On The Brink with Castle Island - Adam Levine on the Fireblocks Global Custodian Partner Program (EP.543)

Episode Date: July 11, 2024

Adam Levine, Head of Corporate Development and Partnerships at Fireblocks joins the show. In this episode we discuss: The history of Fireblocks and the evolution of MPC custody. The recent announcement of the Fireblocks Global Custodian Partner Program and the initial partners. The current state of tokenization and how Fireblocks is playing in that market. Stablecoins and how Fireblocks engages in this market segment. Views on the regulatory landscape. To learn more about Fireblocks visit their website and learn about their Global Custodian Partner Program.  

Today on the podcast, I sat down with Adam Levine, the head of corporate development and partnerships at Fireblocks. In this episode, we discussed the evolution of the fireblocks business model, the announcement of the firm's first global custody partners, as well as the current state of the market for stable coins and tokenized assets. I think you'll enjoy this one, so without further ado, here's my conversation with Adam Levine at Fireblocks. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guest and host may maintain positions in the assets discussed in this podcast.

You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group,

AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to. to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. And print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Adam, well, thanks so much for joining us today on the podcast. I don't think we've ever had anyone

from Fireblocks on this podcast. So I'm very excited that you're the first. I appreciate it. I'm surprised, but very happy to open the door here, especially with a fellow blue devil. Exactly. It's good to see the Duke Mafia proliferating in this industry. Well, I'd love to just start a little bit with your background and what led you to fireblocks. Absolutely. So I have the distinction of not initially being a crypto guy. I used to joke that if I was a crypto guy, I'd be a lot wealthier. And then in the last cycle, knots and then back again. But for me, I was over a decade ago working at a foreign exchange settlement bank, systemically important institution called CLS Bank. And we got pitched by some company with this

cryptocurrency and they were convinced that ever speaking to a few banks, we just needed to add their cryptocurrency to a system that was regulated by the Fed and overseen by 21 other central banks. And then we would solve everything in including World Peace. That company was Ripple early on in their pitch. And I remember leaving the meeting like, what in the world are they talking about and continue to just be a skeptic. But the more I looked at it, started to see how the tech, it would be really exciting in traditional finance. And towards end of my career at CLS, we actually launched our first product on DLT, a quintessential example of a CTO looking for a fun project that didn't need to be on DLT. So one would have thought that that would have increased my

skepticism. But when I moved over to B&YMell and I was running their strategic venture arm and digital partnerships. And that was where I started to piece together, just the excitement of solving real issues with blockchain can make things quicker, cheaper, and with less risk, let alone the fact that you no longer got to ask was crypto a thing. The industry was at that point billions of dollars. So for me, I was quite fortunate that by the time I had my aha moments, Michael Shalov was looking for someone with my background. And that was about three years ago. That's incredible. So why don't you just tee up what fireblocks is. I think a lot of people understand Fireblocks as MPC custody workflow, but it's obviously

broadened out quite a bit since inception. Absolutely. So Fireblocks is a technology provider. At our core, we're not just a SaaS provider, but we focus on cybersecurity. Our goal and our mission is to bring digital assets to businesses everywhere. And we broadly speaking do that as a technology provider, or infrastructure provider to help support the thousands of clients that we do today. We're best known for our MPC or multi-party computation with our wallets because there's amazing things you could do in the world of digital assets. If you can't hold them safe and securely and transact, the rest doesn't matter. So Fireblocks Core is a wallet infrastructure provider. And over the last five, six years, we've continued to expand our offering into payments and tokenization and many other

areas, but all based on the core of holding your assets in the safest, most secure way. So I did a podcast a few weeks ago with Adam Healy, and we talked a little bit about just the evolution of custody over the years. And it's funny to think back on the early days of MPC, where people who are in maybe a different camp in terms of what the technology should look like from a custody perspective were very dismissive. And I would say even scared of MPC. But it seems like now that the industry is really coalesced around MPC being a common standard that you just have to implement. Be curious your perspective on that evolution. Look, we agree. There's a variety of reasons why some may choose not to use MPC. But what we

at Fireblocks feel very passionate about, is that you no longer have to choose between security and the speed of moving assets. Normally, before MPC, there was a seesaw between how safe something was and how quick you can move those assets. And what we've demonstrated is that if MCC, you get both, you don't need to choose. And those that maybe continue to be skeptics, the question really is why. Maybe they have their own offering for proprietary reasons, but whether it's Fireblocks or others in this space, MPC continues to be the market leading standard. And you see that from CSOs like Adam Healy, you see that from insurance providers, you see that from the thousands of institutional and startup clients that choose MPC to build their tech. And we continue

