Exclusive Interview: Matt Hougan, CIO of Bitwise Asset Management

Like Any Disruptive Technology, It Will Take Time To Get Clarity on Crypto Regulation

Ric Edelman: I'm very happy to welcome back onto the program, my good friend Matt Hougan, the CIO of Bitwise Asset Management, frequent friend and visitor here to the program. Matt, thanks for joining us on the show.

Matt Hougan: Thanks for having me, Ric.

Ric: You know, we're getting a lot of questions about crypto as often as ever, frankly, more than ever, which I'm personally finding fascinating. But the big theme that I'm hearing about, which is what I want to ask you about today, Matt, is about regulation. People are wondering, is the government going to ban bitcoin? Give us your take.

Matt: You know, I think the reason people are asking this question, Ric, is that they see crypto is about to go mainstream and they know that in order for that to happen, we need to have progress on crypto regulation. And right now we don't have clarity on crypto regulation. No, they're not going to ban it. They're going to bring it into the regulatory framework and find ways to tax it. And that will open up new applications and new uses. It's like any disruptive technology. Ric, remember when you weren't paying state sales tax when you bought something from Amazon? I do. But eventually that regulatory clarity develops around these disruptive technologies, and that actually helps lead to the mainstream use. And the same thing is playing out over crypto. Of course it's ugly. Of course there are big headlines. Of course there's confusion, but at the end of the road, I think there's a very good thing waiting. 

Ric: The analogy that I like to use best is about the automotive industry. You know, first we had the Model T come off the assembly line and with all these new cars on the road, the first thing we had were car accidents. We didn't have any rules of the road. So which side of the road do I drive on? Who gets to go first at an intersection? What are the speed limits? And so it's only after the innovation does the regulation then follow. And that's kind of where we're at. We're in a model T world in the world of crypto these days.

Matt: I love that analogy. I think that's exactly right. And that's the way regulation should work. Look, if you tried to do regulation before you saw what the innovation was, you would slow down innovation.

Ric: And I find that some folks don't like this change because they're threatened by it. I notice that one big group that is opposing the idea of a central bank digital currency, for example, the notion of the federal government creating a digital dollar, one group that's opposed to this idea, the American Bankers Association. And my reaction is, well, gee, I wonder why they're opposed. They see it as a threat, and they don't want the turf disturbed.

Matt: That's exactly right. Look, crypto and blockchain is going to disrupt finance and money the same way that Amazon disrupted Sears, the same way that Netflix disrupted cable. It's the same story playing out. So, of course, that old school industry is going to fight against it. They're protecting their turf, but at the end of the day, more efficient, faster, more innovative technologies usually win. And I think that's what's going to happen here.

Crypto Regulation: New Rules Are Needed

Ric: So one of the fundamental questions that everybody is seeking to get an answer to is whether or not digital assets are securities under the law. Because if you issue a security, if you sell a security to someone, you have to follow certain rules that people don't have to follow if they're not selling securities. And the best example I can give you are the difference between somebody trying to sell you a stock and somebody trying to sell you a baseball card, try to sell someone a stock. Lots of rules, lots of disclosure requirements, lots of licensing, but anybody can sell anybody a baseball card. So our digital assets securities are not.

Matt: Well, that's a question that's being wrestled with between the SEC and the CFTC. My personal view is we need entirely new rules, new lawmaking around digital assets. We shouldn't be surprised that something that was created 13 years ago doesn't fit into a regulatory framework that was built in the 1930s and 1940s. The securities law is governed by the 1940 Act. It's right there in the name. We shouldn't be surprised that the sort of round peg of crypto doesn't fit perfectly in the square hole. What we do need is adequate investor protections. What we do need is adequate disclosures. We need new rule-making. That's what I'd like to see in this space.

Ric: The more regulation, the more clarity, the more rules of the road, the more easily we can operate safely. Kind of like I don't care what the speed limit is, just tell me so that I don't get a ticket and we'll see more of this regulation coming over the next couple of years. Lots of bills in Congress right now, lots of work being done by the Treasury Department, the IRS, FINRA, the Fed, the CFTC, the SEC. Everybody's all over this. What should investors do? Does this mean you don't invest today? You wait for all of the rules, or do you proceed? And if so, how? What's your view on that? 

