Cracking Cryptocurrency

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In this technical episode of Bank Chats, Drew and Jeff get a crash course in cryptocurrency from Saint Francis University's, John Valkovci. What is cryptocurrency? How is Bitcoin 'mined'? What are the security risks of crypto? John reveals the answers to these questions and more in this information-packed episode!

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Transcript

Drew Thomas  0:01  

Fast Fact. In May of 2010, a man in Florida paid 10,000 Bitcoins for two pizzas, generally considered the first Bitcoin transaction for a commercial purpose. At the time, 10,000 bitcoins were worth about $40. If you have 10,000 bitcoins in January of 2024, they have a market value of more than 440 million. I'm Drew Thomas, and you're listening to Bank Chats.

Welcome to another episode of AmeriServ Presents: Bank Chats. And today we're going to be talking about what I think is probably a very misunderstood or at least under understood if that's a word topic, and that is that of cryptocurrency. The topic has definitely had a series of sort of reputational dings placed on it in recent years. And I think that it's a topic that relates to banking, but honestly, is a very, very different type of topic, different type of product than any bank has ever had, you know, in history. Joining us today, I have first of all, my compatriot from Bank Chats: 2 Cents, which is Jeff Matevish. Jeff is actually joining us today for this episode as well. And we have an expert with us today, John Valkovci. He is going to give us some, some details about his background. I know that you teach for Saint Francis University, but you have a number of other qualifications for being our expert today as well. A few Yeah. So, would you like to give us a little bit of your background? Explain a little bit about what you do and how cryptocurrency is sort of woven into your career.

John Valkovci  1:57  

Sure, sure. Happy to. And let me first thank you Drew, and Jeff, for inviting me to speak with you today. It's a pleasure to be here. And I hope that we can give some insights to the audience when they're listening about crypto, because it is a really interesting topic. But as far as my background goes, Jeff and Drew, I began my career in Navy JAG as a lawyer. And after I finished my tour in Navy JAG, I became a federal prosecutor in Pittsburgh, and then moved to Johnstown to head and open the Johnstown office where I worked for 28 years. It was in about 2014, and we have to realize that crypto just came about, Bitcoin came about in 2009. So, about five years after crypto came about, I had a federal agent, and I'm not going to say which three letters represent the agency, came into my office, and said, I have this case, and it's involving this thing called Bitcoin. By that time, we had all heard about Bitcoin and knew what Bitcoin was, in a way, but never really paid much attention to it. And I said, oh, that's great. And he explained the case to me, and I said, well, is there anything else? And he said, yes, it deals with this thing called a blockchain. And I said, what's a blockchain? He pulled a textbook out of his briefcase, had it tagged with a post it note and began reading the standard textbook definition of a blockchain. This is a decentralized, distributed ledger. And I said, wow, I said, that's interesting. I said, what's all that mean? And he said, I don't know. And I said, well, you know, if we're going to prosecute this, you think that maybe one of us should know what this is all about. Yeah. And he said, yeah, he goes, go for it. And that's really, that began my journey into crypto, and all things digital. And I realized that there was such a dearth of skill sets and knowledge when it came to digital assets, and cryptocurrency and digital forensics among all law enforcement agencies, including the Federal law enforcement agencies. So, I kind of made it my mission then to try to work with them and to take all the training offered by the Department of Justice. I took training outside the Department of Justice. And it got to the point where when we were doing digital forensics, I would just tell the agent to kind of move over and let me drive the mouse. Yeah. Okay. So, anyways, I also then began teaching as an adjunct at Saint Francis University, working with cyber crimes and those types of topics, because I felt that was great to teach the agents now, but we need to develop a whole new generation of cyber warriors and people who understand this going into law enforcement. And so, when I retired from the federal government in 2018, there were four different universities who were asking me to teach full time and develop their cybersecurity program. I selected Saint Francis because they had the beginnings of a really, really great program. I worked with Dan Wetklow, and Dan Wetklow who is one of the computer science professors up there. He really kind of worked with me very closely and I worked with him, and we put the whole program together. And initially, I taught most of the courses, everything from ethical hacking to drones and automobile hacking to dark web analysis, digital forensics, and cryptocurrency. And then about a year and a half ago, I was poached by a company out of the UK called Asset Reality, and I became their Senior Vice President of learning and development where I have a team of people now and we develop training for international law enforcement agencies for governments for the judiciary in different countries, and I've conducted multi-day trainings for US law enforcement. I conducted two three-day training sessions on cryptocurrency for the DEA and DEA agents and analysts and other federal agencies. I've taught in the British Virgin Islands, Kosovo, Ukraine, Kenya, trying to work with their financial investigations unit to bring them up to speed on digital assets, on digital asset seizure and digital asset forfeiture. And so that's been part of my mission. I've been designated as an expert, actually by the Council of Europe, in virtual assets and virtual assets service providers. And it sounds like a mouthful, and it really is. Basically, what it is, I was part of a parliamentary Working Group in Kosovo, working with them to develop their regulatory framework on digital assets and on virtual assets service providers. Virtual assets service provider is just a fancy name for something maybe like a cryptocurrency exchange and other businesses that deal in crypto. So, that's my background in crypto, it's pretty much what I do most of the time.

Drew Thomas  2:05  

So, what you're saying is I need to apologize to our listeners for having such a novice, as, as, as our expert today, no, that is fantastic. And very interesting. I mean, it sounds like we could probably have a day long conversation about some of the, the stories that you probably have dealing with some of this stuff. But we're going to try to focus in on cryptocurrency today. So, you mentioned that it was something that was still relatively new to people in 2014 that Bitcoin started in 2009 I think you said?

John Valkovci  6:39  

The first Bitcoin transaction was in 2009. But the actual white paper written by Satoshi Nakamoto was in 2008. And that's where Bitcoin got its start. But it really began in late 2008, early 2009.

Drew Thomas  6:51  

And so why was this created? What exactly is the purpose of cryptocurrency?

John Valkovci  6:57  

Crypto was created as a form of digital money. It was designed to remove the middleman. When you think about it, every financial transaction that we do on most days, whether using a bank card, or a credit card, or a check, some form of payment like that, you present that to the vendor, the vendor then runs it through a machine, it makes its way back to your bank, your bank has to approve it, it reduces your balance. And then it's sent on to the vendors, financial institution, and it's credited to them on their side. So, there's always that middleman on any financial transaction. The only time we can have a true person-to-person financial transaction is perhaps with cash or with bartering. But anytime you're dealing with anything commercial, there's always that middleman. It's either the government who controls the money supply, in our case, it's the Fed, or it's a bank, it's some sort of central institution. Bitcoin was designed to avoid that central institution, to avoid the Fed, to avoid monetary policy, to avoid banks. I'm sorry, you might not want to hear that Jeff, being here. But yeah, it was designed to take you out of the equation. In other words, Bitcoin was designed, and it's nothing more than a massive peer-to-peer network where anybody can join, and I can send you Bitcoin, and it doesn't have to pass through a central server, it doesn't have to pass through a central bank. It's no different than me handing you a $10 bill or something like that. It's simply just, it was designed as a way as a form of digital money to avoid any type of central institution or central control.

