CHAD CASCARILLA: What happens in this case of a tokenized dollar, you send $1,000 to Paxos, I send you 1000 tokens. Now, why is that useful? Well, you have those thousand tokens, you can send them to anybody anywhere in the world. You can not only just send it anywhere in the world, you can send it 24/7, so it's not nine to five, Monday through Friday. 24/7, you can send it and you can send it instantaneously. It's not ECH where it's bashed. This is not a wire that might take hours or international wire that takes many days. It happens instantaneously, and the fees are low, and you don't need to have a bank account.

MARK YUSKO: Everyone, this is Mark Yusko, CEO and CIO of Morgan Creek Capital Management, here today with Real Vision to talk with Chad Cascarilla, the CEO and co-founder of Paxos. Very excited about this conversation today, to get to know Chad, talk a little bit about the backstory of Paxos and then maybe talk a little crypto. Chad, welcome to Real Vision and great to have you here. What's the backstory? Where'd you grow up? Where did it all get started?

CHAD CASCARILLA: I grew up in Cleveland, we share Notre Dame in common, I went there for undergrad and got involved in the asset management world, was on the buy side, investing, really, globally and financial services companies. I started my own asset manager in 2005, hedge funds and private equity vehicles and some early stage VC. We did a really good job of catching a lot of trends in financial services. We really think captured early the concept of exchanges and clearing corps market structure shifting from floor based and not for profit to being electronic and being for profit, and it was a big shift in how markets operated and functioned and what value there was a financial market infrastructure.

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.

MARK YUSKO: Even worse now.

CHAD CASCARILLA: Yeah, exactly. 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 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.

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.

MARK YUSKO: Yeah. When you think about this blockchain Bitcoin conundrum, some people are like, well, it's all about blockchain, not about Bitcoin. Others are like, it's all about Bitcoin, not about blockchain. You're talking about infrastructure, you're talking about settlement systems and financial plumbing. I love the analogy of the sewer system, as all the toxic stuff floats to the top when you get a storm, that's exactly what happened in the financial system and boom, Bitcoin emerges from that with the origin block with the bank bailout. As you thought about coming into the sector, what was the impetus to leave this nice, safe, secure nine to five job, well, not nine to five, but a regular job in the hedge fund industry to go into this nascent new world of blockchain tech?

CHAD CASCARILLA: What we're really passionate about was thinking about how you could change the financial system in a way that reduce systemic risk, solve this very big problem, create a more access, more democratization and I think more resiliency, and to do that in a way that could really change society for the better. That's an exciting thing to be able to do. I love investing, I'm always going to be an investor, but creating a business that you built from scratch that could really fundamentally change how financial markets operate is a challenge that I just thought was a real opportunity for us to try and address and to be able to take blockchain and be able to apply it not as just some piece of technology, but to an actual problem.

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 and I don't think that's not the 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 set so that they can be moved around instantaneously, and really, by a much wider variety of people.

That changes access that opens people to the financial system that don't have access right now. That's really powerful, and I think it can really make a big, big difference to financial markets, which everyone is exposed to.

MARK YUSKO: Yeah. Let's back up for a second on this idea of technology, blockchain technology is this enabling infrastructure technology that is going to allow us to upgrade the financial system, as you said, in terms of these analog and electronic assets that now can go fully digital. Talk a little bit about that transition as we go analog, literally pieces of paper sitting in DTCC to electronic CUSIPs, but now, pure digital ownership.

CHAD CASCARILLA: I think this is a really key point. When I think of blockchain, sometimes, I like to tell everyone, just forget that word, which is a bit of a buzzword and say database. You can have a paper database. If you think about it really fundamentally, that's what a piece of paper is.

MARK YUSKO: Save it in a file drawer.

