Joey Krug Predicting the Future of US Crypto Policy | Joey Krug - Founders Fund

Is this on? How's everyone doing? My name is Julie Mosler from Coin Fund. Coin Fund is one of the world's first native crypto investment firms, celebrating 10 years of supporting our founders this year. It's a very exciting moment for us.

Well, with a new presidential administration there are always doubts and uncertainty, but in fact, this year we might get some clarity on the regulatory questions and concerns for digital assets. So, in this next section, Predicting the future of crypto policy in the US. future of crypto policy in the US. I am excited to introduce on stage Joey Krug, Founders Fund partner, in conversation with Brady Dale of Axios. Hello, ETH Denver.

It's great to see you all here. And, hey, Joey, it's great to see you. Yes, you too. Well, we're here to talk about prediction markets. For those who do n't know, this guy was the true pioneer of prediction markets.

He was creating this marketplace called Augur even before Ethereum was launched . He was there before anyone else believed in it. Hey Joey, could you give us a little insight into your history in the prediction markets space? Uh, sure. Uh, I've always been very interested in the idea of betting markets.

Basically, since I was very young, I used to make very simple Excel models to bet on horse races. And, you know, the historical problem with betting has been that if you start winning, the bookmakers basically kick you out and close your account. And, in addition, liquidity is quite fragmented; It is not a truly global market. And those were the reasons why I thought it would be interesting to apply crypto to that idea. I started working on it in late 2014, early 2015, which turned out to be almost a decade too soon.

But now you're an investor in it and the market is doing quite well. Who have you bet on today in the prediction markets space? Yes. Well, at Founders Fund we led Poly Market's Series A round in late 2023. And I think they are by far the dominant player in the market and are doing really well even after the election.

I think that was a question many people were asking: question many people were asking: Will prediction markets continue to have significant volumes after the election? Uh, and they're still moving around $30 million a day in bets. Which is really cool to see. Yes, I have to be honest. I always try to be an optimistic tech reporter , but I was pretty skeptical of prediction markets for a while, and then 2024 blew me away, as it did every reporter covering this sector.

I mean , it really was an exceptional year for the whole concept, exceptional year for the whole concept, right? What do you think we learned from last year, from the last election? I think one of the things I found interesting to observe is that all historical prediction markets basically only saw significant volume during political elections. And 2024 was the first time we saw the market not only perform exceptionally well with the political elections, but also go beyond that political elections, but also go beyond that . Politics represents only half of the volume on PolyMarket.

The other half is a very wide range of things. Basically, anything you could see on the front page of the New York Times practically has a market. And I think that's probably one of the most remarkable or important things. Even if you look back at the old Web 2 prediction markets, like InTrade back in the day. If I remember correctly, I think that on election night, PolyMarket had more volume than the entire InTrade election market in 2012.

And that was what people previously considered the so-called golden age of prediction markets. And then you have random markets about things that have nothing to do with elections, like, for example, will TikTok be banned or not? And those markets generate, you know, 20 or 30 million dollars in volume. So I think what we learned is that there really is a certain activation threshold, like in a chemical reaction, where if you get enough people betting on elections and you do the marketing right, you can get them to bet in these markets on the future and other real-world events as well. I was very surprised today, before speaking, I went into Dune Analytics to see what the prediction market numbers were today and you mentioned that the volumes are still quite good on PolyMarket.

What surprised me to see is that the number of operators is actually larger than ever. They may not be investing as much, but there are many more people placing bets, or at least more wallets betting today than last year. So that was surprising. As a reporter, we obsessively talked about election markets within Axios, and I'm sure it's the same in many other newsrooms, analyzing what we saw in those markets. What do you think about how the press talks about prediction markets?

I feel that we approach them with some assumptions. What assumptions do you think we misunderstood? What is your critique of our narrative surrounding prediction markets in the last election? I think one thing that some of the press misunderstood is that they looked at the market and said things like the market was simply manipulated. You know, it was all just fake data.

Or they would say things like, " fake data. Or they would say things like, " Well, Nate Silver's model has a completely different probability than what the market says." Obviously, Nate Silver is right and this market is wrong. They're just a bunch of idiots. Which is interesting, because it 's very rare to see a headline in the mainstream media saying that stock traders are a bunch of idiots.

