Bankless - 78 - Institutional DeFi Infrastructure | Fireblocks' Michael Shaulov

Starting point is 00:00:01 Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. David, awesome podcast today. And subject, I didn't know too much about. Who did we talk to? We talked to Michael Shalov from the Fireblocks Company, which just raised $310 million, which is all going to infrastructure to help people that get scared coming into crypto, which is, I don't know, more or less everyone, especially when there's a lot of risk at stake. So tend to gear towards institutions.

Starting point is 00:00:51 Fireblocks is a infrastructure for getting into the world of crypto, but not just getting assets into cold storage, but getting them into safe storage, yet also hooking into all of the cool powers that defy and the rest of the crypto ecosystem gives you. So we talked to Michael about what it's like to build that company and really how this company fits into the overall sphere of the crypto world and what they have really unlocked and are enabling over at the world of fireblocks. Yeah, absolutely. This is like a huge bridge to crypto to me. And it's an institutional bridge, not only to crypto, but it's also an institutional bridge to defy. So that's what's super exciting about what Fireblocks is doing. There are a lot of crypto custodians out there. You know,

Starting point is 00:01:33 Coinbase, Gemini, they will hold your keys. There's companies like BitGo, that sort of thing. But Fireblocks does more than that for institutions. They actually give them exposure to Defy Protocols. So if you're an institution, you want to trade something on Uniswamp, but you want to do it in a way that secures your private keys. Or if you want to deposit funds into compound or AVE, Fireblocks does this. So, David, this is really cool because I think it is, I guess, living out one of the predictions we've made for a while, which is kind of the Protocol Sync thesis. that the most decentralized, credibly neutral protocols will kind of tend to fall to the bottom of everything else and everything else will be built on top of them. We also talk a little bit

Starting point is 00:02:17 about the defy mullet, which is sort of an extension of the crypto protocols thesis, the idea that fintechs are going to start building on these defy protocols and become these hybrid crypto-fintech type things. And we're really seeing that play out with the fireblock story. That's like exactly what they are doing. They are the bridge to to this entire thesis. For me, the most interesting part of this conversation was how the similar skills from the Tradfi world, which we would consider to be like cybersecurity, when you take cybersecurity skills and then you apply them to defy and you use Ethereum and Bitcoin as your back end, like all of a sudden you have cybersecurity not around, you know, information and

Starting point is 00:02:59 IT for a traditional company, but now you have cybersecurity around bank accounts, right? Like your Ethereum wallet, your Bitcoin wallet. And that fundamental. changes the role that fireblocks has for going from a cybersecurity background to just infrastructure security and protection around your bank account, which is your private key. And so it really just like is a new evolution as to what cybersecurity means because now the cybersecurity is now fintech. Now it's a fintech service, not just, you know, protection around like your servers. And so the changing nature of the role of similar skills from Tradfai or from the legacy world into defy. I think it's a really interesting throughline that if you pay attention, you can glean a lot of

Starting point is 00:03:41 lessons out of this episode with Michael. Yeah, I love this conversation hugely bullish on what's happening with defy. Like the institutions now have a way to enter directly into defy protocols, not just one or two, but like all of them. Make sure you stay tuned where Michael talks about how like through fireblocks, they basically have access to all of the defy protocols that are available that can be connected through wallet connect. One question though, David, we did ask him near the end that I was sort of concerned about thinking about this is like fireblocks is not bankless. You are giving up your private keys to another entity in order to use it. Institutions kind of have to do that anyways in order to play in the space.

Starting point is 00:04:17 So what happens if everyone starts giving up their private keys? Do we get a less bankless world? So he answers that question. I think he had a pretty nuanced answer, which I really appreciated. So guys, we think you are going to enjoy this episode. Before we get into it, we want to thank the sponsors that made it. possible. Arbitrum is an Ethereum scaling solution that is going to completely change how we use defy. If you've been using Ethereum for the past 12 months, you've probably noticed the high gas

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Starting point is 00:06:01 where trades are matched with other humans, Uniswap is an autonomous piece of software on Ethereum, which is what Ryan and I call a money robot. No human counterparties or centralized intermediaries, just autonomous code on Ethereum. Input the token you want to sell and receive the token you want to buy. Something brand new in the Uniswop ecosystem is the Uniswap Grants program is now accepting applications for grants. We have been saying this for a while and we'll say it again. Dow's have money and they are in need of labor. If you think that you have something to contribute to the Uniswap Dow, apply for a grant to Uniswap.

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Starting point is 00:07:08 We have Michael Shaloff. He is the CEO and co-founder of Fireblocks. What is Fireblocks? Fireblocks is like the AWS of crypto banking. He's grown this company to crypto unicorn status already. So in late July, they raised over $310 million at a $2 billion valuation. Just blows my mind. If you're in the crypto institutional space, you already know,

Starting point is 00:07:31 about Fireblocks, but if you're not, maybe if you're a bankless listener, it's kind of a Defi power user, then Fireblocks is probably one of the most important companies in crypto that you've not heard of. And here's my favorite part. Fireblocks is Defi friendly. So I definitely see Fireblocks as providing an essential bridge between the institutions we've been craving to come into crypto and Defi. This is part of the Protocol Sync thesis in action. We think where the decentralized money protocols become the base layer for everything else. Michael, after that long intro, sir, want to say, welcome to bankless. How are you doing? Thank you. Thanks, Brian. Thanks, David, for having me. Doing great and, you know, exciting to join you guys in this session. Well, I bet you're

Starting point is 00:08:13 doing great because you guys just raised $300 million at a $2 billion valuation. I have two questions about this. First, how does that feel? And then second, what are you going to do with all this money? So it feels great. I mean, I think that I wouldn't say just the valuation and the money. I think it's the fact that it happened in a fairly short period of time, right? Because we started a company back in 2018 and we launched our product about two years ago. And probably the most important, actually the most important numbers for us are the fact that we have 500 clients, right? And the fact that we have about one, we grew the company to about 160 employees, right?

Starting point is 00:08:58 in that period of time. So just we're seeing the market expending and, yeah, generally exciting. The main thing around, I think, the funding itself, right, or the big question is what are we going to do with the money, is mostly around the fact that we need to continue and invest, first and foremost, right, in engineering and to be able to support the client base to support more and more institutions that are coming to this space.

Starting point is 00:09:28 both from engineering standpoint, operation standpoint, customer success, customer support, and so on. And the second aspect is that for our clients, it's sort of very important to understand that they're dealing with a stable player that can, you know, work with them on the long term, right? And the fact that we have now the balance sheet and the money and the ability to stay independent is, extremely important for our current clients and especially for the people that we are currently working on doing business with. So you mentioned, Michael, more and more institutions coming to the space. So is that what you're seeing? Are institutions starting to flood into the space? And give us a flavor for who these institutions are. Maybe some names listeners might recognize. Yeah. So

Starting point is 00:10:18 we are seeing quite a lot of the banks. It's a bit weird, right? Because I guess, in many ways the entire essence of crypto, right, was to basically maybe this intermediate banks, right? But inevitably what happens is that at least right now, a lot of those banks, they do have, whether it is FOMO, right, looking at the fintech players and trying to sort of like tap into that amount of, into that activity, into that revenue stream, into the, the opportunity, right? So that's, you know, one reason why they're doing it. And I think that the most interesting aspect of it is that the more intelligent group of, I would say, financial institutions, traditional financial institutions, you know, banks, exchanges, some of the more traditional fintechs,

Starting point is 00:11:18 right? They're basically looking at the underlying technology. And I guess in many ways what we call defy, but eventually the essence of blockchain, right, the ability to have autonomous finance that is driven through smart contracts and this sort of smart programmable money. And they understand that this might be the most impactful and interesting technology that they can, you know, that on one hand, if they're there early, they can use it as part of their competitive advantage, right? And on the flip side, if they're late, they can be completely disintermediated, right? So I think that there is a broad realization of that. And that's why I think people are sort of, those institutions are coming in, right? So I guess a good example that we always give and they invested in us in the

Starting point is 00:12:21 Series C is Bank of New York Mellon that we are working with to basically deploy the technology and build those capabilities. And for the listeners that are unfamiliar with Bank of New York Mellon, it's like the oldest bank in the United States. And they're the biggest custodian in the world. In fact, I'm not sure the exact number right now, but they hold some around $40 trillion of assets, right? So the majority of the assets in the world are actually sitting in Bank of New York.

