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The Essential Podcast, Episode 44: Governance First – Rethinking ESG for Digital Assets & Decentralized Decision-Making

S&P Global

Daily Update: November 17, 2021

Podcast

The Essential Podcast, Episode 50: You Can't Spell SDG Without AI — A New Approach to Evaluating ESG Performance

S&P Global

Daily Update: November 10, 2021

S&P Global

Daily Update: November 9, 2021

Listen: The Essential Podcast, Episode 44: Governance First – Rethinking ESG for Digital Assets & Decentralized Decision-Making

About this Episode

Rayne Steinberg, CEO and co-founder of digital asset management company Arca, joins the Essential Podcast to talk about the unique governance challenges of a new asset class that is still changing and evolving.

The Essential Podcast from S&P Global is dedicated to sharing essential intelligence with those working in and affected by financial markets. Host Nathan Hunt focuses on those issues of immediate importance to global financial markets – macroeconomic trends, the credit cycle, climate risk, energy transition, and global trade – in interviews with subject matter experts from around the world.

Listen and subscribe to this podcast on Apple PodcastsSpotifyGoogle Podcasts, and Deezer.

Show Notes
  • The Arca report Digital Assets:ESG – Why Not GSE? explores the environmental, social, and governance qualities of digital assets and helps ESG investors make informed financial decisions.

Nathan Hunt: This is The Essential Podcast from S&P Global. My name is Nathan Hunt. When I talk to people about ESG investing, they all tell me that the E part is critical, the S part is challenging, and the G part is obvious. I'm not so sure about this last point. Governance is a tricky topic in our fast evolving world, with new geopolitical challenges and new asset classes, having an independent accounting committee on your corporate board doesn't feel like enough. So over the next few months, I'm going to talk to a range of different experts on the topic of governance, starting with my guest today, Rayne Steinberg, CEO and co-founder of Arca. Rayne, and his team at Arca, recently authored an article that caught my eye entitled "Digital Assets: ESG – Why Not GSE?"

Rayne, just to level set, to start off, tell me a bit about Arca. What do you do? What is your focus?

Rayne Steinberg: Arca is an asset management firm focused on investing and innovating in the digital asset space. Our mission is to offer high quality asset management products that meet the operational compliance, legal and regulatory standards needed for sophisticated investors to gain exposure to digital assets. Arca's product sets includes actively managed hedge funds, passive vehicles and blockchain transferred funds developed by our innovation arm lab.

Nathan Hunt: So let's talk about digital assets. When you say digital assets, what do you mean by that?

Rayne Steinberg: When we say digital assets, we mean really anything in the blockchain, or as some people say crypto space. We use the taxonomy of digital assets as a more encompassing term than crypto. Cryptocurrency is a form of digital asset. So we're very specific about it. Our clients' institutions are often way more interested in blockchain applications than things just like Bitcoin, which is a cryptocurrency. We use digital assets as a more encompassing term.

Nathan Hunt: What beyond cryptocurrencies does "digital assets" cover?

Rayne Steinberg: When you think about different types of digital assets, you have cryptocurrencies, which are a replacement for money. Then you have things like protocol tokens, which are Ethereum and other protocols, these are things that are executing programmatically on the blockchain. So Ethereum is kind of the virtual machine, the smart contract language of most other projects. So that's a protocol token. We also look at pass-through tokens. So these are tokens issued by companies or entities where some sort of benefit is passed through to the holder of the token, maybe equity, like cashflow properties. And then, you know, there's all sorts of new utility and new designs from tokens. And this is what is really interesting, I think about digital assets, and we have trouble, I think, as people not separating where we are at a point in time to where it is. This is very early, you know, we're 10 years into the development or 11 years into the development of this entire asset class, which could potentially change money, the way we transact the way organize, so you would expect it to be rapidly changing and evolving, more like an organic organism. So this is just where we are right now, but it's still very early today.

Nathan Hunt: Today, I specifically want to talk to you about the article "Digital Assets: ESG — Why Not GSE?" which is an article that you wrote on the ESG implications of digital assets. Why do you believe that it is important to evaluate the impact of digital assets with the emphasis on governance first?

