[00:00:02] Joe Benso: Welcome, once again to the Casper Podcast, where we take a deep dive into blockchain technology and speak with those who are building the future of the decentralized web. I'm your host, Joe Benso, and as usual, I'm joined by my colleague Matt Schaffnit from the Casper Association. Thanks again for joining me today, Matt.

[00:00:21] Matt Schaffnit: Absolutely!

[00:00:22 ]Joe Benso: Matt, it's really great. You know you are always, out and about, and you just have this knack and talent for just bringing people into the fold. And one of these is Allan Mendelowitz, a super highly qualified thought leader in this space of smart financial contracts.

[00:00:43] Matt Schaffnit: I had the pleasure of meeting Allan in May of 2022, we met each other at the University of Zurich while he was talking about risk and the ACTUS standard.

And since I had the opportunity to go visit Philadelphia, speak in a fireside chat format around the topics of DeFi to the Defi Philly community. But, before we dive in, let's talk to Allan.

[00:01:11] Joe Benso: Thanks for joining us here today, Allan, here with Matt Schaffnit and myself. Appreciate the time. Maybe you can just give us, a quick introduction on how you got introduced to us and, uh, a little bit about your background.

[00:01:25] Allan Mendelowitz: Sure. In terms of my background, I'm an economist, started out life as a professor, and moved to Washington as a Brookings Institution economic policy fellow. Took some positions in the government. And the, last position I held in government was as the chairman of the Federal Housing Finance Board, which was the regulator of the Federal Home Loan Bank system. This all took place before the collapse of 2008, but, as I learned more about what the regulators were doing, I became more and more concerned that in fact,  regulators weren't collecting the best data that they could use to do their job. A lot of it was accounting, it was static, it was backwards looking, and it gave you no insight into how the condition of the business would change when the state of the world changes. And that actually was the starting point for what has become Project ACTUS, the not-for-profit, which has created an algorithmic financial contract standard that generates the payment obligations in almost all financial contracts. Anyone who's been in the financial world knows that financial contracts of the molecular building blocks of the finance system.

[00:02:39] Alen Mendelowitz: My firm belief is that if you're going to have smart financial contracts, if you're going to have tokenization that is related to financial obligations to add to the security and the confidence in what you're dealing with. You need to have a validated, tested way to generate the payment obligations. And so Casper, for example, is using the ACTUS standard as the computational core for their tokens or smart financial contracts.

[00:03:10] Matt Schaffnit: Allan, what you just said really kind of spoke to me as a recovering MBS professional. For those of you that don't know MBS, that's mortgage-backed securities, but the embedded cashflow feature of what you're preaching in the standard and making those smart financial contracts really traceable would be a huge value add going forward.

[00:03:29] Joe Benso: And I understand, Matt, you actually were with Allan at DeFi Philly, was it last year? Maybe you can give a little bit of background on that and how that came about.

[00:03:39] Matt Schaffnit: Yeah, absolutely. Allan was gracious enough to come to Philly at the beginning of July of last year to have a fireside chat with myself and speak to the DeFi Philly community. But in Philly, we touched on two things. We touched on the fact that it's our belief that the language of finance is math and can be therefore algorithmically represented and embedded in the token, making true smart financial contracts, which is huge. Not just dumb tokens and that DeFi needs finance to advance.

[00:04:13] Allan Mendelowitz: One of the things we talked about, uh, was my belief that when you're dealing with the DeFi world, uh, and finance, DeFi has an opening for disruptive. Innovation, uh, and it's related to the fact that the current financial world is a very high-cost operation. And when you have a high-cost operation, if somebody can come along and offer the same functionality but do it more efficiently, you have the potential to disrupt the existing players. But that doesn't guarantee that they will succeed. There are several issues that have to be addressed. DeFi has to be able to provide. The functionality of finance, which is long, live, multi-pay obligations, a contract that, uh, covers a period of time that specifies what the borrower has to pay back and when.

[00:05:07] Allan Mendelowitz: So that's one issue, functionality of finance. The second thing is you have to be able to do it more efficiently than the traditional institutions. If you wanna disrupt what they do. Most of the focus for the first decade of this whole era on things like Bitcoin and blockchain was not on finance. It was on a payment system. You could use Bitcoin in the blockchain to make payments, but payment systems are not finance, at best is that the fringes of finance. And the third thing is you have to be able to scale. The financial world handles millions and billions of transactions every single day. And if DeFi is to have a significant future in finance, it has to be able to efficiently scale to that level. And so a lot of thought has to go into those things If there is a major role for, DeFi in finance.

