Animal Spirits Podcast - The Financial Rails of the Future

Episode Date: March 5, 2022

On today's show we spoke with Meow co-founder Brandon Arvanaghi about how companies and advisors can earn higher yields on their cash in crypto. Find complete shownotes on our blogs...  Ben Carlson’s A Wealth of Common Sense  Michael Batnick’s The Irrelevant Investor  Like us on Facebook  And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.    Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits is brought to you by Meow. Go to Meow.com to learn how RIA's high net worth individuals and businesses can earn up to 4% on their cash with one to three business day withdrawals. Again, that's meow.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holt's wealth management. All opinions expressed by Michael and Ben or any podcast. guests are solely their own opinions and do not reflect the opinion of Ritt Holt's Wealth Management. This podcast is for informational purposes only and should not be relied

upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the securities discussed in this podcast. We are so excited today to talk with Brandon Arvinaig from Meow. Full disclosure before we get started, we are investors in the company. And one of the reasons why we're... Not to brag. What? Not to brag. Of course, the customary, not to brag. One of the reasons why we're so excited about what Miao is doing is because they solve a few big problems. Number one is corporate treasurer is the right way to describe it for businesses that have

cash in their balance sheet. And thanks to Ben's fiscal policy, I should say monetary policy, is getting 0.1% nominal on their savings. What Miao does is they work with institutional lending desecrypto to generate yield, to deliver it in a compliance way so that it's cash in, cash-in. cash out. It's fully self-service so you don't have to do backflips trying to figure out what the best defy protocol for your needs are. Yeah, and you don't have to actually go into the wallet and do it yourself. It's very interesting. And the other thing I was thinking about as we

talked to Brandon is he said, listen, all of our early adopters are tech companies. Some of them are larger, some of are smaller. But I think the sheer size of the tech industry now, what is it, 25% of the S&P, it's probably really more like, I don't know, 30 or 40 if we're splitting hairs on what a tech company is. If all these tech companies are early adopters on something like this, that's going to force other companies and other industries to take a look at this stuff, too. Yes, for sure. One of the things that they did that was so innovative was they tackle this from the compliance point of view. So these are a bunch of ex-Gemini engineers that are like uniquely situated to build this product with the compliance angle. Because as I mentioned on the show,

like we looked at this and came to the conclusion like pretty quickly that these are unregistered securities. And so I don't want to speak for them, but if you want to learn more about how they've solved the compliance potential hurdles, reach out to them at meout.com to learn more. We talk about this in the interview. It's not just companies anymore with treasury on their balance sheet. It's RAs and advisors that are coming to them too and figure out how to get their clients more. I mean, this is the big one. Yes. Getting yield on cash, as we've said, a billion times is literally the number one question. And so if people are interested, just retail investors are interested in getting yield on their cash,

we've spoken in nauseam about how they could do that with their earned products. But there wasn't anything for corporate treasuries where they can feel comfortable getting these sources of yield. So the fact that Meow is doing that on their behalf is pretty huge. And I do think the fact that the majority of the wealth in this country is still in the hands of boomers. I think the net worth number is like 53 or 54% of all net worth in this country's boomers. They still control the vast majority of the money. I think a lot of that money is going to be really slow to come on board with crypto in terms of Bitcoin and Ethereum and

these type of things and defy because the 24-7 nature of the market and the volatility of it. And just the fact that it's more of like an early stage tech investment in a lot of ways. But yield, that group even can understand. And that group understands earning higher yield because they're more up to have like dividend stocks. And they had yield back in the day. They had government bonds that were yielding 5, 6, 7, 8% in some instances. So I think the stable coins in an account like this actually makes more sense to those people who already have the wealth because for them it's not about shooting the moon and earning a ton of money in crypto. It's about earning more yield on a product like this that actually makes sense because it's more tied to like

the financial system than it is to investing in an early stage technology. That was beautiful. Well said, Ben. Thanks, Michael. You're welcome. All right. With that, here's our conversation with Brandon Arvinaaghi from Meow. We're joined tonight by Brandon Arvinaigy. Brandon is the co-founder and CEO of Meow. Brandon, thank you so much for coming in the studio today live.

