Chad Cascarilla, CEO & co-founder of Paxos, being interviewed by Mark Yusko, CEO & chief investment officer of Morgan Creek Capital Management for RealVision on October 8, 2019 (screenshot).
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Financial markets similar to NYC sewers: Paxos CEO

‘How do you take the $600 trillion of assets, change essentially where they sit so that they can be moved around instantaneously by a much wider variety of people.’

What’s the difference between the global financial markets and New York City’s sewer system? One is a filthy, chaotic mess of human waste unable to handle even the slightest increase in use without making everything stink while the other one is run by the New York City Department of Environmental Protection.

That’s gist of what Chad Cascarilla, the CEO and co-founder of crypto exchange Paxos, had to say to Mark Yusko, CEO and CIO of Morgan Creek Capital Management, in a long and substantive interview posted this past week on financial news site RealVision [subscription required].

Cascarilla told Yusko that he was working at his own asset management firm for a few years dealing with distressed assets when he first heard about crypto.

“We’re very much involved in subprime and commercial real estate from the CDS perspective going into the crisis. We created a stressed fund coming out of the crisis. We came across Bitcoin when it was at three or four cents. We were really fascinated by it, partly because of our experience going through the crisis and really seeing how the plumbing of the financial system exacerbated the crisis in a very meaningful way. It wasn’t the cause of it; the cause of the crisis is too much debt. We probably still have that problem.”

Yusko, who also suffers as Anthony Pompliano’s boss, interjected that the current debt situation is perhaps even worse.

“Yeah, exactly,” Cascarilla responded. “In many ways, just worse. Maybe we don’t have subprime mortgage debt, but we have a lot more debt and the plumbing of the financial system, by the way, is just as bad as it was during the financial crisis.”

It was at that point the Paxos chief expounded on the similarities between plumbing in New York and the financial markets:

“It really underscored to us how it was like a 19th century sewer system in a way. I live in Manhattan here so we’re used to this, which is it’s everything’s fine when the weather is okay. You got a storm, and the streets flooded. I think that’s exactly how the financial system is set up, which is that it looks okay but really everything is running on cobalt mainframes from the ’70s.

“That means the system is batch processed and archaic, and you’re taking days to settle assets and move trades around and that doesn’t really make any sense. You can order a toilet paper at your house in an hour, at least here in Manhattan, you can, but you want to sell a stock, you got to wait days and that doesn’t really make a lot of sense. All these things are electronic. That exacerbated the crisis.”

Bitcoin was the game changer, according to Cascarilla:

“We saw Bitcoin, we’re like, wow, here’s a distributed system and that could really change how the financial markets operate. I think we’re really early to that, but we didn’t fully understand that Bitcoin was never going to be like this distributed ledger of record for all assets, but it has a meaningful position as a store of value and I think that’s what it’s shown over time. That really fascinated us and that’s what got us to start Paxos.”

But the real value, according to Cascarilla, is with what blockchain technology can solve for the financial system in the next few years:

“I think when you look at how you could take $600 trillion of assets—which is how many assets exists around the world—it’s a huge number. And how you could put them on a blockchain over the next 20 or 30 years, that is something that’s so hugely transformative… Not to overshadow the concept of Bitcoin or the 200 billion or so of crypto native assets like Bitcoin and Ethereum; there’s a use case and there’s a value to them that’s very real. But it’s still always going to be a small fraction of what the whole opportunity is, which is how do you take the $600 trillion of assets, change essentially where they sit so that they can be moved around instantaneously, and really, by a much wider variety of people.”

In the meantime and for some time to come, though, Manhattanites are stuck with the sewer system they have in place now. And that includes all the toilets on Wall Street.

Lawrence Lewitinn, CFA was the founding editor in chief of Modern Consensus. Disclosure: Lewitinn owns no cryptocurrencies in his portfolio.

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