Drew Thomas  8:29  

Okay. And then, and I'm guessing that the general purpose of that was the idea of being able to avoid taxes or avoid that interference. There's a reason to use cash, right? I mean, like, if we're being honest, most people that use cash, it's convenient. I mean, its legal tender, but it's also one of those things that I think that most governments, if they really were honest, they would probably get rid of because they can't track it. So, is blockchain probably something that, er I'm sorry, crypto we'll get to blockchain in a second, but was that the purpose was trying to avoid those things, or?

John Valkovci  9:01  

Actually, when it was invented by, or created, I guess, is a better word by Satoshi Nakamoto, funny story, nobody really knows who Satoshi Nakamoto is. The person or persons never came forward. We don't know if it's a male or a female or a group of people we don't know to this day, the identity of Satoshi Nakamoto remains a mystery. Satoshi took these ideas that were just put together by people all over the place and said, let's create this blockchain and let's have this digital currency as its first application. I'm sure there was an element there perhaps of trying to avoid. If you're trying to avoid a government, if you're trying to avoid a bank, then you're trying to avoid people recording what you do. You're trying to avoid people tracking your transactions. So, there is that privacy interest in digital currency. And so, your question to me was whether or not it was, part of it was to, to avoid taxes. I think we can probably assume that, but if you really look at the, at the papers that were written by Satoshi Nakamoto in the creation of Bitcoin, it was to avoid the central authority. Okay, they were trying to avoid the man, as I said, in the 60s.

Drew Thomas  10:07  

So, so I think that the reason that I sort of posed the question that way was because I think it's been written, and it's been, it's been argued that that was part of the purpose. But I think sometimes people read a purpose into things after the fact that you can assign whatever purpose you want to something after it's been out there for 20 years and things have happened, but in the moment, and he may not have been or she or they may not have been thinking about that at all, it might have just been simply a thought experiment, or something along those lines that we're now assigning meaning to that may not have necessarily been the original intent.

John Valkovci  10:37  

It may not have been, but it certainly has blossomed into that. The IRS is certainly interested in crypto, what two, three years ago, there was the one question on your 1040, which asked you do you have or own any crypto simply yes or no question. And as we can see in the 1040s are developing, there's going to be more and more information. The IRS treats crypto as property, simple property. So, it doesn't tax it as income, that it will tax it as a capital gain. So, if you own crypto, and if you own it for longer than six months, and then you sell it you like any other capital asset, you would take your basis away. If it's more than six months, it's a long-term capital gain. If it's less than six months, it's a short-term capital gain. So, they're treating it like that. And they're taxing it as a capital asset as property.

Drew Thomas  10:37  

Okay, so cryptocurrency is built on something called a blockchain, as I understand it, so can you explain a little bit about what a blockchain is and how cryptocurrency comes out of something like that?

John Valkovci  11:33  

Sure. The technical definition is a distributed, decentralized, transparent public ledger. But if we take that and break that down, it's rather complex that way. But think of it as nothing more than a very large database. We're all familiar with databases. Okay, we use them every day in our work. And usually, they're in our home life as well. A database records information. In this case, this database records transactions that are made in Bitcoin. It's distributed because there's no central authority. As I said, there's no central server, a copy of this database, this ledger, if you will, is maintained on 1000s of computers around the world, they all have an exact copy of that database. Anytime there's a transaction in Bitcoin, that transaction is broadcast to the network, the network records it. So, basically, you would have, and I'm using 10,000 as a round number, because there are approximately anywhere between 10,000 and 15,000 active nodes in the Bitcoin blockchain on any given moment. But let's use 10,000 as a nice round number. And all of these computers will update. And again, when we're talking about a global network, there may be a little bit of a latency period, but you're talking a few seconds, maybe. So, the entire network keeps track of every single transaction. And the entire network verifies every single transaction. So, if you were to come back and try to change a transaction, you can't, I will explain that in a minute. Let me give you an example, perhaps that I use for my students when I teach them about blockchain for them to wrap their head around this. In the South Pacific, there's an island, and the name of the island is Yap, Y-A-P. The form of currency on the island of Yap is something called a rai stone. And these stones aren't just something you can hold in your hand. They're massive stones, some of them are six feet across and weigh hundreds and hundreds, if not several tons. Okay. The funny thing about these stones is, they're not mined or created on the island of Yap. About 200 nautical miles away on the island of Palau, that's where the stones are mined. So, the islanders on Yap have ocean going canoes, they sail to the island of Palau. And they mined these massive stones out of calcite, I believe, okay. They load them onto the boat, and they sail back, and they roll these stones, because they're circular with a hole in the middle, say put a log and they roll them this way is the only way they're able to be moved. And they let them rest in a certain spot on the island. And they never move. Okay, I understand what you're trying to think, okay, wait a minute. So, let's, let's think of it this way. Each of these stones has a certain value, why do they have value? Because work was expended to create them. You had to have your canoes, you had to hire some workers, you had to sail across the ocean, you had to mine it and bring it all the way back. So, there is a value attached to that stone. And let's assume that one of the stones we just dropped right there on the path from the village to the lagoon. And everybody in the village now knows that John owns that stone on the path to the lagoon. Drew, you have a herd of goats and I want to purchase your herd of goats. And I will say I will give you my stone for your herd of goats. And you say yes. So, word has passed to the entire village that this transaction took place. And everybody in the village now knows that the stone on the path to the lagoon is now owned by Drew, okay, there is no central bank. The money is nothing more than history. That's how blockchain works. If I'm going to send you Bitcoin, I basically create the transaction, I send it to you, it's broadcast to the network, we all understand that the transaction took place. And then once it's approved, it's part of the blockchain. Now, the blockchain is made up of blocks. Each of these blocks contains a certain number of transactions. And once there's, reaches a certain number of transactions, or after a certain time, then that block is closed, and all of those transactions are placed into the block. That block is then what we call mind, it's verified. In other words, the miners, the people who use the blockchain all the time, they go through all the information. And they do some fancy mathematics called hashing and things like that, they verify all the transactions, and then they approve it. Once it's approved, then the miners have, they engage in, in sometimes you hear it called some sort of complex mathematical puzzle, it's really not, they're, they're just in a guessing game, they're trying to guess a certain number that makes the equation work. So, they're not solving an equation, you're just guessing a number. And the first one to solve that, the first one to guess that correct number, then they basically have the privilege of placing that block on the blockchain, and it's added to the block below it. It's also linked cryptographically to the block below. So, there's a certain code that's on the new block that's attaching it to the old block. Okay, I know what you're thinking it's complicated, it is it really is, let me put it this way. The reason we call it cryptocurrency is because all the transactions in the block are, the blocks are cryptographically linked to the previous block, the code that they put on it, that mathematical number that they assigned to the block, they also incorporate that into the next block. If any of the information in that block were to change, that number would change. Because the number is derived from all the information in the block, it's called a hash value. And so, once a block is placed on the blockchain, it becomes what we call immutable, you can't go back and change it. Because if you were to change any transaction in that block, it's going to change that number that we spoke about. And then that would make that block not work.