Thank you, Michael. All right. So for people that aren't familiar with Meow yet, I think they're about to be, who is Meow? Who is Meow? Meow is a team of five X Gemini engineers, including three of the first security engineering hires. building a compliant bridge from corporates, institutions, family offices, high net worth individuals to crypto market yields. So that's DFI protocols, that's institutional borrowers

in a fully compliant way. That's kind of been our story since April of last year. And our growth has been really phenomenal. And we're blessed to see that. Maybe let's show off a little bit. Then we'll take a step back and talk about the product, the Genesis and all that sort of stuff. When you say we're doing really well, how well? January and February, both record months. I mean, doubling one after another. I think we're going to cross. nine figures in AUM in the next couple months. I see a very viable path to a billion in assets by December. And this is really all taken off since we launched this product in end of November. So it's kind of crazy growth. The demand has been there. We've been saying that for a while.

So you're essentially managing the treasury cash for companies. Who are the first companies that came to you as the guinea pigs and which kind of companies and businesses are coming to you now? Tech companies are the most willing, the most forward thinking when it comes to better yields on their balance sheet. But we've progressively been expanding. It used to be series A startups. And then it was series B. And then unicorns. We just announced a unicorn customer and Stitch. We have several using us now. The Fed. Is that who you're talking about? The Fed. Exactly. I suppose startups get a big check from their investors and they have to do some of that cash until they deploy. Is that the idea? Yeah. I mean, it's just sitting there collecting dust. They're earning zero percent.

Inflation's, what, seven percent? And if we can offer them up to four percent in a compliant way with one to three business day withdrawals, I mean, this is night and day compared to a market is accounted. All right. So let's start here. The obvious problem that you're trying to solve for is, you just said it, cash is earning zero nominal. That's before inflation. After inflation, it's getting kicked where the sun don't shine. So you are providing a yield on that cash, and we'll get into all the mechanics of that. But why does meow need to exist? Why can't they just go to one of the lending platforms and get yield directly from themselves? A lot of reasons. It's a great question. So first of all, your deposit size to go directly interact with one of these

lending desks, institutional lending desks, would have to be in the 15 million to 20 million crazy minimums. And they wouldn't onboard you for months. It's not worth their time otherwise. We kind of serve as an aggregator and we get an incentive rate to do so. They basically offboard a lot of the onboarding and the K-Y-C and stuff. The ability to source AUM in one place is much easier for them to just deal with us as opposed to a hundred small customers. Number one. A lot of these yield products that Michael and I have heard about and seen start about with the retail clientele. Was your idea just that we think businesses are going to need this? you have businesses coming to you or did just think that in a zero percent interest rate world,

this is just something people are going to be clamoring for. Yeah, exactly. It was obvious to us that businesses would want this. None of our investors, none of the people we pitched at first believed us. They thought corporates would never go for this. H&I would never go for this. And historically, you're right, Ben, historically retails the early adopter when it comes to crypto and yields and everything like that. But what happened was COVID flipped the world on its head. Alternative asset yields were no longer a cute hobby, but it was a necessity. So we get organic inbounds daily from RIAs, family offices, et cetera, proving our thesis that, hey, everyone wants access to this. There's a Web3 banking stack now.

There's Web2 yields, which is a 0.1% on the Marcus account, and then there's Web3 yields, and that's what Meow offers. So before we get into the compliance and the wrapping and the solutions and all the stuff that you worked on, just at a high level, why does yield exist inside of the crypto ecosystem? Why are we able to generate such high yields on lending our Bitcoin or whatever? Inefficiencies is the short answer. You don't have J.P. Morgan funneling billions of dollars into the space. There are a hundred different Bitcoin exchanges, for example, as opposed to one or two places where everything's traded.

