Preston Byrne - Crypto-pocalypse

**Patrick O'Shaughnessy** (0:00)
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**SPEAKER_2** (1:23)
Patrick O'Shaughnessy is a principal and portfolio manager at O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (1:55)
My guest this week is Preston Byrne. Preston is a vocal critic of the crazy prices and projects in the world of cryptocurrencies. His background is in the legal world, and also as a founder and former COO of Monax, which made the first open source permissioned blockchain client. As Preston says, he is a blockchain without Bitcoin guy who believes that this crypto mania will end in some sort of apocalypse for token holders and ICO issuers.
We tackle several issues from his broad skepticism of crypto assets to the potential regulatory reaction from major governments to types of coins like stable coins, which Preston views as analogous to perpetual motion machines.
Like the Hash Power documentary, this episode and other Hash Power singles are brought to you by Fidelity Investments, a company that is constantly researching and experimenting with emerging technologies like crypto assets and blockchain to improve the lives of their customers. Fidelity provides a comprehensive set of products and services to individual investors, employers and financial advisory firms. For more information, please visit fidelity.com. Please enjoy our conversation and for any crypto investors out there, let me know if this affects your opinion of the investing prospects for cryptocurrencies, generally speaking.
Let's talk in some detail about your notion of a Nakamoto scheme. So I think you had called some aspect of something a Ponzi scheme and then gone back and refined that idea a little bit. So maybe refresh on Ponzi schemes or pyramid schemes. They're a little bit different. And then what you now call a Nakamoto scheme and what's distinct about it?

**Preston Byrne** (3:29)
So Ponzi schemes and pyramid schemes are what a lot of people who have first, particularly old men, in my experience, they look at Bitcoin and they go, well, this is a Ponzi scheme.
And they look at it as a Ponzi scheme because particularly lawyers, a lot of old lawyers I've spoken to, they look at it and they say, well, there's no rights or obligations. There's no one to deliver. They see this shell and they just see people putting money in and somehow getting money out. So they say it's a Ponzi. What a Ponzi scheme is, is when you have one person who sits on cash flows. So money comes in, money goes out and they use the money that's coming in to pay the returns to earlier investors in the scheme and presumably to enrich themselves at the same time. So basically it's one operator centrally managing a scheme where they're fraudulent, you know, they're saying, well, you know, the accounts are fraudulent and the scheme's fraudulent.
Bernie Madoff, prime example. So basically eventually if you have a rush on withdrawals, of course the cash flows don't meet the outflows and so what happens is the scheme collapses under its own weight. Alan Stanford, another prime example. So with a pyramid scheme, slightly different, that's a little more decentralized in that you have a person at the top of the pyramid who then recruits two or three or four more and then they recruit two or three or four more and they pay commissions to people up the ladder until eventually you go down a sufficient number of levels and the person at the top, if they've managed to recruit another 16 people gets a big payout and then the 16 say, well, he got rich, so I'm gonna go do the same, go recruit more. Of course, that also runs out because it's like the old Persian king with grains of rice on a chess board.