Written by Mike Finch

Co-Founder, ICO Alert; Founder, Sutler Ventures
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October 16 2018

ICO Alert Podcast #58: Nevin Freeman, Reserve



My guest for this episode of the ICO Alert Podcast is Nevin Freeman of Reserve. Reserve is launching a stablecoin that will initially be backed by the US dollar, but aims to eventually be backed by a basket of crypto-assets. 

Nevin is a fascinating person, having started a handful of companies in the last seven years and is really looking to make a difference in the world through blockchain technology. He and the Reserve team have literally been traveling to other countries to learn about how they store and exchange value in an effort to make sure their project solves these folks problems.


We talk about stablecoins, how Reserve is setup, the Tether controversy and much more. 




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The ICO Alert Podcast showcases exclusive, in-depth interviews with founders of past, present, and future Initial Coin Offerings. The podcast is hosted by Mike Finch, Co-Founder of ICO Alert. If you’d like, you can request a guest to appear on a future episode by emailing podcast@icoalert.com.





Mike: Welcome to The ICO Alert Podcast. I'm your host, Mike Finch, COO and Co-Founder of ICO Alert. You might ask, who or what is ICO Alert, right? Well, we're a team of 14 cryptocurrency enthusiasts and entrepreneurs here in Pittsburgh, Pennsylvania, that want to see this industry continue to grow. ICO Alert is a company that aims to help move this amazing industry forward in a variety of different ways. If you invest this space as a retail, accredited, or institutional investor, we provide tools and resources to help you do so. If you're an ICO or STO, we offer consulting, marketing, and more to help solve problems you face in fundraising for your new project. We provide content for you to watch, read, and listen to and collect tons of data on every ICO that has ever existed. We have a database of about 5,000 ICOs with anywhere from 50 to a hundred data points on each.

So if you'd like to connect, fell free to drop us an email at team@icoalert.com. Or tweet us at the user name icoalert. If you have questions for me, feel free to hit me up on Twitter, @thatfinchguy. And of course, nothing on this podcast should be considered investment advice or any other piece of advice.

Alrighty. We are back. My guest today was Nevin Freeman of Reserve. Awesome podcast in my opinion. Reserve is launching a stablecoin that will initially be backed by the U.S. Dollar. But it aims to eventually be backed by a basket of crypto assets, as you'll hear. Nevin is a fascinating dude. He started a handful of companies in the last seven years, like a medical research company. You know, a company that brings together ambitious folks as you'll hear. And overall, he's really looking to make a difference in the world through this new technology, which is always great to hear. You know, he's not really kind of like taking advantage of like a short-term business opportunity, right? So that's great.

He and the Reserve team have literally been traveling to other countries to learn about how these folks store and exchange value in an effort to make sure their project solves these various problems. So it's not just a stablecoin that will be used to say help ICOs do fundraising. Obviously that's important. Or to help the quiddity in the space, right? These are important, but not as drastically important as say presenting a store of value for countries with hyperinflated currency, right?

So in this episode, we talk about stablecoins, obviously. How Reserve is set up and when they expect to launch. We talk a little bit about the quote unquote "Tether controversy" or conspiracy, if you will. And much more. So, as always, enjoy.

And we are back. This time with Nevin Freeman of Reserve. Nevin, how are you?

Nevin: Doing well. Thank you for having me.

Mike: Of course, yeah. Thanks for coming on. I'm really excited to talk stablecoins and Reserve today. But before we get there, I'd like to get an intro from you about how you got into crypto, what you did before Reserve, you know, your career, all that fun stuff.

Nevin: Yeah, totally. So I initially got interested in Bitcoin in about 2011 as kind of more from an intellectual perspective. Sort of seeing it as a way to have money where even when governments were not functional. So it's like just this really cool idea that you could have a currency that's just held together by economic incentives. And because of that initial intellectual curiosity, I also started to think like, "Man, maybe this is the future of money. Maybe I should buy some." So I did. Like tried to mine some in my laptop and stuff. And then within a year had lost my faith or my enthusiasm for Bitcoin, just kind of thinking through the monetary policy. Became convinced that it wouldn't work as a currency. And so I figured, "Oh, this is cool, but it's all gonna go away and not really gonna be that useful."

And so in the intervening time, I sort of got out of cryptocurrency. I started a news website for financial advisors, which is sort of just a random happenstance thing that I fell into. Started a medical research company. And then spent many years building a company builder, which is the thing where we sort of recruit entrepreneurs over the course of time and then periodically spinoff projects. And that-

Mike: Wow.

Nevin: Yeah, it's really ... It's been amazing. It's taken us like five or six years to get to this point. We have like 45 people that are part of it and the people are like super, super, super handpicked. We've looked at like thousands of people to get the 45 we have. And it's ... The theme, the thing that unites us is that we tend to select these hyper-ambitious people who maybe they aren't super accomplished yet, but they believe that the world can be somehow really, really massively changed in their lifetimes and they're on some kind of mission to do that. Not everyone's on the same mission. We all have different things that we're particularly excited about or concerned about. And I personally am one of those people who's pretty concerned about artificial intelligence and also interested in the potential promise if it's done sort of safely.

And so Reserve is kind of borne out of that group of people initially. We ended up getting interested in cryptocurrency again as a way to make money and fund these big ambitious projects we want to do in the future and also as way to directly improve human cooperation and coordination basically. We see money as a way that humans can get along with strangers and sort of be cooperative and collaborative with strangers. And we think that cryptocurrency has present an opportunity to like incrementally improve on how money works in a few ways. Which maybe we'll talk about in this conversation.

And so yeah, basically, you know, building a price-stable cryptocurrency as something that really could be used as a currency all around the world in a really, really big way is exactly the sort of project that people that are a part of this company builder would want to do. Because it could have this enormous impact of a type that we're excited about. And it could earn us some profit that we can then reinvest into other stuff that we also care about. So that's how this project came together.