There's price dislocations left and right. There's arbitrage opportunities that are very low risk. A big backbone of these low risk arbitrage opportunities is, for example, premiums on Bitcoin futures. So people want to borrow money to take advantage of a slightly higher spread on selling a futures contract, for example, with very little risk. Why doesn't that get arbitraway? Because there's a hundred different exchanges out there. So you need liquidity on all these different exchanges. It's not. just one place. The price dislocations happen. Volatility affects that as well. That's kind of the backbone of a lot of these yields. And then there's opportunities in defile, which get more

complicated, like yield farming, et cetera. But we have not seen corporate money, large institutional money find its way into this market. And that's why Meow exists. We are the first gateway to it in a cash-based way. People don't need to own wallet. Institutions don't, I mean, that's just a joke. Thinking about institutions owning their own wallet. We provide a cash-based way to introduce that money into the ecosystem. So you said that to Packy. I listened to your podcast with him. You said cash in, cash out. Talk about what you're doing to package that. Yeah.

So when you log into Meow.com and you sign up, you would go through our BSA-ML checks. You'd see our dashboard. You would pick the yield offering you want from the crypto markets, be it an institutional borrower, an over-collateralized institutional borrower, or a defy protocol. And then you would get ACH or wire instructions, self-service. And then you're done. You would see in your dashboard, your daily interest earned, your transaction history, your 1099 interest statements, et cetera,

we handle any of the nonsense behind the scenes of converting your dollar into a stable coin and then putting it into a defy protocol that you picked, for example, or giving it to an institutional borrower at 4% for example, or getting collateral back from that institutional borrower at 150% of what we loaned them.

We handle all of that, and then when you withdraw, when you request the withdrawal again from our dashboard, we send it back to you in a wire as cash. So your job is done after you aced your wire. effectively this is kind of like any sort of online banking that a company would deal with. They have a login. They can see their holdings. They can see their cash. They can see what their interest is. And you handle all the behind the scenes for them for everything. Exactly. Compliance

too. I mean, the killer features that people have requested are, well, can we have multiple users on the account? Invite a read-only account for an accounting firm or something like that. We have that too. Businesses have historically wanted a clean, compliant way to interact with these yield sources. And no one's done it yet. That's kind of what we're doing. It's quite simple. Talk about the compliance challenges, because we kick the tires on this, because we are very intrigued about the opportunity to earn 8% on these stable coins. But from our vantage point, these were unregistered securities, which I think we just got some clarity on from the SEC. Talk about what you're doing to make this compliant. As an advisor, how would an RAA work with

me out to get yield to their clients in a compliant way? a good question. And we have heard from many of the RIAs that we work with that they try to go to other people first and they realize that our offering is the only one that they were comfortable with. So why? At a high level, it's because exactly what Ben, you were saying, it's that we fundamentally have a different compliance apparatus because we go after accredited investors. We can take a more conservative position that our offering is likely a security. Whereas if you're facing retail, you are making different arguments and that may not sit well with certain RIAs. Now, I'm not taking a side on this, by the way. This is just the nature of the law as written. And it's

very fair to say the law hasn't changed in 1930. But that's kind of the world we live in. Now, Meow is the only one doing this because no one thought the market existed in the first place. That's the difference. Everyone has been gearing towards retail, retail, retail. But it's a totally different compliance apparatus when you go after accredited. And we are serving the RIAs, the high net worths, the family offices. Can we get the elephant or the cat out of the room? What the hell's with the name? Yeah. The crypto space is so high entropy. that no one knows what it's going to be on a month-to-month basis, forget about year-to-year. So if you pick a name like Block Treasury or Bit Yield or something, you very much pigeonhole yourself.

You need a happy name that can be what it needs to be for its customers, and Meow kind of serves that purpose. I assume this was an ode to Rod Farva from Super Troopers. Yeah, we got that a lot. We actually had, yeah, one investor tried to trick me into saying meow on the call, and I fell for it. Like an idiot. I fell for it. So how much do you expect the volatility in crypto space to impact? to your yields. Do you look at this as something where you want to keep your yield relatively stable or some sort of spread above some arbitrary benchmark? Or do you see this moving around a lot? Like,

