“I’ve got a maximalist view on this I’ve sort of self radicalized but it’s not just that advisors have to compete with now, banks and insurance companies and fintechs and Google for the distribution of financial products. And I think the opportunity for advisors there is money in motion is a sales trigger. And so I think, a smart integration into those streams of information as well as transaction activity can actually be the best way to introduce somebody naturally into a financial product around their point of intent, around the thing to actually want to do.”
— Lex Sokolin, Head Economist, ConsenSys
The WealthTech Today podcast features interviews, news, and analysis on the trends and best practices in wealth and technology for wealth management, asset management, and related areas. This episode is part of our November focus on alternative investments. We’re talking to influential industry leaders who can provide technology solutions that help advisors build stronger relationships, improve outcomes, and enrich their clients’ lives. A quick shoutout to our sponsor, the Invest in Others Foundation, please go to InvestInOthers.org, and be sure to subscribe to our show wherever you listen to podcasts so you don’t miss future episodes.
- AdvisorEngine [01:23]
- Axie Infinity [22:10]
- Chime [08:43]
- Mariner Wealth Advisors [11:23]
- MetaMask Institutional [4:00]
- Mint [09:05]
- Plaid [15:40]
- SoFi [08:42]
- Understanding Crypto Wallets
- Money in Motion
- What Are Non-Fungible Tokens?
Craig: I’m happy to introduce our guest for this episode is Lex Sokolin, Head Economist at ConsenSys, a blockchain software company. Lex, how are you doing buddy.
Lex: I am doing fantastic. I’m doing my best with the shadowy SuperCoder outfit for those listening, I’m wearing a hoodie. I’m very proud of myself for finally getting the uniform that Liz Warren would.
Craig: She’ll recognize you as being in crypto that’s how she knows. She doesn’t know much, but she knows that hoodie equals crypto. And before forget, Lex is also the founder of AdvisorEngine, one of the founders.
Lex: Yes, yes, one of the founding team. So it is fun to trace back kind of robo advice to then FinTech to the evolution of FinTech into decentralized finance and just want to express my affection for wealthtech and the RIA space.
Craig: We love it as well. That’s why we’re here, it’s all we do is wealthtech, it’s the WealthTech Today podcast, that’s the name of the podcast man. Can you give us the 30-second elevator pitch for ConsenSys?
Lex: Can I sigh for 29 seconds?
Craig: You should be pumped this is just an exciting man, you escaped wealthtech you’re into the new world.
Lex: I wouldn’t say escaped I would say, I was liberated from. No, no. So ConsenSys is a blockchain software company and so understanding what blockchain is as well as what software is at the heart of that, I think the highly stylized answer is that wealthtech and fintech are technologies that are primarily focused on distribution of financial products. So selling portfolios, selling stocks, selling ETFs through a technology enabled experience, thether it’s with an advisor or whether it’s an a mobile phone.
Blockchain based software flips it the other way, blockchains are there for manufacturing there for making things. So what makes the asset management product or the deposit product and so on. And then Ethereum is a type of blockchain that runs all this financial software. And again, you can think of trading, lending, banking, portfolio management, all this stuff being open source and run on a blockchain. Anyway, I assume you know that, and then ConsenSys is at the heart of this phenomenon of these programmable computational blockchains, we’re a company that helps users and developers build on top of computational blockchains like Ethereum. And more broadly, people call this Web 3.0, Web 3.0 being the internet, after the social internet after Facebook after Twitter. Sometimes people also call it the internet of value. And so ConsenSys helps people access Web 3.0 through what’s called a crypto wallet, MetaMask, now over 16 million users. I’m gonna pause there, 16 million monthly active users on MetaMask, and then help developers write software, portfolio management trading rebalancing lending investment software through a bunch of projects like Infura and Quorum used by JP Morgan and MasterCard and other large firms to engage with these kind of next generation systems. So in part it’s hard to explain them 30 seconds without contextualizing it but, just the short of it is that ConsenSys helps people use blockchain based software.
Craig: I think that’s about as concise, a description as you can give in less than a day. Considering what’s going on, and considering that we’re gonna have a very wide range of knowledge and people listening to this podcast. Some people familiar with crypto and some people aren’t but certainly not at that level, I think that was a pretty good overview.