So, that part of it actually makes sense. I mean, I can understand the connection between blocks. I guess my thing, and I think that, that thing is something that a lot of people who are novices or who are sort of new to the concept of cryptocurrency is, and going back to your analogy of the stones on the path, you have to still assign value to it. It's not, the stone isn't worth anything unless every villager believes that it has value. And the same thing I think happens with cryptocurrency, you know, there's, there's a sort of, and I guess you could I mean, you could argue it's the same with cash. I mean, we all, we all have bought into the idea that $1 bill is $1 bill, and it's all worth $1. But at the end of the day, it's made out of cloth and paper and ink. And if we all decided tomorrow, that $1 wasn't worth $1 anymore, then it wouldn't be worth anything. So, I guess my question, sort of, that's a roundabout way of asking, why is this valuable?

That's a good question. To your dollar example, to that point, it's because the Fed, I mean, $1 is backed by the full faith and credit of the United States and they say it's worth $1. And everybody agrees and says, okay, it's worth $1. And we all agree, and we trust the system will work that way. There is no central authority when it comes to blockchain or Bitcoin. So, we don't have somebody saying, this is what it's worth. So, why is bitcoin trading at what $41,000 today for one Bitcoin, something like that? Yeah, it went from 35 to 45, within the last what, week, or 10 days? So, so why does, why is Bitcoin worth so much? There's a couple of different reasons. One, if you remember, the stone on the island has value because it took work to create that, there was something somebody had to expend something to, to create that. When it comes to Bitcoin blockchain, they use a consensus mechanism called Proof of Work. In other words, these miners who are trying to verify the transactions and add that block to the blockchain, they have to use a significant amount of computing power. The computers they use, it's not your home computer, it's not a laptop or anything else like that. They're using special mining computers that could process close to 50 trillion calculations per second, and it still takes them 10 minutes, because on average, it takes 10 minutes to add a block to the Bitcoin blockchain. So, even going 50 trillion per second, it still takes them about 10 minutes to figure that number out, you and I were talking about, okay, because it's such just an astronomically large number that we're looking at here and how to arrive at that. So, they have computing power, they have cooling power, it takes a lot of resources to mine that, and therefore there is proof of work and when you guess that you broadcast that number to the entire blockchain, the other miners type in that number and say, hey, it does work. Okay. And you've just proved that you've done the work to reach this point. Okay, so there is a lot of expenditure involved in mining a Bitcoin just from purchasing the computer, the electricity to run the computer, cooling the computer, the time involved. But another factor that we have to keep in mind is supply and demand. When it comes to Bitcoin, the way the Bitcoin protocol was originally drafted is there will never be more than 21 million Bitcoins ever produced. That's the limit is part of the Bitcoin code, there can never be more than 21 million Bitcoin. Right now, we're at about 19.5 million Bitcoins in existence. So, we have about a million and a half to go. And I think it's just like any other commodity when it comes to supply and demand, the more that supply starts to shrink, maybe the more the demand might go up. So, that's another element. Another element that drives the price of crypto is the regulatory scheme. I know the SEC and the commodities market are trying to regulate crypto, but everybody's struggling with what, how they can possibly regulate crypto, because how do you regulate this decentralized network where the computers are spread all over the world?

Drew Thomas  20:59  

I was going to say, how do you regulate something that was intentionally designed to be unregulatable?

John Valkovci  21:04  

That's exactly what many governments including ours are really grappling with right now. So, they're looking for choke points to regulate. And we can talk about that in a minute when it comes to cryptocurrency exchanges that are regulating the exchanges, as opposed to regulating the actual crypto and thinking they could manage some degree of control over it that way. So, there are a number of factors that drive crypto, but when it comes down to it at the end of the day, it's basically because we think it's worth $41,000. Yeah.

Drew Thomas  21:30  

So, I guess you had mentioned that there's a limit, right? There's 21 million Bitcoin is all that there ever can be. But there's also a thing called halving, right? So, every so often, it was every four years or something like that, there's, there's what they call a halving event, where it essentially takes twice as much computing power to create a Bitcoin as it does, you know, the day before that. So, I guess my question is, it's sort of ingenious in a way, like, the Bitcoins are limited, but in a weird way, they are also unlimited, because half of a half of a half of a half of it, you'll never get to 21 million, you'll always end up getting, the minute that you get to 20.9 million, it'll go into a half and then you'll have to mine that much more to get to, it's kind of like a penalty in football, right? You can't, you know, it's half the distance to the goal, you can never actually score a touchdown on a half a distance to the goal. Right?

John Valkovci  22:23  

Good point, I've never looked at it from that perspective, when you talk about half the distance of the goal. The halving refers to the reward. Remember, I talked to you about the miners who tried to guess that number? Well, the one miner who guesses it correctly, they are given a reward, the Bitcoin protocol issues them so many Bitcoins. And right now, I think it's about six and a half Bitcoin isn't it, or no? Yeah, it's about six and a half Bitcoin. And every four years, that number drops in half, then you get down to 3.25, then you dropped off that in half every four years. Actually, it halves on about every 200,000 blocks that are added to the blockchain is really when that, that is supposed to change. If we look at that and keep progressing down on the halving, after every 200,000 blocks at the current pace, it's estimated that the last Bitcoin will be issued in the year 2140. But it will be so infinitesimally small, that it may not have much value, and it will be significantly less than the cost it's going to take to produce it unless, of course, the value of Bitcoin increases to something astronomical over $100,000 or $200,000, which I think some people are holding right now hoping that it happens.

Drew Thomas  23:33  

And I know that they've said that in the past, and then the bottom fell out. And, and we can talk a little bit about why that happened in a little bit. But before we get too far into this, specifically about Bitcoin, I also just want to touch on the fact that there are a lot of different cryptocurrencies out there, correct? I mean, there are, there's Bitcoin, there's Ethereum, there's Dogecoin, which was made as a, I guess, started out as sort of a joke but became a thing. What's the difference? Are they, are they all basically built along the same ideas? Or is Bitcoin obviously is the most well-known? Is there a reason for that? Like, is it somehow better than Ethereum or Dogecoin, or any of the others?

John Valkovci  24:09  

There are 1000s and 1000s of different cryptocurrencies out there. Bitcoin was the first, it's the most well-known. Ether, which runs on a different blockchain network called the Ethereum network, was probably the second one came, coming about in somewhere around 2014 or 2015. Really, we look at Bitcoin as being the granddaddy of all cryptocurrencies.  Anything else, any other coin is referred to as an ALT coin as an alternative cryptocurrency, an alternative coin. So, those are called ALT coins, but they all share one thing in common, they use blockchain technology. Now, most cryptocurrencies reside on their own individual blockchain. The Bitcoin blockchain hosts Bitcoin and Bitcoin cash the Ethereum blockchain hosts Ether. Dogecoin runs on its own blockchain. So, they all use blockchain technology, and all blockchain technology functions, even if I described it poorly earlier, it still functions in the same basic way where you have a consensus mechanism. For Bitcoin, it's proof of work, for Ethereum, it's called Proof of Stake, there still has to be some way for the miners to verify that transaction. Keep in mind, we're talking about the village on that island right now. So, anytime there's a transaction on any of the blockchains using any crypto, it has to be broadcast to the network. And when it's broadcast to the network, those individuals who, who are part of that network will verify it and add it to their blockchain. The reason we have so many is because they were created for different reasons. Really, when it comes right down to it, you mentioned Dogecoin, it was created pretty much as a joke. And, and Elon Musk goes on TV, or it goes on a podcast and says the word Dogecoin and it jumps up to 70 cents per Dogecoin. And shortly thereafter, it drops down again. Yeah, so if you want some Jeff, let me know I have several thousand Dogecoin.