Rayne Steinberg: First, we really wanted this paper to start conversations, and we try to give both sides of a lot of these very complicated conversations. And we think, like a lot of discussions that we have, they boil down to kind of a too simplistic view, ESG, one of them. So at the very highest level, this paper was really designed to engage people and to have them think about what they're trying to do. And ESG investing is impact investing, investors want their investments to make a difference or accomplish some sort of good. So that was our highest level. First, we just wanted to engage people in thinking. And then when we flipped that statement on its head, GSE not ESG, what we were trying to say is where ESG has become just a buzzword, and for a lot of people or investors, more styles a box that's checked. That order of operations of the "E" first, may not be the most appropriate for digital assets. And so when you think about digital assets or blockchain technology in general, what it really is, first of all, is a new method for organizing and polling people broadly. So decentralized governance, decentralized decision-making, mitigating the problems of concentrated power, that's kind of the value proposition of digital assets as an overall thing. So we think that it's important that you add value to governance, which is often overlooked in ESG investing, a lot of time is spent on the E part in general. And then S is very important too. When you're talking about wealth inequality or lack of access to financial services, these are the type of potential things that blockchain is trying to solve for, while the energy component is a by-product or a secondary part of it, there is no part of blockchain, which is talking about energy consumption, and it just happens to use energy, but all activity is energy. So there seems to have been a hyper-focus on the E part of the conversation in this with very little thought on the G and the S part of the conversation. And we just wanted to stimulate people to think about it broadly across the spectrum of E, S, and G.

Nathan Hunt: People I work with, or talk with, are involved in the ESG space. And one of the challenges that they have is that ESG has become such a buzz word, that essentially it is just use as a box to be checked. Products are described as ESG friendly, for example, which doesn't have a great deal of meaning. One of the ways that they see a solution is to come up with a standard set of methodologies that are applied to all assets, but you seem to be saying where digital assets are concerned, we should concentrate on the G part of ESG, perhaps deprecating, particularly the E part. Do you see a contradiction between trying to establish standards and emphasizing different things for digital assets?

Rayne Steinberg: Not really a contradiction. Let's unpack that a little. I completely agree with standards for defining ESG investing. And I think you've seen the SEC come out with things like this recently, because as we all know in the asset management business, a lot of it is about marketing, and as people become more socially conscious, they have wanted more investing opportunities that align with that. And the ESG part of it, like you say, all of a sudden everything seems to be ESG friendly or you have a plethora of ESG opportunities. So some way to quantify that and really understand what that means in shorthand for investors would be completely appropriate. And I think digital assets could be brought into that as well.

But then on the G, S and E side, I'm not saying that you should ignore E or look at it completely differently. All I was saying that in all the discussions really around ESG, in the digital asset space, there has been a huge weight of gravity sucking all the oxygen of the conversation around the energy piece, with very little conversation around the G and the S. So our paper was to more drive a balanced look at this, and I wouldn't put digital assets out of having to fall under these qualifications. I think that would be a way to put it, but that's not really what's going on right now. There's just a lot of very noisy talk around E part. And when you look at how weirdly distorting things like this are, somebody who has a large queue score, like an Elon Musk can drive a very positive reaction in digital assets, just because of his notoriety and following, and then all of a sudden change that with his opinion, a couple of months later, it completely about facing saying that he's unaware of the energy impact. And then all of a sudden the world is quite certain that it is bad in the E sense. And this seems to be a very bad way to do about it. Celebrity driven, non metric driven kind of way to do at it when we're saying, regardless of those metrics and how you measure it, if you're an investor and you're looking at digital assets, you should consider all parts of these. The governance part is actually the primary directive of kind of blockchain-making governance decisions and a more equal financial system is a goal. There are obviously energy components as well, but there's two sides to that as well. So we're encouraging people just to engage thoughtfully with their ESG investments specifically in digital assets and not really be caught up so much in this kind of hyperbolic echo chamber that we've all lived in. If you really want your impact dollars, you're investing dollars to make social impact, you're probably going to have to do a little work and think about some questions that don't really have easy answers.

Nathan Hunt: So there are digital assets that have poor governance. Historically, we've seen that in a couple of cases. How do you think governance should be evaluated for digital assets? What makes for good governance and what makes for bad governance when it comes to digital assets?

