York it was constant it's concentrated in a few block area or was for four centuries really or the trading districts and they want centralization don't they well for that it was concentrated for simply because they had to move the paper stock certificates around that's that's settlement was when I delivered you the actual paper stock certificate now that's that's no longer the case but but I think the dodd-frank actually pushed and pushed us in a direction of centralization ironically they missed an incredible opportunity to push decentralization and make the financial sector healthier they did do something's right in in increasing the capital requirements so there are certain things that have gotten better about the financial system but that those central organizations have become ensconce and anytime you get somebody who's just you know stick-in-the-mud ensconce we're not going to change that that's an incumbent that is difficult to disrupt so there are lots of examples of of central actors like that but I do believe what will happen over time is that decentralization will will show that it's that much more efficient and actually that lit that much less risky and that the the market will eventually move in that direction naturally you know as a fellow I've been kind of a philosophical sociological economic observation there one of the that is great about capitalism as it you know as we generally talk about it is the role of intermediaries because a lot of times people don't understand the value of what they own over here versus what it would bring over here intermediaries often are the people who create value and this is you know the rise of anti-semitism in Europe is you know trace specifically to their being involved in capital markets the overseas Chinese are intermediaries they're shopkeepers there are people who import something to a place where it has more value is you know in that sense does blockchain kind of you know is it is it a threat to capitalism as we understand it and that essential function of the intermediary no intermediaries won't entirely go away so you're talking about the example of shopkeepers they won't they won't go away if they add value by creating a marketplace you know a grocery store where I know I can go get my various and sundry items in one place I don't have to go to lots of different places that's that's a service that that is valuable and the same thing will be true of other intermediaries I don't think that the investment banks for example will completely go away they do provide a real value in bringing buyers and sellers together the stock exchanges provide value and bringing buyers and sellers together look at it in the Bitcoin world there are now cryptocurrency exchanges that bring buyers and sellers together there's value but what they're doing is taking a fee this is the big difference in today's day and age what they're doing is running the assets through their balance sheet and taking a cut of the value and oh by the way if Lehman Brothers goes bust before your trade settles oh you're suddenly a creditor of Lehman you thought you were buying a share of stock and suddenly you've got an IOU from a bankrupt institution that's the piece that will get will and should go away there's absolutely no reason why financial intermediaries need to have our assets moving through their balance sheets on the way between buyer and seller of a financial asset you've written about how nobody knows how leveraged the economy really is yeah explain why that you know why that presents risk and obviously blockchain addresses it by kind of clarifying who owns what at any given moment yeah so this gets back to what I was talking about in the Treasury bond market where there are three Treasury bonds Oh and reported is owned by every for every one Treasury bond that actually exists that makes each financial institution look solvent but if you actually try to pull out the double-counting guess what the financial system is not a solvent as it appears right and the Austrians would say it's actually not solvent at all if they're if everybody were to actually grab their assets and and and take them home so to speak so if the musical chairs ever stopped you realize just how insolvent the system is and it and just like a traditional banking system works that way so does the securities industry it works that way and so the challenge and actually there's a there's a regulator Christian Carlo at the CFTC who's been a big and early supporter of blockchain he's the one who's out there saying hey this is the tool that will allow regulators to realize just how leverage the financial system really is so he's he's out there admitting this not from ideological perspective but from a practical perspective do you think most regulators either kind of would be regulators like senator Elizabeth Warren or the actual people who are going through financial Ledger's and balance sheets do they understand that and are they asking the right questions and just giving the wrong answers or are they not even asking the right questions look I was in the industry for 16 years in the weeds before I figured it out so I think a lot of people probably don't understand it yeah but there are some who do you know and you asked about Senator Warren that that that wing of the of the Democratic Party has diagnosed the problem correctly just like the rod Paul wing of the Republican Party has and it's really that if there's a fundament of fundamental fraud going on in our financial system well to the extent that multiple institutions are reporting that they own the same asset at the same time when there's really only one asset what would you call that yeah I would like to get in on that action for the collapse is figured out right all these folks in the dole food case how many people got a free double-dip yeah and stole value from mom-and-pop sometimes I wonder whether when they see those opportunities to sort of ARB the system because the system doesn't keep accurate track and then they wouldn't get caught or presumed they wouldn't get caught I wonder how many of the folks who are doing that actually stop and think about what that means and that is part of the settlement process for kind of stock trades I mean by you you were talking about you know T plus 3 down to T plus 2 and that can become you know basically where the trade is instantaneous what what is the issue with the stock trades taking so long to settle what what kind of you know what kind of funny business goes on between them it's a market structure issue so we talked about the creation of the DTC don't need the DTC anymore from a technology perspective because we could settle trades instantly between buyers and sellers or their agents like a brokerage for a new brokerage firm but what happens is right now literally each institution that touches a stock trade is Pro is sequentially processing that trade so from your broker to the custodian then the custodian has to sequentially process at the DTC then they sequentially process to the next custodian to the broker so that's five institutions who are touching a trade literally having it run through their balance sheet so again they're leveraged institutions if anything fails in that chain you're you're stuck with an IOU and each one has to be processed in sequence that's that's why under the current market structure it's really tough to speed this up because five institutions have to process something in sequence are there specific you know illegalities that creep into the system that you can talk about well the naked short-selling is technically illegal and explain that for that's where you it's where you where where you create securities are lent out and it's not required to find an actual security you just have to verify that you could borrow it if you wanted to so you can see how there's room for interpretation on how many securities there are outstanding and so if you get a borrow you can borrow the shares that creates a phantom share of stock if it's not tied to an actual share of stock that is illegal and our friend Patrick Burnett oversaw comm ten plus years ago really made a lot of noise about that because