Mike: Wow, that's wild. So did you do all of that between 2011 and now?

Nevin: Yeah, yep.

Mike: Wow, that's wild, man. You must have ... Have you taken a vacation at all? That's a lot. You got a medical research company, you know-

Nevin: No. I'm known for working too hard. I do take short vacations periodically. I had a beautiful vacation with my Dad and my sister earlier this summer where we did a really remote river trip in my home state of Oregon that we've been meaning to do for actually like almost a decade now. So-

Mike: Wow.

Nevin: That was great. But yeah, a lot of work.

Mike: That's awesome, man. I love the concept of those 45 people, you know, super ambitious. Maybe there are certain kind of politically-focused things or organizationally-focused things that don't allow them to get that top spot in a big crypto company. But you have pulled them together and happy to see that blooming and creating these stablecoins. So that's awesome, man. Well done to you guys there.

Nevin: Yeah, thanks.

Mike: So what's the whole point of these stablecoins, right? Like, to kind of give some people some background who haven't looked into it and this obviously goes into some kind of monetary theory and whatnot like you said. But why are these things blowing up so much in the crypto space?

Nevin: You can sort of think about it philosophically or practically. On the philosophical level, a currency is kind of meant to track value, the exchange of value. And if I do something for you, then the idea is that you can then turn around and have somebody else do ... Or I could turn around have someone else do something for me of equal value. And so if you have some method of tracking that where the value of each unit is kind of fluctuating all over the place, the market value of it, then that system doesn't really work. It's like I do something for you and you pay me one token, and then I turn around and I want a favor of equal size and I have to pay five tokens, well, then that system doesn't really work.

So on a fundamental level, currency kind of needs to be ... Have like a stable consensus value for it to really function. But on a practical level, the way we see it is we kind of break down the applications of stable cryptocurrencies into three categories. So kind of the earliest on is applications inside of the crypto space, the existing crypto world and kind of the future crypto world that we think is gonna be built out. And so, you know, clearly Tether has been a really useful means of exchange for crypto traders.

Then we think that stable cryptocurrencies will be quite useful for basically raising money for crowdfunding inside of crypto space. We think it's much more practical for a number of reasons these volatile currencies. We think that many builders of distributed apps have gotten in touch with us and said, "Hey, maybe we'd want to use Reserve as a means of payment inside our app instead of sort of Bespoke individual token." We think stablecoins also can be the basis of many financial contracts that get sort of automated in smart contract form. And then there's some other things that can happen as well. That's category one.

Category two we think is actually an even bigger deal. And it's kind of the category that our team has gotten the most excited about. Which is basically providing a ... Initially a stable store of value. Basically a way of savings. And then later on a means of exchange for people who are in countries that have highly inflationary currencies. So there are like 16 countries with 20% or higher inflation right now. If you look at the unofficial numbers it's like maybe even higher than that.

Mike: Wow.

Nevin: And so that means that if you're in that situation and you have some money saved, whether it's just cash at your house or money in a bank account, it's just losing its value really fast. And so it's almost like having to pay a tax of like maybe 30 or 40% on all of your money every year. Not just your income but all of your money. And that's pretty harsh.

And so we think that stable cryptocurrencies, which are sort of easier for those people to get their hands on than like foreign stable fiat currencies, might be a really, really good tool for them to actually kind of bootstrap to economic functionality. And so that's kind of this whole second category. And so it's a really potentially enormous application, you know? We're talking about like hundreds of billions or even trillions of dollars worth of value that could be stored in stable cryptocurrencies if they really work.

And then the third category is a bit more abstract 'cause there's so many uses of money that it's kind of like making computers. It's like, "What are people gonna do with them?" Well, you know, you kind of know but you kind of don't know. And so we sort of think about stablecoins, stable cryptocurrency as potentially playing some important roles in the whole global monetary system in one way or another. So something we've looked into is, how do big multi-national corporations move money around between their different like arms? Or when like paying vendors and so on? And there's sometimes a lot of friction there just in terms of the time it takes or the cost or the currency risk if you're dealing with many different foreign currencies.

And so we think that in situations like that it could be that cryptocurrencies that are either pegged to stable major fiat currencies or ... Who are ... That are actually independently stable, sort of their own floating but stable value currency could end up playing a big role in those different parts of the world. So that's kind of the big picture for us of like, what's the point of doing this? You know, it all kind of comes down to facilitating better economic activity around the world.

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Mike: Right, absolutely. That's a great kind of broad reason there at the end. And the second point that you brought up, I would agree is probably the most exciting where, you know, people have talked in the past and they will always talk about how Blockchain technology and cryptocurrency can make a real significant difference in people's lives. But for those of us here in Pittsburgh at ICO Alert and others around the United States or in other countries where the fiat currency is relatively stable compared to those 16 or so that have this crazy inflation rate, we don't really tend to think about that.

And you kind of get localized to what matters to you and you think, "Okay, well, a stablecoin can be great for these exchanges or kind of the small minute problems that exist in the crypto space like fundraising." Right? Where the-

Nevin: Right.

Mike: The price of Ether changes or now okay, I'm an ICO and I have to update the pegged rate of Ether to my token. Big deal, right? So [crosstalk 00:14:07]-

Nevin: And ... Well, so the interesting thing there is that because of the recent market crash basically, a lot of people who are holding crypto, they actually have a first hand experience of what it's like to be holding a currency that loses its value that quickly.

Mike: That's true.

Nevin: And so what I like to point out to people is like, "Look, imagine that your crypto holding were your only form of money, and you had worked super hard to earn that money. And you had no option of trading out into any other currency and that's what you had to live on and it was losing its value that quickly year over year. That's what it's like." And so there's actually kind of a way for everyone in crypto to relate to those people when kind of just last year they couldn't really.