Rayne Steinberg: This is very much still not well understood. So this is all very theoretical and something like the governance, like the governance promise of digital assets of decentralized decision-making, of people having a more democratic say, it's still kind of theoretical and we live in a very centralized world. So this is a very new technology that is not very well understood. And also its nature, decentralization, also kind of makes it very difficult to direct. This isn't very command-and-control-like, and the outcomes aren't quite like that. So I really kind of see an evolutionary process where I'm not sure exactly the direction of it is going to take, but incremental improvement. And what I mean by that is, these are all new projects and people have theories on what would make good governance and then they launched them into practice. And then we kind of see what happens. So what we've basically been seeing is that as projects start more centralized, with either a very centralized treasury or a small group of people making these decisions, even if they could be made by a larger group of people, that's what happens at first. And then successfully transferring to way more inclusive, diverse decision-making set, but that's difficult because we also see that when you have many, many parties with many, many preferences and things like that, it's hard to make good decisions. To use two examples that we're both familiar with, or we as a team at Arca from the investment side.

We have Uniswap, which is a decentralized exchange, and SushiSwap, which is another digitalized exchanges that are going through very similar, but slightly different, governance paths. Uniswap is transitioning from more centralized to diverse, and then Sushi really started a very diverse. And we recently participated in a governance exercise, where the community basically said no to a deal that they thought was bad and it's still being worked out. But this was a place where, for one of the first times, that instead of a decision being made in a board room by a very small group of people behind closed doors for a company or protocols direction, it was done in the light of day judged on the merits of its arguments and voted on by the SushiSwap community. That is fascinating and people that are interested in corporate governance and then broadly more governance just in general. These are, these are very interesting things that we really don't have any corollaries to look at, so this is all happening new, but we're seeing new things develop. So I would say just broadly, trends towards decentralization and more inclusiveness in decision making processes is what I would expect, but it's still TBD.

Nathan Hunt: People talk in the digital asset space about permissioned and permissionless systems. Would you say that, in general, it is your conjecture that a permissionless is a better governance model than permissioned?

Rayne Steinberg: It's hard to say better or worse. And what I mean by that is, the permissionless versus permissioned, again, we are still in a very centralized world, where we've given our decision-making and protection power to a lot of centralized authorities. And to give an example of that, things like Bitcoin, where there is no control, you know, centralized control over that. While advocates of freedom and lack of centralized control are very pro that, you can have a catastrophic outcome if you had all your wealth in Bitcoin and lose something to your keys. So we're in a very centralized world where we rely on centralized regulatory agencies for investor protection, centralized institutions, like financial institutions, to monitor and control those types of transactions, and that is the calculus we have made. Right now, if you dropped everybody into kind of a permissionless system, I don't think it would work very well, and I don't think our outcomes would be very good. As we move towards that, and we kind of gain the philosophical and societal structures and culture that allows us to take that responsibility on as individuals, and we see that maybe there is more benefit by having that power, you know, degrade down to individuals versus some of the problems that we see with centralized power and, you know, centralization of wealth and some of the things that our company that we're making a trade-off, but it can't just happen in a vacuum.

And this is why at Arca, we are not dogmatic about these things. We're practical in the utility of things. I do believe in decentralization and permissionless, like going forward generally, but we work in a heavily regulated sector of the world, and it's not helpful to tell regulatory agencies that they shouldn't exist or financial institutions with a lot of power money that they should just give away that. This is not ways to bring people into this, that you have to present them with things of greater utility that they can use now, sometimes in a very incremental way to bring them in, and drive adoption. And that's why our focus on institutions, where there's not so much activity where we go about that, but it's a very slow process and you have to be, you have to be okay with that kind of a slow iterative process.

Nathan Hunt: So the classic model of good governance would be an independent board of directors that operates oversight over a variety of different corporate functions within an organization. This is what we think of when we think of governance. What you seem to be suggesting is that there is a model for how to think about governance, where digital assets are concerned because they are decentralized that is very different. Tell me about where you see the distinctinction.

