Paul Brody on Crypto Outlook as Contagion Fears Linger

Crypto 2023. The road ahead. What's next for crypto? That's a question asked by and answered in part by our next guest, Paul Brody Ernst and Young principal and Global Innovation leader and Coin desk contributor, Paul. Welcome to our show. You wrote an article for our Coindesk theme week 2023. What are some of the lessons learned this year that they may carry it on to the next? 00, I then my theme of my article was there will be no lessons learned. And I, I think, you know, depending on your point of view, basically, this year proved it. Whatever it is. If you think crypto is all a big scam, then you have plenty of evidence to support your case. If you think the only thing that works is D I, you got evidence to support that case. Um Whatever it is that people believe they, they saw proof of that in this last year. So I, I'm, I'm afraid at least when it comes to really learning lessons from the year, I'm a bit of a cynic. I think people won't have learned any really substantial lessons. Do you think that one of the things they might have learned though is, or, or at least do you think one of the things to come away from this is that maybe there's been too much of a focus on the idea of just trading currencies and in essence, cryptocurrencies have become just gambling tools and they haven't been about the actual applications that they're supposed to, uh, they, they're supposed to be about, uh, do you think that's going to change at all in 2023 or are we going to see more of the same? Are we going to see more of the, uh, uh, I, I have to alt coin casino aspect, uh, of it. I'm using polite family terms rather than, uh, the application aspect of it. So I hope that if nothing else the last year has kind of deflated the crypto casino and what we get to see in the next year is less focus on financial organization, more focus on industrial applications. It doesn't mean that there's no financial future for crypto and for Blockchain and for stable coins. And we're going to go through a period of some pretty intense regulation and enforcement actions. But I think overall next year, my hope is that we'll get to focus on the things like ESG application, supply chain management, asset tokenization. And when I say asset, I don't mean financial asset, I mean, real world assets putting them to use. So that's my hope for the coming year and we're certainly gonna try to, I'm gonna try to make that real uh by introducing products and technologies that support that nonetheless. Do you find it harder uh with, you know, talking to institutions, et cetera and potential venture capitalists about getting into the space, given the sort of high profile collapses of the financial organization of, of crypto, the FT XS and the uh and the terra of the world and three hours capital and all these names imploding. Uh Do you think that it scares off a lot of institutions from investing in that infrastructure stuff and investing in, in applications, real world applications that could go to market? Definitely, it's not a universal thing. So if I think about the conversations that I've had in the last few weeks, there's been a couple where uh the clients just said we've changed our minds. This isn't for us. Um There's been a couple where internal advocates have said I'm not deterred, but I don't think this is a time when I can sell this inside of my large enterprise. And then there's been quite a few where people have said to me, we're ready to go forward. We're continuing to move, we might not move at quite the same pace because they, we are encountering more skepticism from other parts of the organization, but we're still ready to go forward. Uh We've not seen any pullback in supply chain or business operations. The only place where we've seen some pullback is on the financial services side. And even there, it's really a client saying we might have to go slower. Not that we're gonna stop talking about big collapses in the crypto industry. We're now looking at Sam Bank and Fried's, you know, he did his media tour in the previous weeks. Now he's going on a congressional tour this week and perhaps after that, a court tour. But thinking of, you know, this very big and exposed strategy of laying out his case, I wonder what your thoughts are on that. So we never comment on specific companies or cases or individuals. What I can say is I feel like the last three or four months has over and over again, re reiterated a couple of things that are really, really important. Number one, you really got to have business controls. Uh, and you hear people talking about things like proof of reserves, but proof of reserves even with liabilities and there's not enough, you've got to have confidence that the people who you are trusting and you have to choose to trust somebody, whether it's an exchange or some other interface point, the people you trust are behaving in a reputable way. And so I do think, um, the winners here are the ones who have embraced uh public uh uh regulation, the ones who have asked to be regulated, the ones who have hired top tier auditors and invested the money in regulatory compliance. So I think uh even though a lot of people will say the, what this last year proves is that only on chain sort of pure D I works, I think the bigger lesson is that uh transparency isn't as easy as it looks. And that in fact, you need regulatory compliance and you need external inspection by true experts on things like liabilities and business controls. It's interesting you say that because yes, I, a lot of people said self custody is the way. And wasn't that the argument for, for Bitcoin in the first place was that you could have a trust less system, you could have custody your own assets, finances have a bank in your pocket, so to speak, on the flip side. Ok. If we're trusting companies, the argument has always been, yeah, we want more transparency, but there's no regulatory clarity. And so until we get that, I mean, we're still going to have stable coins that are not audited that are a little opaque. And so where do we go from there? You've nailed on kind of the really the toughest question which is, uh I think actually we would have much quality, much better quality participation and much more participation in this market. If there were clear rules, we talked to many, many companies, we have clients, they have stable coins sitting on the shelf, ready to go, they want to be regulated, they will not launch them until they get a clear yes from the relevant regulators to do so. So we have very direct experience. It says that when regulators set very clear rules, they will be rewarded with a flood of high quality participants in this marketplace. And until then those highest quality participants will actually stay out of the market and that's not going to benefit the growth or the maturity of this market. So, Paul uh before we go two questions, of course, I got to ask first of all uh updates with Ethereum, what's happening uh this coming year. And then second of all, you're working, speaking of the thee and you're working on something on polygon, which is, of course, uh I it is a uh layer two on Ethereum, something called Nightfall, which sounds a lot like a Bond sequel. It's not a Bond sequel. I we'll start with the first one which is predictions for the year ahead for Ethereum. Uh This is uh this in by almost every dimension Ethereum has, has long passed Bitcoin. It will continue to be kind of an exceptionally strong environment. Ethereum is a bet on a programmable digital ecosystem. So to the extent that there's a shift towards industrial and and non purely financial applications, we'll see them on Ethereum and Ethereum will continue to be really dominant in 2023 from an ey perspective. One of our big priorities and one of the things we've been working on with polygon is a system called Nightfall. Uh And Nightfall is a privacy enabled ZK optimistic roll up that's designed for enterprises. We're gonna have the, the Nightfall kind of production edition released in January on the main net and on the Polygon proof of state network. And along the way, we've made a couple of really important changes uh that I that I think are gonna get a lot of attention. Number one, we have shifted it so that it is a fully and completely decentralized application. So Ey and Polygon have always committed to make the source code fully public domain and open source. We've now made it more. It's a fully decentralized application. Once it's deployed, it is irrevocably deployed, it cannot be managed or upgraded. So that's the first thing is we've completed a full decentralization. Secondly, and I think equally importantly because Nightfall is targeted at enterprise users, we are requiring that you have the code requires that you have an enterprise X 0.509 which is basically an enterprise SSL certificate to use them. And this is a really important step. It basically means that although nine fol enables privacy, it does not support anonymity, you have to be an enterprise, you have to be identified as such. And in order to get an XO 509 C, you actually have to go through a screening against the major sanctions list. Now, I believe we we picked this for a very specific reason which is we didn't want to support money laundering. We didn't want to enable anonymous assets and payment transfers. We wanted to support privacy without total anonymity, but we wanted to do it in a way that retained a fully permission, permission list and open structure. And to do that, we relied upon another genuinely public and decentralized model, which is the SSL certificate model which is used on the internet, so that those are two really big changes. Uh And we're also going to rely upon the community members to deploy the trans contract so that both Ey and Polygon are fully and completely independent of this. There's no back doors, there's no control, there's nothing that people should have doubts about as this gets deployed into the ecosystem in January. But I hope it will trigger a big wave of industrial applications using privacy for business tools.