Lex: I think a lot of folks think of crypto as this asset class of stuff, they think of it as like, oh there’s timber and pork bellies and oil and crypto.
Craig: Pork bellies like you’d find in a BLT Bacon Lettuce and Tomato Sandwich, delicious.
Lex: Exactly, yes.
Craig: That’s from Trading Places, do you remember when he’s explaining how commodities work it’s Eddie Murphy and he has like a bacon, lettuce and tomato sandwich.
Lex: That’s fantastic. I know of the things you’re referring to, but I can’t confirm or deny.
Craig: I will speak in movie quotes the entire time if you let me, but I won’t. Sorry, go on.
Understanding Crypto Wallets
Lex: No, not at all. So, a lot of people because the CFTC has kindly put the commodities label on Bitcoin, kindly in the sense that it protects Bitcoin from some of the more onerous things the SEC would imply on onto Bitcoin and Ethereum, so the CFTC labeling Bitcoin a commodity has a bunch of implications for people who are on portfolios, and that’s all good but it is a bit narrow in terms of what the actual thing there is. And in the same way that referring to the internet as a place to put text would be wrong. The internet is not just a bunch of books stacked on top of each other, even though that analogy might have been the answer in the beginning, Web 3.0 is not just a bunch of commodities that you trade around, it’s actually the whole economy just on a different chassis. I forget where we’re where that came from.
Craig: You lost your train of thought, there’s so much going on here.
Lex: Crypto. Some folks think about crypto as commodities, but it is in fact a much more rich ecosystem now that pretty much every entrepreneur and college student are trying to get into.
Craig: Everyone’s trying to get into it but doesn’t mean it’s a good idea, there are some things that are good and some things that are bad, some things that relate to wealthtech in our industry, and some things that won’t. I think that Metamask at some point will, and I think everyone should look into it, especially advisors who want to understand what a wallet is, want to understand how Ethereum works and MetaMask is the biggest new wallet around, so they should definitely look into it and do some reading on it because I know, as Ric Edelman says, you really need to be educated, even if you’re not investing in it, you need to know when your clients come to you and say, what you think of crypto you should at least be able to give an intelligent answer.
Lex: And the nice thing about MetaMask is, I think the stuff is much simpler than people make it out to be. Yes, there’s some janky interfaces here and there but it’s a very intuitive metaphor. We’re all familiar with the robo advisor app, which puts financial advice into a phone or a website. We’re familiar with a neobanking app, which puts a bank account into a website or a mobile app. We are familiar with a payments wallet, which is like Google Pay or Apple Pay, which puts a card into a mobile app. We’re familiar with a super app, which combines a bunch of these financial primitives into one thing. And there’s a lot of confusion, really at the end of it. What’s the difference between, SoFi and Chime and Square Cash App and PayPal and Apple Pay, they’re all kind of converging on the same thing, which is your wallet. It’s just your old leather wallet with a bunch of stuff in it and a bunch of cards and functionalities that reflect your financial situation. And we’ve always wanted to do this, if you think about Mint and data aggregation and PFM and the net worth statements that advisors provide to clients, that’s exactly the same idea of, people want to see their stuff in one place, they want it to function well and so on and so forth.
With a blockchain based infrastructure, you call this a crypto wallet. The word crypto sounds scary, but that’s incorrect, because what it represents is the word encryption, which means that it is safe. World War II was won on encryption.
Craig: And breaking encryption.
Lex: And breaking encryption, exactly. And so you want maximum encryption, you want as much crypto as possible, so that it is safe. If you use a website with HTTPS on it and it’s got a little lock in the corner, that means it’s encrypted, which means it is a safe website to use. So I would rather have encrypted money rather than just a bunch of stuff in a CSV file on a custodian FTP, which for those from Pershing or TD or Fidelity you know exactly what I’m talking about.
So, a crypto wallet is a way for a regular person or an institution to interact with addresses on blockchains, to interact with monies and financial instruments that are native to blockchains. And the cool thing is that it’s not just moving money around, it’s paying for goods and services, so it is not just your payments account and your bank account and your investment account, it is also your shopping cart, and your payment gateway and your payment processor and all the stuff that Fintech is made of. And so for sure I think advisors need to understand the concept of crypto wallets and digital wallets to understand how their customers actually use their funds.