Rayne Steinberg: So when we think about a corporation and kind of the organizing structure of that before, so you really only had two groups of kind of owners or stakeholders in that manner that could actually control or exert influence. You had equity holders and debt holders, and then the corporation represent equity holders. What you have in digital assets is interesting that you have a different way to align stakeholders. And what I mean by that is in tokens, often the users of the ecosystem on something like a SushiSwap or a Binance token, these are both users of the system. They are like equity holders. They are like debt holders. They are getting some utility in the system. So there's a more alignment of stakeholders, which is interesting, and you're not just beholden to the equity interest of the corporation and the structural abilities to make these flexible structures that we're still finding out. These are kind of like behavioral finance experiments in the open, we still don't really know exactly what works or how it's going to go, but we're seeing more inclusiveness that the people that make networks important, like if you think about something like a DoorDash, when DoorDash went public, who got rich? The venture capitalists and a few people at DoorDash who makes DoorDash possible. People that cook food and people that deliver food, but they did not participate in that same sort of value creation. You now have the ability to have many more people and the people that are actually involved in a network's success or growth be aligned. So it's more appropriate that the decision-making be broader and more decentralized.

And also when we think about independent boards and the way they govern corporations. That's the idea in theory, but we've also found that the boards become quite cozy with management. Often there's overlap, overlap of boards between other companies, generally an elite structure anyway. So the ideal of independent boards is also fuzzy and also just an ideal and not always exactly executed in practice.

Nathan Hunt: When you talk about governance and digital assets, you talk about the possibility, the potential. In practice though, isn't there a lot of concentration, both in terms of hashing and ownership with digital assets. The big hashing consortium have amalgamated over time and control a huge amount of mining operations just on the classic Bitcoin or Ethereum model. Isn't centralization also happening there? And with that centralization, isn't there the possibility for conflicts of interest?

Rayne Steinberg: Absolutely. And that's why I say this is evolving and also coming out of very centralized structures as well. When we look at some of the biggest successes in digital assets right now, let's look at something like Coinbase and takes decentralized assets like Bitcoin, centralizes them, puts them under the control of that company, where you are, you as the client to Coinbase are giving your trust over just like a normal, traditional financial institution to a Coinbase for the convenience and security. So we're still in a very centralized world and there's a lot of centralized, I wouldn't say problems, but just as many centralization issues in digital assets as there are in the traditional world, but there's also things that we're seeing in decentralized finance, and the growth of these other areas that is very different than anything we've ever seen in the centralized financial system or centralized organizations. And I think what you have to do here is you really have to look at the incredibly short period of time that we're talking about for digital assets in this experiment, we're talking 10, maybe 20 years, if you talk about some of the technology going into it, but incredibly short periods of time. But when you're talking about what you're displacing, organized financial system, hundreds of years old, centralized decision-making in human societies, thousands of years old. So you're talking about a very, very entrenched way of doing things and an incredibly short period of time now. I would be very surprised if you massive, giant decentralized networks that were working incredibly well, that had figured all of these things out in such a short period of time when there was just no experience, roadmap, examples to do this. These other systems didn't develop that quickly when there's been huge evolutionary paths, and I would say that you might even expect those to move quicker in centralized decision-making. So I am not surprised that there are centralization issues and digital assets make sense, but there are very interesting green sheets of truly decentralized decision-making processes that are, that are almost novel to human experience that are going on right now.

Nathan Hunt: Gary Gensler, who is the current chairman of the SEC, is an individual who actually has a fair amount of sophistication where digital assets are concerned. It is extremely rare to have a regulator have this much knowledge of digital assets. He seems to be of the belief that though these assets are extremely promising, that organizations like the SEC will continue to be extremely necessary as these assets mature and move forward. Do you see there being a conflict between Gensler's position and your own?