to innovate on that space to make sure that it stays just a step ahead on the cyber and the security and the resilience. One of the cool things to see over the years at Firebox has just been solving real problems for people that are already in the crypto space. So just moving assets around between trading firms seemed like it was a great initial wedge for the company. But increasingly, it looks like exchanges are very active on the fireblocks network. I wonder if you could talk a little bit about just the settlement product and how you see that part of the business evolving. So there's a few aspects to settlement when comes to fireblocks. First, we're proud that we have dozens of some of the world's largest crypto exchanges that are built on fireblocks and even more

the connect to fireblocks network via the fireblocks network. And the fireblocks network is an amazing way basically to mitigate your operational risk when settling assets and moving your assets with counterparties. So our 2,000 plus clients all are automatically part of the Fireblocks Network. And for those that have seen a demo or look at the UI, you can see the ability to move assets in and out of exchanges or to counterparties in the most simple and secure way. What we've done last year and really rolling out with the delivery this year is our Off Exchange product. So off exchange is a settlement mechanism that's a technology solution, as opposed to creating some version of a CCP or creating a credit exposure on a certain party.

Block's looked at some of the counterparty risk involved with settlement and worked with exchanges and leading traders on how you could develop a tech solution to mitigate those risks. So we launched this OpExchange product with Deribit as our design partner and expect to have many more exchanges coming on on a rolling basis, more coming out each month. And the idea is that you create, if they're party vault, or basically it allows both the exchanges and our client to have comfort that their assets are only moving when intended. You don't have the C-5 risk that it got exacerbated in the last crypto winter. You're also not requiring people to post an immense amount of collateral. So the Alphabet exchange is a great innovation, we think,

to help solve this real risk that parties see today. It's really cool to see this in play with digital bearer assets like cryptocurrencies. You don't have to squint too hard to think maybe this would work pretty well with tokenized real world securities. Obviously, we're probably not at the stage of the industry where these things are scaled up such that banks and broker dealers are touching tokenized assets, but I know you guys have been pretty active in that space. What's the general thinking around tokenization and how fireblocks might play in that market? What we've been able to leverage with fireblocks is when you're supporting crypto traders at scale, you'd be able to demonstrate to traditional players how that scale

would help support, where if instead of ETH and Bitcoin and Solana, you're trading tokenized bonds, tokenized currency. And so many same solutions, absolutely we're having those conversations with FMIs that are saying, hey, what's going to happen to my business next? What do I need to do to stay ahead of the curve when everything moves on chain? So we're quite proud. We focus a lot on the crypto-native clients, the crypto-traders, they're really important of fireblocks. And in many cases, they're helping proving what we think will be the future of financial services in general. When it comes to tokenization, it's also something we feel quite strongly about. Last year, led an acquisition of a company called Blockfold, a really strong team conveniently located in Melbourne,

in Australia, away from the rest of the society, beautiful little city. And it was the team we worked with on a variety of high-profile-profile tokenization projects. Tel Aviv Stock Exchange is a great example with some tokenized bonds that we did with the state of Israel. And this acquisition helps supercharge what we're already working on with tokenization. Today, we're seeing more and more tokenization, not as fast as any of us would like, but whether it's tokenized fiat, tokenized deposits, stable coins, et cetera, or traditional financial assets, it's very much what we see the trend continuing. So you referenced being at CLS and going through the, I would classify it as the private blockchain days, take a private blockchain and re-intermediate the system. And I think as I was

going through that journey in the early days of the industry, one thing that was obvious was that none of these things were really going to work from a business model perspective because they weren't common infrastructure. And the other thing was that you didn't have US dollars on a blockchain to actually make any of this work. So I wonder if the advent of stable coins and the quick proliferation of that category shines more light on what you can actually do with tokenizing other types of assets and actually have a settlement occurring on chain. So I guess the question is, do you see stable coins accelerating this tokenization narrative? In a word, yes. When we think about traditional financial assets, the way they move today, there's a variety of very complicated

financial market infrastructures that are looking to settle things like delivery versus payment or payment versus payment. And inherently, you almost always have a dollar, and if not maybe a euro, on one side of the transaction. And when you're moving one asset on chain, one asset off chain, it's feasible. There's some advantages, but it's also really complicated. But now when we think about delivery versus payments where you have a tokenized dollar versus a tokenized asset, maybe it's a bond or equity, you start to think about how smart contracts can solve some of these traditional issues that FMI solved today. And you could solve it in a much cheaper, quicker, and actually less risky way. And that's a big aha moment. So stable coins as the counter asset for

a transaction or just with payments is absolutely going to help catalyze the market when it comes to real assets on chain. So it seems like there's a tremendous amount of just technology to support this tokenization theme. Is the real structural barrier at this point, just the regulatory landscape and bringing some of these assets to market? For the U.S., it definitely feels that way. The technology, well, maybe complicated, it's not that hard to work with someone like us or other providers in the market and get your asset on chain. When you start to layer in the need for transfer agents and other parties that need

to have the right tech solution and regulatory assurance, it's more complicated. But you're seeing in other markets where there's regulatory certainty or clarity or just a simpler process, they're slowly starting to pick up. But it's going to be the U.S. that catalyzes the market, even for parties that are not active in the U.S. They're somehow dependent on U.S. banks in the back end or they're looking for the signal that this is where they should invest. So it's no brilliant epiphany that when the U.S. market moves, the rest will move that much quicker. But for when I travel and I just got back from Brazil as a great example, you're seeing other markets that are much further along in the process. And when we get clarity here and hopefully helpful clarity, those markets are going to be primed to jump in.

