Reggie Middleton rose to national prominence when he accurately predicted the failure of Bear Stearns and Lehman Brothers and his BoomBustBlog became required reading of analysts, investors and the financial media.
Having built a reputation as a radical financial thinker with guest appearances on CNBC and the Keiser Report just to name a few, Middleton turned his attention to Bitcoin in 2013. Now he's launching Veritaseum, a Bitcoin solution which aims to disrupt the traditional financial services model by eliminating the need for middlemen.
Cointelegraph spoke to Reggie Middleton to discuss his background, his solution and where he thinks the Bitcoin industry is headed.
“Several clients asked me to look into Bitcoin, and when I did my jaw dropped.”
- Reggie Middleton
Cointelegraph: Your personal journey to where you are in the Bitcoin Community today was an interesting one – can you talk a little about that?
Reggie Middleton: I struck out on my own at age 23 creating mutual fund arbitrage programs, selling risk management and insurance programs to municipalities, creating dot.coms during the frenzy (basically, the first version of Google Docs 20 years before its time), and creating fundamental analysis software. I was (and still am) a full-time dad raising three children. I bought distressed real estate in downtown Brooklyn in 2000. The fundamentals were in place, liquidity via loose lending standards, optimal pricing (distressed only) and quantitative metrics were prime (the bubble was just getting on its way).
“[I] schemed on shorting each and every financial institution that ever did business with me as I blogged about it.”
After a 1,200% return 5 years later 2+2 started to equal 63 - it was time for the exit. I sold off my portfolio for literally multiples of what I paid for them just a couple of years earlier after pocketing real cash flow and schemed on shorting each and every financial institution that ever did business with me as I blogged about it. Since I couldn’t find any decent research, I decided to roll my own by hiring a few analysts and teaching them my critical, spreadsheet-driven method of looking at things.
The blog became very popular (~2007) to the point where people were actually getting belligerent in their requests for opinion causing me to put up a paywall. Three days of silence later I got a call from Wall Street to turn on 3 members of their prop desk if they wired me US$10k. BoomBustBlog.com was born.
Seven years and roughly 80 highly contrarian, accurate boom/bust predictions later… Bear Stearns, Lehman Brothers, Countrywide, WaMu, residential and commercial real estate busts, Blackberry fail, Google pop and Apple drop, European sovereign debt crisis, etc. Several clients asked me to look into Bitcoin, and when I did my jaw dropped.
Programmable money with its own transportation rails that can sidestep money center and central banks via an unhackable, open consensus ledger? Even though I missed the boat on BTC price gains, I was actually right on time for the smart contract gravy train.
CT: You made a name for yourself in finance by predicting the demise of the, then very buoyant, housing market and then the banks that had become incredibly wealthy from trading MBS etc. – did you have an inherent skepticism about financial services or was it a result of what you saw with regards to leverage and counterparty risk?
RM: I’m a very analytical person. If you went through the balance sheets of the banks during that time (or today) you’d notice plenty that didn’t make sense. It’s as simple as adding 2+2 and then realizing it didn’t really equal 64! Now, add on top of that my natural “skepticism about financial services” business model and you had what was essentially a hound on the scent of insolvency armed with spreadsheet wielding analysts and a penchant for sniffing out bullshit.
CT: When was your ‘eureka moment’ with regards to applying Bitcoin to this industry?
RM: It was October 2013, when I read the “contracts” section of the bitcoin Wiki. The minute I got through the first paragraph my entire brain lit up! Smart contracts are by far the most disruptive aspect of the bitcoin “invention” yet they are being overlooked and dismissed by most investors and practitioners. I expect this to change in a dramatic way once education permeates the sector.
“Veritaseum contracts are superior to traditional contract law in terms of security, costs and efficiency and reduces the frictions of most other transaction costs commonly found in the financial system[.]”
CT: Can you explain (as simply as possible) the workings of Veritaseum and its difference from the traditional financial services model
RM: In Roman mythology, Veritas was the goddess of truth. Veritaseum is the business expression of this truth, the ability to transact with anyone, anywhere knowing full well their ability to deliver upon any promises made and what their intent to deliver is.
Veritaseum is the culmination of what happens when truth in transaction and business is constant and a given. It is literally Truth in Transaction, what we call the unbreakable promise. In practice, this means two or more parties create a smart contract – a computer protocols that facilitates, verifies, or enforces the negotiation or performance of an agreement.
Our smart contracts feature a graphical user interface (GUI) that enable simple and extremely rapid creation of terms normally found in any financial purchase or sale – basically enabling the logic of contractual clauses without a legal contract, but binding through cryptography and math.
The resultant contract is fully funded (assets are pledged up front), self-executing, self-enforcing, unbreachable and viewable by all parties involved at all times, along with all of the assets involved in the contract.
Veritaseum contracts are superior to traditional contract law in terms of security, costs and efficiency and reduces the frictions of most other transaction costs commonly found in the financial system, e.g. Policing and enforcement costs - making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if they don’t.
“Even with all of these ‘can’t trust ‘em’ safeguards, the [legacy] system still comes crashing down as entities discover ways to circumvent the safeguards of trust.”