Mike: Right. Yeah, absolutely. It would be essentially someone forcing you to hold that Ether or Bitcoin, right?

Nevin: Yep.

Mike: 'Cause that's what happened in Venezuela. I mean, you know, you might look and you might say, "Okay, well, why don't you just go and buy USD with it? Or go and buy Euros or whatever?" Well, it's not that simple, right? 'Cause governments are controlling this and when there's all sorts of power in a country like Venezuela or Greece, these governments can literally go in as we've seen and disallow people to move money in and out of the country. Or literally pull money out of your bank account like we saw in Greece. And it's just unbelievable, right? Like, these aren't normal problems that we in the United States deal with or in a lot of other countries.

So, yeah. I mean, when I first heard about stablecoins, that was exactly something that popped up, too. So all great points.

Nevin: Yeah, and not to belabor this too much, but just one more story for your listeners. So we went and spent a week in Argentina to understand like what it's like to live with inflation there. And that's an interesting case because now they actually are allowed to buy dollars. And so it's become a functional two-currency system where anyone who has any notable amount of wealth where they're just not living literally week-to-week. We'll store it in dollars. And so they'll go to the bank and put the money in dollars and then when they need to spend it, they'll go exchange it for pesos and spend the pesos because all the currencies is still done in Argentine pesos.

And this two-currency system is what we expect to develop with stablecoins in a bunch of other nations where dollars or Euros aren't available. And people in Argentina really have seen kind of the worst of how this can go wrong. Back in 2001, there was this event that they call the Corralito which was when essentially the government was forced to stop banks from allowing anyone to withdraw any of the money they had in their accounts. And then eventually what they did was they took anyone's dollar denominated deposits that were stored in bank accounts and forcibly converted them to pesos. Basically they [crosstalk 00:17:07]-

Mike: Oh, man.

Nevin: Like, issued pesos instead of the dollars and they did that at one quarter of the market exchange rate between dollars and pesos. So basically everyone lost like 75% of their money just without ... Not because they made a bad investment, the government and the banks just sort of took it away. And so if you talk to anyone in Argentina who's old enough to have had a bank account in 2001, they don't want to put their money in a bank at all. They just don't trust the government and banking system to not literally steal their money. And so these are the sorts of things where, you know, self-custody of digital currency, it's a bit cumbersome right now 'cause the UI's not that great and people in the U.S. are like, "Why would you want to deal with that?"

Well, if you've lived through something like that, you kind of get it. You kind of see, "Yeah, if I can just hold my money myself, you know, that might be much, much better." And people in Argentina often do store dollars literally at home. That's really prevalent. And so ... So yeah. Throughout the past year, going and studying these different circumstances has been really eye-opening. And we've really noticed that the way currency works around the world varies a lot.

Mike: Oh, absolutely. Yeah, that's fascinating and unfortunate in a lot of circumstances. But so, in the situation with Argentina, how do you guys build trust with these folks?

Nevin: That's a great question. I think the short answer is slowly. I think that things like this need to be proven. And I think that that's a good thing in the long run for the whole system. You know, if people were to quickly adopt any one of these stablecoins or other cryptocurrencies they'd be taking on a lot of risk on average. We've looked at a lot of these stablecoin proposals and we actually think a bunch of them don't make sense and will fall apart. And so it's sort of rational for people to be skeptical and kind of take their time and sort of see what develops and what works.

You know, we think that you might be able to shortcut that process a bit and get people to kind of test something out by basically working with existing companies in these regions that people already have a trusting relationship with, you know? Large brands, companies that have earned their customers' trust. Where then basically those individual citizens can sort of outsource the due diligence process to that large corporation that has a lot on the line with its reputation and isn't gonna expose its users to a lot of financial risk. And so that's one angle we're taking is starting conversations with groups like that that might want to work with us to bring this to people and that can sort of be a skeptical gatekeeper and make sure that we don't mess people around.

Mike: Gotcha.

Nevin: But yeah, I think it'll be a process that will develop over time. And I think that's fundamentally a good thing.

Mike: Yeah, yeah. I mean, it's ... Trust takes time, for sure. You see that in the ICO market a lot, right? Like even from kind of the big boom and end of 2016 beginning of 2017, it's ... There's still a long way to go there, too. So, yeah, trust definitely takes time.

With Reserve, what's the business model? Are you guys a for-profit? Or not-for-profit? And the reason I ask is because you look at other cryptocurrencies ... Kind of quote unquote "normal" cryptocurrencies, and the incentive model there is that the team holds hopefully a small portion of tokens and as they theoretically do well and grow the overall business, then theoretically if the token economics are set up correctly and the token has a strong utility and all of this, then the price of the token should increase in value and the team will be rewarded along with the users and the holders and all that. So how is Reserve set up?

Nevin: The way that it's set up on the protocol level is that there's two tokens, the Reserve, which is the stablecoin, and the Reserve Share, which is the secondary token in the system that is sold by the protocol itself automatically over time to raise capital. And we can get into how that works later. And the Reserve Shareholders ... If Reserve becomes a popular currency, then the Reserve Shareholders will end up being rewarded for that. And so our business model as a founding team ... You know, that the collaborators are working on this ... Are that we hold some number of those Reserve Share tokens depending on how much we're each contributing. And so we will ... We stand to benefit in the same way as anyone else who buys the tokens early on.

And so we have a Delaware C-Corp, which is just like a standard for-profit company that we're using to operate this. And more than likely there'll be like a series of legal entities around the world to make sure that we're complying with all the relevant regulations and so on. We have looked into having a non-profit foundation and we may nor may not do that. There's some like reasons for and against that we're still considering.