Rayne Steinberg: No, not at all. Arca is very embracing of regulation, the investor protection mandate of the SEC, we think is a very important one. There has been a tremendous amount of investment or securities like behavior in digital assets. It stands to reason that aspects of them will be regulated by it. So, you know, in Arca's philosophical footing, we embrace appropriate regulation. We actually have the first 40 Act Fund. So the first fund that's available to the public or to under the Investment Company Act of 1940, where the shares of our fund trade on blockchain and our calculus is that, you know, there's a huge amount of the traditional world or incumbent financial system that has to comply with regulation. And that really needs that sort of regulatory clarity to move into this space. So while it may be disruptive or problematic, initially, we think that appropriate regulation, and I can tell you this, that I have been . Overwhelmed by how progressive and forward-looking the SEC was when we were dealing with our application. And really we're looking for good outcomes and how you get something like this through. And I've done this before. I co-founded an ETF company called Wisdom Tree in the early 2000s, where it was actually more difficult, I would say, and kind of less engaging just trying to get some equity ETFs through the SEC. So I've seen tremendous growth in the regulators in wanting to really think about how this legislation works, not stifle it, but still provide investor protection, provide issues around security. And this is, this is what you have to do in this space. Blockchain is a technology that kind of breaks down walls that used to be segregated by jurisdictions, exchanges, technological barriers. Blockchain allows a lot of these things to happen outside of the structure. So this is, you know, this is kind of a gray period where we're going from a world where, you know, if it was a security and it was treated by the public, it was most likely a stock or something like that and it would be on an exchange. Now you have securities like instruments that can be offered to anyone in the world, anywhere by anybody, immediately that people are saying should have no regulation? And then you're talking about a general public who is not used to that type of power, having to be that savvy when addressing these things like that, because they're not exposed to unregulated securities offering, or they're not experts in financial security law or some of the pluses and minuses of a certain thing. So I think appropriate regulation is incredibly important. I think what the SEC has been doing to date has really been trying to do that.

We're very pro thoughtful regulation and that's what we've seen. It's probably a little more slow moving than people are comfortable with, but things like this just take time.

Nathan Hunt: Rayne, I've often thought about digital assets from the standpoint that they establish a cost of trust. There's this general thought that blockchain allows you to conduct business in a trustless environment, and that the value of assets to me, I imagine, would be closely tied to the cost of trust. When you talk about good governance of digital assets, it occurs to me that in some ways you're talking about something that maximizes trust in that asset. Do you think that's a meaningful way of thinking about this?

Rayne Steinberg: I think it absolutely is. I think that's a very good way of thinking about it because when you think about, especially in financial services. When we think about that as one of the things that blockchain as a similar value proposition or similar potential, especially from where I look at it as an asset manager, the real value proposition of financial service companies and financial services at the end of the day is a trust proposition. You are surrendering your value or assets or investing decision to some entity and you have to have supreme trust that they're going to return it, that they're going to be competent, that they're going to safeguard it, they're going to follow the law, all of these things you're trusting them to do. And that's really what the value is. And you're willing to tolerate transaction costs and a whole bunch of other things, the enrichment of people, potential bad societal outcomes, who knows. All of this stuff is wrapped up in that trust equation. So the digital assets piece to replace that is you now are having to conduct a similar activity with this other entity. And this is what's different or strange. Is that the idea of a trusting, a decentralized protocol. What goes into that? How do you evaluate the quality of that protocol? How do you evaluate the governance, making decisions of this decentralized evolving thing? And this is where that you see as you get higher up, or into more sophisticated places of due diligence or higher thresholds of risk management that they haven't crossed that. Their first mandate, if they're a fiduciary with somebody else's money is to not lose it. And a lot of these things just aren't at the place where they can make that. And they would prefer to go with entities and systems that they understand. So that trust premium or the cost of trust or the valuing of trust and all the things that go into trust, I think, is a very smart way of thinking about it. It's hard to measure, right? It's hard to understand exactly the pieces that go into that and how you do it. But I think that that is what we're talking about. It is overcoming that trust and valuing it. And what does mean?

Nathan Hunt: So, Rayne, the core thesis of the article by Arca is that governance should be thought of, if not first, certainly governance is a key part of understanding the ESG profile of digital assets. But you do talk about E and S, and I just want to ask a couple questions in that area. As you point out in your article, digital assets tend to be held pretty disproportionately by white men. From the perspective of the S in ESG, isn't that pretty regressive?