Jeff Matevish  25:59  

Do these work the same as Bitcoin where there's a finite amount of you know, that can be created? Or are these different?

John Valkovci  26:05  

They're all different. Okay. Okay, let's just start with Bitcoin. Bitcoin was created and designed to be digital cash, and to be an asset that can increase in value, not so much as an investment just, but something you can put, to hold value, but it was designed to be digital currency, and pretty much that's it. Ether or Ethereum, on the Ethereum network is everybody refers to it, was designed to be much more. It was designed to be digital currency, but it was also designed to be a way to create smart contracts, to have distributed applications and things like that. So, on the Bitcoin network, if you're talking trying to embed some sort of document or some sort of text onto the Bitcoin blockchain, it's very, very limited because its scripting engine is very limited, and maybe you can get 20 characters. So, it's possible to put what we call a micro message onto the Bitcoin blockchain, and you can stitch those messages together, those characters, to form a coherent message on the Bitcoin blockchain. In fact, it was used frequently by terrorist groups to send coded messages to the people in the different cells around the world. The Ethereum blockchain said, okay, we're going to digital currency, but we're going to take it a step further. And they have a much more robust scripting engine. So, we can actually create smart contracts, self-executing pieces of code that we call smart contracts on the Ethereum network, we can create distributed applications. What that is, is we all have apps, we call them, on our cell phones and our laptops and tablets and things like that. Well, this app is distributed on the entire network. So, it's a distributed application. So, it's much more robust. It's designed to host tokens and non-fungible tokens, NFTs and things like yeah, that's a whole other podcast. It really is.

Drew Thomas  27:47  

So, what I'm gathering is that it's not so much like the difference between, say, the yen and the dollar and the peso and, where there's an exchange rate, where one can be exchanged for the other. They're literally designed to be different applications, or am I wrong? Can you exchange an Ethereum, an Ether for a Bitcoin? And is there an exchange rate for something like that?

John Valkovci  28:11  

To answer your first question, they're all designed to be digital currency in a way, but they have different purposes. Some are designed to be faster. In other words, as I mentioned, it takes about 10 minutes to mine that block. So, if I were to send you Bitcoin right now, Drew, we won't even see it on the blockchain for at least 10 minutes, it won't appear. So, if you're trying to purchase something with Bitcoin right now and you give it to a vendor, you're gonna be standing there in line waiting for 10 minutes for that transaction to actually go through when you think of it that way. Okay, the Ethereum network, which was the really the second type of, the second most popular cryptocurrency, they felt that 10 minutes was simply too long. So, it takes on average about 12 to 15 seconds to mine a block on the Ethereum network. So, the transactions go through much more quickly. Other cryptocurrencies saw what Bitcoin did, and maybe they want more privacy. So, we have privacy coins, like Dash and Monero, which are really privacy coins and designed to be much more private because even though when we talk about crypto and if you want to talk about privacy and the use of crypto, we can a little bit later. So, basically, they each have different purposes. Can you exchange one for the other? Yes, you can, you can go to something called a cryptocurrency exchange. And there are different types of exchanges, Binance is an exchange, Coinbase is an exchange, FTX was an exchange. And basically, if I own Bitcoin, I can go to Coinbase exchange, and I can create an account and say I want to swap or exchange my bitcoin for Ether or for Doge or for Solana, or any of the many other Cryptos. Not every exchange will support every type of cryptocurrency. Think of it as nothing more than a currency exchange at an airport. If you've ever gone to an airport and walk past the currency exchange, you're going to give them money, and they're going to give you a currency from another country, maybe a euro or a yen, as you mentioned before, and they're going to take that a small fee for that. And these exchanges these cryptocurrency exchanges work the very same way. So, yes, you can exchange one cryptocurrency for another, depending on the exchange, but you will pay a fee for it.

Drew Thomas  30:14  

So, that actually brings up another question that I sort of was thinking about when you were explaining the process of moving these coins. So, not every, well, I don't know if, I don't know if I'm right in saying this or not. But Jeff, and I do not mind Bitcoin, right? But say, somehow someone paid me for something in Bitcoin and I accepted that. Do I then have to become a bitcoin miner to be able to do anything with that? Or does someone sort of do that on my behalf? And then I'm able to say, well, I want to move my bitcoin to Jeff, someone does that for me, right? And then kind of like to your explanation of the currency exchanges, do they take like, a fraction of my bitcoin as payment for transacting that for me? Or do I have to actually literally get a server and start mining Bitcoin?

John Valkovci  31:00  

You don't have to mine Bitcoin; you can simply go online and create what we call a wallet. A wallet is going to hold a private key. When you trade cryptocurrency, when you send cryptocurrency, you send it to somebody's wallet address. A wallet address is nothing more than a very large alphanumeric sequence. It's about 30 characters, 30-35 characters long. And basically, what happens is, when you choose a, your wallet will choose a random number, it will then apply some mathematics to it. And ultimately, you're going to get this address after you apply some different types of math to it. That's really not important for us right now. Sure, but because that address is derived mathematically from this random private key, the private key controls it so the way I can send you Bitcoin, I can send it to your wallet address and your wallet is controlled by your private key. That's where your private key is stored. I can't send you Bitcoin, okay, your wallet doesn't store your Bitcoin. Your wallet doesn't really send your Bitcoin, your wallet, basically stores your private keys. And that's pretty much all it does. Most people think that well, they're used to what a wallet is, it stores my money. No, it doesn't, not on the Bitcoin blockchain. But we can, if you want to talk more about wallets, we can as well. But you can simply create a wallet if you choose, and it doesn't cost any money, you can just go online, create the wallet, and then you generate an address. You then Drew would give Jeff, your address, and he would open up his wallet and send it to your address and it goes through the blockchain that way, no central authority, no exchange nothing. On the other hand, if you wanted to, to make life easier, and you didn't, you don't want to worry about the technology of trying to download a wallet or create a wallet or worry about addresses and private keys, you can go to many of the exchanges, Coinbase and Binance, and create an account. It's very similar to a bank account, and you open it up and you then tie that account to a physical bank. I have what I call my crypto account at a local bank. And anytime I could use that account to purchase money, or to purchase crypto using fiat currency, or I can sell my crypto and then fiat currency is sent by the exchange to my bank account. So, it's very similar to a debit card when you think of it that way. So, if you wanted to, instead of creating your own wallet and maintaining it and controlling yourself, you simply create an account on Coinbase, and then Coinbase will generate the, your address and you say, Jeff, send it to this and it goes to your Coinbase account. You can have a Coinbase wallet, or you can have a Coinbase account.

