Ep. 229: Lamont Black - Navigating the Digital Finance Future: Crypto & Blockchain

July 17, 2023 | 21 Minutes

Unlock the mystifying world of cryptocurrencies and blockchain in this enlightening episode of Count Me In. Join our guest host Kelly Richmond Pope, accounting Professor and author, as she speaks with Lamont Black, an Associate Professor of Finance at DePaul University.  They navigate us through the complexities of blockchain technology, its relevance to accounting and financial services, and the turbulent landscape of cryptocurrency exchanges. Lamont takes a deep dive into how blockchain serves as the foundation of cryptocurrencies, elaborates on its inherent security and transparency, and paints a picture of its significant role in the future of digital commerce. We will also unpack the rise and fall of crypto prices, the risks involved, and how to safely engage with cryptocurrency exchanges. No matter whether you're a finance professional grappling with the challenges of a rapidly digitizing economy, or a curious listener wanting to unravel the world of cryptocurrency, this episode is an invaluable resource.

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Full Episode Transcript:
Welcome to another enlightening episode of Count Me In. Where we delve into the pressing issues shaping our world and the business landscape. Today, we have the privilege of hearing a wonderful conversation between our guest host, Kelly Richmond Pope, accounting professor and author, and Lamont Black, an Associate Professor of Finance at DePaul University. They discuss an issue that is at the forefront of finance innovation; cryptocurrencies and blockchain technology.
Lamont brings his vast knowledge and expert insights to help demystify these complex topics and explain their relevance to the finance industry. So whether you're a CFO, a controller, a finance professional, or simply a curious listener, prepare for a deep dive exploration into the world of blockchain and cryptocurrencies. Let's get started.
Kelly:              So Lamont, thank you so much for joining me, today. And if you could start by just introducing who you are.
Lamont:         So I'm an associate professor of finance in the Driehaus College of Business at the DePaul University. So I'm one of your colleagues.
Kelly:              You are one of my colleagues. And, so, I want to welcome you to the IMA podcast series. And I have been working with the IMA, a little over a year. Working in research and thought leadership about ethics, corporate governance, risk, and you know my favorite love, fraud. And as we watch the news, read the news, what has just been in the news, so much, in the past, I'd say 18 months, is this really weird word called cryptocurrency. 
And when I came to you, originally, about trying to understand what in the world is cryptocurrency. What you shared with me was how important it was to understand blockchain. And what I want to do, today, is have you really break down the importance of understanding blockchain. Because what I think the world is getting a little scared about is when you keep hearing about cryptocurrency, these exchanges that are falling apart. And, I think, everybody is really skeptical of this concept of cryptocurrency.
But what I know you feel is, though, people might be scared of that. But you still need to understand the soundness and the value of the underlying technology, which is called blockchain. So could you tell us a little bit about what blockchain is and why we need to know about it as managerial accountants?
Lamont:         Yes, so blockchain is the platform behind cryptocurrency. And blockchain is a technology, that, I think, everyone should be trying to understand. It's really a system of shared record keeping. So if you think about how we now live, in the information age, most of what we do is involving data. That data is being stored and shared using different systems, today. Whether that's on the cloud or other types of servers, and the blockchain is a way of sharing information. So that it's recorded on a shared ledger. 
So you can really think of blockchain as a system of accounting. And what makes it different is that rather than these ledgers being held in a private form. Different ledgers on different institutions that, then, have to communicate, blockchain cuts across all those silos. It's a way of recording information across an entire network. Sharing that information with the network, that makes it very secure, very transparent, and very efficient for sharing information. 
So as we move deeper and deeper into the digital economy and e-commerce. I think every organization should be trying to understand how do we store and share information on the internet. I think blockchain is likely that next platform. And, so, even in the world of accounting, this is where things are likely headed.