Yeah, I totally agree. Well, hopefully we get some movement on some of these bills. So I want to transition a little bit here to a big announcement that you guys are making this morning. Tell us a little bit about this global custody partnership that you're announcing. Absolutely. So about a month and a half ago, we mentioned that this was coming and now we're really proud of the participants that are in it. So first, let me talk about what the program is and why it's important, and then we'll get the proper shout out to the inaugural group that are joining. So what's very clear to Firebox, we continue to believe self-custody. But there are many in the market that need a custodian or want a custodian in addition to self-custody. So those that need a custodian

may be for regulatory legal reasons in the U.S., registered investment advisors, really don't care what asset you're talking about. On-chain, off-chain, they need a custodian. And there's plenty of others that have a similar view from their stakeholders. And some of our clients that want to keep some assets with the custodian, and the rest they may want to keep themselves because they're active in defy or staking or other, more crypto-native activity. And so what FireBlock has developed is a program where we are going to leverage what we believe are the leading digital asset custodians, all of which are building on Fireblocks technology. So we know their security and tech is really strong. And that allows our 2000 plus clients to be able to interact with their custodians

seamlessly through the Fireblocks experience. And that means helping manage your liquidity, perhaps with multiple custodians or in your own wallet in addition to your assets with the custodian and be able to do this at scale in multiple markets. So that's the goal. It is not a shift away from self-custody, but we're meeting our clients where they are and be able to provide this functionality. So just, as I mentioned earlier, you could move assets in and out of a crypto exchange. You'll now be able to have a similar type of experience with some of the leading custodians. That's fascinating. So I guess that would mean that these custodians would just have a much broader asset coverage than if they were just doing this from the ground up. Is that the right intuition?

So many of them have that broad coverage because they're built on fireblocks, one of our differentiators. And what it will mean is that it allows the custodians to support more clients, maybe more use cases as well, and also allows our clients more flexibility, where they now may not need to choose if they're going to hold everything in self-custody or be limited to the type of activity that a certain custodian offers them. So it gives them much more flexibility. Fascinating. And would love to understand the shift towards a regulated financial institution and how you guys thought about that. You touched a little bit about meeting clients where they are, but that was a big announcement. I guess it was a couple of months

ago around the New York progress. Exactly. So at the same time that we announced this global program with custodians, we also announced our conditional approval from the NYDFS to become a licensed trust. Or in other words, Fireblocks will have its own qualified custodium as part of the corporate group. So the Fireblocks Trust company, we're expecting the conditional approval to go into a formal approval later this summer, fingers crossed, in case the regulators listening, obviously dependent on their approval. But the idea is that Fireblocks feels that there's an opportunity where we need to step up specifically in the U.S. market and offer qualified custody. The rationale is not, again, that we don't believe in self-custody, but the demand that we've heard from clients saying,

hey, love your tech, who can I use in the U.S. and for all regulatory and risk reasons, there's clearly not a lot of options. And even the issuance of the ETF, dominated by one provider, they're doing really important work for the industry. But those same ETF providers have come to us and said, hey, we need to differentiate. We need an additional custodian, a backup custodian. And that's where Fireblocks is going to step up. The Fireblocks Trust Company is first and foremost built on fireblocks. So we are absolutely, the trust company is a client of Fireblocks. And the idea is by cold storage technology, a cold storage custody for our clients. That's going to focus on registered investment advisors, asset managers, BCs and ETOPs. And we're really excited about what this will do

to bolster the U.S. market. It feels to me like the regulatory landscape could just cause a seismic shift here in the custody market in the U.S. if you were to get clarity on Sab 121 and maybe a market structure bill. You're a corporate strategy guy. I used to be. I would think that the build-by partner conversation at these banks must be incredible right now as they see the regulatory clarity coming down the pipe. And I know you guys have already been active in a lot of those conversations, but just how do you see these large financial institutions, these banks that want to be in the custody business when there's clarity plugging into fireblocks? I would say that there's broadly two camps that we see. Those that are being more proactive that are clients today,

they may not be fully live in the U.S., but they, from a tech perspective, made their decision of who makes sense and we're really happy to support many of them. And then there's others that are quite conservative and Sab 121 is probably their current excuse as to why they're not jumping in. And many of them may become fast followers, whether they become clients of fireblocks or they become active in the M&A market. I think we'll see a little bit of both. But it's that former category that we're really excited about. Those that get it and they're thinking about ETFs. They're thinking about pure crypto, but they're obviously spending a lot of time with us and others around tokenization. And that's where the light bulb goes off for many of these big banks.