Jeff Matevish  33:30  

Okay, so, there's many ways you can create a wallet or many places you can create a wallet online, right?

John Valkovci  33:36  

You can have a hardware wallet, which looks like a thumb drive. There's the Ledger Nano, there's a Trezor. These are hardware wallets. You can create a mobile wallet on your cell phone, you can have a wallet on your desktop, you create a paper wallet if you chose. So, there's many different forms of wallets. The two primary, primary types you want to be careful of is what's called custodial and one's noncustodial. A custodial wallet is maintained. As I said, Coinbase they maintain your wallet, they maintain your private key, they control all the crypto that you own. A noncustodial is where you actually own the wallet, you own the private key nobody else does. So, you control your own crypto.

Jeff Matevish  34:13  

There's no central authority. So, if somehow your wallet got hacked, is there any way to get your money back or your crypto back? What are the security concerns with, with something that's not regulated?

John Valkovci  34:25  

That's a really good question. Let's just kick back and talk about this for a while. If you have a wallet, a custodial wallet, say hosted on Coinbase and Coinbase gets hacked. There's really not much you're going to be able to do because Coinbase controlled that wallet on your behalf. They control your private key. They got hacked for some reason. Now they may out of the kindness of their heart, give some money back if there was a hack or some sort of data breach, but typically they don't. If it's your wallet and it got hacked and the crypto is gone, will you be, be able to get it back? And the answer to that is usually not sadly, if I can just diverge for a minute. I've worked on many, many cases with victims of some sort of online fraud, whether it's pig butchering, or whether it's a romance scam or an investment scam, where they're told to send crypto here or if you invest so much in crypto here, invest a 10th of a Bitcoin. And I promise you a 30% return in 30 days, and you send your Bitcoin to this address trusting that this is going to work out and it does. I mean, you actually earn 30%. And they, they tell you, here's your 30%, and they offer you another one and another one. And after a while human nature kick in, perhaps greed, I guess, or will become somewhat desensitized, and they say, you know, you've been such a great customer, you've done this with us three times we have this special program for what we call our Platinum customers. And if you just send us five Bitcoin right now, we can get to that 30%, we'll get it to you in two weeks, not 30 days, and all of us anything well 30% of five Bitcoin, that's a lot of money. And you do and then that site goes dark, and you never hear from them again. So, when you're a victim of some sort of scam of some kind, can you get your money back whether your wallet is hacked, or you're the victim of a scam? The answer is usually no. Now what we can do is we can trace the funds leaving your wallet across the blockchain, to the criminal’s wallet and then we can keep tracing it as it moves across the blockchain. Think of the blockchain as a highway. On a highway, you need an on ramp and an off ramp. So, most of those on ramps and off ramps are what we call the cryptocurrency exchanges. So, sooner or later, if you're going to send money, if your money is hacked or your wallet is hacked, or you're sending money to a scammer, that money will move across the blockchain. Sooner or later that criminal is going to want to cash out. The Bitcoin is great, but they want the cash. They want the money. That's why they're defrauding people. So, they usually have to have some means to cash out to hit that off ramp to get off the blockchain, turn that crypto into fiat currency. And it's done through an exchange. So, most exchanges are regulated right now, as I mentioned earlier, that's the choke point that the SEC and other agencies are looking at around the world by regulating cryptocurrency exchanges, because they're considered to be, they're defined as money transactors. So, they have anti-money laundering and know your customer, just like your bank does here. If I were to come here and open an account, you're going to require my driver's license, my social security number, all sorts of biographical information, you're going to photograph that and you're going to keep it in a file because ever since 911, and the Patriot Act, all financial institutions have that KYC regulatory, that know your customer. Cryptocurrency exchanges have the very same thing. So, we can trace your cryptocurrency from your wallet that was hacked Jeff, to an exchange, then law enforcement can contact the exchange and ask for all that KYC information about the individual who cashed that out. Okay.

Jeff Matevish  37:59  

Okay, so before that, you're unknown, right?

John Valkovci  38:03  

Right, because if they want to just keep it on the, on the blockchain, it's very difficult. It's just there, because the blockchain was designed to be pseudo anonymous. When you create a wallet, when you deal with crypto, when you trade crypto, all the transactions are completely transparent. We can go back on the Bitcoin blockchain right now and see every single transaction since the very first Genesis block, since the very first transaction happened back in 2009. So, it's all transparent. The problem is, it's, it's only an address. It's that long, alphanumeric number I was telling you about. It's not tied to your email address; it's not tied to a username. It's not tied to an account. It's not tied to anything else, any physical address or any of the biographical information. Now, there are some methods using open-source intelligence techniques that we can perhaps de-anonymize an address. Most of the time we're about 50% to 60% accurate with, with de-anonymizing a crypto address, depending on how it's been used, and who's using it, and the technical expertise of the people doing it. So, I know it's a long answer to a really short question, Jeff. But if your wallet is hacked, and you lose your crypto, if you're part of, or if you're the victim of a cryptocurrency scam in some way, shape, or form, is there a chance you'll get that crypto back? The answer is yes. But it's not a very strong probability. Okay.

Drew Thomas  39:21  

So, you were sort of talking about the on ramps and off ramps and sort of converting that crypto over to fiat currency and so forth. So, I guess that leads into my other question, which is you know, it's, it's all fine and grand to say okay, I have this Bitcoin on the blockchain and you know, I say that I have so much and we all agree that I have so much but ultimately, I can't, and I'm gonna say this with a little bit of irony because as I understand it, the first the first transaction happened Bitcoin was to buy pizza was, but, but I can't buy pizza with Bitcoin, right? I can't call Domino's and be like, I've got a Bitcoin. I want two pizzas.

John Valkovci  39:56  

There's some places you can do that. Okay. There are I don't know if you'd want to.

Drew Thomas  40:02  

I was going to say but, so how do you convert this? And I think that's where a lot of people get sort of stuck. Is this idea that okay, you know, I'm willing to take the, the conceit that we all agree that Bitcoin is worth something, I'm willing to, I'm willing to buy into the idea that my anonymous series of letters and numbers is assigned to a certain amount of bitcoin but at the end of the day, if I want to spend it, if I want to buy a car with Bitcoin, how do I do that?