[00:06:05] Matt Schaffnit: Allan, I think these are all great points, especially like pointing out that payments are kind of something that facilitates the core of finance rather being the crux thereof finance. I'd be also interested in kind of understanding the. Your take then of a blockchain in the transfer of value itself?

[00:06:23] Allan Mendelowitz:  Well, I think the key to understanding what gives you stable value for cryptocurrency is that it gets used widely for transactions and is accepted widely for transactions. If you're dealing with stablecoin, it is genuinely a stablecoin. You then have the beginning of a system where a digital cryptocurrency, in fact, has the potential to play a major role. My view is you just can't make a smart financial contract and think it's going to work. If you want a smart financial contract, how do you increase confidence in the fact that the contract will do exactly what it's supposed to do?

You're not going to be surprised down the road like the participants in the DAO where uh, somebody figured out there was a capability to drain off about 50 million dollars, even though that wasn't the intent. That created an incredible fissure over at Ethereum because half the crowd said, “Hey, in this world, code is law. We don't like what he did, but it was made possible by the code, so we're not going to do anything about it.”

And the other half said, “Wait a minute, this guy just stole 50 million.” That can't be right. And so this goes back to the issue of tokenization and using to represent the payment obligations, uh, you know, a validated tested standard, like the active standard to be the computational engine to determine what is the obligation to pay on, how much is that obligation and on what date do you have to pay it.

[00:08:01] Matt Schaffnit: One thing that I thought would be really interesting for you to tease out a bit is this idea of regulatory certainty. Companies like FTX and the collapse due to what is apparently simply a lack of corporate governance, where if they were given regulatory clarity, they would have a tremendous amount of transparency across the stakeholder set, including government officials that should be involved because we are electing people to help manage public health and safety and a variety of other things, transportation, you know. What do you think about this?

[00:08:38] Allan Mendelowitz: Whenever there appears to be the opportunity to make massive amounts of money very quickly, people's good judgment winds up in the dirt. Making good decisions in finance is not easy. Secondly, regulation is far from perfect. The traditional world collapsed in 2008 because of, I think, totally inadequate supervision. The logic behind the ACTUS project was the fact that I didn't feel regulators were collecting data in the standard that supported forward-looking analysis that wouldn't eliminate problems, but hopefully, it would reduce the incidents of surprises in the financial sector.

[00:09:26] Joe Benso: Alan,  how much can blockchain and how much can smart financial contracts and standards like ACTUS solve some of these problems within this industry?

What would be the takeaway here that you want people to focus on?

[00:09:39] Allan Mendelowitz: When blockchain and Bitcoin came on the scene, it was promoted with a vision of the world where you didn't need any central authorities. You didn't need regulation, you didn't need any of the infrastructure that you find in the traditional financial world. So we've come now a couple of decades into this DeFi world, and we see that blockchain has health, doesn't protect you from the perverse incentives that can lead to bad decision making in the traditional financial world and in the DeFi world. You know, there are in fact three distinct things going on in the DeFi world.

[00:10:18] Allan Mendelowitz: One is cryptocurrency. The second is blockchain, and the third is digital currency, which is separate and distinct from cryptocurrency.

[00:10:30] Joe Benso: How do you define that?

[00:10:31] Allan Mendelowitz: Well, that's all the initiatives of every central bank who's devoting efforts and resources to trying to better understand what the benefits and the risk are of creating alongside their traditional currency, a digital currency. You have, in the case of blockchain, a lot of industries that are finding very valuable and productive uses of blockchain, supply chain management, distribution, et cetera. That actually have nothing to do with cryptocurrency, but it has to do with the benefit of a permissioned blockchain where the stakeholders who are all part of the process can be part of it and produce real value for everyone involved.

[00:11:13 ] Allan Mendelowitz:  But we see the infrastructure of blockchain and DeFi doesn't counteract human greed and willingness to make bad decisions. And so you do need some kind of legal regulatory structure. That in fact contributes to addressing some of these problems that are really linked to human nature and paved the way to realized benefits that can be realized going forward.

[00:11:43] Joe Benso: Really appreciate your time today. Thanks again, Allan.

[00:11:47] Matt Schaffnit: It's always refreshing to have folks from the real world, quote-unquote, and I see that across industries, and this one happens to be finance. The only thing certain in life, as we all know, is change. And so instead of fighting it, figuring out how to do it rationally in a way that adds value is always refreshing and I can't thank you enough for your time.

[00:12:10] Allan Mendelowitz: Hey, thank you guys. This was really a lot of fun.

[00:12:19] Joe Benso: And if you are enjoying these conversations on the Casper Podcast, be sure to subscribe. You can also leave us a voice message for a chance to appear on a future episode. We always love to hear from the listeners. So until next time, keep building and we will see you on the next episode of the Casper Podcast.