Starting point is 00:12:51 Mark Mellon. And they do see, it's sort of public information, but they do have a fairly extensive plan around not only how they do crypto, like Bitcoin, Ethereum, but really how this is sort of, what is the progression to really touch on the traditional assets or the existing assets of their currently custody and how they can basically bring them into blockchain, tokenize them, and so on. Michael, you mentioned FOMO in the context of institutions. We talk about retail FOMO all of the time. Is it true that institutions can also get FOMO?

Starting point is 00:13:32 The individuals within the institutions can get FOMO, right? I guess like, you know, people are people, right? And yes, I mean, in reality, what happened was is that all those banks and institutions, they, somewhere in between FOMO and basically, you know, being cut off guard, right?

Starting point is 00:14:03 If you take J.P. Morgan Chase as an example, right? And I think it's an interesting example to look at. They sort of switched side over the last, I don't know, 12 months, 18 months, right? From the CEO, of the bank saying, you know, this is a complete fraud.

Starting point is 00:14:25 I don't remember the exact wording over there, right? Oh, I remember all of that. You know, Jamie Diamond said this, and crypto Twitter went absolutely berserk on these comments. But yes. Yeah, but I guess his main comment was, I think he had two comments. One, he said, like, you know, or three comments, that's like the biggest bubble of all time. You know, it's fraud. And his third comment, which I appreciate the most, is that he said that he will.

Starting point is 00:14:50 fire any employee that will touch crypto because he's stupid enough to basically invest in crypto, right? That was basically his most probably interesting comment. Yeah, I appreciate that, you know, very opinionate and gentlemen, of course. But the reality is, right, that the bank sort of publicly changed his stance, you know, very quickly within almost 12 months. But probably the crazy story, which I think is sort of maybe not very obvious to people from the outside, is that think about a situation where basically your employees are penalized for touching this asset, working with technology, right? And then everybody wake up one morning and basically the telling them like, oh,

Starting point is 00:15:50 Okay, now we need to go and execute against something that we basically have zero internal knowledge, right? No one in the bank have ever done a single Bitcoin or a crypto transaction. Now let's go and offer it to our, you know, tens of millions of clients, right? And that's like a very difficult situation where you basically trying to go from, you know, zero to 60 very quickly. you never took any driving lessons, right? Now, when I say FOMO, what I basically, it's sort of reflecting the situation because if you think about how this should have happened if it was well planned, they had, you know, 10 years, right,

Starting point is 00:16:40 to basically investigate, educate themselves, you know, do testing and just accumulate the knowledge the same way. that I and you guys did, right? But they're being, they're being cut off guard and the fact that they're seeing some of the biggest, you know, biggest fintechs, right, moving so quickly into the space sort of forces them to react quickly in a way that it is really unplanned. And I think that actually offers a great explanation as to why Fireblocks has raised such a large amount of money with such a strong valuation is because when institutions FOMO and when they realize that they are behind the curve with regards to infrastructure development, they realize that

Starting point is 00:17:28 they need to outsource some of this and then they turn to fireblocks. And so that brings me to, I think what we should really get into next, Michael, which is exactly what is fireblocks and why would an institution choose to leverage fire blocks rather than going and building out all of these same things in-house and doing it themselves. And while you give that answer, I'd like to ask the listener to put this into the context of the protocol sync thesis, which if you're not familiar with, you should definitely go and do your homework on the protocol sync thesis, because I think that's going to be a theme of what Fireblocks is and what it's doing throughout the show. But Michael, question to you, what actually is Fireblocks and what is the products and service

Starting point is 00:18:07 that you guys have to offer? Yeah. So we're basically making the ability for businesses to basically offer services in crypto is what does it mean? The first thing that means that we basically provided them as secure access to storing those assets. So essentially, what a technology that is secure and designed for institutional usage, right? So hot storage, cold storage, warm storage, all that is being basically packaged to the technology that they can consume and install and use, right, with all the complexities, regulations, policies, and workflows that they need. The second capability is around the ability to transfer assets between themselves and between their counterparties or business partners in a secure way. So I assume that most of the people on

Starting point is 00:19:04 the show familiar with the fact that when you're sending the transaction, you're sending a Bitcoin transaction, I'll be saying Ethereum transaction to your favorite exchange or to your favorite defy protocol, there is those, you know, depending if it's Bitcoin or Ethereum, 15 seconds or 15 minutes of a heart attack, right, that you don't know if you actually put the address, the right address, if you made a mistake, right? Yeah. Even if you're a veteran, you still get that, by the way. It never goes away. That's part of the extreme fun in this space. So, yeah, so, you know, I mean, I think that most retail users and most consumers and even prosumers, they would do a handful of transactions per day, right? If you are operating a brokerage, an institutional brokerage, you can end up doing hundreds of transactions like this per day, right?

Starting point is 00:20:01 If you are a big exchange, right, you're talking about thousands, right? So clearly to scale up, and by the way, an average transaction size in our network is around $100,000, right? So if you make a mistake, it's going to be a very costly mistake, right? And therefore, what we basically created is this concept that is called the Fireblocks Network, which is essentially a directory, a set of APIs and plugins that basically creating sort of like an off-term chain protocol that allows you to securely transfer those deposit addresses and identify the destination wallet or the counterparty that you're sending this transaction to and guarantee that you know if you know i'm i'm sending a transaction to to david this transaction will go to david by

Starting point is 00:20:59 selecting him in the directory it's not going to go to Ryan it's not going to be sent to the you know to the void, right? So that's basically the second capability, the fireblocks network that is, became, you know, sort of almost the de facto platform to work with digital assets. And then the last capability that we have is around all the access to tokenization, smart contracts, and defy. So it is slightly like, you know, different things. in our offering, but it's basically all the packaging around secure access to, you know, what we will call decentralized finance. So you just said three things there, Michael.

Starting point is 00:21:48 One is wallet, custody, storage, right? The second is a network to route transactions. And the third is access to what we call money protocols, DFI protocols, right? And staking, maybe I'll bundle in there, too. So those three things. But I want to ask an obvious question. And you kind of alluded to this. If you're like the person who just sent at an institution a, you know,

Starting point is 00:22:10 transaction with $5 million in it. And you're not quite sure whether it's the right address or not, right? Like you may have missed a character. Like, oops, right? That is not a good feeling. And obviously institutions can't do that on a daily basis. But like, is that like, I think some people are still sort of wondering, right? Like, why can't institutions,

Starting point is 00:22:33 just custody things on their own. Like the individuals listening to bankless, they do this all of the time, right? So why is it so difficult for institutions to enter this space? Why do they need those three surfaces? Why can't they just use, you know, hardware wallets and Metamask

Starting point is 00:22:51 and deposit in AVE themselves? Why do they need fireblocks? Because of the complexity and the security level that they need, right? So when we started Fireblocks, that's what institutions were doing, right? They would, I remember the first time I walked into one of our bigger customers, and they had a Ledger Nano with, you know, $80 million worth of Bitcoin on it. And they were doing, you know, 50 transactions per day, probably. And the way that it was controlled is that one guy had the Ledger Nano, the other guy had,

Starting point is 00:23:32 of the passcode and the third guy had the pin code and the the third guy had the other half of the pin code right and every time that they wanted to do a transaction and they basically had to come all of them together and and you know collaborate and sort of check do all the check and checks and balances right to basically guarantee that they're sending the right amount that they're putting all the protocols in place. And those protocols can be, those protocols can include, first and foremost,

Starting point is 00:24:08 are we sending it to the right recipient, right? But have we, they have compliance obligations, right? So they need to take that deposit address, scan that deposit address in something like chain analysis or elliptic, right, to guarantee that it's not a bad actor, right? Because they do need to operate within,

Starting point is 00:24:26 you know, the applicable law, right? depending on the jurisdiction, right, and for sanctions and things like that, right? They might have all kind of a procedures that they guaranteed to the regulator, that a transaction above, you know, $100,000 is going to be reviewed and approved by their accounting team, right? And, you know, and last but not least, I mean, let's assume the scenario that I just explained, you can have maybe like three people that is involved in that process. But what happens if you need to have five people or 10 people or 20 people that are involved

Starting point is 00:25:09 and maybe like they're working in shifts, right? So the complexity that is required to really do it in a robust way with high availability, with all the policies and procedures that those, that those entities need to comply is well beyond what something like a hardware wallet can provide, right? And this is basically where Fireblocks excels, right? On top of those basic offerings, you have a policy and workflow engine where as a customer, you can essentially codify all those workflows and all those approval processes.

