It's only a matter of time before privacy tokens, like Monero, which conceal the provenance of transactions, become illegal in the U.S., said John Sarson, CEO of Sarson Funds.
How should investors pick amongst the thousands of cryptocurrencies to invest it in? Should you be concerned about the rise of regulations, both domestically and abroad. We'll be discussing these themes with John . He is a CEO of funds, a cryptocurrency asset management firm. Welcome to the show, David, thank you for having me on John is your first time on Kitco.
I want to talk about your funding strategy. First, you have a multitude of pressures. Starting from a large cap blockchain fund all the way down to a stable coin index fund. Um, a variety of, uh, of products. Very interesting before we get into them, I want to just get your overview, uh, your sort of philosophy on investing, so to speak and, uh, how it is that you pick individual, uh, securities, cryptocurrencies, whatever you'd like to call them and assign them into a basket or a portfolio.
I got into cryptocurrency because I'm a fanatic investor. I love investments. And around 2015 people started making money in an asset class called Bitcoin that I had not learned about. I was working, uh, traditional wall street jobs, uh, distributing and mutual funds and, uh, in New York city. And I thought I was in the flow on the investment world.
And the idea here was the investment that my. Colleagues, and I didn't know anything about, and that evolved over the course of the past six years into a registered investment advisor, focused on cryptocurrency assisting high net worth individuals and other financial professionals. Get up to speed on this complicated asset class.
Um, when we think about cryptocurrencies, we have to remember that they're not companies that are up stocks. They don't have to deliver iPhone. They don't have to deliver tests. Uh, their protocols, uh, their protocol for transferring cash from peer-to-peer. That was the first line of the Bitcoin white paper that started this all.
Uh, you know, these technologies are applications of blockchain technology or distributed ledger technology. Um, and the first killer app for blockchain technology is Bitcoin. The peer to peer cash Spencer program. The reason I mentioned this is because when we're talking about protocols, it tends to be a winner, take all environment.
Um, there's nothing that stops Bitcoin from becoming the only way people transfer cash back and forth. The ability of a protocol to scale is really very much infinite. And, uh, let's give you an example, like hypertext transfer protocol. That's how we navigate the internet. Now, you know, we used to use file transfer protocol.
But no one uses that really we all just hypertext transfer protocol. And if you could go back in time and by the right side protects transfer protocol, uh that's um, that would have been a great investment. You probably get asked this question quite a lot, but, uh, what are some of your favorite altcoins?
If I were to ask you for some, some coins that you think have the best investment potential over the next year or two, what do you think those would. Um, well, I mentioned one in telephone. Um, you know, I'll, I'll speak briefly about doge coin. Doge coin is very polarizing people think, you know, how can there be so much value being stored and people making so much real money in doge coin when it was really kind of, uh, started as a joke, um, it really was started as a way to give people.
Cryptocurrencies that they could freely pick to each other on the internet with, and that didn't have a whole lot of. You know, like, um, a crude value, so people wouldn't want to spend their Bitcoin. And so that's where we are today. People don't want to spend their Bitcoins. And so when the Dallas Mavericks decided they're going to take cryptocurrency, like they don't want to accept Bitcoin because people don't want to spend their Bitcoin people are totally right.
Uh, but doge coin, which they do accept, like people are happy to spend and that's kind of like, they're there pocket change and they can buy things on the internet with it's a great transactional currency. And we look at, in addition to seeing who's best of breed in, in, uh, in a particular vertical, we look at community and community engagement and community growth rates and, and nothing, no community is more engaged or growing more quickly than doge coin.
So, um, we'd like to ask why then we have it in our portfolio. Uh, w when you say growing quickly, John, you don't mean it's getting, getting to become a bubble. Now, that's what some, that's what some investors are concerned about.
You know, there's 150 million Bitcoin wallets, approximately worldwide. There's probably billion people that would be organic users of Bitcoin because either they're unbanked or they live in, uh, under an oppressive regime where Bitcoin offers them the solution. So. The community around cryptocurrencies are going to, it's going to grow another eight to 12 times in size and dos coins community is going to.