Kelly:              So that's a great explanation, and it really makes me feel a lot more comfortable in understanding that. Although, I hear all this craziness about cryptocurrency, and cryptocurrency is just where you shouldn't put your money. You've made me feel a lot more comfortable about why I need to understand blockchain. But let me digress, for a second, what in the world is going on with all that we hear about FTX, and the collapse of these exchanges? What is that conversation even about? And how does that affect or how should it affect our opinion of blockchain?
Lamont:         Yes, so cryptocurrency is the money that is transferred across public blockchains like Bitcoin and Ethereum. And, so, people can own Bitcoin and Ethereum as digital assets, and crypto prices ran up, dramatically, during COVID. There are different arguments for why that occurred. 
But one of them would be the amount of monetary stimulus. As people had all these different sources of income coming in. Let's say through stimulus checks in the form of fiscal stimulus, that money flowing into the economy. A lot of that ended up in crypto. And, so, Bitcoin almost reached $70,000 for one Bitcoin by late 2021. And as we moved into this year and our economy started to slow, inflation started to rise, largely as an outcome of COVID, crypto prices started to collapse. 
Now, some people focus on the collapse of the crypto market as being something unique. But I just would point out that the stock market also entered bear market territory in the first half of this year, and in particular, tech stocks. So tech stocks are very risky. And, so, speculative assets during an economic slowdown, those prices tend to fall the most. 
I view crypto as a form of technology. It's the frontier of technology. So, to me, it's no surprise that as risky assets have sold off this year, crypto has gotten hit the hardest. Now, as it relates to the exchanges, that's really been the problem this year. Because most people when they buy crypto, they buy it on an exchange like Coinbase, here in the US, or FTX, which was an offshore exchange headquartered in the Bahamas. 
Now, many people wanted to jump on the crypto bandwagon, especially, as prices were rising. And, so, a lot of people were investing their money in exchanges like FTX. But one thing that people didn't fully appreciate, in this period of time, is when you own crypto on an exchange, you don't actually own the crypto itself. It's really being held on your behalf. And, so, FTX is what's called a centralized exchange. 
When a centralized exchange fails or goes bankrupt, you're going to lose your money. They're going to freeze those redemptions. You're not going to be able to get it back. And, so, now, I think a lot of the fear around cryptocurrency is not just in the price volatility, it's also the fact that you could lose everything. And, so, I think crypto does have a PR problem, now, of people just being hesitant and confused about where all this is headed.
Kelly:              Well, and I think what's interesting, about our conversation, is as managerial accountants, as CFOs, as controllers, as finance professionals. We could be interacting with clients and or in an organization that either embraces blockchain or accepts cryptocurrency. At the way that they handle transactions. 
And, so, it's really important for us to understand some of these nuances. And my question to you is this how do I know what exchange I should engage with if I do want to purchase cryptocurrency? Because I do have to use an exchange, correct? That's the only way.
Lamont:         Yes, it's the only way to enter the crypto ecosystem. So if you think of cryptocurrency as a currency, a form of money, then, it's like a foreign currency. If you want to buy euros with dollars, or if you want to bring the euros back into dollars, there's an exchange rate. 
And, so, the price of crypto is really an exchange rate between dollars and crypto. And the U.S. money, the dollar, is a fiat currency. And there's a long history behind that term but it, basically, means that we are no longer on the gold standard. So the U.S. dollar is not backed by anything physical. It is a fiat currency. 
But in order to buy crypto, you have to go through something called a fiat on-ramp. Because you're basically buying crypto with U.S. dollars. You can't do that just anywhere. You have to go through one of these exchanges, which is why that's the starting point for most people. 
But one key point that I would like to highlight is you don't have to keep your funds on that exchange. And, so, the exchange that I typically use to buy crypto is Coinbase. Because Coinbase is a U.S.-headquartered institution. It's publicly traded on the U.S. stock market. Highly regulated by the SEC. And, so, it's, relative to FTX, a little bit safer but not totally safe. 