CHAD CASCARILLA: Save it in a file drawer, it's a paper database, you can have a centralized database, which is what historically we think of as a database and that's electronic, or you can have a distributed database. Then there's a whole continuum of how you could operate on database, but having a distributed database is very powerful because we're all sharing one together. When you need to be able to commonly be able to move things around, having a shared database can be very valuable. I think what you're describing is going from pieces of paper to either a centralized or skipping centralized and going right to distributed. It's a database upgrade.

That can even still sound a little esoteric, but it's simply, hey, how can we take asset ownership from one place that is hard to move it around and put it onto some platform where it's easy to move? It's like going from your computer that was sitting there and not networked, not on the internet, to go to like a fully networked computer, fully on the internet. That's, I think, the analogy here and so imagine how much more powerful it is that you're able to communicate with everybody instantaneously on the internet, instead of just having your home computer by yourself.

MARK YUSKO: Well, and you talked about a couple things that I think again, most people don't really think about in terms of fault tolerance and resistance systems. Our whole world is built around these hierarchical systems and it's all about leveraging the person at the top. Everybody else exists to lever that biggest brain, it may not always be the biggest brain, but it's all hierarchical and centralized. We have one home office, one CEO, the way to kill off a centralized system, kidnap the CEO or blow up the home office, I'm not saying do terrorist acts, but it's really simple to stop. Where Napster was going, they want to stop it. They arrest Sean Parker and blow up the server, but a distributed network, maybe talk about the benefits of that distributed network or that distributed system relative to hierarchical systems.

CHAD CASCARILLA: I think that's a really key point. Because if you look at the financial system, part of the reason why there's systemic risk, and part of the reason there's too big to fail, is because it is centralized. You have to keep pushing information through to someone that you can trust. That's usually someone who's bigger and bigger and bigger. Eventually, you get so big that you can't allow them to fail. You create socialization risk, and that's really ultimately how the system is set up currently, but that's not how it needs to be set up.

The whole point of blockchain and certainly, I think one of the key points about Bitcoin is that by having a decentralized system, you create more resilience and you create more access, you create more transparency and so that creates more competition, that creates more fairness, and allows people who have access who don't have it today. I think that's fundamentally important in order to create more resilience in the financial system because the more you have to rely on centralized intermediaries to move information and to hold your assets, the more you have this risk to somebody failing like Lehman Brothers, and it creates a domino effect.

Because essentially, that's what we discovered with Lehman Brothers is they are too big to fail. We didn't think that was the case, but it proved that there was and you couldn't let anybody else fail after that. I think that it was a huge revelation about the nature of the financial system, but also about really the resiliency of the plumbing, because part of the reason you couldn't let somebody fail in the case of Lehman Brothers is because assets, no one knows where they really sit.

MARK YUSKO: No transparency, too much capacity.

CHAD CASCARILLA: You still can't find assets today from the Lehman estate. It's still missing, you don't know exactly where they're at, which is strange because they actually only sit in two places. They either sit at the Federal Reserve or the DTC. That's the weird thing about the financial system. All the assets really sit at two institutions, yet at the same time, how is it that we can't know where the assets are? It's because of the archaic plumbing and the centralization and you can't quite follow the breadcrumbs [indiscernible].

MARK YUSKO: Seven difference players, seven different systems, all created with different software packages, not compatible. We all have our aha moment or eureka moment around crypto, I think, those of us who leave the traditional world and come into this world, and I had mined when I thought about this pattern of technological advancement or computing power technology changes over time. '54, we had the mainframe, '68, the microchip, '82, the personal computer, '96, the internet, 2010, the mobile net, and 2024 and a four years from now, called the trust net.

Really what it has to do with is increasing computer power and applying connectivity to different things. What email did to information exchange, or the mobile net did to e-commerce. 750 million people bought something with their mobile phone last year in China, just a staggering number. Now, we have this opportunity to exchange value on a peer to peer basis without a trusted third party, that intermediary. Maybe talk about that establishing trust using the technology.