You know, saying that Apple is totally overpriced. You might see that on Seeking Alpha or financial sites, but you don't see it in the mainstream media. And I think that was interesting. And well, we talked about this a little behind the scenes. I received a call from the New York Times about Polymarket near last year's election, and if you're a fan of prediction markets, you might say that was a very unfair story.

I thought it was fair enough. And one of the things they asked was, "Aren't all these markets rigged?" And I told them, "Well, there aren't that many rich people who are happy losing money indefinitely." The reason they are rich is because they like making money. And another thing I think the press didn't understand is that there isn't a single cabal of rich people.

Just like there are rich people who are die-hard Republicans and rich people who are die-hard Democrats. And there are also rich people who only care about making money and have no political leanings. And if you have a market with an incorrect price, someone will correct the price. And I think there are two other interesting things about that : one is that Polymarket was big enough to incentivize some people to create their own survey data, where instead of asking "Who are you going to vote for?" —they asked: " Who do you think your neighbor will vote for?"

And then that person bet about 40 million on Polymarket. That was the French whale, wasn't it? Yes, everyone was sure it was some kind of scam and in the end it turned out to be just a guy with a thesis turned out to be just a guy with a thesis , right? Yes. Yes, that was, that was surprising.

So let's move on, let's move on a little now to look towards the future. Well, I guess we should look a little further back in time. Another thing we talked about was this whole notion of " was this whole notion of " Operation Choke Point 2.0". And for those who don't know, there's a theory that there was some kind of coordinated campaign from the Biden administration to perhaps undermine the cryptocurrency industry.

And there is a lot of skepticism about it. But the big piece of information that came out recently, and that made people take it a bit more seriously, is that the FDIC released a bunch of documents that made it pretty clear that they did seem to have a particular view on banks getting involved in the digital asset industry, something that wasn't obvious when we were talking. You said that, as an investor, you've also had some perspective on this with respect to the Securities and Exchange Commission. Can you tell us a little more about that? Yes, I think my opinion is basically that the Operation Choke Point issue in the press and also in the narrative.

It was interpreted as something exclusive to banking, as if banks were cracking down on cryptocurrencies. And that was historically true. And then there's all the public information from the SEC and the CFTC that you can see in the press. And people more or less know about that. I think what people really don't know is that the government, in many cases, went to the founders of DeFi protocols, not centralized entities, and basically told them they had to come to an agreement with them.

And in many cases, they were told that they also had to sign a document agreeing never to work in crypto again. And, by the way, this agreement cannot be discussed publicly because it includes a non-disparagement clause. And the only way you could have an opinion on this is if Congress calls you to testify. So one of my hot political issues is that I think there are many founders who would be happy to tell how the government harmed them if Congress asked them to testify. And that's why I think Congress should do it.

It's not just about banking. It also includes the CFTC and the SEC. Um, so these are agreements. These startup founders made deals with these agencies; Instead of what, what was the sword of Damocles hanging over their heads? Yes.

Well, the sword of Damocles is that these agencies basically went to the founders and said, "Hey, if you don't accept this, you'll end up in jail." Which is interesting because these agencies are inherently civilian, so they would have to refer it to the Department of Justice. None of these matters have been referred to the Department of Justice so far. And there is also the important fact that none of these founders actually broke the law. It was just a crazy administrative state that got completely out of control.

And I realize this sounds very conspiratorial, and at first I didn't really believe it either. But finally, one of these founders told me this story. I told him, "Okay, there's no way they've banned you from working in crypto again." "That seems illegal." So I got some people to show me their agreements.

And indeed, there are clauses that say you can never work in crypto again. You can't talk about this with anyone. And I guess my opinion on all that is... I think, looking ahead, obviously the new administration is taking a very different approach. But I also think that anyone who was involved in that, in my opinion, should be fired.

I believe it is completely illegal and probably, in many cases, unconstitutional. So , yes. And on another point in this regard, I know from my own reporting, something that might also sound conspiratorial, but this is simply standard practice at the SEC; For any company that reaches an agreement with the SEC, this silence clause is a standard part of that deal. It is an official SEC policy. It is documented.

You know, we've written about it. People have sued the agency to remove this non-disclosure clause, but the fact is that every agreement has this kind of very strict restriction. Uh, so yes. And so, you saw at least some of them with your own eyes, right? Yes.