There could be a run on Coinbase as well. But once you own crypto on Coinbase, you then have several options. You could move that money into something called a digital wallet. And what makes a digital wallet different from an exchange is that you, then, own the crypto. You manage what's called the private key. There's no risk of bankruptcy for some type of exchange because it's like money in your wallet. Just like U.S. dollars in a physical wallet, this is crypto in a digital wallet. You own it, you manage it, and so it protects you from some of those types of risks.
Kelly:              For the first time, in my life, I understand everything you're saying.
Lamont:         That's great.
Kelly:              But you know what, how you described the exchange is making transactions on your behalf versus the digital wallet. I understand it because I actually own some crypto. 
Yes, I'm the accountant that owns some crypto. And let me tell you a little bit about the way Lamont and I met, first. Because, yes, we are colleagues at DePaul University in Chicago, but we also were in a movie together. And we were in a movie about a fast-appreciating asset, at that time, called HEX. 
And, so, there was this production company that was doing a documentary about this gentleman by the name of Richard Hart. And Lamont and I actually flew out to the south of Spain to interview, can you believe we did this Lamont? Interview Richard Hart at this undisclosed mansion on the cliff of a mountain, on the side of a mountain. And I was completely skeptical of everything crypto. I didn't have the understanding that, of course, you had Lamont. 
But it was fascinating to watch you go back and forth. You were a finance superhero going back and forth with this gentleman, about this cryptocurrency that he created. So my question to you is this; when we did this project, together, and all that you know about blockchain, all that you know about crypto. And then there's this new created currency that this gentleman started, what was your opinion of that experience? What was your opinion of HEX, at the time?
Lamont:         Well, that was a pretty crazy experience. But it was great working with you on that. So I think what's hard for a lot of people, with cryptocurrency, is that there are so many of them. So I think everyone's now heard of Bitcoin. Most people have now heard of Ethereum or Ether. Those are the two largest cryptocurrencies. But if you go to a site like coinmarketcap.com you can see that there are now over 10,000 cryptocurrencies. And, so, people wonder, "Well, where should I invest?"
"What's right, what's wrong?"
"What's legit?"
"What's a scam?"
And I would acknowledge that there are a lot of cryptocurrencies that are a scam. That's why I don't encourage people to just follow hot tips. You should never be looking for some crypto that no one's ever heard of, but you think is going to pump for 100 X over five days or whatever. You should just focus on the core ones like Bitcoin and Ethereum. 
But this documentary, we worked on, was for a particular cryptocurrency called HEX. Which is really an application, a project, built on Ethereum. And, so, what's also important to understand with cryptocurrency is you have your native tokens that trade on the blockchain itself, like Bitcoin or Ether on Ethereum. 
But HEX is a project built on Ethereum that can create its own token, on top of the Ether token. And that project, the documentary, was really about is this project legitimate or not? And we were brought in, as the skeptics, to try and ask some hard questions. And I think we ended up in a place where we were not fully convinced that this was the future of cryptocurrency. I'm a big fan of this space. I do think cryptocurrency has a lot of potential still. But for some of these individual projects there's still a lot of question marks.
Kelly:              Now, when you go in and you do your consulting with organizations. What do you find to be the questions that the employee population may have or the executives may have?
Lamont:         Yes, so I'm in the finance department, in the financial services area. And, so, a lot of the firms that I work with are financial institutions, banks, credit unions. Trying to understand what does this mean for the future of money and banking, which is actually how I got into this space. So, as a quick background, I'm a former economist from The Federal Reserve. I was there through the financial crisis. And, so, my background is very much in risk and regulation. 
But when I left The Fed to join DePaul and started teaching money and banking back in 2013. It was my students who started asking me about Bitcoin. And that started a whole journey, for me, about is Bitcoin money? And I'm now convinced that it is an important chapter in the evolution of money. 