Starting point is 00:26:01 At the fundamental level of the wallet, it's actually enforced cryptographically through this technology that is called MPC, multipartic computation, right? So you actually don't have a situation that you're relying on a one single device to hold your private key. The private key is distributed among a set of servers and endpoints. and mobile devices, and even if one device fails, lost, or actually like, you know, a quorum of, even under a situation where a quorum of those devices fails or being lost, you can still recover, right? So all those functionalities are, you know, fairly complicated.

Starting point is 00:26:43 And it takes time to build, right? It requires pretty significant expertise, both from cybersecurity domain, domain, I, IT, cloud, mobile, and so on. And most institutions, they just don't have that skill set. And even if they have that skill set, it takes several years to basically build a product with all the functionalities that we have. And they need, right, to actually operate. Michael, I just want to rewind the clock for the listener here back to like 2017, 2018.

Starting point is 00:27:18 There was this mantra when the crypto bull market was getting a little long in the tooth. It was still rising. Everyone was euphoric. Everyone was excited. And this mantra that people kept repeating, the institutions are coming, right? That was supposed to be the next wave of crypto adoption to send prices even higher and higher. But like, I remember at the time what you were saying about, like, large crypto funds, storing funds on hardware wallets. Like, that was how everyone was doing it back then in 2017, 2018.

Starting point is 00:27:50 I know a story of a crypto fund. I won't name them. But like, they used to talk. about how they would hide their recovery keys in a safe deposit box in a bank. And they would like use glitter and glue on top of the envelopes to create like a certain pattern of glue that couldn't be like repeated and tampered with and, you know, I guess made phony. And you couldn't really bring the institutions into that environment. Because if you are a large bank or a large, you know, pool of capital, you're not going to enter that level of Wild West.

Starting point is 00:28:21 So we needed like this layer of infrastructure in order to actually get the institutions to come first. What I'm saying is 2018, 2017, 2018, the institutions are coming wasn't even possible for them to come. That was a pipe dream. We did not have the custodial infrastructure on top of this to allow the institutions to start pouring capital in. And I think that's basically what you've built over the last three years with fireblocks. Does any of that resonate? Yeah. I mean, I think that definitely that's the majority of the story, right?

Starting point is 00:28:52 I think that there was lack of infrastructure, right, for that to happen at the time. Honestly, just to reflect on 2017, 2018, I think in a retrospect, right, there were a lot of probably regulatory issues, right, that even if the bigger institutions would have tried to enter the space, I think the regulation was still not there for them to really, you know, jump fully in, right? But honestly, those are, I think, the two main things that have been resolved over the last three years or so, which I think that I think allow a much more, you know, a real interest and a real movement of institutions into the space.

Starting point is 00:29:41 And honestly, you know, with how much I want to always say, like, you know, the institutions are coming, it's all there. You know, when big, when big institutions, even small institutions, even some of the smaller banks that we are working with, it's a fairly lengthy process. It takes them somewhere between, you know, six to nine months to basically go from inception to really signing contract and start deploying the technology and probably takes them almost 12 months to go from zero to production where they can offer those services. Right. So we are sort of in the middle of that process and in the middle of that happening.

Starting point is 00:30:23 So I think we're already starting to see some of those vehicles coming into the market. We are going to see even more of them towards the end of this year. And I think that there will be quite a lot that we're going to see in 2022. Hey, guys. I hope you're enjoying the conversation with Michael thus far. In the second half of the show, we bring up the conversation of regulation and how Michael and Fireblocks has had to traverse the changing regulatory landscape, as well as how are they positioning themselves for future unknown regulatory headwinds? Ryan asked Michael the question, what happens if Fireblocks is too successful? Is that a risk vector for Ethereum? Can they suck in too much money and become too much of a centralized risk for the rest of the ecosystem? I thought his answer, Michael's answer to that was particularly fascinating.

Starting point is 00:31:14 that and more is coming in the second half of the show. So don't go anywhere. But first, before we get there, we need to take a moment to talk about some of these fantastic sponsors that make this show possible. When you shop for plane tickets, you probably use kayak, Expedia, or Google to compare ticket prices. So why would you limit yourself to just one exchange when you trade crypto? When you make your trades, you want to make sure that you're getting the best possible price on your trade and that you aren't paying high gas costs that you could have otherwise avoided. That's why you should be using Macha. Mata routes your oil. orders across all the various defy exchanges on Ethereum, Polygon, Binance Smart Chain, and gives you the

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Starting point is 00:33:41 place. So when we talk about some of the 500 customers that you have, like, I see a couple categories here. There are kind of like the crypto banks, as we call them, like the blockfies of the world. These are a bit more, you know, crypto-native. And I'm curious what they use you for. There also seems to be the second person of like funds. You know, Galaxy Digital might be an example of that. Large capital pools. I don't know if they're staking. I don't know what they're doing, but I'd be curious to hear a user story for them. And then there are these fintechs and new banks. You mentioned one of the banks, Melon, but also these fintechs like Revolut that are using fireblocks for things. So like walk us through what each of these groups are using you for.

Starting point is 00:34:22 Is it across those categories? Is it like, you know, custody and also like, you know, payment, you know, trade? Or like when I deposit funds in something like BlockFi, how is fire blocks potentially getting involved? Yeah. So the way that we segment the market right now in a very high level is that we have what we call crypto trading firms, right? So that can be Galaxy, can be blocked power. It can be proprietary trading, hedge fund, broker, but essentially it's either they're basically trading their own money, they're trading money of their investors, or there are some kind of intermediary that is facing businesses from one side or credit investors on one side and then liquidity exchanges and so on the other side, right?

Starting point is 00:35:13 So that's basically category number one. That category is about 45, like basically 45% of our client base. And then the other category is what we will call business to consumers, right, or business to retail that for me, although maybe a year ago, there was a clear distinction between someone like Block 5, Celsius and, you know, Voyager to someone like Revolut. but I think that over the last 12 months, those categories,

Starting point is 00:35:44 they become more or less the same type of entity, right? Because, you know, for Revolut, which is the biggest, it's the biggest neobank in Europe. And, you know, for the listeners, I'm not familiar with Revolute, they sort of build a name for themselves for offering a credit card and an app through which you can, if you're traveling through Europe, you basically have very low

Starting point is 00:36:10 interchange between, you know, different currencies, right? So they came with a very interesting offering, you know, captured a very large customer base in Europe and then sort of expanded to offering regular banking services, right? And then they basically went into offering crypto, buy, sell, and, you know, recently also withdrawals and they have a pretty interesting roadmap over there. And then, you know, when you look at BlockFed, Celsius, they basically almost started from the other side of that spectrum. And they basically said, oh, you already like a very sophisticated user. You already have crypto.

Starting point is 00:36:47 Deposite with us. We will basically generate yield on that. But then they basically went downstream, right? They basically said, okay, maybe you're not that sophisticated. You can, you know, buy through us or sell through us. And by the way, you know, if you have crypto, why won't you also use our credit card? So they almost went down towards what Revolut started with, right? And I think...

Starting point is 00:37:10 Yeah, I totally agree with that, like, case in point, BlockFi just rolled out a credit card, right? They started purely crypto, now they have a visa card. Right. So I think that at the end of a day, broadly speaking, those are, you know, in the long run, there will be fintechs, neo-banks, however we want to call them, right? But basically, wallet providers that will have maybe start from crypto and then they're diversified into Fiat or start with Fiat and diversified to crypto. But eventually, I guess, there is a hybrid world that all of them are trying to compete

Starting point is 00:37:43 to be your main finance app and allow you to do whatever you want. And I think that hopefully, as we all believe here, over time, there will be this like more and more shift into things that are digital assets. So there is a question of like if you want to basically pay or send a transaction that is cross-border, why will you even use a credit card? why wouldn't you just use a stable coin, right? So that's, I think, like, you know, just the holistic vision for all of them. In terms of just, you know, to your question around where fireblocks plays in that flow, right?