The technical term for this is a zero trust system. When zero trust is required, anybody can transact with anybody else for anything, anywhere in the world nearly instantaneously through the blockchain.
The legacy financial system is essentially the opposite of Veritaseum. Actors inherently cannot trust each other. This distrust calls for the need of “so-called” trusted thirds parties to mediate and intermediate deals. Even these “trusted” third parties have trust issues so they must contract with 4th and 5th parties (and often more) to mitigate risk and build trust in a trustless business environment.
Even with all of these “can’t trust ‘em” safeguards, the system still comes crashing down as entities discover ways to circumvent the safeguards of trust. Methods used in the past (and present) include wayward accounting, outright fraud, off balance sheet vehicles, failure to mark to market, rehypothecation, excess leverage, opaque reporting, regulatory capture, etc.
Transactions have yet to take full advantage of modern technology, so although institutions can execute multiple trades in literally milliseconds (think HFT), it still takes T+3 days to settle a single retail trade – and it costs too much!
CT: I find it somewhat ironic that you are skeptical of the traditional Wall Street model (as well as of esoteric financial instruments such as complex derivatives) but you know that the first real users of Veritaseum are likely to be hedge funds and other traditional Wall Street players, probably seeking two sides of a complex derivatives trade – how do you square this?
RM: I’m skeptical of the Wall Street compensation model, because it incentivizes actors to move against the best interests of their clients. I’m not skeptical of esoteric instruments per se, but I am skeptical of the use of said products without:
- A proper understanding of them (from both the vendor and the client side)
- Proper safety nets
I believe entities should be able to trade whatever they want provided they know what they are trading and the risks in doing so are limited solely to their balance sheet and not the taxpaying populace a whole. Veritaseum simply provides the tools to allow institutions to do their thing transparently, efficiently and safely. And while the first waves of material revenue should come from larger players, individuals are using the platform right now. You don’t need to make big trades (you can trade 10 cents at a time) or complex trades (you can simply buy AAPL exposure for USD).
CT: Can you explain how Veritaseum is able to minimize counterparty risk without creating an intermediary?
RM: The true nature of bitcoin, its blockchain and by extension Veritaseum is that of autonomy. You have original possession of your private keys and can transact directly with others like this without a problem. That is the invention, and that is what makes Bitcoin unique and powerful.
Participants in the Veritaseum platform are wholly and solely in control of their own assets. By removing the need to rely upon other entities to handle your assets (custody, transfer or settlement), we have essentially removed 3rd party credit/default/counterparty risk in addition to significantly reducing friction and costs by eliminating rent seeking middlemen. Entities that ask you to send them BTC are breaking the autonomy mold and then attempting to glue it back together with extra technology, more 3rd party assurances and regulation.
“Using smart Bitcoin like dumb assets is akin to buying a 2015 Ferrari 458 Speciale A and then removing the (private) keys and pushing it around town instead of driving.”
This is how a purely autonomous platform proves to be both safer and superior to heteronomous platforms that seek to provide assurances and insurances such as FDIC and SIPC protection. The very reason why these insurances are necessary is because you are allowing third parties to take possession of your assets in the first place! This is a very, very important point for it goes to the heart of what advantages are had by utilizing the bitcoin platform.
Why strip the (free) autonomous security protections of Bitcoin away from customers and then charge them to buy another set of inferior protections that also limit their autonomy? Using smart Bitcoin like dumb assets is akin to buying a 2015 Ferrari 458 Speciale A and then removing the (private) keys and pushing it around town instead of driving.
Of course, even with 3rd party risks removed, you still have to worry about your counterparty. Veritaseum solves this problem by forcing all parties to prefund their contracts fully, and up front. No one could default, even if they wanted to. Institutional players accustomed to high leverage systems can use our digital leverage to turn up the risk/reward dial as high as their respective stomachs can possibly withstand.
With the ability of implementing enough leverage to practically guarantee dramatic price action in just a few trading hours, there is no issue of capital efficiency. Of course, the restriction here is that you’re P&L is restricted to you capital at risk, meaning you can only win or lose the amount that you have wagered. You can’t bet US$10 million to lose US$1 billion and then rely on the taxpayer to cover the difference.
“Veritaseum is nothing short of a highly ‘programmable version’ of dollars.”
CT: The possible applications of this solution are numerous: from trading to P2P lending to investments. What made you choose to target everything at once rather than selecting one, more narrow segment of the market (such as exchanges only) to try and disrupt?
RM: I created the vehicle (Veritaseum) as a universal platform upon which to build industry solutions. I’m not trying to “target everything at once.” I’m providing the tools to allow my sales staff and solution providers to enable customers and clients to build their own solutions or buy said solutions directly from us.
We will create business verticals to address separately from a marketing perspective. Keep in mind that the universality of Veritaseum literally makes it a write once – run anywhere solution. Think about asking the same question of the purveyor of the dollar bill. “What made you choose to target everything at once with dollars rather than selecting one, more narrow segment of the market with which people can use dollars?”
Veritaseum is nothing short of a highly “programmable version” of dollars.