Money in Motion
Craig: Yeah, it’s all connected and while of course we’re not in the payments space, but payments do get involved and they do matter, how you move your money around is involved and advisors need to be more holistic about all of their clients’ money. We have been talking to advisors who are getting more into insurance and more into trust and estate and more into budgeting and CPAs and bringing it all into one,. I saw a great presentation from Mariner and talking about, they basically have everything, every aspect of your financial life, they’ve got someone on staff to help you with. And that seems to be more of a holistic point of view than, well we just work with your assets where broker dealer, we sell stuff. So you really need to understand where clients’ assets are and more of clients assets are moving into different crypto related infrastructure.
Lex: I think they abstracted even one layer up, which is, and I’ve got a maximalist view on this I’ve sort of self radicalized but it’s not just that advisors have to compete with now, banks and insurance companies and fintechs and Google for the distribution of financial products, of course they have to do that today. Or with YouTube stars that are that are selling things. But they also have to think about money in motion, so you’ve got products that are money at rest. And then you’ve got products that are money in motion. So, when you pay, or when you trade, or when you transact, those are systems to move value around. And then when the money moves around, it stops at some point, and it doesn’t move anymore and then it’s at rest, and that’s when it goes to a bank account or a savings product or a money market fund or an asset allocation. And so advisors have historically been focused, and especially the switch to fee based advisors have been a switch from money in motion, transactional business to money at rest sort of all manager portfolio, but we’re in a world now where all the money in motion providers, including Visa, and PayPal, as well as the crypto systems which move money by default are all in this sort of game of what to do with your full financial picture which is a very interesting competitive pressure. And I think the opportunity for advisors there is money in motion is a sales trigger. So, it is what tells you when somebody is having a life event. It is what tells you when somebody is having a financing event or a purchase. And so I think, a smart integration into those streams of information as well as transaction activity can actually be the best way to introduce somebody naturally into a financial product around their point of intent, around the thing to actually want to do.
Craig: I saw this years ago and I haven’t seen it really well implemented yet. It was heldaway assets data aggregation, but it gave you an alert when a client for example, had a CD rolling over or had something else coming due, other money in motion, that there was now cash available, they sold something they did something. And I’ve seen little bits and pieces of this and everyone has data aggregation in some form, but it’s not active, it just shows you the screen and you’ve got to then figure out was that something I should deal with or is that something I should deal with. So that’s always interesting to see how that works. And so how would you explain how that the money in motion will work going forward?
Lex:I think this is quite difficult to put into place in the traditional financial infrastructure. So you might have to think about how does BlackRock an asset manager, combine with the MasterCard payments network from a software perspective? And there are some middleware pieces like Plaid, and a bunch of other embedded finance pieces that are trying to tackle it, but it’s a big technical lift, and it is against the grain for some of the setup of these different systems. In the crypto native world, there is no distinction between a payments of a bank account or savings account, an investment account, or even some sort of video game experience it’s all running on the same underlying software in the same way that for the internet, it’s not like there’s a telephone, a telephone line over there and a cable line over there and this is a paper book, the web is just one experience for the user. And so I think some of that integration really can only be successful on these next generation platforms.
Craig: I think that what they’re missing when they look at all this is that if they don’t see the crypto holdings, they could be missing a large portion of some clients assets, or at least a large portion of money being moved, and they’d want to know why you’re doing that? If you really want to help with the financial life you should be knowing that hey I’m using crypto to do certain things with a moving a moving money I’m using defi, I’m locking up Bitcoin in an earning account and earning interest and those types of things that you wouldn’t be involved in, you would never see, because you’d have no, you have no visibility into it.
Lex: Yeah, for sure. I think the amount of wealth that is generated by some people on crypto rails or by engaging financially in the crypto ecosystem is much larger, and also more of a surprise to people than what you would find in the traditional economy. So to the extent advisors want to help people deal better with their finances and have better financial lives, and to the extent that the right client. The best client is a client that needs and wants help and values it, it is in fact, some of the folks who have gained financial success from crypto because it usually comes suddenly, often it’s unexpected, and they’re not prepared to deal with it, and they don’t have asset allocation or financial planning frameworks or any of that stuff. It’s not like they’ve been growing 5% per year or 3% per year for the last 20 years and finally now they’ve reached the net worth they need, it’s that they made 10 million bucks last year on a trade, what now? Should should I make another 100 trades to capture the same magic?