Starting point is 00:38:19 So for all of those offerings, as a retail client, you're basically facing a custodial service that is operated by, you know, by the company. by the app that you're using, right? It's not that you have your keys, you know, on your device, right? You're basically sending your assets to a wallet that is operated by, whether it's BlockFi or Celsius or someone else, right? And what happens behind the scene is that Fireblocks is a technology provider that powers those wallets, right?

Starting point is 00:38:59 So your payment, the deposit address that you see, is basically a deposit address that is generated by, from a fireblocks technology wallet. The funds will be deposited over there. Each one of those entities has a different way of doing treasury management, right? So especially if we are looking into sort of those yield accounts, right, they need to basically take your Bitcoin

Starting point is 00:39:28 and do something with it, right, to execute some kind of strategy that, in if you basically deposit one Bitcoin in a year from now, you will be able to receive, you know, one Bitcoin.05, right? Like, you know, 5% interest or whatever they're currently promising. And, you know, usually there are a couple of strategies, right, to generate yield, right?

Starting point is 00:39:52 One strategy, which I would say is one of the most popular strategy is essentially to lend it to high-grade, borrowers. Most of those borrowers are probably very sophisticated hedge funds or crypto funds, right? That they borrow this crypto to short, you know, in some cases to short, in some cases they have other strategies, right? But basically they would borrow this crypto to execute their trading strategies. another option is to basically service as a gateway into DFI, right?

Starting point is 00:40:34 So you're depositing it with a CFI provider, but the CIFI provider will take advantage of the fact that they have, they can basically face something like compound or RV, and they will generate yield through compound or RV. And then the third one is that they might have some kind of prop trading or proprietary trading strategies by themselves, and they will allocate to that portfolio, right? So in general, all of those activities

Starting point is 00:41:02 that I just described, you know, from a settlement standpoint, I mean, they all require movement of the asset, right? Whether you're forwarding that asset to someone else that is borrowing from you, whether you're trading it now on some kind of centralized exchange, or whether you're basically depositing it into some kind of defy protocol,

Starting point is 00:41:22 and basically the institutional desks in those entities that are responsible of executing those strategies. And usually there isn't like one strategy that those entities will go after. They will try to diversify to minimize the risk of some kind of, you know, specific market event. They would use fireworks, right, for the management, the treasury, the movement of the asset. When you say treasury, do you mean custody? Is that what you mean?

Starting point is 00:41:50 Well, when I say treasury, I basically mean how do you move the asset between, like, like treasury operation, how do you move sell the assets between different venue? Like a very simple treasury operation might be that, you know, I'm using cold storage within Coinbase, like Coinbase custody, it's like their institutional offering. I'm using them as my code storage provider. But I also trading on four different exchanges, right? So I need to pull funds out of Coinbase and now I need to basically deploy. that crypto on, you know, BitStamp, Crack, and FTCS, right? I need to do all this movement.

Starting point is 00:42:31 Maybe now I have too much crypto on FDX. I need to go and move that crypto to BitStem. So all those movements, this is what I call Treasury. Got it. So it's not in those cases when you say Treasury. It's not that you're always providing custody for those assets, though in some cases it sounds like you can and you do. But when you say Treasury operations, you're talking about kind of the movement of those assets. it's, you know, wherever it needs to go, wherever they need to go. Yeah, so we do provide a lot of the custody for those assets, and it really depends on the clients.

Starting point is 00:43:04 Some clients would use us for 100% of the custody. Some clients will use us for a portion of the custody. Most clients would use us for a certain percentage of custodying the funds. But we also, we are sort of not really, religious or fundamentally obsessed about it, all the custody is supposed to be with fireblocks. In fact, we do believe that it's a good thing that you have, it diversified across, you know, multiple high, you know, high grade repeatable providers, just, you know, in terms of risk concentrations and things like that.

Starting point is 00:43:45 That kind of brings me to how you see yourselves, Michael. So I think you, I understand your background is like cybersecurity, right? And so you probably started this with like a cybersecurity mindset, right? Like, okay, how do we keep these crypto assets safe? Like there are these hacks and there's Mount Gawks and there's all of these things that, bad things that can happen to your private keys, right? And lots of incentives for people to steal them. But now it seems like you're something else.

Starting point is 00:44:10 There's some kind of a fintech, maybe even like a bank. I said in the intro, an AWS for crypto banking, basically. And that seems to me to be a good definition. How do you think of yourselves? That's actually a good summary. of the journey, right? So when we started, our thesis was that it's a cybersecurity play for finance. So just as an anecdote, right, I've been in the cybersecurity space for about 20 years, right,

Starting point is 00:44:42 before starting fireblocks, both in, you know, very technical roles and eventually in, you know, commercial roles, you know, sold my previous company to one of the biggest vendors in the cybersecurity space and then it was running basically their innovation products, which was their mobile and cloud. And when you're in the cybersecurity space, there is actually a very interesting, again, an interesting number, right, that 40% of the cybersecurity revenue is actually coming from the financial vertical. So what you basically understand when you spend.

Starting point is 00:45:18 I had no idea, by the way. Yeah. And that is in a pre-private key world. No, that's just like selling firewalls to J.P. Morgan. Okay, got it. Yeah. We're not dealing with bare assets in this world. No, no, no.

Starting point is 00:45:34 No, I think there is also a lot of, by the way, misconception around in the crypto space or the crypto space is being accused for this sort of extreme fragility around bare assets and the fact that you can lose those assets, I think people just don't realize the amount of assets, death, hacking that is actually happening in the traditional space, right? And by the way, like, for anyone on this call, every time that you hear that people accusing crypto

Starting point is 00:46:05 at being the main driver for ransomware, right? You know, Google FBI business email compromise. and what you would discover, that the amount of fraud and the amount of extortion that is happening on traditional rails with US dollar across Swift and ACH is tenfold than everything that is happening, if not more, than what happening with ransomware. Because the number four, just a very stupid way of doing extortion and fishing, which is called business. email compromise. So basically someone hacks my account and the CEO and then sends an email to my CFO. We forgot to pay to this vendor in China, $40 million. We need to do it today. Otherwise, they would stop our supply chain. And the CFO actually, like, you know, goes into the bank accounts

Starting point is 00:47:07 and wires that money through China. That's like a $3 billion per year front. Okay. Wow. Yeah. And that's an FBI number, right? So if you, if you Google it, you'll actually land on a website of the FBI. And that's the number that they publish. And, you know, they have all those sort of recommendations of how you're supposed to avoid. Okay. And no one accuses the banks that basically they're the main driver for, or no one accuses accuses Swift or ACH that they're the main driver behind a $3 billion loss per year for the U.S. industry.

Starting point is 00:47:52 So maybe to go back to my point is that what you do realize is that the financial, what I've realized, right, is that one, the financial industry is at the end of the day probably the most interesting industry to start building, some kind of cybersecurity play, right? And it was also very clear for me at that point of time that when we look at blockchain, it's a transformative technology, right, that, you know, assuming that everything plays outright that all those banks, well, either they will disappear, right, or they will have to re-platform into this technology. So it's not going to happen in five years, right?

Starting point is 00:48:40 but, you know, over the long horizon, it will happen. And what we initially said to do is to basically build a security solution in some ways you can think about it like an antivirus or a firewall right for crypto, right? Very quickly we find ourselves, well, you know, I personally find myself in probably the most intense crash course around finance that, you know, I had to understand what is an option, what is the derivative, you know, what is settlement, how clearinghouses work. and how the entire plumbing is, of both the traditional world and the new world, is basically structured

Starting point is 00:49:19 and to basically realize that we are actually not a cybersecurity company. We are a fintech infrastructure company that, you know, maybe in some ways you can think about us as the AWS of this space or you can think about us as the Shopify of this space, but it is a fintech infrastructure company by all means. And that's what we are. And I think it also required us to think very differently around our business.