But basically, you know, the sort of funding cycle and profit model of a crypto company is often this sort of backwards thing compared to a normal startup where you raise a fair amount of money upfront and then you kind of just spend that money over time until you run out. And by that point, the whole thing is distributed enough that you don't even really need the company anymore. The company can actually just completely go away and the network itself can then continue maintaining and improving how the software works.

And that's our current intention. It could be that over the course of time we decide to do some additional business, but doesn't have to do with the Reserve protocol directly. Maybe we have some, you know, payment service that has some other functionality that we charge users for as such that we keep the business going. But that's not currently our plan. Our plan is currently just to really build this network and get it to the point where it's completely self-sufficient such that our company can basically just fold and not be relevant anymore.

Mike: Gotcha. Okay. So and on those two token types, you got the Reserve token and the Reserve Share token. Reserve Share token, correct me if I'm wrong here, is the one that is distributed to the team and other early backers. And then the Reserve token, just standard Reserve token, is what would be used by normal users.

Nevin: That is correct.

Mike: Okay. So talk to me about that Reserve Share token, then. How is that different? Is it functionally different? Or does it just kind of represent equity in the company? Or, you know-

Nevin: Yeah, yeah. So it doesn't represent equity in the company. So basically the way that it works is that in the long term, the holders of the Reserve Share can receive potentially the earning via some like actions. We'll sort of specify this in slightly more detail publicly pretty soon. Basically some form of compensation. And there are two places that that value comes from that they can end up receiving. One is a very small transaction fee for the Reserve token holders. And that's actually not a very big revenue stream for the shareholders. It's pretty small.

And then number two is that the way that our system works is that the Reserve token is always 100% or more backed. Or at least that is how the protocol is designed. So if it functions as intended, the Reserve token is always 100% or more backed by other value. And that other value is stored in the form of a diverse portfolio of crypto assets. And many of those crypto assets will themselves be tokenized real world assets like tokenized gold or real estate or currencies, et cetera.

And over the course of time on average we expect that portfolio to slowly appreciate. Not quickly, because it's optimized for stability, it's not optimized for gains.

Mike: Sure.

Nevin: But we expect it to slowly appreciate. And that ends up leading to some excess capital in the system that can then be paid out in some form or another to the Reserve Shareholders. And if you get into the whole thing and you do all the math and you see like how much the Reserve Share purchasers paid to get those Reserve Shares and what that expected cash flow is every time, it ends up being we think a pretty compelling financial deal for the Reserve Shareholders.

And so ... And the point of the Reserve Share, just since we've been talking about it, the reason why it's even there in the protocol is because the protocol at the beginning needs to raise much more capital than one-to-one in order to back the Reserve. So let's say you had, you know, like a hundred Reserves in circulation, to use a small number. And there all supposed to be worth at the beginning one dollar. You wouldn't just want $100 worth of crypto assets in that smart contract because those crypto assets could fluctuate in value.

Either ... You know, if they're a pure crypto asset like Ether, then obviously that just moves around a lot. But even if they're like a tokenized real world asset like tokenized gold or even tokenized dollars, there's some chance of default. Maybe the issuer of that token runs away with the assets or the government shuts that project down. And so we need to be tolerant to some of that value going away. And so at the beginning, that backing should be substantially overcollateralized. And to use an example number if like this would be specified in detail like before we launched ... So look into the details before we launched to make sure you're not being misinformed on where it is right now.

But as an example, we're thinking it could be something like 300% collateralization. So if you had 100 stablecoins, you'd have $300 worth of collateral to back those 100 stablecoins. And so then there's the question of, well, where does that extra $200 of value come from? Like, why would people contribute that to this smart contract? The answer is it comes from the sale of Reserved Shares. So sort of half of our user population is the Reserveholders, half of the user population is the Reserve Shareholders. And the Reserve Shareholders kind of contribute that capital. They sort of crowdfund this kind of quote unquote "central bank account".

And then in exchange, if the stablecoin is widely adopted and the value in that central bank account so to speak grows and appreciates and if there are transaction fees, then they end up being sort of compensated for their financial support in the long term. And so we start off with something overcollateralized ... You know, for example, 300%, and then the long term, that portfolio ends up being quite stable we think. And so it trends down to one-to-one backing instead of something like three-to-one backing.

Mike: Gotcha. That's ... Wow. Fascinating. I've got like a thousand questions. I'm trying to write some of 'em down here. Okay, so my next question was gonna be what issues you saw with backing a stablecoin by volatile assets. Obviously you've answered that with the overcollateralization piece. From what I've seen, most people have suggested ... You know, if it's a hundred ... Under your example, a hundred tokens, they say it should be overcollateralized with $175 or $200. So $300 seems like from what I've briefly read well-collateralized, overcollateralized there.

So these Reserve Shares, then. Can folks only have access to them at the beginning of the project? Or are these going to be constantly sold by Reserve? Or distributed on secondary exchanges? Like, how's that gonna work?

Nevin: Yeah, good question. So first off, it may be the case that they actually didn't just choose to list these tokens for secondary trading. And ... But then aside from that, the protocol itself, are smart contracts, which we're intending to launch on top of Ethereum, will mint and sell additional Reserve Shares over the course of time as the smart contracts need to raise that extra backing capital to scale up the supply of the stablecoin. And so-

Mike: Got it.

Nevin: In the long term, once we've reached the one-to-one backing point, you don't need to sell anymore Reserve Shares because you sort of get that hundred percent backing just from people buying the new stablecoins. But at the beginning, you have to have that extra capital inflow. And so the protocol will itself, yeah, mint and sell those Reserve Shares on a decentralized exchange that operates on top of the Zero X Protocol.

So then in practice, most likely the participants in those transactions will be arbitrageurs who would like buy those newly minted Reserve Shares through our like somewhat complicated decks. And then turn around and resell them on like normal crypto exchange secondary markets, like centralized exchanges. Such as like a normal user, if they wanted to buy in or get out of Reserve Shares would probably just do that on a normal exchange. But then maybe they're transacting with an arbitrageur who had bought that for like a slightly lower price but they had to go through a more complicated process to do it.