It is an ideal client type for an advisor, but the advisor has to be fully conversant in the language that has allowed this person to build these assets, and that means knowing everything from some of the basics of what does it mean to mine and to stake and to validate, and how the trading works, but also much more deeply, where the value and ecosystem is going which is around digital objects, NFTs, art, video games, Blockchain based games and so on.
What Are Non-Fungible Tokens?
Craig: And you lead into the next topic perfectly. Something advisors should be concerned about for at least advisors who deal with higher net worth clients, is this new asset class you just mentioned, NFTs. So can you just do the quick 30-second NFT overview, then let’s figure out how we can explain why advisors need to be concerned about this.
Lex: Sure. So NFT’s stands for non-fungible tokens. That just means a token that’s unique, rather than a token that is equal to another token of a similar type. A dollar is a token that is similar to another dollar, whereas the Mona Lisa is non fungible, there’s only one of it. And in fact, any two drawings you make, or I make, or two songs that we sing those will be separate and distinct. And so NFT’s are really just a wrapper. They’re a digital object that is now being used for media assets, any media asset that you can think of. Historically, over the last two decades has been priced compressed, and in fact it’s been price compressed to nothing, because you can copy and paste it and distribute it to infinity.
Craig: Like music or movies, you can download a movie off of somewhere for free and, you know, pirate it.
Lex: Yeah, and if I send you a copy of my version of an .mp3, we both have it, so there’s no scarcity, which means there’s no value. And so the only business model that has emerged out of that` is trying to turn our attention in the consumption of the music or the art into a product which has led to this attention based or advertising based world that we live in, and has created a fairly dystopian and strange society. And so the repackaging that NFTs offer is that every digital object is actually scarce and unique. So if I were to send you my NFT of a picture or if I were to send you my NFT of a music file, I would no longer have it, which means you can pay me for it. And some people will say that this is bad, isn’t it great that we can just send each other pirated textbooks and isn’t it great that we all have the world’s music available to everybody. And I think this is a useful and valuable vision of the world.
At the same time, I think it’s wrong to have no markets for creative goods, for artistic goods. And so we’re in the beginning stages of developing economic systems for having digital objects that make sense, that look like books, that look like things we value in the real world. And so, that opens up investment opportunities that look a lot like the art market, that look a lot like the financial attributes of the music industry royalties, things of that nature. So if you’re an advisor and your clients are athletes who do endorsement deals, or if they are musicians who get paid largely through royalties on a catalogue or things of that nature, or if you’re working with folks in the movie business and a hit driven movie business, you would be very familiar with these economic structures, and they are becoming digital, they’re becoming liquid, meaning you can buy and sell them and invest in them, and they’re becoming quite valuable.
Craig: Some news, which you posted on LinkedIn, Axie Infinity sold $2 billion of NFTs. So this is not just some people, some kids in their basement trading with each other this is big money.
Lex: And possibly it’s two kids in the basement worth a billion, which again goes to the point of, there are multiple decamillionaires who are teenagers or who are in their 20s, who can really use some but really understand what it is. You know for Axie, Axie became very popular in the Philippines, as well as in other parts of Southeast Asia, and people are playing that game over working local minimum wage jobs because it is more financially rewarding to be paid in the crypto rewards of that particular game than it is to work doing menial labor in the real economy. There’s some strange outcomes, but these virtual communities and economies and games, they’re going to be places where people go to work in the next several decades. They will be places where livelihoods are made and if you think this is weird, just think about YouTube, YouTube is a user generated content site that everybody thought was for pictures of dogs on skateboards. And there are thousands of people making a serious living off of generating content for for these networks today already.
Craig: And a reason why advisors should understand this is because it’s a new asset class that their clients could be invested in and they could be spending tens of thousands, hundreds of thousands of dollars on just one of these things. And that’s something to know about because you want to know where your clients are investing, and you may not have any influence over that but you should at least realize that they’ve got a large portion or some portion of their assets invested in this particular asset class.