Starting point is 00:49:51 What are the risk? What are the regulation? We need compliance people. We need things that, you know, as a cybersecurity or just like an enterprise sector business, you simply don't have those people in the company. But if you're a fintic company, this is sort of the bread and butter and the cost of right. the business. And Michael, I actually think that that is the most interesting part about this conversation

Starting point is 00:50:14 where, like, if Fireblocks was a legacy, just, you know, security company, maybe it's one of his customers would have been like Goldman Sachs and you would have just prevented fraud from Goldman Sachs. But now one of your customers is Ethereum or one of your customers is Defi, right? And you are connecting, you know, Ethereum to other customers, right? So that is the new infrastructure, or the new security that you are providing, and that fundamentally changes the nature of your business, as you just said. And so they talk about that evolution from just going from a software security company to realizing you are now actually dabbling in the world of financial services.

Starting point is 00:50:54 And kind of to what Ryan said, starts to make fireblocks kind of feel like a new bank, right? Like a kind of a place to deposit your assets. Would you agree with that take? And talk about just the evolution of fireblocks. blocks from going from a security providing company to more of a fintech company. Yeah. So I don't think we don't view ourselves honestly as a new bank.

Starting point is 00:51:16 We do view ourselves as maybe the, you know, if you want to take the parlor to the bank, right, then in the most traditional way to think about it, maybe we are the company that sells the safes that are being installed. You guys are Brinks. Because it brings security. Because Ethereum is the bank. Yeah. And Bricks.

Starting point is 00:51:36 Yeah. Yeah. And Briggs, right? And there is, and I think that there is also a fundamental question that I always mentioned to people. I think, you know, at least for the more traditional financial folks, it just like blows their mind, right? But what is really custody, right, in the space? Because at the end of the day, the blockchain is the custody, right? The real sort of custody solution is actually not fireblocks. It's not blockfi. It's not bank of New York Mell, right? The real custody is Bitcoin, right? The real custody is Ethereum, right? Because the ledger, like, of who owns what, right? And the gatekeepers to your account is eventually the blockchain and the miners, right? What we are doing and the banks and it is basically the access control there, right? We are the one that are basically helping you to secure identity, helping you to basically secure your password, right? If maybe like, you know, we're trying to maybe put the analogy in place. If in the traditional space, Citibank is your bank and your custodian and, you know, you have one password on your computer, which is basically your login

Starting point is 00:52:52 into your account to transfer the money, right? You know, fireblocks and all the people that are doing wallets is, you know, the one pass, right, that that helps you to to securely control the password. Now, it's clearly like, you know, to do it in an institutional way is very different, but that's basically, I guess, one way to look at it. I think another way to look at it is really, okay, we are the financial infrastructure that is more related to maybe at the most basic layer it's like brings some of the folks that put the safe into the bank, but more broadly today, it's almost like a core banking system, right? So for people that are unfamiliar with how banks are run in practice, right? There are sort of a dozen companies worldwide, like, you know,

Starting point is 00:53:49 FISA, Finestra, and so on, that those companies basically develop. all the, you know, databases and all the software that the banks are running on, right? The bank itself is basically a regulatory license, a bunch of people, you know, a customized UI, but on the back end, there is basically a technology that is usually, not like the bigger banks, but it's like, you know, the mid-sized banks, it's usually off-the-shelf software that is essentially running all that. It has a bunch of plugins for your credit cards, for the compliance, for for wiring money and so on, for lending and boring. And Fireblocks is sort of the equivalent of that for digital assets, right?

Starting point is 00:54:42 You're a business. You have the license or you don't need the license. Now you want to to do that. You consume our software and, you know, we. make it very easy for you and very robust for you to run it's funny because this is all a new paradigm you know like when people are new to crypto they'll get a hardware device like a ledger or something right and they'll be like oh my tokens are on this USB stick and it's like no they're actually not they're still on Ethereum right what you have on that USB stick is private keys

Starting point is 00:55:17 to go unlock a vault on Ethereum that's why when you're saying like fireblocks is like Brinks It's almost like last pass because you are doing that private key management for unlocking the vaults that are on Ethereum or Bitcoin or Pick your other blockchain, right? But the actual storage of the assets, as weird as this is, happens on the chains themselves, right? That's where the assets always are. It's a different mental model that I think people need to wrap their heads around, and it's new for crypto. It's very difficult for people to... It is. It's weird.

Starting point is 00:55:50 Yeah. It's a little weird at first. Yeah. Well, let's talk about something else that's weird. weird. And that is this defy thing. It's kind of weird, kind of strange for people. And I think, I've heard you say before, Michael, some of your past conversation interviews, that you're a defy bull. And it seems like you guys have oriented your products that way, too. Can you tell us why? Why are you bullish on defy? In one sentence, because, or maybe if it's like in one

Starting point is 00:56:16 word, because that's the essence, right? I mean, at the end of the day, um, Right, there is Bitcoin, and Bitcoin has some specific property around a reserve, right, a reserve asset. But everything else, the reason why we're doing it is because we are able to create those tokens that represent some kind of asset, right? I mean, it can be, you know, stable coin, it can be NFT, it can be a Kiti, right? the digital kitty on the blockchain. It can be a real estate asset, by the way. Funny enough, I think people don't really remember, but the NFT standard was actually,

Starting point is 00:57:03 I think originally was invented because people wanted to tokenize fractional real estate, right? And then what we're actually able to do is to build this unbelievable machinery that are the defy apps, right, that replicate what traditional financial institution had to do in a centralized way with huge amount of counterparty risk, with human procedures and human oversight and human errors, right? And we are able to execute those things in an autonomous way with governance, right?

Starting point is 00:57:48 and with autonomous governance and basically allow interactions between two people over the internet from two sides of the world without having zero trust both between them but also like there is no intermediary that they both need to trust

Starting point is 00:58:13 that might default defraud or make a mistake which will impact both of them Let me ask you this, though. Like, you're from cybersecurity, Michael, like, is that a little bit terrifying? Defi terrifying? Like, one hack, one error in the code, $250 million gone. You know, parity wallet hack.

Starting point is 00:58:31 Yeah. Gone. Yeah. I mean, I am, okay, but I think that it's a maturity, right? There's sort of like a maturity curve that's happening over there. I mean, I'll give maybe like a very different example. you know, a year ago I bought a Tesla and most of the time I drive on autopilot, right? And it works.

Starting point is 00:58:56 Like, you know, I work like I drive at 60 miles per hour, you know, on autopilot and I sort of trust the vehicle to be able to perform something that probably three years ago or even five years ago would be terrifying, right? And it's sort of like, you know, there aren't examples of bad things that. happen, right? And, you know, you talk with people that were using autopilot, you know, three, four years ago, they tell you about, like, you know, crazy, conky experiences that it would just like stop in the middle of the highway, and it was just a complete disaster, right? But over three years, basically, Tesla was able to bring it into something that, look, you know, I can drive for two hours without essentially, you know, trying to interfere with the driving, right? So I think, you know, the unfortunate reality is that there will be, a lot of money will be made, a lot of money will be lost by the time that we'll get to the point where we see full maturity, right, of DFI.

Starting point is 01:00:02 But with that being said, you know, you look at the, on the massive protocols that we have, compound, avis, uniswap, right? I think that, you know, knock on wood, right? With those protocols, we're already approaching a point where the technology risk is substantially low that will allow people to deploy it without huge amount of concern, right? And I think that the real point of that really happening is that when those protocols will be insurable, right? And there is also a question of what will be the mechanism to insure those protocols because it might also be the case that they will be not be insured by, you know, AIG or Munich Creed. They will be insured by also, again, some kind of a decentralized finance-based insurance capability. but, you know, I think that with the bigger protocols, we are slowly getting there.

Starting point is 01:01:11 But it takes time, right? But I think that if three years ago it was, you know, somewhat delusional, right? I think we are at the point where, you know, together with compound, we launch compound treasury, and, you know, we're working with AVE Arc on things that for people that understand the technology, they are willing to go in with massive amount of capital and use those protocols. Michael, earlier in the show, you talked about how a lot of your clients will migrate funds across different exchanges. I would suspect that's a decent amount of people just taking arbitrage opportunities across CFI exchanges. But what about people's activity?