John Valkovci  40:28  

That depends on the vendor. But there are vendors, there's in fact, there's an increasing number of vendors out there who are accepting crypto as a form of payment. And the way it works is, as I said, you have it in your wallet address. It's an address that exist on the blockchain. That's where your cryptocurrency exists on the blockchain, in that massive database that spread around the world, that's all the blockchain is, is this this large database that records all the transactions. It's in your address, you haven't moved it, you haven't spent it, you haven't transferred to anybody else. If you go to a car dealer and they're willing to accept crypto, they'll give you, their address. And then you simply open up your wallet, you create a transaction and send the crypto from your wallet address to their wallet address, and now it's in their wallet address. Most vendors who sell large ticket items like cars don't want crypto, Bitcoin particularly is extremely volatile, you can see it moving 1000s of dollars in a day. So, if I were to send you one Bitcoin, today, it's worth $41,000. For a car tomorrow, that same Bitcoin might be worth $35,000, it could be worth $50,000. Okay, so you don't see it often used for that, but you can use it for different vendors. And the way you spend it is you simply send it to their wallet address, they provide you with their wallet address, and you simply create the transaction and send the crypto to them and they deliver the goods to you. It takes about 10 minutes for that transaction to be recorded on the blockchain. But that's as simple as it is. There's many ways you can convert crypto, you can take crypto to an exchange and exchange it for fiat currency if you want cash back. They actually have crypto ATMs right now too, have you seen one? There's one in the, there's more than one in the gallery. Yeah, I saw one a couple weeks ago. Is there really? Um, yeah, right by the lottery booth.

Jeff Matevish  42:12  

I pushed some buttons. I didn't know what I was doing. I was just curious about how do they work. I mean, how do they work?

John Valkovci  42:17  

It works just like any other ATM. You can put money in, and you basically tell them what your wallet address is, and they'll send it then to your wallet address. Now there's a fee for that don't get me wrong, just like there's a fee for using an ATM. But think of it that way, you have a wallet address. Now this wallet address that we're talking about this long, alphanumeric sequence, you can transform that into something like a QR code. And you put the QR code on your phone. So, you go to the ATM at the Galleria Mall, and you slip in five $20 bills, and then you hold your QR code up, your phone up to the screen, that camera reads it, and that's your address, and then the organization or the company that runs that will then send so much Bitcoin to your address and you have it and they give you a receipt showing you what the transaction was and whatnot. Now they're gonna take a fee out of that. And some of these ATMs have some pretty steep fees. Some of them are 3%, 4%, 5%, 6% what, the transaction is. And it's the same way too, if you want to, you can have your wallet address and send Bitcoin to that, and they'll money will come out of the ATM machine.

Drew Thomas  43:20  

Wow. So, I have read and again, you know, when you put something out there like a podcast or something on the internet, it lives forever. Somebody could be listening to this when we release it in January, and some could be listening to this next January. But at the time that we're recording this, they're talking about an ETF being developed for Bitcoin, it could be approved as early as early 2024. And that seems to have a lot of people sort of excited about adding to the legitimacy, I guess of Bitcoin. Can you explain a little bit about why that would be a big deal.

John Valkovci  43:56  

An ETF is an exchange traded fund, okay. And those are regulated by the SEC. And right now, actually, there's, there's a number of funds out there that are Bitcoin related ETFs and you can purchase shares in it like you would money market, the only difference between a money market and an ETF like this with Bitcoin is that this you can actually buy on an exchange. And there's a number of them right now that are tied to cryptocurrency and Bitcoin related companies that work with Bitcoin, but none of the ETFs right now directly own any Bitcoin. The reason the SEC has been so hesitant to, to sanction this and to allow this is because Bitcoin has to go through these exchanges. And even though the exchanges are regulated, not all exchanges follow those regulations. Coinbase and Binance, two of the largest ones in the world, they do adhere to those anti-money laundering Know Your Customer regulations, because those aren't unique to the SEC. Those aren't unique to the United States. The EU, Europol, UK, most have the same type of regulatory scheme when it comes to exchanges. But not all exchanges are the same. There are some exchanges around the world that maybe have a different format. We have something called a centralized exchange or a decentralized exchange. So, some of them will not maintain the same level of, I guess, how should I say this? Some of them don't take their obligations, regulatory obligations, as seriously as others. Okay, you can contact one exchange and say I need all of the KYC information for this individual and they'll send you page after page of transaction history and biographical information. It's a complete dossier on the individual who owns that account. Other exchanges will send you a piece of paper saying the person who owns this is, his name is Bob. Thanks. So, the reason the SEC is so concerned about approving a Bitcoin ETF is even with the regulatory scheme we have right now, we can't guarantee that all Bitcoin transactions will go through an exchange that takes their regulatory obligations seriously. And Bitcoin is, can frequently be traded every day on exchanges that don't follow any type of regulation. And they don't want to do that because the SEC's job as we all know is to protect the investor as well. And to maintain that level of confidence that level of, of, I guess surety within the monetary system, and that the consumer is protected from different types of investment options. That's why they began regulating ICOs, initial coin offerings, if you remember, many years ago, you can do an initial coin offering create your own coin, and it was not regulated by the SEC, and people would buy into it thinking it was very much like an IPO, an initial public offering, which is regulated, and when things went south, they had no place to go since SEC wasn't involved. The SEC now to a pretty large part does regulate ICOs, initial coin offerings. But the reason that we, we don't have a Bitcoin, direct Bitcoin owning ETF is because of the SEC is concerned. I know the SEC is working on this and there's been talk about it being approved. But I think if it's approved, it's going to be very, very limited to certain exchanges only and certain funds. And so, I think you're going to see a pretty heavy hand of the SEC in anything that could be approved.

Drew Thomas  47:20  

So, just based on the conversation that we've had, you know today and knowing your experience and you and your, your expertise in the legal world, do you think that Bitcoin, or not specifically to Bitcoin, do you think cryptocurrency has a legitimate future? Or is it always going to be this sort of a casino where, where you never know what you're gonna get when you're gonna get it? How you're gonna get it? Some people cash out and win big and some people lose everything? Is cryptocurrency ever going to be considered a legitimate form of payment or currency? I know you're not a future teller. But I mean,

John Valkovci  47:59  

I'm not giving investment advice because you don't, want investment advice, right? No, we don't. I have Dogecoin right now that I thought it's gonna go back. I'm still waiting for Elon to get on some podcasts and Dogecoin so I can sell mine. Yeah. But I do think there's a legitimate use. There are right now legitimate uses for Bitcoin. I mean, there's certainly legitimate uses for blockchain technology. Because blockchain technology and blockchain is different from Bitcoin. Let's separate that out right now. Because think of it as the Internet and the World Wide Web. The Internet is just that interconnected network of computers. The World Wide Web, basically, is that overlay on top of the internet that uses HTML protocols to communicate for graphics.

Drew Thomas  48:43  

For those of us that are old enough to remember a difference between the two.

John Valkovci  48:47  

Yeah, there was, right. In other words, the Internet can survive just fine. Without the World Wide Web. The World Wide Web cannot survive without the Internet. And it's the same thing with Bitcoin and blockchain. Blockchain technology has many uses from voting, to supply side management to real property and property recordings. Okay, because it's on this permanent ledger that can't be changed ever, ever, ever and everybody can see it. So, there are legitimate uses. But again, blockchain can survive just fine without Bitcoin. Bitcoin can't survive without the blockchain technology. So, there are many uses right now. Bitcoin does service, some underfunded countries, countries who don't have a strong monetary system, countries where people don't have access to ATMs or banks. If they get some Bitcoin, they can start using that. So, there are some legitimate uses for now. Will it ever have the legitimacy of say, the dollar or the yen or some sort of fiat currency that we're used to? We have something called stable coins. Have you? Have you heard that term before?