Uh, have similar growth over that period to your earlier comment, that Bitcoin tends to drag the market around, uh, what we're seeing really as adoption of digital money. And Bitcoin is the biggest digital money with the most on and off ramps and the most countries. And so that's where people start. Uh, but it's like a gateway drug once they get into big.
But then they might get some of the them. Once they get into a theorem, they can buy some ERC 20 tokens in their browser and their met mass wallet. And then they can buy some ETF or some NFTs and they can put their NFCS alongside of their doge coin and make it. Start to live in more of a digital life.
And this is really, this is a trend that no, one's no one's questioning now we're leading more digital lives, but yet they're questioning why digital money is becoming so popular. It's kind of right. Okay. Back to your example. If I go to a Dunkin donuts, people behind me will be, will be a little bit annoyed that I'm taking 10 minutes to process a transaction.
Uh, do you think there's going to be an emergence of protocols on top of Bitcoin? That can be layered, like for example, lightening network. That can make the peer-to-peer transaction a little bit faster. Is that sort of the new trend right now? John Bob, there has been lots of attempts to do exactly that.
And the lighting note is the, is the most well-known example of trying to make Bitcoin more useful. Uh, the reality is that Bitcoin's development community is very. Much committed to Bitcoin's core code. Um, it caused a mutiny when they tried to take the block size from two megabytes to 10 megabytes. So that more transactions could have been into a block.
This is when Bitcoin cash was. But, uh, forked from Bitcoin because the developing community couldn't agree on something so simple as that, the lightning node is a solution. Um, but it's not going to solve the, the, um, unaffiliated payment high-speed payment problems, uh, letting know there'll be more of a solution for a corporate client that wants to the point.
That's fine.
But there'll be other points in there better. No I'm watching technology and pay paying for things is just one application, um, iota, uh, which stands for internet of things that a company out of Japan is launching there. Blockchain, uh, in they, them a million, a million iota, uh, at the time. And it's being used by self-driving cars that speak to the cars around them.
And when you attach a token to your data, then it removes spam from your network because every data transact, every data admission costs, money, and it has to be sent on the blockchain. It also creates an immutable ledger. And as we get to the self-driving cars of the future, I don't want to put my family into a car going a hundred miles an hour, two inches behind the car in front of it, just because the car in front of it, so that it's going a hundred miles an hour.
I want the network around that car. Also agree with that their data is accurate and that that car is in fact going that direction at that speed. And I want it to be done in mutable and, uh, Unassailable way, clean technology in tokens, flying back and forth, um, at a very high speed on the iota watching enable that.
Okay. What do you think in your opinion then is the ideal cryptocurrency as a form of payment? You've talked about doge coin. Is there something else that you like? Yeah, I liked, um, us DC USCC does cross $25 billion. Uh, total assets. It's a project that is backed by Coinbase, Goldman Sachs, BlackRock fidelity.
They are an on-ramp that will let people that don't want to invest in Bitcoin or any other cryptocurrency get all the benefits of cryptocurrency payment, ramps. You know, um, this is actually better than traditional banking when you SDC, which is basically the United way. Banking gold standard coin for every USCC that's in circulation.
There is the corresponding dollar in a bank vault that USDA sponsor from, which is a firm called circle. And it's better than traditional money because it moves faster. And if it goes to the wrong place, you don't have to get it back. You can just turn it off. It's it's, it's better, faster, cheaper, and it's winning the day and it will continue to win the day.
And that will become our payment currency for things that, but we want to say, you know, traditional, um, vendor will accept us dollar coin. Bye. Let's talk about regulation now, John, uh, we know that the technology exists for cryptocurrencies to serve as a viable form of payment visa, PayPal among other platforms already accepting Bitcoin here in the United States.
But if you look abroad now, let's take a look at China. What China did over the last week. They've banned 90% of their mining capacity, basically over the weekend. They've outlawed over the counter trading of Bitcoin and other cryptocurrencies. So they're really taking a harder stance on crack. Do you think that kind of a stance could be adopted here in the west?