Whether Bitcoin itself will become a common means of payment, it's still yet to be seen. But money is digitizing and assets are digitizing, I think everyone would agree with that. And, so, the financial institutions that I work with are often inviting me in to speak to their board of directors, to speak to the leadership team. To talk about strategy and really strategic risk. 
Could this emerging ecosystem of crypto and blockchain, potentially, disrupt traditional financial services? If people start using blockchain as a peer-to-peer payment system, that could disintermediate banks and credits from the payment network and the payment system. To the extent that people are now able to get loans on a blockchain. So decentralized finance, or DeFi, is an entire financial system that's being built on the blockchain network. 
And, so, banks and credit unions are looking at this, trying to figure out do they have a role to play in the future of this technology? Because the original vision for crypto was replacing banks, even money without governments. But with the importance of regulation, with the importance of ethics and society. What we're likely going to see is an integration between traditional finance and decentralized finance. And banks and credit unions are going to have a very important role to play at that intersection.
Kelly:              Interesting. Well, Lamont, this has been great. What I'm also excited about is we are working on a paper, together, in conjunction with, of course, the IMA, about the management, the risk of blockchain and what managerial accountants and finance professionals need to know about this space. So I hope that everyone that listens to our conversation, today, also reads the paper that we write because it's eye-opening. 
I know that I've learned so much from working with you and listening to you. I did purchase a little snippet of HEX when we were doing that project, of course, it is almost worthless at this point. So I don't know that I am a big cryptocurrency cheerleader, yet. 
But I do have a respect for blockchain and understand that it is something that we need to know. Like you said, I don't know where we'll be five, 10 years from now, but I do want to make sure that I am current. And this sounds like it could be a big change. 
Something that you said in one of the answers to the questions, is you talked about the idea that blockchain is this decentralized, peer-to-peer type process. And I want to focus on the word decentralized. Because one thing that you said, when you talked about it being decentralized, is you then said that you used Coinbase. Which Coinbase was highly regulated, had oversight by the SEC. 
And, so, what I took from your comments is the point of this integration piece is probably what makes most people feel confident, more confident and more secure. Because there are pros and cons about something that's decentralized. The pro is you don't have this third-party intermediary. But the con is you don't have the regulatory body that may give a sense of security and integrity to the data that a lot of us, especially accountants, are used to filling. 
So I like how you talked about this idea of the integration of the two as opposed to the replacement of one. And that resonated with me because for people like me who are ultra-conservative, especially, when it comes to money. I think the integration and appreciating the integration of how this technology can impact business transactions, in the future, is really important to understand. 
So I'm rambling a little bit, but I finally understand what you're talking about. I'm not a cheerleader like you, yet, but maybe one day. Maybe one day. So, any lasting thoughts that you want to say before we end our talk, today?
Lamont:         Well, first of all, I'm very excited to work on this paper with you, Kelly. Because I think I'm coming at it from the perspective of finance. You're coming at it from the perspective of accounting. So in terms of managerial accounting, we're going to bring those two perspectives. Help people understand the implications of this technology, and help remove some of the fear and hesitation around this. 
Because, like you said, crypto has very much gotten some bad press, recently, because of FTX. But I want to help people understand blockchain and crypto are related. We don't, necessarily, have to pull these two entirely apart. 
And, so, in this article, we're going to talk about public blockchains like Ethereum. How can you use that for business use cases and things like that? So this will be a unique take on blockchain, relative to some of the other things that are out there in the accounting space. So I think we're going to have a lot of value to bring to the profession.
Kelly:              Well, thank you so much for the time, Lamont, this is great. And, listen, we have a movie premiere coming up one of these days soon. So we need to walk the red carpet, bring our families to the red carpet, talking about this crypto movie we did together. So I can't wait for that day.
Lamont:         I'm looking forward to it, too.
Kelly:              Thanks so much for the time, today, I really appreciate it.
Lamont:         Thank you, Kelly.
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