Starting point is 01:01:54 What about your client's defy activities? Can you kind of compare and contrast the amount of activity that your clients use in a CFI world? And then also, how much activity is in a defy world, how do those things compare? And then when they are using the defy things that Fireblocks is hooked into, what is the frequent activities that you see your clients doing?

Starting point is 01:02:16 Yeah. So let's start with some, again, numbers, right? Right now we have about, I would say, 80 clients that use our DFI plugins, right? Out of, let's say, 500 clients

Starting point is 01:02:33 or let's say like, you know, 450 live clients, right? So we are approaching, right, the almost like, you know, the 25% I guess, right, of clients. And, you know, we see, I think, on a daily basis more and more clients, basically, asking us to activate those plugins for them, right? So there is like a daily progression into that. And just to set sort of the time frame, we basically launched our DFI, beyond what we had with compound, which we launched over a year and a half ago, the main capabilities we launched at the beginning of this year, right, basically around January. So in six months, we basically managed to almost activate one quarter of our client base to work with DFI or they activated themselves. That surprises me, by the way. 25% is a lot higher than I thought it would be.

Starting point is 01:03:31 Yeah. I mean, also for me, I think that we didn't expect that there will be such a huge uptake. I mean, I think that as of right now, there is still a lot of crazy things that are still, you know, happening. So I think a lot of people are still experimenting with, you know, liquidity, mining. and they, every day they are trying basically new protocols and, you know, it's not only Ethereum.

Starting point is 01:04:06 We see people doing it on, on, on, on, on Bynon smart chain, which we support also. We see them doing that on Polygon and Matic and those protocols, right? So you basically see some kind of like, you know, all over place activity. And, and I think a lot of that is somewhat, of experimentation, we do have quite a few clients that they have very clear strategies, right,

Starting point is 01:04:37 in terms of how they work with DFI, how they work with, for example, for example, something which I always found a very interesting example is stable coin arbitrage opportunities. So basically, you have this temporary arbitrage between synthetic stable coins, right, and the asset-backed stable coins like USDC, right?

Starting point is 01:05:09 And you have different yield curves between them, and there is an arbitrage. So there are people that are essentially matching that arbitrage. And I guess the fascinating thing about that, right, is that first and foremost, it's a strategy that is not like a a crypto native strategy. It's basically a strategy that is taking from FX where people will basically do foreign exchange currency arbitrage.

Starting point is 01:05:43 And the second aspect of it is that because of what those people are doing, they essentially stabilizing the value of the synthetic stable coins, right? Because they essentially, the activity they're doing is, is continually sort of like, you know, bringing them closer to the actual dollar, right?

Starting point is 01:06:07 And, yeah, and that's, you know, it's not the vast majority of what people are currently doing, but that's maybe just a very interesting example of things that I've seen people doing. There is also maybe another example that is just our personal, example of how we use defy internally, right? So about 30% of our clients, instead of paying us with wire, ACH, or credit card, they pay us with stablecoin. And in general, in the very beginning, we basically told people only to send us us USDC. And over time, we basically started to allow people

Starting point is 01:06:52 to pay us with both Pax and USDT. Now, the main issue that we have, is that we don't, eventually we do need to, at some point, we do need to off-ramp those tokens to Fiat, right, for accounting reasons. But what are we doing in the meantime, right? The first thing that we do is we do use, when someone, for example, pays us with USDT, we use either uniswap or curve, right, to immediately swap it to USBC with a very fairly minimal sleepage, right? The second thing that we do is that we do use compound and avid to basically generate a much

Starting point is 01:07:34 higher interest rate on those deposits than any bank can offer now for, you know, the money that we raised from the VCs that is currently sitting in the bank and, you know, in a good day, we're basically getting, you know, 25 bibs, right? So, and that just, this is just sort of a really, interesting example where I think, when I think about the real value of that, that's, for me, it's a mystery how come there isn't sort of a huge amount of businesses trying to do exactly that. Yeah, I totally agree.

Starting point is 01:08:14 I love, by the way, that you are dog-fooding your own tools to go bankless and, like, dog-fooding these crypto protocols, basically. And, like, what we've found to you is, like, while we can't completely severize with the traditional banks of the world, right? The defy ecosystem is just better, right? Like lower wire transfer fees, higher interest rates, like just immediate transfers. Like, it's just a better financial system. So, like, you know, good on you guys for leading the way and actually using the tools

Starting point is 01:08:45 that you're building. Yeah, I mean, the first time we've done it was actually when we had a client that wanted to pass $30,000 with a credit card. And our option was to basically take it on Stripe and then to pay $1,000 to Stripe as a commission. Yeah. 3%. Yeah. And I thought like, okay, send it to stable coin.

Starting point is 01:09:07 That was, you know, a year and a half ago when the gas prices were low, right? So it cost us maybe 30 cents on the gas, right? But, yeah, instead of $1,000 and 48 hours to get in our budget. bank account, it was 15 seconds and, you know, 25 cents, right? So it's not 10 times better. It's like 10,000 times better, right? Michael, earlier you talked about how Fireblocks is both the service provider for compound treasury and Ave Arc, the respective, like, institutional versions of those two major defy protocols. And before this conversation, I kind of thought that compound treasury and

Starting point is 01:09:49 AVE-Arc would be doing their own K-YC in order to do their own onboarding for institutions. But it sounds like they are outsourcing that to fireblocks and allowing you guys to do that lift of the journey for institutions to start to use these defy apps, which brings me to my question, A, is that true? And B, when you do the onboarding for an institution so they can start to use compound treasury, by definition, does that also make that same institution ready to be using Avey Arc? Is that how it works? So what we do with Avey is different than what we do is compound.

Starting point is 01:10:24 And I think that the way that I look right now on the institutionalization of DFI is that we are currently in the sort of experimental phase around the compliance issues over there. And that's why I think we are. taking different approaches with each right for for compound we actually for compound treasury we actually not the the the we are not the K YC provider because of the way that they basically structured their offering okay and and and and And what is basically being done over there is that we do have an entity that is not our main entity. It's a subsidiary that has specific licenses that help them to do what they need to do.

Starting point is 01:11:36 And clearly, there is a technology that is used by them to do it in a secure way, which guarantees both the, you know, unramping the funds, deploying them into the protocol and so on. with with with avid the situation is actually somewhat different with aweb what we are really experimenting is around creating um what i would call as an institutional pools right where they're sort of gated right and they're gated by k y c and it's true that at least in the experimental phase of this fireblocks is the fireblocks and the fireblocks network essentially

Starting point is 01:12:23 is sort of the KYC gate right because we the advantage that we have is first of all because of some specific capabilities that are related to that entity we do have the machinery and the technology

Starting point is 01:12:44 to basically properly KYC clients or institutional clients, which is not a trivial task. And the second thing is that we know or we are able to basically enforce a linkage between your identity and your wallet. That is related to both the technology.

Starting point is 01:13:06 It is actually related to MPC. And therefore, when we allow you to enter through that gate, because there is a white listing of your wallet, we can guarantee that this is your wallet, right? We can guarantee that this is your wallet. We can guarantee that the assets that are flowing through that wallet's the path, that they belong to you.

Starting point is 01:13:31 You know, if you take, if you took assets from a bad actor and you're trying to throw them into the pool because we have a partial control over that wallet through MPC, we can at least block you from doing that, right? So the technology, there is a more interesting sort of combination of a mixture of technologies, which basically allows us to operate those gates. So Michael, I'm curious, like if you're to summarize this for us, when you're talking about those DFI plugins that your clients have access to, right?

Starting point is 01:14:05 This could be the institution, say, that wants to just invest in AVE and get a higher yield on their stable coins or compound, right? So you've got like these lending and borrowing protocols. What other protocols do you have too? Just high level. Do you have like trading? If I'm an institution, can I click the uniswap plugin or the sushi swap plugin and start trading these long tail assets? And how about staking? Can I just like switch something on and suddenly start staking? Yeah. So first and foremost, initially we started with building the experience into the product itself as a very intuitive experience where we actually have it still with compound, where you have an asset that you see in the wallet, you can click on it, and one click you basically, it's being deposited into compound, right? But what we discovered very quickly is that there is this sort of like huge long tail, right, of applications that everybody want to access into.