Matt: Well, I think everyone has to make their own choice, Ric. But of course, the downside of waiting until there's absolute clarity and absolute product market fit is you're going to miss the bulk of the returns. I think you lay this out very well when you talk about a Bitcoin ETF, will there be a Bitcoin ETF ultimately, yes. Will it bring more investors in the market? Absolutely. Do we know when it's going to happen? No. But do you want to invest before it happens or after it happens? The same thing is true on regulation. We're going to get to regulatory clarity. It's not going to destroy the crypto market. It's not going to be a lawless libertarian paradise either. It's going to be somewhere in the happy middle and that's going to unlock mainstream use cases. I think taking that regulatory risk as an investor is part of what you need in order to get strong asymmetric upside returns. You want to take on that risk, but you do need to recognize that it's a risk. But if you wait until it's all clear sailing, these strong returns that we've seen historically in crypto will be behind us.

Ric: I remember years ago when computers were still pretty new. I mean, desktop computers and what used to drive all of us crazy is that if you waited six months, the new computer was going to be better and cheaper. And so the question was, should I buy the computer today or wait six months? And what we finally concluded is that if you wait six months, you'll always wait six months because it's always going to get better and cheaper. So you can either spend your whole life waiting to buy a computer or you can just bite the bullet, buy it, take full advantage of what it can do for you right now. And I kind of think that's maybe where we're at with digital assets. Is it ideal? No. Is it working flawlessly in the investment world? Not yet. But given the alternative of missing out on the investment opportunity, well, maybe it's time to just grin and bear it.

Matt: I think that's a great analogy, Ric. I couldn't agree more.

Ric: So you're on the road an awful lot. You did manage to take a little time off this summer, but your conference schedule is packed through the Fall. You're speaking all the time to advisors. What are they telling you about their attitude about crypto regulation?

Matt: Yeah, they understand that it's coming. They would like to see more clarity, but they know that they may need to invest ahead of that. They have questions they want to know will the government ban crypto? Will it slow down DeFi? When will the SEC approve an ETF? And we try to give them answers, but mostly they're focused on the long-term. Look, I think advisors are now realizing crypto has been here for more than 10 years. And what I tell advisors is we need regulatory clarity to get to the next bull market. So every time you see progress on the regulatory front, you should think of that as a good thing. I think we're going to get there. I think advisors realize that.

Ric: So it's interesting to hear you say that you acknowledge the need for more regulation and that you're supportive of it. And I know that you spend a lot of time with regulators in Washington, DC helping to develop those rules and helping guide them and provide education for them, because this is new for pretty much everybody. But I think that isn't something that most people expect. I think the general assumption is business hates regulation because regulation only gets in the way of doing business and making money. But that's not really the case in the crypto community, is it?

Matt: No, it's really not. Look, financial services are regulated on a global basis. Crypto will need to exist within that framework. How do we take this technology and help make finance more efficient, more creative, more inclusive, more innovative? And we recognize that in order to do that, we need regulatory rules of the road. We know this because we talk to the largest banks in the world, to leading VCs in the world, to financial advisors, and the lack of clarity is preventing them or slowing them from entering the market. So we want that regulatory clarity and it's going to be the key to the next big bull market unlocking.

Ric: I'm anticipating that over the next 18 to 24 months, we're going to be a much more advanced state regarding regulation and that's going to, as you said, unlock new investment activity as people recognize, hey, I know the speed limit. I'm happy to go on the highway.

Matt: That's exactly right.

Ric: Well, that's Matt Hougan, the chief investment officer of Bitwise Asset Management. If you would like to learn about the investment opportunities in crypto that Bitwise offers, I invite you to go to BitwiseInvestments.com. Matt Hougan, thanks for joining us on the show.

Matt Hougan: Thanks for having me, Ric.

Ric Edelman: Matt and I spoke for actually a lot longer than you just heard on the radio. So if you'd like to listen, watch, or read the entire conversation, just visit us at TheTruthAYF.com.