Drew Thomas  49:45  

I've heard the term, I don't know, Jeff, I've heard the same thing. Yeah.

John Valkovci  49:49  

A stable coin is nothing more than, than a cryptocurrency that's pegged or tied to a fiat currency. We have the USDC the US dollar coin or USDT, the US dollar token, those are tied to the value of the US dollar. So, the value of a USDC, a US dollar coin is anywhere from 98 cents to maybe $1.02. It fluctuates, but it's not volatile at all because it's pegged to the value of the US dollar. So, yes, something like a stable coin being used for currency. I think that's a possibility. Something like Bitcoin, I'm not quite sure. Most cryptos because of the level of volatility associated with them, may not become mainstream. And there's other issues as well. One is just volatility, two, when we talk about Bitcoin Drew, is, who wants to wait 10 minutes for a transaction to be approved? I mean, people right, as society is changing right now, fast food isn't fast enough for most people right now. I mean, they want things instantaneously, it's true. You know, they don't even want to go to the mall and shop anymore. They want to sit there in their jammies and sipping their coffee. And so, you know, they hit a couple of keys or mouse clicks. And then next day, things miraculously appear on your porch and boxes.

Drew Thomas  51:00  

Yeah, I mean, that's again, I mean, not to diverge too much from the topic, but you're right. I mean, I'm old enough to remember when ordering something and having it shipped, was, you know, three to five weeks for delivery. And now if you order something online, and it doesn't show up in the next, you know, 72 hours, you're frustrated and calling the company and saying why aren't you delivering my stuff fast enough? So, so yeah.

John Valkovci  51:25  

That's how I feel, I just think because of the volatility, because of the time, even if you're talking Ether coin, Ether is fine. 12 seconds for a transaction, that's fine for me, I can wait 12 seconds to make sure that transaction goes through and is verified. But what about the volatility? I don't want to spend, you know, half of a Bitcoin today on something, and then find out the next day that, that the value went from, say, $20,000 to $25,000. I would be kicking myself. Yeah. And if you're the vendor, you're going to take that half a Bitcoin for $20,000. The next day, it's worth $15,000. Okay, you know, you're gonna be kicking yourself. So, I don't think because of the volatility we're going to see become really, really mainstream. I think you're talking about stable coins? Absolutely. And I think a lot of governments right now are really, really wrestling with that central bank, digital currency. They're all trying to think of how the government can create its own digital currency.

Drew Thomas  52:19  

Is that even is that even a thing? Is that even something that's necessary, though? I mean, because you can go online, and you can move money electronically, I can move dollars electronically, I don't need to literally hand you a $10 bill, I can go onto my online banking, I can issue a transfer through Venmo. I can do Apple Pay, I can do any number of different electronic transfer methods for the, for dollars from my account to your account. So, the idea of the government creating a stable coin sounds good, but in reality, is it even needed? Or is it one of those things where they're trying to sort of jump onto this idea of like, well, we have a crypto and it's tied to the dollar, but it's really just a digital dollar?

John Valkovci  52:59  

That's pretty much what it would end up being. Yeah. But it puts the government onto the, onto the crypto playing field. Yeah. And they feel if you have that CBDC, that central bank digital currency, that people will start using that. And when you think about that, it goes through probably government servers and whatnot, even if there's only an internal blockchain of whatever it might be. It gives the government a degree of control over that money that just like they control the money right now. So, is it needed? No, I don't see it as needed for the very reasons you just said. Will it come about? Maybe, but I don't think we're going to see it anytime in the next six months to a year. Yeah.

Drew Thomas  53:37  

Well, I gotta tell you this is, and honestly, there are parts of this that I feel a lot more educated on. There are parts of this that I still feel confused.

John Valkovci  53:48  

Can I help with anything? I know that my explanation...

Jeff Matevish  53:52  

It all sounded really good. You're very well spoken. Yes.

Drew Thomas  53:54  

Yeah, no, no, it's not you. It's just it's a lot to wrap your brain around. It really is a lot to wrap your brain around. And I think that, you know, we sort of alluded to we use the acronym NFT earlier in the conversation. And there's, that's a whole other conversation, but it kind of reminds you of that in a little bit of a way. Like there's so much, I think there's just so much faith that you're putting in this thing being valuable and having that faith that other people are going to continue to find value in it without any sort of a regulatory or stabilizing force to sort of incent that value to remain where it should, that it just feels, I think this is the reason why a lot of banks a lot of investment firms a lot of trust companies have are very, very resistant to getting involved in, in cryptocurrency and things like that, because there's just no way to legitimately look at a customer right now and say, I can with relative assurance feel like I can navigate these waters and help you to invest your money in a way that's going to be beneficial to you. Because it's a gamble, nobody knows what it's gonna be tomorrow, you know, I mean, in the stock, I mean, and you can say the same for the stock market, I suppose. But there's a lot more that goes into calculating a stock price than there is to calculating Bitcoin.

John Valkovci  55:09  

I agree with you 100%. In fact, I've been asked this because I've spoken at different fiduciary conferences and other, other types of industry conferences on just that subject. And my comment is, you know, I would never use invest and Bitcoin in the same sentence unless I would be telling you don't invest in Bitcoin. When you're investing in a stock, we have certain metrics we can look at, we can look at the PE ratio, we can look at all sorts of different things, to kind of see where the stock was, where it's going, why did it move that way? What's going on? We don't have really many metrics when it comes to Bitcoin other than it was up and it was down. What caused that, what may have caused that right now? What causes Bitcoin in the last week to jump the way it has? I don't know, it could have been a bunch of different market factors playing on it, right? We don't have any metrics. So, you're really not investing in Bitcoin, you're speculating. And that's all you're doing; you're hoping that it goes up. And in fact, many of these ETFs right now that deal with these Bitcoin companies, they deal with futures, okay, and as most of your investor customers out there probably know, a future is nothing more than a contract that's going to take place at some point in the future. And, you know, I hope it goes up or goes down depends on what I want to do with it, if I want to short it or not. So, you know, it's nothing more than speculation, Jeff, you don't have any way of really predicting where Bitcoins going to be. Okay, I can tell you right now, I think I can, you know, unless some great contract comes about, I can tell you where Apple stock is going to be, or some other stocks based on a lot of things but Bitcoin I, it's if we had a crystal ball, it'd be great. Yeah, yeah. I know, when, when, when COVID hit if you recall, Bitcoin tanked. I mean, it really, really went down. And it was to the point where I actually contemplated buying a Bitcoin. I own some Bitcoin, but not much. And I thought, oh, maybe now's the time, just get the credit card out and buy a Bitcoin? And I said, no, it's just going to keep going down. And now we're at what $40,000? So, it would have been a nice little investment for me.

Drew Thomas  57:11  

Yeah, yeah. Or speculation as you put it.

John Valkovci  57:15  

Yeah, that's all you're really doing.