Starting point is 01:15:01 Some of it is because, you know, the real use case, and some of it is just basically chasing after some kind of temporary yield, right, that exists over there. So we had to generalize. And the way that we generalize it is by essentially creating three main approaches. The first approach, which is sort of the easiest to understand, is API. So there is an API. If you want to interact with any smart contract, you have what we call the Fireblocks

Starting point is 01:15:30 Defi API. You basically can invoke a function. That function is a function of a smart contract. and that has policies that are being checked and so on. The second is a browser extension, so very similar to Metamask, but instead of basically using a wallet that sits in your browser or a hardware wallet, it's actually links into the secure wallet platform of Fireblocks, the Fireblocks Vault.

Starting point is 01:16:01 And the third, which is my personal most favorite plugin, is through Wallet Connect, right? So you go to a website, you basically click, you go to compound or you go to one inch, right? And you basically click Connect My Wallet, you click Wallet Connect, and then you're basically taking your phone, there is the FireBlock's app, you scan it, and behind the scene it basically creates a bridge into your vault,

Starting point is 01:16:26 and then you can basically interact through the Wallet Connect Bridge. So those are the three capabilities that we have as it relates to Defi, and because of the generic capability there, yes, you know, you can use compound, you can use AVE, but you can use Uniswap, Sushi Swap, you know, DY, DX. You can use anything on DFI-Fi then, and Wallet Connect, anything that has a Wallet Connect interaction point. Yeah, anything that has basically Metamasker wallet Connect you can use. So what do you think of this idea of institutional D-Fi? So we're seeing it start to play out with AVE, start to play out with compound.

Starting point is 01:17:06 Is this going to be a thing? So you said you had 25% of your customer base start on defy. I'm guessing that's just all happened within the last year or so. Like a defy summer and post-Defi summer phenomenon. But like what's it going to take to get institutions really comfortable with defy? Is institutional defy going to become a thing? Yeah. So I think it's important to clarify, right, that the 25% that are using it,

Starting point is 01:17:31 Right now, they're using just the regular protocols, right? They're using those three extensions, API, wallet, connect, web browser extension, and they're accessing the same pools as anyone else. The same pools as the retail, right? There is nothing unique about the specific protocol that they're accessing. So I guess that's one version of institution of defy, which is just like institutions now have a managed way to get access to all of the other DFI protocols that we have.

Starting point is 01:18:02 Yeah. That's one definition. Yeah, they have a convenient, highly secure way with internal guardrails that allows them to do, right? The next phase of it is to solve the compliance or the regulatory issue, right? And I don't know what is the percentage of the 75% that are not in DFI right now from our customers that the reason why they're not in defy is because of the compliance regulatory issue but at least from the subscription that I'm seeing into testing some of those newer initiatives right like the compound treasury and the aviarch it is like you know 10 20 percent at the very least right

Starting point is 01:18:52 that are interested in in that type of product there is an overlap by the way between the one that are using it right now and the people that want to be part of that offering as well. But definitely there are unique names over there that are not currently playing in DFI because they don't have, because from a regulatory standpoint, they're uncomfortable with participating in a pool where there is uncertainty around where is the other crypto that is in that pool is coming from. Right. And that's just basically. basically, I guess, some kind of a regulatory limbo situation. And I guess like, you know, I don't need to basically, I mean, we can.

Starting point is 01:19:39 But I'm not sure that I need to give like a 30 minutes overview of all the different approaches that, you know, from Thataf to FinCent to, you know, all the other regulators, everything that they're trying. And, you know, the crypto bill in the United States. but I think that that entire, the regulatory environment around DFI is unclear and is inflex, right? So their only way to deal with it is basically to say, okay, what are the most extreme procedures that I can take to still benefit from it? And that means that I'm going to only access basically a subset of the protocol that is gated and it's guaranteed. that I'm basically entering into this game with people that are in the same compliance level as I. Let's touch on regulatory for a minute. Difficult to speculate what's going to happen next.

Starting point is 01:20:39 But I'm curious how regulatory issues have impacted your business and what you really think about. Like, what keeps you up at night with respect to regulation? I think we've seen in the past couple of years definitely some tailwinds, right, for crypto. Like, you know, good regulatory initiatives. OCC said, Banks can hold crypto, for example. I imagine that was impactful. That was a great thing.

Starting point is 01:21:01 We also have seen some headwinds, right? There's the Gary Gensler speech that just came out as we're recording this this week. There's comments like shadowy coders in the Senate. There's also, if you look toward the east, Central Bank digital currency in China, what they're doing to like get crypto miners out of China. But like, what's your take? What do you think about where we are with respect to regulation now? And what kind of worries you, what keeps you up at night?

Starting point is 01:21:25 I wouldn't say that I'm not worried, right? But I do think that on the long run, certain type of regulation is both necessary and good, right? The main concerns that I have is that, you know, when you have, you know, hammer, every problem looks like a nail, right? And that's the situation right now that the regulators, they have frameworks that were created in the 40s, in the 1970s, in the 1970s, right? But those frameworks are, one can argue if they're useful or not useful for a specific type of ecosystem signal or finance. I mean, for everyone who spent enough time with the technology, he understands that the,

Starting point is 01:22:31 and I think like, you know, there is a slight difference between the SEC sort of view on things that they're coming in and they're basically saying, look, you know, let's make sure that people are not being defrauded, right, through illegitimate ICOs to trying to enforce, you know, travel rule and compliance and BSA AML through tactics that just technologically do not comply, right? Because at the end of the day, let's take it like, you know, the most extreme proposals over there, which basically were trying to force KYC on hosted, unhosted, like, you know, take a, take defy developers, to hold if I have developers as accountable, right, for what they are building, I think anyone who understand this technology, you know, enough understands that, A, you know, it's just going to hurt the people that are doing the legitimate things.

Starting point is 01:23:38 And the people that are wont to use this technology in an illegitimate way, right, the cyber criminals, the, you know, the regular criminals or whatever, they can bypass all those things at the click of a button, right? There is nothing that holds you from, you know, taking a paper wallet, right? I mean, let's take like, you know, the latest, one of the latest proposals, right, that were put in front of the Senate that they basically said, oh, by the way, you know, unhosted wallets need to report on tax. Well, guess what? I can print a QR code on this piece of paper and it becomes an unhosted wallet. So, now this paper is responsible for reporting tax, right?

Starting point is 01:24:25 So, so like people basically, I think don't understand the extent of a technology, and then what they're basically doing, they're preventing the good usage, but they're not really blocking the bad usage of the technology. So I think, and that's like, you know, what honestly worries me, I think that or from everything that I've seen also in other domains in my experience. And I've seen, I think similar situation in the past, you know, just to give it maybe an interesting example from the privacy space, right? Maybe some of the listeners remember the famous case of the FBI against Apple, right? That, you know, they're basically telling Apple, hey, you know, we don't care.

Starting point is 01:25:17 unlock this iPhone and Apple was like, no. One, we're not going to unlock this iPhone because we don't have the keys. And two, we are not going to introduce a backdoor because that goes against the will of our consumers. And if you want, like, you know, go pass a law, which will force us to do it, which clearly would not something that will fly in a modern democracy, right? So I think that, you know, we will eventually face a similar situation where the technology will prevail. And eventually we will have tools that are self-regulated. There are quite a few exciting companies that I've seen recently that are coming to basically deploy identity, deploy compliance into Defi and to do things. I don't know if solve the problem 100%, but it's definitely going towards the right direction rather than trying to essentially come with this hammer and basically say,

Starting point is 01:26:16 well, you know, everybody need to report every suspicious transaction, you need to KYC everyone, and send SRs on everything that is suspicious. Like, yeah, that will not work, right? So that's just like, you know, my personal view. Michael, is there anything about regulation that has impacted the trajectory of your business at fireblocks? Is there anything that you wanted to do, but your lawyer said no due to regulation that you also think is silly and should be changed?

Starting point is 01:26:48 I mean, okay, I think actually for us, regulation was somewhat favorable around the OCC and a lot of those things that happened last year, which basically mobilized what is a very important segment of the market for us, right? So I'll give them that. You know, there were things that we worked hard recently to put in place.