you can see how that artificially suppresses the price of a security again this gets back to how the mechanisms in the in the capital markets that skin value unfairly from mom-and-pop because nobody is quite sure who owns what at any given player charm right and it you know back then it really did suppress the value of over stocks shares I believe Patrick had to sell some assets at a fire sale value at the time but now short selling is not a bad thing right short selling is also a way so why isn't it quiddity why is naked short selling that because it creates phantom shares right so if I'd if I'm gonna short a share of stock as long as I can tie my short to the actual share stock that's that's that's that there's tremendous value and pension funds and insurance companies do securities lending all the time and they can collect extra income for that that's absolutely legitimate and should be done all day and about 20% of the trades in securities markets are done on a short basis so it's very much a part of the liquidity in the market where it starts to become a gray area is when you're allowed to say well gosh maybe the I don't have an actual share of stock I can point to one over there but that one might also have been pointed to by somebody else and that's how you get into the accounting being out of whack and value being skimmed off last year you made a prediction that involved overstockcom Patrick burns company who is you know one of the great kind of evangelist for Bitcoin and blockchain especially the prediction was that overstock would issue public securities that exist only in the blockchain in December the last December they did just that why is that a good thing or what does that prove well that paved a trail for the rest of us to follow because they went through the SEC approval process that is an SEC registered security full disclosure I own it personally an overstock in summer of this year made an investment in my company so full disclosure sure we're philosophically aligned and working on some things together but but that blazed the trail for other issuers to follow the the legal documentation that overstock went through the heavy lifting to get approval to do that security doesn't trade very much because it actually is in this in this one place you have to have an account with that one brokerage firm and so the next generation versions of those securities will be more liquid and trading in more and more venues tell me a bit about how different national banks are starting to use Bitcoin or blockchain technology to transform you know their business and and particularly the Russian National Bank seems to be doing something or Central Bank rather yeah you know that is forward-looking in a way you know we don't associate Russia with anything other than looking back at you know either the czars or the comet itself is a country that's tended to be on a different cycle than the rest of the world because they haven't been as connected to the OECD type countries and of course they've in the last ten years been frozen out because of sanctions from the global financial system and so it isn't a shock to me that Russia's the first central bank that came out and said that there will be a crypto ruble and we don't know how their they will be implementing it but it remains to be seen I look at at the fact that Russia has been buying gold in its central bank all the Keynesian economists were saying you should when that when the ruble had a rough patch a couple of years ago the Keynesian economists the IMF we're telling him sell your gold protect the value of the ruble and no they just let it drop and they actually bought gold at that point in time it's fascinating how does you know how does a country like Russia which is a low trust society to begin with and then in the international markets it's very sketchy I mean have how will blockchain technology our crypto rubles first will they be able to make people actually confident that there's something there or this is just another scam but secondly how will that transform the internal politics of Russia which is a very secretive closed society yeah well I spent I did the trans-siberian Express last year so I spent a lot of time I'm fascinated by the history of the country is it better better than I am track or about the same oh well you know it's I've gotta tell you Russia's vast it is it is I think one and a half times the width of the United States I mean it there instantly when you're in Siberia there's a lot of it a lot of that let's put it this way Trane is the method of transportation because the highways are just it's too sparsely populated for big for big highways and and so it but what I saw was a tremendous amount of Commerce and especially a lot of oil tankers on the train tracks but but back in on your question about the crypto rule ruble it all depends on how they implement it if they implemented in a means by which you can verify that the central bank became a money warehouse and it's backed one-for-one with something real and russia remember is a very rich natural resource economy so in addition to having bought a lot of gold they in China have been buying gold from the other central banks in the world in the last ten years in large size so if so they could actually back their currency with something real if they so choose so the interesting to see how they implement it is that kind of ironic though that a crypto ruble needs to be backed by gold coin sitting in a in a vault somewhere well essentially it becomes an electronic version of whatever is on the central bank's balance sheet as long as it's one for one yeah yeah so that that and of course you know a lot of the mainstream economists would be probably scratching their heads listening to us right now saying why on earth would that matter well it would matter because all of a sudden if your capital goes to the place where it's treated best and if the central bank is not going to dilute you by playing shenanigans like we were talking about in the in the government bond markets around the world namely the Treasury market here but that happens in all the government barn markets in the OECD countries where there are more government bonds than there actually exists in the accounting systems so yeah it depends on if Russia implements it in a one-for-one manner when will the rest of us realize that you know the blockchain has one I think it's when you see big financial institutions deploying it as a means by which to create a shared back-office and take a take out all of the expense and the risk and the latency in settling transactions and essentially becoming service providers that enable the peer-to-peer market and we wouldn't necessarily in our interactions with the blockchain know that there is a blockchain because what we'll see is just a nice web-based front-end like we experienced we already have with with online banking but what the difference is when you send money to your friend on venmo they're going to get the money right away as opposed to waiting until the money shows up the next day right if you if you deposit a cheque in the bank today it's usually t plus three before you get access to your funds and that's because of those intermediaries that we're talking about on a blockchain basis you get an instant I got to tell you the prank phone caller and me is not looking forward to the future in the same way that called caller ID and did prank phone calls this is you know let's let's have a moment of silence for what we'll lose in a perfectly transparent financial well at a very fast financial system right for sure but but but this is this is you need a capital market in order to have a vibrant economy you need a true fair free capital market where most especially interest rates are set by the voluntary interaction of buyers and sellers of borrowing and in lending money and we don't have that today and that's what we gain by blockchain well that's a great note to end on thank you so much thank you we've been talking with Caitlin long she's a Bitcoin and blockchain enthusiast and she's the president of Symbian thanks again for talking to us thanks Nick for reason I'm Nick Gillespie