Mike: Got it. Got it. So all in all, considering all these factors, would it be right to say that you guys are basically aiming to or kind of racing to get to a network effect for the Reserve token?

Nevin: Yeah. And ... Excuse me ... Network effects are a huge deal in currencies. The interesting insight that we've had as we've thought this through is that the network effect on a means of exchange is really intense. Because like if you're talking about doing commerce, it's sort of only useful to deal in a currency that everyone else is dealing with. Because you want to be able to spend it everywhere and so on.

If you're talking about a store of value, which is kind of another use for cash, you ... It doesn't really matter who else is using it. All you care about is sort of the risk profile and the return profile and the liquidity. You have to be able to exchange it for ... With at least one other participant for something that you value. Either a currency that is widely used or the exact goods and services that you want.

And so what that means is that we think that we can sort of offer a store of value and sort of not have to deal with battling network effects. And then if it becomes used as a means of exchange, once it has been adopted by these as store of value, then there's sort of a network effect that holds this in place. And you can totally see that with Tether in the crypto world right now where a lot of people complain about Tether, but it's still by far the most popular stablecoin.

Well, why is that? You know, it's really because of the network effect. Everyone knows that it's highly liquid. That you can trade out of any token into Tether and out of Tether into any other token. And so it's really hard to shift that consensus even if people think that like true USD or Gemini Dollar or one of these other coins is better. And so yeah ... So, you know, we definitely think a lot about network effects and the dynamics of how they work in building these projects.

Mike: Right. Gotcha, yeah. That makes a ton of sense. And is a good segue into Tether. That's obviously something that I wanted to ask you. I mean, this is perhaps one of the biggest conspiracy theories in the space lately. Essentially for those who don't know, Tether is supposed to be ... And cut me off here if I'm missing anything or whatever ... But it's supposed to be audited essentially to make sure that they have the reserves for the USDT out there because if they don't, then there's big problems with the inherent value of it. And because, like you said, there's such a network effect in the industry where people are in and out of it so quickly that you'll see the price go to 97 cents or a dollar three just from natural supply and demand that people believe there's kind of this overarching risk.

And then when you build in points about BitFinex, there was some news lately with them closing off USD deposits I think it was. What are your thoughts on all this? Right? You're at the ... You know, on the frontlines with this stuff. I mean, and if you don't feel like you want to come out one way or another against it or for it or whatever, that's totally fine. But just, you know, what do you [crosstalk 00:34:50]-

Nevin: No, I'm happy to talk about it.

Mike: What do you see?

Nevin: So I think I am actually less critical of Tether than many people in the industry. The way I see it, I think it just wouldn't really make much sense for Tether to not be backed. I think that it's like BitFinex is making so much money, how would they ... What sort of business decisions would lead them to decide the right to do was to issue Tethers without backing? It seems really unlikely to me. And so I cannot say first hand, but-

Mike: Sure.

Nevin: But if I had to guess, I would guess that the money is there. And the issue with Tether really comes down to the regulatory environment we find ourselves in. Where banks don't want to be in the business of holding Tether as dollars. And so what that means is that even if they really, really, really have the money and really, really want to do an audit, my suspicion is that there's no way for them to do that. And that's I think because either the banks that are holding the money, they don't know that Tether's dollars.

And so you can't come out and say the bank has the money, because then the bank itself would find out and want to get out of that business. Or it could be that the banks know that they're holding those dollars, but they don't want that to be publicly known because they don't want to get in trouble. So my suspicion is that one of those two things is happening. Such that the money's there, but there's no way for them to come out and say, you know, this bank is holding this much money and this bank is holding this much money for one of those two reasons.

And so then, you know, there's this unfortunate situation where no one can trust that the money's there even if it is. And so that kind of means that that business model doesn't fully work because of that situation. And so ... And again, I totally could be wrong. A lot of people that I respect think that the money isn't there and they have reasons for thinking that. So no super strong predictions here, but that is my personal take on it.

Mike: For those who don't know, Tether, it's supposed to be backed by USD. Which would you kind of consider Tether like a derivative then? I mean, wouldn't ... If a large overreaching point of stablecoins is to get away from the changing value of fiat currency. Like, what's the point if you're backing it by USD? Do you see an issue with that?

Nevin: So that's an interesting point. And there's something I do want to say about that. So yeah, if you look at how stable USD is right now, it's really great compared to a lot of other currencies. And so as a step one, pegging cryptocurrencies to USD, even if it has 2 or 4% inflation per year is still pretty great. And so that's what almost all stablecoins are trying to do, is in some form or another peg to USD or perhaps Euro or something like that. In the long term, the vision that we have isn't to peg to another currency. It's to have as truly independent stable value cryptocurrency. And there's kind of this question of like, well, stable relative to what? If you're not pegging it to the dollar, are you counting the value in dollars? 'Cause then it really is kind of just in dollar terms. We mean stable in terms of like real purchasing power in terms of like the actual sort of value of goods and services that you can buy with the currency.

And so whereas most stablecoin designs we thought of and most stablecoin designs we've seen, they don't really have a way to transition off of the peg to fiat currency. The way that we've built Reserve ... Part of the reason why we have all these assets held in this smart contract we call a Vault that then back the Reserve token is that once that portfolio makes it to the point where it is stable in real terms, our protocol can start just ignoring the price of the Reserve token in US Dollars and have it be that the Reserve token is just redeemable for sort of fractional share of those assets such that it's just independently stable. It's actually independent currency such that if we do end up in a world where the dollar starts to be devalued or starts to inflate because of bad luck or bad monetary or what have you, it presents a real alternative.