Starting point is 01:27:11 For example, we block off-AC transactions right in the world. So there were things that we had to do or comply with. You know, there were customers that we didn't agree to service them because we thought that it was too high over risk, right? So there are things that I believe that whether it's regulation or just like our own reasonable judgment that prevents us to do that. And beyond everything else, there is, I think beyond the regulation,

Starting point is 01:27:44 there is just like, you know, pure reputational risk, right? So eventually when you play the game that we play, you, the reputation is important and I think you need to basically be thoughtful in terms of how certain things will be perceived by your customers or by your prospects. Michael, this has been really interesting. Like, thanks for walking us through this. We have just a few more things that we want to cover with you as we close here. You know, I want to talk maybe about a worry that listeners might have. And it's a worry in the back of my mind, too. So this podcast is called bankless. This entire movement is called bankless, right? This is a movement to restore self-sovereignty to the individual, peer-to-peer type transactions.

Starting point is 01:28:31 My worry is not that you guys won't be successful, but my worry is that you'll be too successful. So picture a world where fireblocks or someone else like fireblocks has all of the world's crypto assets. They're all institutional. They're all cussied. They're not fully bankless. And then what happens? What if you guys get acquired by Jamie Diamond at J.P. Morgan? Or worse, Wells Fargo, right? David, Wells Fargo could be that acquiring company. Then we're back to the same spot. Well, then they were just open accounts, right, for people that don't exist. That's like, you know. Well, so like, so can you allay these fears, right? So there is, there is this important thing that we are trying to build, which is a new financial system that is not a financial system full of the same

Starting point is 01:29:16 banks we just left. Like, hey, here's the new boss, same as the old boss. Is what you're doing as important as it is right now as a bridge to institutions in defy and crypto? Does it also have a trade-off here? Could we be centralizing this system in this way? What are you about it? It's a very important concern and something that actually philosophically we think a lot about, right? And, you know, another podcast you will hear me saying that one of the reasons that Fireblocks works the way Fireblocks works and not the way that, for example, CoinBased Custody works is that at least in our case, the institution that we serve is in direct custody, right? So Fireblocks, like Fireblocks as a company, right? We don't have access to the keys or to the sufficient amount of key material to really operate on behalf of our client. client. So first and foremost, I do believe, at the very least, in the institutional idea around

Starting point is 01:30:21 not your, you know, not your keys, not your Bitcoin, right? So basically each one of our individual customers is keys is Bitcoin, right? Not our keys. On the long run, I do think that what we are seeing over here, and maybe I'm just like sort of shooting myself a bit in the foot, right, is that we're actually looking into a temporary situation, right? And I think that the thesis that we have is that eventually the reason that it's now important to work with the banks and it's important to work with Jimmy Diamond, it works important to work with Wells Fargo is to bring it to the masses, right? I think that once we will bring it to the masses, right, and my grandma will have access to

Starting point is 01:31:09 Bitcoin, this is where we will actually be able to unlock self-custody, you know, wallets that are completing non-custodial, and people will like, you know, will start to see an outflow, right, from those institutions. And then you can ask yourself, okay, so, you know, then you guys, fireblocks are doomed, right? Because basically what's happening right now is that you essentially, you know, selling a service that eventually will disend, you know, that eventually will disin intermediate your own clients. So the way that I think about it is that, look, in eventually like, you know, financial institutions and not financial institutions in the end of the day, we have businesses, right? And those businesses need to run and they need to do their own finance.

Starting point is 01:31:56 And I'm actually looking forward for the world where my clients are not necessarily only Wells Fargo or JP Morgan, but my clients are Airbnb. And, you know, Uber and booking.com and Spotify and all those guys that are internet companies that, honestly, for them probably this technology means more than, I mean, except of the retail, you know, if we think about, you know, unbanking, I think that there is unbanking for the retail, but there is also unbanking for the businesses, right? Because right now, all those businesses that we value and we use their services, right? They're being back, right? And, you know, sometimes they don't get the best service, right? Sometimes they're being overcharged. And the main question is,

Starting point is 01:32:48 how can I eventually go direct to them, enable them, and help them do what they want to do? Good thoughts there, Michael. Now, you know, as we close, I was going to ask like general predictions about crypto in the next five to 10 years. But, you know, I feel like that's pretty specific and it's difficult for someone to give just general predictions. Here's what we have, Michael. So Dave and I have talked about this a lot. So bankless listeners will be familiar with this. This is what we call the defy mullet thesis. And this is what we think is happening in general with fintech right now, which is a whole bunch of fintech companies are about to grow out their defy mullet. Right. So fintech in the front, defy in the back, crypto rails in the back. And that seems to be what's happening. So your comment about like, hey, when I look at blockfi and when I look at Revolut, they're actually converging on the same thing. They're all like fintech companies. that are hybrid crypto, right? So I'm curious if you could make some predictions in this area, since you're so close to it, right? We see Visa, they're getting into crypto, they're hiring blockchain people. We see PayPal. What are they doing? We see, you know, a square. Jack Dorsey's

Starting point is 01:33:53 talking about defile these things. How is the defy mullet going to play out in the coming, let's say, one to three years? Do you think all of these fintechs will convert to crypto rails and how's that going to look? Yeah. So I guess it goes to my previous comment around this is the essence, right? I think that is that going to happen in the next three years? Well, I hope, right? I'm not entirely sure that it will move that fast.

Starting point is 01:34:22 But I do think that the two things need to happen, right? One is definitely sort of the access and what Fireblocks is doing and sort of just helping them to do it in a secure and compliant way. which is paramount for the access or like, you know, for the nice hair that they have the back, right? Like, you know, someone that goes and come their hair. And the second aspect there is that we need more assets, right, on defy, right? Or we need more instruments, right?

Starting point is 01:34:59 Because I think that one of the problems that we're seeing that I'm also quite concerned of, right, is that right now we have Bitcoin. We have, you know, a bunch of tokens that are protocol tokens that, you know, their value sort of derived from what that protocol utilization will be. But beyond that, it's not that much of interest, right? We have some governance tokens that are important. But again, it's not, you know, really meaningful. And then we have stable coins, right?

Starting point is 01:35:30 Stable coins, for me, it's like, you know, really an very important instrument. I don't think that CBDC will happen that quickly, and therefore stable coins are really, really good instrument. But now we need basically to bring more, you know, real-world tokens into this ecosystem for the defy protocols to be effective, right? Because, you know, the value of swapping USDC with Ethereum is only valuable if you're speculating on Ethereum, right? Or you need to buy gas, right?

Starting point is 01:36:11 But the value of basically swapping USDC to an NFT or to a tokenized real estate or to, you know, I don't know, mortgage or something that can actually represent a financial instrument is actually like, you know, very, very useful. think for this ecosystem not to sort of like, you know, just collapse into itself, we need to see the fintechs and the FI's basically starting to deploy mint, you know, and bring more representable assets into the blockchain for the defy to really become maybe like, you know, not only the back, but also the front. Really cool insight. I haven't heard that take before, Michael. It's been a pleasure to have you. And you thank you for Fireblocks. Thank you for being the

Starting point is 01:37:07 hairspray in the Defi Mullet to tie all of these things together, sir. It's been a pleasure to have you on Bankless. Thank you so much, guys. Appreciate it, though. It's fun. All right, guys, action items for you. One is get a job in crypto. Wow, Fireblocks just raised $300 million. I bet they are hiring. Every crypto company I know of is hiring as well. We have a job board at Bankless. We will include a link to that in the show notes, has some of the hottest jobs in crypto. You could check that out. Also, David, we need some more five-star reviews. We're doing really well. But guys, if you are a long-time listener of Bankless have not done a five-star review, what should they do, David? They should go to wherever they listen to podcasts and make sure that you give us those five-star reviews.

Starting point is 01:37:52 So Bankless can get to the top of the iTunes business and investing podcast where we always have wanted to be yet we are not there yet. So if you could help us by giving those for those five-star reviews, it would be greatly appreciated. All right, guys, none of this was financial advice. None of this was hairstyle advice. Eat and crypto art rescue. Wait, we're allowed to get hairstyle advice. So is D-Fi. We won't get in trouble for that. Next podcast. You could lose what you put in, guys, but we are headed west. This is the frontier. It's not for everyone, but thanks for joining us on the bankless journey.

Bankless - 78 - Institutional DeFi Infrastructure | Fireblocks' Michael Shaulov

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