Rayne Steinberg: Yes. It's still a reflection of our current society, where this technology originated in, and still how young it is. What we were trying to do in the article, like I said, was not come down on one side or the other, whether digital assets as a whole are good ESG, whatever that means, like you said, without a quantifiable matrix or metric for measuring these things, whatever does that even mean? But it is just to engage people on thinking about these investments, and when you look at them, what are the characteristics of them? And if you actually have impact goals and you're investing, if it's diversity of exposure, promoting things like sex and gender, equal representation in ownership, take these things into consideration. That part, if you look at that as regressive is, yes, regressive. Then on the flip side, we talk about the more available and equal access to financial services, the potential dispersion of wealth that we seem to have a really big problem with right now, these are all things that could potentially be solved by this. But again, I'll go to the pro sides. When I think about this, I think are still on the TBD and more in theory, because of the newness of the technology. It's more of the, what we think this technology at its largest expression is capable of on the pro side. But I think it's, it's still very early to know with certainty how these things would play out.

Nathan Hunt: The last thing we have to tackle. This is obviously a subject of great interests where digital assets are concerned is the environmental footprint. As you point out in your article, digital assets, and specifically Bitcoin, use a lot of energy for mining or hashing operations. When you say in the article that the energy used for mining is surplus energy, what do you mean by that?

Rayne Steinberg: Sure. And first I just want to contextualize, a lot of energy. We're not exactly sure, but we can get to a fairly good number about what the absolute energy used on something like the Bitcoin network is. And let's, just for the sake of this argument, talk about that as the corollary or, you know, for all digital assets. But it's a lot of energy in absolute, but when you talk about it, what is it, the value proposition, and that also has to do with how one sees digital assets. So if you see Bitcoin or digital assets broadly as something that could replace huge portions of the financial system and other parts that are still, you know, very resource and energy consuming, then maybe relatively, it's not so much. If you view digital assets is a complete dead end and a tool of money laundering and bad activity then almost any energy that is used in it is too much.

So first that energy, a lot or little, is probably relative to how you view digital assets and where it is in its development. When we talk about the surplus energy of Bitcoin, what I mean is that Bitcoin is a little bit unique in terms of its energy consumption than other things. With other activities, you really have to co-locate your energy use to power because you're powering something physical in nature, and, you know, the further you move energy away from it, you lose the entropy and things like that. So things like hydro, solar, they're still relatively low growth. Well, you can locate a Bitcoin mining operation anywhere, so you can co-locate a Bitcoin mining operation to something like a huge hydro project where they're running a massive amount of surplus during the wet season and energy that can't be used there. You can co-locate Bitcoin mining in places like Iceland, where the local thermo dynamic electricity production is more than the local use possible. And the Bitcoin aspect puts the energy, which may not even have been used in the terms of flaring of natural gas or when a energy grid has to be kept at capacity just to keep it there. That energy may be just wasted in those times or not used at all for any sort of productive activity. To giving monetary use that's transferable, and now portable into other areas kind of makes that energy also portable in usable if there is value in Bitcoin and if somebody else will give you some other economic activity for it. So that's what I mean by surplus energy. So the fact that it can be located and used in places where other activities would not necessarily use it, that's what I meant by surplus.

Nathan Hunt: Right, but in general, large-scale hashing operations tend to be located in regions where there is inexpensive energy available for use. Nonetheless, not all of those locations are dependent upon renewable sources where the energy would otherwise be wasted. I mean, A certain amount of coal gets burned every year in order to mine Bitcoins. So there does seem to be, objectively, some environmental impact from these operations.

Rayne Steinberg: Oh, absolutely. And I would say there's no human activity that doesn't have some sort of environmental impact. And the only point I was making was that in the terms of Bitcoin as a user of energy, it's actually interesting that you can put it in places where your goals are more about the use of energy than having to be around a physical location. So like places that need energy, that there isn't hydro or clean energy and only coal, those operations have to be dirty and coal-dependent. The use of clean or carbon neutral energy on the Bitcoin network, there's estimations that range it at 40%, some as high as nearly 80%. There's no doubt that any use of energy is clearly made up by a mix of the sources of energy. So again, then it gets down to really, the idea of is the economic or the activity, a more positive thing. And this is where we're trying to encourage people to at least think about the G and the S aspects of blockchain and digital assets, and not just the E because if you don't think that there are any positive benefits in these other areas, then the E kind of becomes almost irrelevant. If there's nothing positive to come out of digital assets in any way, no societal good, nothing moving in that direction, almost any E expenditures over zero is nothing. If the benefit is incredibly positive, a more fair and transparent financial system that leads to greater outcomes of wealth alignment, and, you know, societal benefit all over the place and all these fantastic things, you would actually probably devote quite a lot of energy to something like that. So that's what I'm saying, why we say the G and the S, because these are mainly governance and societal transformations. It would just be like looking at some random, absolute energy expenditure without thinking about the impact. That's kind of the idea there.