Yes. I've seen the PDF files and, uh, yes, the silence clause is also very strange because it's written within an agreement. I suppose you can accept certain things that the government normally couldn't impose. But also, on a superficial level, he feels very opposed to the First Amendment. It's like the government is saying you can't criticize the government's actions.

That is indeed what it is. Even though you have n't actually broken any laws, the only reason you're signing this agreement and paying around $300,000 is because you're threatened with jail time if you don't. Uh, it just seems wrong. And can you tell us who some of these companies are? No, I wouldn't want to share it, since the founders of these companies told me in confidence; They are not part of my portfolio or anything like that.

They're just founders I know in the industry. But I think, I don't know, it's definitely something that the journalistic side of the industry should investigate. Maybe some of them would share it, you know, under seal or with their names changed or... uh... Yeah, well, I have to ask, you know, but I understand.

So, good know, but I understand. So, good . So, Joey, that's a super interesting story. Looking ahead, I know you are someone who cares about what will happen with policies. You know, what are your thoughts on the two big things we keep hearing that Congress wants to address, which is this idea of market structure?

So, market structure? So, what does the CFTC regulate? What does the SEC regulate? Should we create a new crypto agency? Who knows?

That probably won't happen. But, hey, and stablecoins too. That's the agenda. stablecoins too. That's the agenda.

What is your opinion on that agenda? Do you agree with that, or is there something else you'd like to see? I think that overall the agenda is basically correct. What I would add is that, in my opinion, within the market structure bill it is very important to exempt DeFi from this type of regulatory apparatus. And the reason is obvious: anyone here who is a developer knows that the existing rules and regulations for operating an exchange or brokerage do not apply, because in DeFi, you are not actually operating it, a smart contract does.

And secondly, in many cases, it is not even physically possible to add these things without completely destroying everything that makes it useful and interesting. And the third point, which is quite interesting, is that many of the provisions in the Securities Exchange Act and the Commodity Act on how exchanges are regulated require adding things that create massive security vulnerabilities in a crypto environment. Such as the requirement to be able to reverse operations. In other words to be able to reverse operations. In other words , someone could simply hack the account that has the ability to reverse operations and do something really crazy, make money and reverse a bunch of transactions.

Or if you perhaps made a massive leveraged bet and lost, you would simply reverse the trade because you hacked the person. You can see how this is falling apart. So, I believe that under the Biden administration, there was this bill, Fit 21, which was passed in the House. It didn't actually come to a vote in the Senate, partly because of Senate Democrats and partly because Biden would have vetoed it partly because Biden would have vetoed it , but it had some very good provisions that exempted DeFi. There are people in the space field who will have objections, but it's certainly better than nothing.

So I think that, basically, anything we approve should have fairly broad exemptions for DeFi. And regarding DeFi, what's complicated for many people is that it's difficult to implement anti-money laundering regulations there. They want to be able to connect those transactions to people and make sure that, you know, they 're not terrorists or criminals. So 're not terrorists or criminals. So , do you think the entry and exit points are adequate to handle that, or what's your opinion on the KYC and AML issue?

Yes, I think...it's a good question. I believe there is a theoretical answer and a practical answer. Um...I think obviously this won't work if you tell Congress, but from a theoretical point of view, the whole anti- money laundering thing doesn't really work anyway.

It's very rare that it actually stops or catches the money. If you want proof of this, there's a very good article in The Economist that came out a year ago showing that Singapore became a massive oil trading hub, when it was n't before, and there were traders making hundreds of millions of dollars a year trading oil. And you ask yourself, well, why is that? It's because they're basically laundering Russian oil and then labeling it as Western oil. So, basically, none of the anti-money laundering measures really work in my opinion.

But if you talk to people who do believe it works, I think exchanges as a centralized point are a good lever because, with the exception of really secure privacy-based systems that most people don't use today. Aside from that, it's pretty easy to trace that, you know, Joey sent money to Coinbase and then withdrew it to his Ethereum wallet. And then, you know, you want to make sure I 'm not sending that to ISIS or whatever. You could track that pretty well with string analysis. I think it's a good enough middle ground , although not perfect.

Alright . Well, great. Well, thanks for giving me some homework today, Joey. Thank you for shedding some light on these topics, and thank you all for being here. Please continue with your next meeting.