Drew Thomas  57:17  

Yeah. John, this, this has been really great. I mean, this, this has been a fantastic conversation. And you obviously know, and have dealt with a lot of this, you know, from a legal standpoint alone, if you could find a way to identify that marker, the fact that it cannot be changed, going back all the way to 2009, you know, actually makes it very easy. From a from a legal standpoint, not easy, but it's very reliable, to be able to say, well, this can never be changed. So, if this is the marker today, it's the same marker that it was, you know, you know, 10 years ago, but if right now, there's only a 50/50 shot at getting that marker to be identified correctly, in a courtroom, I can't imagine that that's anywhere close to enough to sway someone to convict someone for money laundering or terrorist activities, or any of those other things, which is, I suppose, why you said earlier that, you know, some of these groups are using some of these blockchain technologies to move money around and things like that. But it just I don't know. It's, it's fascinating, but it's also very, very, I would definitely not recommend anybody who's not as educated as you are getting too involved in something like this.

John Valkovci  58:30  

You can get involved just by opening a little bit up. I mean, we were talking earlier about the Coinbase, where they host your wallet, they control your private key, because Coinbase is a centralized exchange, all transactions involving that exchange Coinbase have to go through their central server. That's why they can maintain very healthy KYC and other types of regulatory schemes because they can just pull up the information right away if everybody who uses their service. When you think about it, that pretty much defeats the purpose of the entire blockchain, which are supposed to be no centralized authority, right. But now we and you can still use the blockchain that way, but you need that off ramp. Are there other off ramps that you can use that don't have that central authority? Well, perhaps you can use the ATMs, but those are limited in how much you can withdraw in a day. There's other ways in other words, if I just meet up with somebody on the internet and a chat group or something saying, I have a Bitcoin, I want to sell to somebody, would you meet me in the McDonald's parking lot, and I'll transfer the Bitcoin and you give me $40,000 in cash? I wouldn't recommend that. Yeah. Let's just stop for a second and think how that's going to work out. Yeah, I don't think it's anything. I don't think we'd use the word it's going to work out well, for anybody on that one. But, but so, you know, when it comes back down to it, it is a fascinating topic. I think blockchain is there. I really do. But crypto and Bitcoin, there's some issues with it. There really are.

Drew Thomas  59:52  

Yeah, I know that, and maybe we can talk about this and then we can kind of adjust but I also just wanted to get just very quickly your take on the whole FTX, from a legal standpoint, I mean, what happened there? I mean that, they were advertising that on the, on, like during football games on TV and like sponsorships and everything else. And I mean, so was FTX, like Binance or Coinbase, or were they different?

John Valkovci  1:00:16  

It was an exchange very similar to Coinbase and Binance. And it was very well, very well-known actually around the world. And we had many celebrities and athletes who were buying into it and advertising for it and whatnot. There's a couple of different reasons that, things we can look at with FTX. One is there was a degree of mismanagement, you pretty much had a bunch of people who really didn't have the experience in managing a large company, particularly a large financial company like that. And they didn't do certain things there, the protocols weren't in place, there weren't things that you would need, from a regulatory standpoint, things that you would need, just from a simple running a business standpoint that most people who run a small mom and pop business would be doing that they didn't even do. So, we had a degree of mismanagement there. But what it, when it really came right down to it was that liquidity pool, and you can really compare it very, very, it's a very direct comparison to the run on the banks that caused the Great Depression here in the 1920s. When all of a sudden there was a rumor that, oh, the bank is going to fail, everybody would go in and pull their money out of the bank. The bank, of course, at that time didn't have enough cash reserves, they didn't have enough of a liquidity pool, and the bank failed, and the bank closed. And that's what caused the FDIC to be created. That's why your deposits are now insured up to a certain amount, so that if the bank does fail, the government will come in and rescue you. Back at the time of the Depression, we didn't have the FDIC. A very similar thing happened with FTX, there were just different things that cause people to start withdrawing money, okay, and FTX is an exchange just like a currency exchange at an airport, people will send money in and take coins out. So, they have a certain liquidity pool at FTX. Well, the more people started to run on it, and the more that word spread, people started cashing out their Bitcoin and their other cryptos, high value. And the liquidity pool for FTX wasn't sufficient to basically absorb everybody trying to take their money out. It was basically a run on the bank, it was a run on FTX, just like that caused the Great Depression, the liquidity pool wasn't large enough, and it failed. So, it was as a result of mismanagement, insufficiently funded liquidity pools. And there's some other reasons in there, too. Don't get me wrong. I can't we can't rule out at this moment, any type of criminal activity that was involved with it as well. But those are the two primary reasons if we take a look at it objectively, that, that FTX failed. Is that possible for any other exchange? It could be, it could be.

Drew Thomas  1:02:40  

Hopefully not. Yeah.

John Valkovci  1:02:42  

Hopefully not.

Drew Thomas  1:02:43  

All right. I think that I think we'll go ahead and wrap this episode up. And I definitely appreciate the time and the expertise on your part. Jeff, thank you for joining us. Well, thank you. Yeah, absolutely. You know, we'll have to, we'll have to invite you on to some of the longer form Bank Chats, you know, more often. So, yeah. And so yeah. So, we're gonna go and let John go, but thank you very much, I definitely appreciate it. I hope you'll come back and talk with us again, about some, some of these other things that we sort of touched on today that we didn't get to sort of elaborate into. I would be happy to. Yeah, absolutely. Thank you.

John Valkovci  1:03:13  

All right. Thank you very much, Jeff, and thank you Drew for, for allowing me to kind of work with you today, and I'd be happy to come back any time.

Drew Thomas  1:03:28  

This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts with the goal of helping to take some of the mystery out of financial and related topics, as learning about financial products and services can help you make more informed financial decisions. Please keep in mind that the information contained within this podcast and any resources available for download from our website or other resources relating to Bank Chats, is not intended, and should not be understood or interpreted to be financial advice. The host, guests, and production staff of Bank Chats, expressly recommend that you seek advice from a trusted financial professional before making financial decisions. The host of Bank Chats is not an attorney, accountant, or financial advisor, and the program is simply intended as one source of information. The podcast is not a substitute for financial professional who is aware of the facts and circumstances of your individual situation. Our thanks once again to John Valkovci for joining us to talk about cryptocurrency today. From a banking perspective, this topic is both fascinating and terrifying. We must emphasize how high risk getting involved in cryptocurrency can be. Crypto is still much more of a gamble than an investment. And while some may gamble and win, many others have lost. There may be a day when coins like Ethereum and Bitcoin become mainstream, but that day is still in the future. As always, I want to thank Jeff Matevish both for joining us on the podcast today, as well as for his assistance in the editing, production, and distribution of Bank Chats. We truly couldn't do this without his talents. We also can't do the show without you, our listeners. If you haven't yet, please consider helping the show by subscribing. Plus, you'll never miss a new episode AmeriServ Presents: Bank Chats is produced and distributed by AmeriServ Financial Incorporated. Music by Rattlesnake, Millo, and Andrey Kalitkin. All of our episodes can be found on ameriserv.com/bankchats, or by finding the show on your favorite podcast app. For now, I'm Drew Thomas, so long.