Do you think one day, the government here in the U S would say, Hey, Hey PayPal, Hey, visa enough with your Bitcoin transaction platforms. Shut it down.
No, God bless America, but I don't see that happening. Um, you know, we are the most innovative country in the world. And part of the reason why we're the most innovative country in the world in, and that includes financial innovation is because the regulators. Come with a philosophy of first do no harm.
And that's that mentality is present at the office of the control over the curve. The OCC, uh, that approved banks to custody and service digital assets late last year, spark sparking this big rally and the presence of digital assets. It's precedent at the sec under the leadership of Eric Gainesville, uh, and, um, has to purse, uh, crypto mom.
Um, there's a provision being loaded around saying that maybe there should be a two year safe Harbor provision where. Cryptocurrency companies don't have to worry about all of the sec regulations that can be so onerous for the first two years so that they don't stifle innovation. And, um, you know, it's, uh, it's kudos to these regulators, uh, for being worried about stifling innovation, because that's certainly what's happened in other countries where they've created.
Kind of knee jerk reaction laws, outlying cryptocurrencies, or ICO's I'm thinking about Korea in 2017. And then what happened was those firms moved to Japan and Japan welcomed them in Japan, took a piece of Korea's financial sector. And like that will happen to every country in the G 20, that unilateral, uh, decides that they don't want to allow cryptocurrency transactions, you know, on their, on their own.
So, so I don't see that happening, but I think that, um, we're, we are in a very positive and a constructive place, um, when it comes to regulation in this country. And now, you know, that's what I spend a lot of time analyzing and worrying about on behalf of my clients, because that's the big, you know, the, that all of a sudden Bitcoin becomes illegal.
And what we're hearing from the fed is Bitcoin seems inefficient. We have better ways to do this. What we're not hearing from the fed. The dollar is the only currency allowed in this country. You know, we're going to go back to an era worldwide where there's lots of currencies and different social groups have diff have their own currency.
And that was more the way it was in this country, 150 years ago where each bank issued their own bank notes. Um, and, um, really the, the anomaly in the history of the humidity is, has been like so few. Uh, store evaluate instruments or transaction instruments. We know Bitcoin's clearly a store of value instrument for people, whether how well it works is, is debatable, but it's clearly being used for that.
It's also a transactional. Medium for people. No, we mentioned it. It's not going to be the currency. You'd buy a Dunkin donuts coffee with, but if you are going to buy a tanker full of oil two years from now, you're going to pay with big one in $30 million, a Bitcoin for that tanker full of oil, it sure.
Beats going to get dollars to send to another to the vendor and another country that they then have to turn the dollars back into their home currency. That's. You know, better, faster, cheaper, and on the back of Bitcoin, you don't agree with criticism that governments around the world, not just the United States are more concerned about preserving their own Fiat's state issue currencies and not having anything compete with that.
Oh, a very that's very much the case. And then like, that's why China, that's the reasoning behind China's movements. Clearly they. Like to control capital flows. I mean, that's how they manipulate their currency. They need to keep their currency weak to create manufacturing jobs, and they have, um, a finally a way to let their domestic currency, even if you waited and have a.
Not international trade currency, which they've never really had before because the travel controls, but it's all on the back of the DCP, the digital currency, electronic payments project, which they're already, uh, pioneering in Sichuan province. And that's actually where they outline. Bitcoin mining as well.
Bitcoin mining and Bitcoin. Isn't our front to dictators. It's a frontier communist economies, and Zimbabwe has also been Bitcoin. So China and Zimbabwe are going to bend Bitcoin. And I don't want to be in the same side of the boat. There's those two countries on this particular issue. Okay. So John, we've talked about regulation abroad, uh, but what about regulation here in the United States?
Do you think regulations will evolve to be a little more proactive in combating? What investors believe is a rising threat? In, uh, the use of cryptocurrencies for illicit financing and illegal activities. For example, the ransomware attack or the colonial pipeline, uh, not too long ago. What can the government do now to combat this?