And we think that's actually kind of more in line with the true ideals and vision of cryptocurrency, is to have something that's really separate. And so it'll take us a while to get there and we'll sort of peg to the US Dollar in the meantime, which we think is kind of the best option. But we do have that long-term vision which is kind of a different thing than what a lot of other stablecoin projects are trying to do.

Mike: Yeah. That was gonna be one of my questions because tokenized gold and tokenized oil and all these things which ... You know, a lot of the most recent podcasts we've had have been around security tokens or DSOs or whatever you want to call 'em. I think these are coming, but obviously they're far off still I think, right? Like, they're still obviously building out the infrastructure. So what's a timeline that you think on your end? Is it months away? Years away? Decades away? Obviously you guys have thought about this.

Nevin: To launch you mean?

Mike: Yeah, where you can kind of go from that USD back ... Definitely to launch. I want to know what the timeline is for Reserve. But to go from that pegged to USD to pegged to this more kind of crypto-focused basket if you will.

Nevin: I see. Yeah, that's a great question. Yeah, it really comes down to which assets are available on the Blockchain to be held in that portfolio. And so I think that it's definitely years away before we would have a stable enough crypto asset portfolio to not need to pay to the US Dollar in terms of modifying some supply of the token. I don't know how many years it is. But it's definitely years.

Mike: Gotcha. Yeah, I would tend to agree with that. There's a lot that still needs to happen. I think most would agree with both of us as well. You know, kind of switching topics here, Bitcoin is interesting and kind of the narratives that go with it are always interesting. I mean, you mentioned you originally found it in 2011 and then kind of were turned off to it because of some of the inherent flaws for it to be used as a currency.

And I think a lot of people followed that. The narrative at first, at least when I joined kind of post-Gox was, "Soon you'll be able to buy a cup of coffee with your Bitcoins. So load up now. You'll have a lifetime's worth of coffee." Right? And then that ... I don't know when it happened, but that switch to this store of value narrative where people say, "Hey, if you had of bought Bitcoin back in 2010, look at how much money you would have had." Right? Even if it drops by 70, 80% multiple times, right?

And stablecoins, I think a lot of people are theorizing that they will kind of harm the store of value narrative for Bitcoin. I mean, just recently this week we saw a drop down on the price of Bitcoin and the overall market I think was like 17 billion in total market cap that was wiped off after a period of a week or two weeks or three weeks or whatever it was where Bitcoin was relatively stable at around 6500.

So to those that think around this theory of store of value for Bitcoin and that stablecoins might take that away, do you agree with that? Or do you think it's kind of separate?

Nevin: It's a good question. So the way I see it, people use the term store of value somewhat loosely at this point. Where they're often not sort of intuitively thinking of it as just storing value, they're thinking about kind of getting free money, right? Like if you buy Bitcoin now, probably it's not because you want something that's just gonna stay stable in price. Probably it's because you want it to go up in price. And so we can kind of separate like basically an investment from a pure store of value. I think that people who really are just looking for a pure store of value, something that just doesn't change in value, will certainly be more interested in well-designed stablecoins than in Bitcoin.

People who want an investment probably don't want stablecoins, right? They want something that goes up. And so then but there is a relevant question here which is, well, what about the secondary tokens in these stablecoin systems? Are they gonna become a more attractive investment than Bitcoin or any other sort of like quote unquote "store of value cryptocurrency" that has a fixed supply or at least a deterministically growing supply? And I think that's ... It's hard to say.

Where you can sort of make an argument that like the Reserve Share or other like Share-like tokens in these other stablecoin systems could actually be in the long term much more successful than Bitcoin as being kind of a consensus place to put your money if you want to see some return. And the reason for that is that because they're connected to a stablecoin that has a stable value that can be used as a means of exchange, there's kind of a path to them becoming highly entrenched through network effects from means of exchange.

Whereas if you believe that Bitcoin will never really be used as a means of exchange, then arguably it's much less likely to end up being sort of cemented in the financial infrastructure through network effects because with the store of value, as soon as everyone starts to think that it's just gonna keep going down, everyone wants to jump out and you can sort of have the whole thing fall apart. And so it could be that Bitcoin eventually goes way down and everyone sort of gets rid of their Bitcoin and it turns into collectable, whereas the secondary tokens connected to these means of exchange type stablecoins, maybe once you get to a sort of saturation of people using them as a means of exchange, that really can't happen. You can't really have that sort of downward spiral in confidence.

And so it could be that, yeah, that these Share tokens end up kind of displacing Bitcoin for that more investment-minded crypto purpose. I don't know if that is what will happen. And an argument against that is that if you look at like the Reserve Share for instance, kind of the expected future like income of a Reserve Shareholder is something that's like kind of more calculable. You can be like, "Well, if the network gross of this size, this is what the transaction fees would be and this is what the expected income would be from the appreciation of that as that portfolio." Therefore, I can sort of make a value-investing claim about the value of this thing. You can almost treat it like a stock or like an equity.

Whereas with Bitcoin, it's almost maybe more attractive to people in that it's not that defined. And so maybe because there's no straightforward argument to me made about what the value of a Bitcoin should be, maybe that means that through speculation it could end up being even more way more valuable. And so if you're kind of ... Or just thinking about that like Keynesian beauty contest thing, maybe pure cryptocurrency is like Bitcoin. Bitcoin especially because of its popularity and sort of place in the narrative. Maybe it ends up actually sticking around and becoming much more valuable because all it is is this sort of popularity contest.

So I think it's really tough to predict. But if I had to bet, I would bet that these sort of more equity-like tokens that have ... Where you can make like a sort of claim about them from a value investment perspective, I think that they'll have more staying power. And then I think that the means of exchange element that causes those network effects can also sort of make them a more stable thing in the longer term.