Lex: I think it also has to come from the perspective of, what if it is a required investment these days, in order to be prudent? What if a prudent investment approach implies that you do have to be invested in crypto assets, and that it is in fact, irresponsible and destructive of your client’s financial well being, to not be invested in this. If you’re young and you’re a full on risk tolerance and your investment horizon as long, especially given sort of the macroeconomic structure of what the US is doing with the dollar, I think there are some strong arguments to be made about why digital assets and digital objects are in fact, where most of the early stage alpha is going to be created over the next decade and has been in the last decade.
And investing in NFTs and art is not in any way new to this moment. Lots and lots of investors in the high net worth segment in use art as a store of value and build out art collections. And many people think that some NFT projects today are the equivalent of buying a Jackson Pollock, or Andy Warhol or Picasso at the very moment of the apex of that movement. I think advisors, the reaction shouldn’t be like oh this is frivolous, but rather the reaction should be, what is driving the value in this market because like you said, not only are some pictures selling for a couple of thousand dollars, I would say some pictures are selling for millions of dollars, and they’re being sold at Christie’s and Sotheby’s, so if you need institutional sort of rubber stamping, you have it.
Craig: I’m looking at open SCA, which is a website that’s OpenSCA.io, one of the biggest sellers of NFTs and looking at the highest last sale. It’s a crypto punk number 5455 five last sale 114 ETH, which is $379,000.
Craig: It’s crazy if you look at it, it’s just a guy smoking a pipe and it looks like it came off a Sega Genesis from you know the 80s kind of graphics.
Lex: Yeah, I think there are some cognitive traps in both directions, as they relate to these assets. One of them is, well, I just want the picture. And that’s a mistake because you don’t just want the picture you want to own the object. So when you go to a museum and you see a painting, you take a picture of that painting, you don’t have the painting. If you print out a poster and you put it on your wall, you don’t have the painting, people would think that you’re insane if you started to claim that your reproduction of the painting was the actual painting.
And in a similar way, what NFTs do is they determine what the actual thing is, the thing that has historic significance that has cultural power that has sort of the, the origin and the provenance of the creator, and the significance of the movement. And in that way your copy doesn’t capture those attributes. The other thing that is true about NFTs is that they function like social clubs, so when you purchase crypto punk you’re part of the crypto punk community, which end of the day is a highly selective club of very wealthy crypto people who are essentially creating markets between each other. And so, as many people know, networking is both useful and expensive. If you want to raise money, if you want to find a collaborator and so on, people are willing to pay these premiums in order to be in a community that they think is their professional destination.
Craig: Which is just similar to any community, any art, people buy certain types of art because they want to impress their friends and those friends like that kind of art and they appreciate that kind of art, whatever it might be, whether it’s modern art or old, old Dutch masters, those have particular groups and that’s what they are into.
Lex: Think about somebody taking the CFA exam. So I got through two of them, I didn’t finish the third. There’s a lot of work in taking the CFA exam, there’s an opportunity cost to the CFA exam which is probably dozens of thousands of dollars if not more that you could spend that time on other things. And largely knowing how to calculate very complicated derivatives formulas isn’t particularly useful because what you’re probably going to do is open up trading software, and click the button that says rebalance, as probably as much of that as you’re gonna do. But the CFA exam is a test in order to generate pain on you so that you prove that you should be part of that community. It is exactly the same mechanic here, it extracts a cost for belonging, even though the shape of that cost, I think, for many people who consider themselves serious financial professionals is not a shape that they’re familiar with, and is therefore alienating, but the commonalities are there.
Craig: Right, it’s very similar, it’s just a whole new world and a very different way of looking at things that people who are mired in the old world don’t understand.
Craig: Lex we have run out of time again, and we didn’t even touch half the things we wanted to talk about, but I think that’s okay. So where can people find out more about ConsenSys and MetaMask?
Lex: Absolutely. I try to be very easy to find so you can get me on Twitter or LinkedIn as Lex Sokolin, and then for ConsenSys check out ConsenSys.net. If you’re in government and you want some central bank digital currency, please come and talk to us. If you’re a firm that is trying to access that on Chain Innovation activity, Metamask Institutional might be an interesting fit. It’s got an overlay for ways for firms to interact with DeFi and on chain activity. And so you can see that at Metamask.io, around the site there’s an institutional section. And then finally I do a lot of writing on the space at FinTechBlueprint.com.
Craig: I am a subscriber to FinTechBlueprint.com so I’d recommend all of you listening to that as well. Lex thanks so much for being on the program.
Lex: My pleasure.