CHAD CASCARILLA: Well, I think this is the sea change that's happening, which is that access to information is basically going to infinite and so that means that transparency is happening, frankly, across the entire economy. But one of the key places where that transparency hasn't been able to create clear benefits is in the financial sector. If you look at financial services as a percent to GDP, it's about 8%, 8.50%, up from 3%, a number of years ago. I don't think that's a sign of efficiency. I think that's a sign of inefficiency. Because ultimately, financial services is helping to allocate capital across the economy, you are taking more and more percentage of the capital you're allocating.

Maybe that's because there's more assets and more debt, but I think it's also because there's inefficiency, and pretty significant inefficiency. There's like, how good talking about the plumbing. I think that's partly because of the regulatory moats. I think that's partly because of going through the crisis that's been about safety and soundness and having more capital in place, and trying to basically, instead of create a decentralized system, really protect the centralized system that we have from failing. Understandable, but I think that that doesn't really get us to a better place. It just keeps us in a place that we're at that's a little bit safer but more efficient.

Now, you've hit this point where the technology wave is going to overwhelm those walls and those moats that have prevented the way information movement has changed from affecting financial services fundamentally. I think that's what's happening. I think this trust net concept that you're describing is exactly right because it will fundamentally change what you can do and anybody can be able to move an asset around, as opposed to right now, where you basically have gatekeepers and so the reason you can't move cash is because it's all sitting at the New York Fed, you have to be a member of the New York Fed. You want to move stocks and bonds, you have to be a member of the DTC. By the way, well, remember the DTC, we think that's valuable, but it is restricting access. If it's restricted too much, you really lose innovation.

MARK YUSKO: Yeah, it's a great point. If you think about the banking system, it's a system that's designed to make profits for bankers and it's basically excluding 40% of the people on the planet, the unbanked. One of the things I get excited about is this idea that this technology can do for financial services what email did for communication. It can make it ubiquitous and available to all the people. I like to move away from this term banking, is that literally, we'll be able to provide financial services to those people who have historically been unbanked. Step back for a second, when you had this aha moment, you said, "Okay, I'm going to shift from the traditional asset management world and I'm going to go down the path of starting Paxos." What was the origin story for the company?

CHAD CASCARILLA: Yeah, it was really is-- we've gone through the crisis. We've seen this exacerbation from the plumbing of the system, from obviously too much debt as well. Then we came across Bitcoin. We're really fascinated because it was still early at three or four cents. We saw Bitcoin and blockchain, there was no other blockchain that existed. In fact, the one of the big debates was could you have blockchain and not have Bitcoin or something like that. I think those debates have now been settled but it really underscored to us, wow, you could have a decentralized system. Imagine a world where you could take assets and you could reply for them on blockchain. Basically, database upgrade the assets onto a blockchain and you can now move them around so much more efficient. That got us to start Paxos and we realized that--

MARK YUSKO: What was that process like? You have this idea, genesis idea, you want to start the firm, did you go out and seek friends and family money? Did you look for venture capital? What was the process of getting that going?

CHAD CASCARILLA: Well, there's a couple of components to it. The first thing is we said, wow, we think you could apply this technology to creating financial market infrastructure. It's not just, hey, let's go use blockchain technology for something. We saw this problem with financial market infrastructure. We said blockchain could fundamentally solve it in a better and different way. Then we thought, "Well, if you're going to create financial market infrastructure, is there regulatory capacities and authorities that you might need?"

We did quite a bit of an analysis on this and we came across the concept of creating a trust company in the state of New York which is historically how a variety of infrastructure setup like the DTC, Sterling custodians, some of the CDS clearing houses were set up in New York say trust originally. A lot of people don't know what a trust is, you hear bank and trust or whatever it is trust, you think of something a long time ago. It's really a safer version of a bank, because all the client assets are held segregated. That means if something happened to Paxos, the client assets are still there, we can't use them. Unlike a bank or a broker where client assets are inherently a