Mike: Yeah, that ... Well done explaining that. That's wild to think about it. And kind of the explanation there of Bitcoin is perfect, 'cause it's kind of like a mindfuck, you know? You're thinking about it one way and it only makes sense if you think about it the opposite way as I kind of like explain it to myself here. You know, and I guess people that would argue against you would say ... Well, if you think about Bitcoin from the store of value kind of investment approach like you said, they would go to the supply and demand argument and the fact that there's a set relatively small number of Bitcoin compared to other cryptocurrencies and because this is naturally deflationary. It has these advantages and all of this. So, yeah. It'll be interesting. It's definitely gonna be hard to predict. I'm not sure or not convinced one way or another that these even compete yet, right? So I guess we'll see.

But on to Reserve. You had mentioned a status or a kind of timeline for the project. What is it? What's the timeline for launch?

Nevin: Yeah. I would love to give concrete numbers. I've been advised by our lawyers that I probably shouldn't do that, 'cause I don't want to break promises. So unfortunately I'll be kind of vague. We think it's months away. And we're kind of looking into things we can do to move that process up. And so if we get to the point where we have like a concrete enough timeline that we're willing to sort of commit and put that spike in the ground, then we'll announce that to all of our followers. So if you are curious about the timeline, join our telegram group or join our email list and we'll kind of keep you guys up-to-date.

Mike: And for those who want to check out your website, just so we have it here and I don't forget, what's the link?

Nevin: Yeah, it's reserve.org.

Mike: So what's holding you guys back right now? Is it legal? Is it regulatory? Or are you still working on the development of it?

Nevin: Yeah. I think that the legal questions are kind of the biggest open area for us in terms of the economic protocol design. We're feeling really great about that. We're sort of polishing our written descriptions in order to publish the full spec and share that as soon as we can. On the development side, that's going well. There's certainly some more work to do. We have a lot of code checking and a few things we want to change. But we're live on the Ropsten testnet and running a bunch of tests and we're feeling good about that. Yeah, the legal side of things is ... You know, we just want to make sure that we do this the right way. And as everyone knows, it's very open to interpretation what that means at this point and the evolution of the industry.

And so we want to strike the balance between not being too conservative and sort of allowing as many people as possible to participate and take the journey with us. But then also make sure that we're not violating the laws. And then the way we think about it is we often step back and say, "Well, what are the laws trying to do? And do we agree with that?" And usually we agree with what the laws are trying to do. It's like we don't want people who don't understand this to lose money on it. We don't want to like help a lot of people evade their taxes. We don't want to facilitate like terrorism. Like, there's lots of laws that are there for good reason.

And so we kind of try to take both approaches of like, "Okay, well, how do we comply with all laws in the sense of how they're written up in the rulebook to make sure we don't get in trouble? And then also how do we build the thing so that we prevent the bad consequences even with the bounds of complying with the laws?" And it's a tricky thing to make sure we're doing both of those. And so there's a lot of work left to do there.

And then the other sort of main part of the project is even if we have great economic protocol, the code works perfectly, it's all legal ... If no one ever finds out about it and uses it and gets value out of it, well, then it was a waste of time. And so we've been putting in a lot of effort also to understanding the markets. Doing a fair amount of travel around the world. And talking to different existing businesses that would be good partners, that would help us actually bring this into these markets in a productive way. And so that's kind of another challenge for us is making sure that we distribute quickly and effectively as we launch. And we're excited about our progress there.

Mike: Gotcha. Gotcha. Yeah, don't feel bad about not having a set date. I mean, as the market crashed there are so many ICOs that kind of are raising in private sale now and our ICO is TBD. So being able to say months away is better than most.

So when it does launch, will you be running an ICO? Will you be running a security offering? Like, how will that happen?

Nevin: Yeah. So we have already raised $5 million privately from some partner investors that were pretty excited about, including Coinbase and Peter Thiel and Sam Altman and Digital Currency Group and-

Mike: Wow.

Nevin: A bunch of other crypto funds. It ended up actually being like 43 funds and angels that we had some particular reason why we wanted to work with them.

Mike: Wow.

Nevin: GSR, that's like a market maker and liquidity provider. Obviously really relevant for a stablecoin. And then some funds in Asia. Fam Bushi, PreAngel, NEO Global Capital. So yeah, so excellent sort of set of partner investors that are helping us bring this to the space. And we're intending to do some more private fundraising over the coming months. And then we can't really say one way or the other on whether we're gonna do a public ICO, but it's certainly something that is on our radar.

Mike: Sure. Yeah, a handful of the last podcasts we've had have been on the regulatory front. So I don't want to bore people with that. But private fundraising right now is just killin' it, you know? It sounds like you guys have pretty much every single top tier crypto fund of sorts, so congratulations on that front. That's-

Nevin: Thank you.

Mike: That's awesome.

Nevin: Thanks.

Mike: Must be great from a strategic standpoint. Another question I have here, you mentioned that you guys will be running on Ethereum. Why Ethereum versus others that are in development or not your own developed Blockchain?

Nevin: Great question. So we think it kind of comes down to two pieces. One is that Ethereum is proven, right? It's been in production for a long enough period of time that we feel pretty good about its level of censorship resistance. And then the second is that it has a well enough developed set of development tools and developer ecosystem to actually write the sorts of code that need to run on these smart contracts with a low enough probability of bugs. And, you know, even if Ethereum is just getting there, like things are still pretty young, but a lot of the other competitor platforms are like still way, way earlier.

And so the combination of those two factors kind of meant that we think Ethereum is really the only responsible platform to build something like this on top of right now. We do think, though, it's important for the user experience to be fast when you're actually spending the currency. And the way we're gonna solve this and the way that we think other projects like ours might end up solving it, too, is to kind of have the core guts of the platform running Ethereum, but then basically with like a two-way token peg. Allow the tokens to be transferred onto basically any other smart contract platform that gets popular. So you'd be able to spend the Reserve token on Hashgraph or EOS or any of these other smart contract platforms.