Nathan Hunt: Rayne, it feels like a lot of the potential issues around digital assets from an E, an S, or a G perspective come down to the nature of mining operations nowadays because the technology involved in mining has evolved and the expenditure is so large to get involved in mining operations. Do you think the thing holding back digital assets is that they've allowed themselves to have a system that depends on this very specific model of mining that lends itself to centralization, lends itself to the use of large amounts of energy in one specific location.

Rayne Steinberg: I would say yes and no. What you're seeing here is kind of one of the issues of digital assets in general of the success in size, really of Bitcoin. When I have to talk about why we say digital assets and there's these other things that are digital assets that aren't just Bitcoin, this is kind of what you're combating. Bitcoin was the first digital assets and a master stroke and a brilliant theoretical proposition that worked on this one system, and as it was the only one for a very long time and the one that drove the narrative and adoption, that is the most well-known, that is the biggest network, that is where the most energy goes. Energy, no pun intended. But it's just the beginning. It would be very, it would be strange to me in my mind if I was thinking that the first thing developed in this space ended up being the only, or most important or final evolution of what we say is something is maybe as potentially transforming as things like the internet. That just doesn't make logical sense. Now, we're very early on and its dominance and the amount of resources and things it takes up make sense to me that it has evolved like that, but you're seeing other things start to chip away at its dominance. And we still have to consider how very new all of this stuff is. So we look at something called Bitcoin dominance and we use market cap as a measure of this, in this space at one point was 100% because it was the only one. I don't know where it is right now, but it's probably in the 50s or 60%. And there are many things that are gaining more market share, more ideas, more users faster than Bitcoin. So I don't see this state of proof of work or even proof of stake or any of the things that we're doing right now as the necessary end points of this and more as probably pretty early in an evolutionary way if this continues to develop.

Nathan Hunt: One final question, Rayne. Several times in the article, you point out that digital assets are still developing as an asset class and that they are difficult to evaluate or perhaps imperfect from certain ESG perspectives. You call these issues transitory. I'm wondering, do you have in mind a future state in which some of these issues are addressed? Do you see of fuller realization of digital assets and what would that look like to you?

Rayne Steinberg: Yes, I do. I don't think I have a good idea of exactly what it would look like, but I think if we think about it, when we think about really what is the purpose of financials, right? It is to energize other productive economic activity. So what I really see is the evolving of the digital asset ecosystem is giving more people to access to financial services with lower and lower fees, getting rid of some of the trust and concentration problems that we have that I think lead to adverse societal and equal type of opportunity issues and more and more decentralized decision-making that brings more people into real positions of power and decision-making by spreading it out. So I don't know exactly how that's going to manifest itself, but that's what I kind of see in this transformation is this democratization of financial services and allowing financial services to really lead to the outcomes that we want from them, the energizing of other parts of the economy with as little adverse and cost effects as possible. So that's what I kind of see broadly as the trajectory. And I'm seeing that, but it's, it's not straight, it's not clean, it's messy. And there's a lot of things that happen. Things get more centralized sometimes or bad outcomes, as long as I'm seeing that trajectory generally kind of in that, up in the right direction. I still feel good, which I, which I do right now. I feel quite energized and enthusiastic about the way everything.

Nathan Hunt: Rayne, this has been an absolutely fascinating conversation. I hope that I can convince you to come back again, as things develop in the digital asset space and give us your sense on how much progress we're making towards that vision for the future.

Rayne Steinberg: Nathan, thank you so much for having me. This has been a really fantastically interesting conversation, and I will come back anytime you'll have me. So please, I look forward to that.

Nathan Hunt: The Essential Podcast is produced by Molly Mintz with assistance from Kurt Burger and Camille McManus. At S&P Global, we accelerate progress in the world by providing intelligence that is essential for companies, governments, and individuals to make decisions with conviction. From the majestic heights of 55 Water Street in Manhattan, I am Nathan Hunt. Thank you for listening.


The Essential Podcast is edited and produced by Molly Mintz.