how does that work in terms of the yield changing? I think these yields will be around for at least two years. But at the end of the day, we're competing with the Federal Reserve here. And that's a battle that, I mean, they're not equipped to fight. Say more. What you mean? The money printer is just like, they can't stop printing. So right now, we're getting 0.1%. If they 10x that, be 1%. yield compression is not really a concern to us. We have a lot of pricing integrity here. And there's different versions of our yield. We can offer insurance wrap versions, over collateralized versions, which is very exciting. That's the product that's selling the most. So we'll talk about that in a second about, Ben, as an honorary Fed member, do you want to defend your honor? No, I mean, if I'm a betting man, I'm going to say the Fed is probably going to have to keep rates really low for a long time. And I don't see that changing. So I want to circle back to the compliance thing. We'll get there. But before that, let's talk about the products. So one of the products that you offer is an over collateralized Bitcoin. Is this a note? What do we call this? And talk about it. Yeah, exactly. So here's another reason why going to me out is a much better idea in a lot of cases than going directly to a lending desk. These lending nets are very reputable, the ones we work with. If we loan them $10 million, they require them $10 million from their end borrowers in almost every case, at least one to one to one. So if they loan out that $10 million to a hedge fund or something, they would require that hedge fund to

almost 125% collateral back to them in Bitcoin or something like that. That's great. But we take it one step further. So if you don't trust that lending desk or if you wanted an extra layer of protection around it, we actually require that lending desk to give Meow a 150% collateral in Bitcoin. If you were to lend to Meow and then we were to lend it to lending desk, we would require that lending desk to give us 150% in Bitcoin as collateral. We have more than we've given them. And if it ever dips below 125%, the value of the Bitcoin, We issue a margin call, and we're able to liquidate them in 24 hours if they don't get back to us. So we basically serve as a wrapper.

Has it ever happened? It hasn't happened yet. The market's been not super volatile. But this is the offering that a lot of the lower-risk kind of old-guard customers, like the bigger ones, like the unicorns, et cetera, are very excited about. Is there a steep learning curve for these companies or because they tend to be younger, they sort of get it? So the younger ones are more aggressive. They're open to the D-5 protocols, et cetera. and the RIAs and institutions, there is a steep learning curve.

But the security of the offering, when we explain it to them, they come around. They understand it very well. They understand that it's mispriced compared to the corporate legacy finance instruments. Are you working effectively with a number of different lending desks then to have this happen just so you have some diversification that way? Exactly. So it's not pooled, by the way. It's not like you give to meiao and we kind of mix and match how we want.

That's another concern that we have with other yield products. They do loan re-hypification. They mix and match. their books aren't transparent. You pick your counterparty effectively. You pick the yield source on Meow. It's a dashboard that enumerates all the options. And you can pick the collateralization requirement you want. So if you want it to be unsecured for a higher rate, you could do that. If you want Meow to hold 150% in Bitcoin and collateral, then you can do that. And by the way, that's another killer feature we have is a lot of companies are not equipped to build a

margining system and custody Bitcoin and hold it against a lending desk. And why are you guys uniquely situated to do this? There's only a handful of people who have worked with HSMs, et cetera, hardware security modules, we helped build Jaminize custody offering back in the day. We were a team of six crypto engineers. So this is our bread and butter. We know what we're doing here. And that's like an added layer of assurance for our customers. Clients can effectively pull a few levers and understand if I do this and I have more collateralization, my yield's going to be lower. If I go this and take more risk in defy, my yield is going to be higher. So they can look at what their options are. Exactly. They can diversify however they want. And we're able to offer

potential yields of 4% for the over collateralized offering. So when you said there's never been a default, even in 2020 when Bitcoin went down. Did it go down 50% of the day? Yeah, intraday. It was something like that. It was 40 to 50% when COVID hit that one day when everything tanked. Explain to me how that doesn't blow everything up. Well, a lot of these lending desks have very strong margin systems. So they would issue margin calls to their counter parties. And they've got strong assurances on that. I mean, the margin system worked very well. It's been battle tested. And we don't think that we're going to see an intraday swing like that again. But even if we did, it's been battle tested once. Does the transparency of the blockchain make like the lending