And so that way you can sort of have the solid censorship resistance at a bit of a slower speed for the core functionality. But then still allow people to spend the stablecoin much more rapidly. And then that is coming along with some extra risks, so maybe those platforms end up not being totally secure and some of those stablecoins get lost. But that's a much less bad circumstance than like all of the crypto assets in our Vault being drained or something like that. Which we really, really can't have.

Mike: Right. Yeah, that'd pretty much be the end there. Yeah. Gotcha. That's a great answer, for sure. A couple of more questions and then I kind of want to steal Pomp, Anthony Pompliano's new thing where he does like a rapid fire on his podcast. So I'm gonna take that from him. Awesome podcast if anybody out there hasn't heard it. It's new, it's called Off The Chain. So check that out.

But anyway, as I was kind of going through stablecoins and reading up and thinking about where they have fit into the industry today ... You know, as you said, back in 2001, first we had Bitcoin, right? Bitcoin was kind of the focus. Then that slowly turned into cryptocurrencies with Peercoin and NXT and a handful of others emerging. And obviously Ethereum showed up and gave birth to the ICO industry more or less.

Last year, maybe middle to end of the year we started hearing about Airdrops and how Airdrops were going to be the next hot thing. But that's kind of slowed down a little bit it seems. I know some projects are doing them, but there are inherent issues with that model. And then many are calling this year kind of the year of the stablecoin when you think about these quote unquote "new crypto assets".

So my question to you would be, what's next? Right? What can we see next year? Or in 2020? Do you have any predictions or kind of thoughts? Maybe needs that the industry has that could be filled?

Nevin: Yeah, that's a really good question. So the way I've been thinking about it, you kind of have these underlying consensus mechanisms. And then on top of that, you have these smart contract platforms and people have been trying to build stuff directly on those smart contract platforms. And those applications that get built there, if they're just using a token that has no specific monetary policy or no policy for stabilization, then it kind of messes with the usability and kind of messes with the economics of whatever that distributed app or like financial contract is.

So we kind of have needed this further layer of like sort of the currency layer on top of the smart contract platforms. And then given that, I think that a lot of the stuff that kind of that people have already been trying to build will kind of make more sense. So there's a way in which the way I'm thinking about it, kind of what happens next after stablecoin's inside of crypto is kind of what we were already trying to do in 2017. But there's actually a path to really doing it and having the whole thing fit together and make sense. Where you can participate in some distributed application and pay in a way that actually makes sense.

Whether it's a game or an application that is financial in nature. Or maybe it's a prediction market or some sort of derivative contract or something. Even with like asset tokenization or security tokenization, one reason for security tokenization that we've encountered as we've talked to these tokenization projects is they're often subject to really specific regulatory constraints around how many people can own portions of that security. Whether it's a fund or whatever. And that regulatory compliance can be automated in the smart contract so that there's just ... The logic is built in and that can never be violated. And those-

Mike: Wow.

Nevin: But those smart contracts that are sort of like tokenizing those securities will in many cases want to pay dividends and you kind of need a stablecoin to pay those dividends. So that's like another example where once you have that stable currency, you can build these things with it built in. And so I think kind of the premise of distributed apps we'll kind of get to actually run that experiment for real and see, is this a big deal? Do people really like these or not? That's kind of what I see happening next.

Mike: Nice. Yeah, ooh, man. I'm excited. That's awesome. I like it.

Nevin: Thank you.

Mike: I like that thought. Cool. Okay. So three, four questions here. Number one, do you think crypto needs to be more regulated, less regulated, or just needs more clarity in the U.S.?

Nevin: More clarity.

Mike: Yep. I would definitely agree there. Where do you see the Blockchain-based crowdfunding industry of sorts going in the future?

Nevin: Well, I think that stablecoins enable smart contract-powered escrow. Which can bring responsibility by forcing projects to deliver in order to get their funds released. And so I think that's something we'll see happening in the next year or two.

Mike: Got it, got it. What new projects have you seen lately that are super interesting or exciting to you?

Nevin: The one I found most recently that I'm super excited about is called Access. They ... One of the things they're doing at least is building like a crypto bank in Ghana. Really fast the way that it works. They have like I think 50,000 users right now and 1,000 mobile tellers. These mobile tellers just walk around to like ... It's like a paper route of like an average of 50 houses and allow people to deposit or withdraw in cash. And I just think that that's so cool.

Mike: It's a ... Yeah, it's amazing. I've had the pleasure of talking to those folks as well, and yeah, it's really awesome. Finally ... And then we'll get some information on how folks can get ahold of you or learn more about Reserve or stablecoins in general ... Will Tether be around in three years? Yes or no?

Nevin: Oh my gosh. Yes, I think so.

Mike: Okay. If you said no, I would have asked why, so good answer. Cool. Well, listen, man, I really appreciate it. I think this was a really great, in-depth kind of introduction to stablecoins. There's a lot of resources out there to learn more. For those who want to get ahold of you or keep track of Reserve, other than reserve.org, where should these folks head?

Nevin: Well, so, head to reserve.org. You can sign up for our email list and you can join our telegram group. And we'll be making a bunch of exciting announcements over the coming months through those channels. So that's a great way to interface with us. If you're interested in joining the project, reach out to us through our careers page, which is on reserve.org. Or email us, contact@reserve.org. We actually read every single one of those emails on a pretty regular basis, so you can get in touch with us that way.

Mike: Beautiful, beautiful. Well, thanks again, Nevin. It's been a pleasure.

Nevin: Likewise. Thanks for having me.


Topics: Blockchain, ICO, Cryptocurrency, Podcast, Sto, Podcasting, Stablecoins