Um, yeah, it's, it's an important question. And a year ago, the government was a little bit behind the eight ball when it came to kind of staffing out their cryptocurrency divisions. Uh, but that's changed dramatically in the last 12 months. There's been a real emphasis placed on it. Getting cryptocurrency talent on board at regulators.
Uh, we all know that the IRS is now tracking crypto transactions. It's easy to track crypto transactions. It's hard for, to triangulate who owns cryptocurrency wallets, but not that hard. Uh, there's firms like shenanigans. Um, that specialized in doing exactly that analyzing blockchains and figuring out who owns the wallets and then the IRS software can run and you're going to get a tax bill it's really important to not believe that you're going to get away without paying taxes on your cryptocurrency.
That was 2018, not, not 2019 and not 2020, but the more specific question. About financial crimes. Uh, you know, financial crimes are, uh, investigated by a group called fin cen, uh, since for financial crimes enforcement network. And, uh, there have guys that will go out to you if you launder money and they just made a strategic hire, they hired the executive functionality, uh, to come and run their cryptocurrency division.
So they now have the smarter. One of the smartest people in the cryptocurrency ecosystem, working at the financial crimes enforcement network. And, um, I would warn any listener that what looks like a private dark web transaction to you is not. A private transaction, then I would not be surprised to see certain privacy centric, blockchains, such as Monero being deemed illegal in this country because there's only one reason to have them.
Uh, and that is to conceal the identity of the vendor. That was my next question. There are privacy coins specifically for this reason. And you think there might be more heavily regulated. That's interesting. Look, I'm not, I'm not claiming to be smarter than FinCEN. I just, I just, you know, it just, if I. You know, uh, create a wallet using a fake profile.
How could they trace it back to my real identity? I mean, obviously they figured this out. I'm just curious. Yeah. So like, um, you know, all of a sudden you've got, you know, 20 Bitcoin and then you buy something with them and it gets shipped to your house or your violin Regina and they, and they ask for your name and like all of this.
And like, they triangulate. Uh, purchases and they can do it across, but in unlimited number of wallets, it, their algorithms, not anymore. I can use it to finance hackers to attack. Uh, Yeah. Or you pay, you pay like something, you just, you do anything that attaches to you with that money or a version of that money.
Seven iterations from now. And they got guy. So it's not as private as you may think. And if you're using a blockchain like Monero, that's designed to conceal your identity, like that's what senders have a problem with. And that's what they talk about. They talk about money laundering and they talk about financing.
And, uh, it's our some funds, we don't invest in privacy tokens because fund terrorists, but mostly because institutions aren't going to invest in them because they're going to be made illegal in this country. And there goes to the investment thesis. So like, I, I understand that everyone's worried about government overreach, but like don't do illegal things and you want us to do some work.
Sure. So, so you don't, you don't think privacy tokens just to sum up are good investments exactly. For that reason. Yeah, they're not going to get the institutional money. Institutions are great of crypto and they take a wide berth from anything that's controversial. And they'll take a wider word from privacy tokens.
We've already seen happening. They're out performing the rest of the cryptocurrency market. And again, real quick, the, uh, skeptics of Bitcoin, again, Bitcoin, um, skeptics of Bitcoin will point to the exact same reason. They think that Bitcoin can be used for illicit activities. And so eventually the government will have to shut it down.
You've already talked about this extensively throughout the interview, but just in one in 30 seconds, how would you shut down that argument? No, it's an unstoppable payment method, but it's not. Um, a really great, uh, way to do illegal activities. The head of the DEA has said that she would love it. If drug dealers continued to use Bitcoin, because once again, we saw the same thing happened last year with a child porn ring, where they were all using Bitcoin and now immutable evidence against each one of them.
So my, um, it's not, it's not as private as, as like a w we may have been led to believe, or at least software figured, you know, technology cracked the privacy and that's that's. Okay. All right. Uh, so you've heard that criminals, if you want to, if you want to break the law, use cash or a privacy token, that's probably going to be banned somewhere down the line.
John, thank you very much for coming on the show today. Excellent thoughts. Thank you. My pleasure. Take care. Thank you for watching Kika news.
Okay.