easier because you see what your counterpart is exposed to, or is that not really the case? That's a good question. I don't think so, because the lending desks end up lending it to a hedge fund or a trader, and they have to understand the risk there. But so ostensibly, those lenders are underwriting the risk of their counterpart. Exactly. Yeah. Okay. So you're trusting them to do that. Let's circle this back to compliance, because this is a sticking point. Again, unregistered securities, what makes me out a viable option? The fact that we go after accredited investors allows us to lean into the fact that our offering is very likely of security. And in doing so, we are not in the same regulatory, even discussion as kind of

the news that you've seen. When you say very likely a security, what does that mean? We take a very conservative position with all compliance things, all security, compliance consideration. And there's no judgment whatsoever here. It's just we are taking a different approach. So when we get that question a lot, is like, is what's happening in the news affecting you? No, because we built this company on the assumption that that could happen one day. And we came from Gemini, for example, we're very compliance oriented. That's kind of our bread and butter. Are there any fees involved for the businesses that come to you or is it effectively like a bank where you're earning a spread and that's how you make money? We don't really care too

much about taking a fee right now. That's all negotiable. We just care about getting the AUM through the door and giving people access to these offerings. But yeah, we're able to take the difference in the interest earned from the fund versus what we offer the customers. But it's not a priority right now. If somebody wants to dial it up, what does that look like? Let's say somebody's like, all right, I've got $4 million, and I'm going to barbell it. So I want to put $750 in the Bitcoin, 150% over-collateralized loan, getting 4% that sounds terrific. And with the quarter million dollars, I want to go for it.

And what does that look like? Exactly. So, by the way, it's all cash on their perspective. So they would deposit into cash into any one of these offerings. So a lot of times we'd see them put the vast majority of that $4 million into the blue chip over-collateralized offering where they deposit cash into Meow. Meow gets the collateral from the counterparty, we loan it out to them. That might be 75% of their funds, for example. And the remaining 25%, they might put into a defy protocol like Maple Finance,

which can earn them potential yield of 10% right now. People are kind of allocating on our site, they're diversifying their funds between the blue chip and the defy, effectively. I'm curious, too, where do you think all the defy stuff could go in the future? Is there anything else that can be done there? Because, I mean, a few people have told us, like, the great thing about crypto is just how transparent it all is. And that could affect. effectively allow you to add even sort of more leverage and make you feel safer about that. So are we still just like scratching the surface as far as the staking and earning yields in Defi goes? What's coming down the pipe in that? Yeah, we're just scratching the surface and that's a great

question. So historically, the vast majority of like lending and borrowing and Defi has all been over collateralized because there's no concept of credit scores in Defi. So you had to post more collateral than you were borrowing because there's no way to know, there's no way to underwrite the credit risk of just some arbitrary blockchain address. So that's why everyone borrowing would have to post 150% in another asset. It's collateral before they borrowed. Now, we're just scratching the surface of unsecured lending. So Maple Finance is one of the first ones. And if you can get unsecured lending done right on chain, I mean, that's more efficient, it's more liquid, it's programmable. You can feasibly take the entire financial system of the legacy finance

and put it into a programmable, interoperable world, which is defy. So we're mega bullish on Defi for what it does for your U.S. dollars via stable coins, which is how we're powering now for some of our offerings. And also, if you're a fan of ETH, if you're a fan of Bitcoin, what it can do for those, for earning interest on those? How fast or slow does this happen before this is just everybody's doing it? Is that 10 years? And I guess part two of that question would be, do we really think that the giant financial

institutions are just going to let this happen? Or are they going to get involved? I don't think they really have a choice. It's happening as we speak. I mean, Maple Finance just has something like 500 million locked up, and they started pretty recently. I mean, that's the unsecured lending that I talked about. So defy is growing, crypto's growing, we have billion-dollar funds launching left and right, like almost every week these days, and just finding new developers going into these ecosystems, building new protocols,

becoming more interoperable. And the chains are getting faster, by the way. So Ethereum is working on scaling right now. Solana is now up and running. So it's happening. It's inevitable. It's too late to stop. These are the financial rails of the future. It's obvious. Is there any sort of minimum if a business comes to you? I know you said you work with some seed in Series A rounds maybe, but do you want a minimum amount to come on the platform for people? We initially had no minimum, but we've had such a queue these days that we've actually had to implement a minimum lately of $250K. What's slowing you down? Just getting to everyone, frankly, they're just onboarding with them, having a call.

It's just a lot. There's a lot of meat on the bone. This is yields at the end of the day that we're talking about. So talking to a broker dealer, we work with certain broker dealers. We work with RAs. We work with Series B companies, Series A companies. those are high touch relationships. So 2.50K is the minimum. So bringing this back to advisors because that's what we do. I'm curious. Okay. So if I want to get clients into this earned product,

how are you working with advisors and integrating with their software to make sure that they can actually report on this? Yeah, it's a little bit different per advisor, and that's actually been the trickiest thing. But the good news is that we issue 1099 interest statements. We have monthly account statements. So at a high level, they have everything they need. Programmatically, we're working on certain features. But at the end of the day, we have, in some cases, relationships with their customers directly. Anyone can onboard through the site. They can refer the customer through the site and have them deposit. We have heard countless times that we're the only offering that is appropriate for them because of our compliance apparatus. So you mentioned the liquidity for this.

Is it as easy as putting an amount in and clicking a button and that's how you get the money back? How does that process work? Yeah, this is all self-service. I mean, I wish I could verbally explain the dashboard. But when you have a meow account, you're a business, you're an H&I, your family office, you're an RIA, you have a dashboard that allows you to click in, get unique wire instructions, ACH instructions per offering that we have, and you're able to click the withdraw button for any of those offerings and get your funds out in whatever the terms are. So in most of these offerings, it's one to three business days. So it's self-service.

It's not like you need to call someone. We've made it all programmatic, which is really nice. Maybe let's close with this. So this sounds great. Everybody wants to earn some yield to their cash. What are the risks? Because it's really hard to quantify. What's the tradeoffs? Is it a one in eight chance of blah? But I know maybe you can't quantify, but just help us understand the risk profile here. The risk when it comes to the institutional lending desk offering, for example, is say Bitcoin went to zero and the collateral that the lending desk has, they're not able to sell it and everyone defaults that way. Or the collateral that we hold against the lending desk goes to zero. We can't sell it in time as well. That's the risk is if we see that happen.

Maybe this isn't your job, but I guess I would be curious. If somebody says to you, a company says, all right, business is going well. We've got $5 million in the balance sheet and cash. It's always there for a rainy day. How do you think about, would you say, okay, great, let's put it all to work? Or how do you think about like putting that to work? Yeah. So our unicorn customers, for example, without naming anyone specific, they tend to put somewhere between like 10 to 20% of their excess cash with us. So that's a very good starting point for them. And then as they get more comfortable with the offering, they can expand that. That makes sense. Because Cash is cash. This is not cash. This has much higher reward. Obviously, there's got to be some element of risk. And we know that there is some element of risk. So putting yourself in a position where you can get the yield, but not your business go under, God forbid, Mia doesn't make it. Yeah. And all of our offerings are completely bankruptcy remote from one another. So meow not making it does not affect the obligation of a lending desk, for example, to pay back the offering that you select into. That's a very key value proposition is everything's air-gapped from one another. Every offering is air-gapped. It's not just one meow pool.

of funds. We don't mix and match things. If there's a business that wants to talk to you and get into the queue, what's the process like? Yeah. So a lot of this is self-service, which is fantastic. If you go to meow.com, meow.com, meow. You click the sign-up button. You'll be prompted with some questions. Are you a high net worth individual? Are you a business? And onboarding is quick and neat. You just have to prove that you're an accredited investor. And then you'll have someone from our enterprise sales team or our institutional sales team reach out to you and do some verification. But it's that simple. All right. Awesome. Brandon, this is great. Thank you so much for coming on. Thank you. I enjoyed it.

Thank you, Brandon. Thank you, meow. Go to meow.com to learn more.