It'll be fascinating from an M&A perspective because if you just look at a landscape where banks and broker dealers are actually able to participate in this market, I don't think there are enough companies to go out and buy if you wanted to get to market quickly. So I think you're looking at a build versus partner type of conversation at a lot of these places. I think the subcustody model you see in traditional finance is going to come up very much in digital assets over the next few years. And that's going to be a version of the partner model. I think that's right. During the last crypto winter, there were a handful of crypto custodians on the market for sale, and you probably could have bought quite cheap. They each had their own challenges. So I'm not surprised

that some of the bigger banks didn't jump in as an acquisition target. But I think you're right, especially in the U.S., there's not a lot of quality, qualified custodians, that the big banks will scoop up. It'll be really interesting to see that evolve. I want to go back to stable coins. One of the things that we've been observing is just the adoption of U.S. dollars on blockchain rails, internationally has been breathtaking. And it seems like there's crypto-native use cases, but there's also just the idea of moving dollars more efficiently outside of the legacy system and holding dollars.

So storing dollars as a savings technology in a lot of jurisdictions where it's really difficult to get a U.S. bank account, for instance. How is Fireblocks thinking about that part of the market in serving some of these customers outside the U.S.? So I'll tell you earlier this year, it's been very clear and throughout the first two quarters that payments use cases is one of the greatest areas proliferation of our new clients. Some are in the U.S., but many, if not most, are XUS. And the reason for that is along the lines of what you said, they may have either less developed payment systems locally or more importantly.

They want access to dollars and stable coins provides them a version of that access in a much more efficient, simpler way. It's definitely an area of focus for us. We all do this because we see the future of finance moving on chain, but you can get really excited when you think about things like remittances and how incredibly expensive it is for some really hardworking people that want to send money back to their families wherever they are. Stablecoin is a great use case for that. And the feel-good situation, there's plenty of those examples. But of course, there's a lot just traditional commerce. And moving on chain, we're hearing from clients, just much more efficient. That is truly the disruptive scenario where back in 2014, 2015, a lot of these pitchers,

were around using a net new cryptocurrency to make payments. It turns out that people actually just wanted to make their payments in dollars, and this was technology that evolved. That's exactly right. And now it's whether it's money markets that are tokenized or some version of USD, and they'll pick their preferred USD stable coin provider. That's where we're seeing the excitement. On the corporate level, we're starting to see institutions that are global, think about treasury management and having multiple stable coins. But I think the real adoption we're going to see in the market is much more about a version of a USD, USDT, USDC, PYUSD, many more. I felt like last year, everyone was legally obligated to talk about a stablecoin war when they

spoke at a conference around a podcast. What we're excited about is we're actually seeing people use them in real life. And that's what matters. Yeah. And in the U.S. market, you've had the stable coin bill move out of House Financial Services Committee has not been brought to a House vote, but dovetails into the next question just around regulatory. So you have a stable coin bill, which may or may not happen.

You have a market structure bill, which would drive a ton of clarity for tokenization and banks and broker dealers. Then, of course, you have Saab 121, which would allow the banks to compete in the custody market. So we don't know if any of these things are going to pass in this Congress that probably would in the next is sort of the general feeling, I would say. But what's it like to operate with this ambiguity? And I guess is there a wish list here of clarity that you guys are looking for?

There's definitely a wish list and it feels more like a control delete than a wish list. It's going to be exciting. There's, by and large, at fireblocks, we're excited about what could happen in the U.S. market, but we're focusing a lot of our attention outside the U.S. as well, where there is clarity, where there's institutions that are not talking about a really complicated POC. They're talking about how quick they can get into production. So that's the part that we're much more excited about. But we are waiting with anticipation and actively involved in all the discussions we can be

to help get that clarity in the U.S. market. I do think it's not only going to be good for fireblocks, it's going to be good for the industry. And I think it's going to be good for the U.S. And I know in this podcast you talk about how often treasury bills are being held by stablecoin providers. It's something that the U.S. market, the U.S. government can't just put their head in the ground. They need to focus on. It's really important for our industry and our country. So the clarity is going to be good regardless of which side of the aisle people sit on. Stable coins is a category. I think they would be the 16th largest sovereign nation in terms of treasury holdings. And it's only going up. It really is. I don't see any

way that this slows down. And it's mostly driven by just appetite for dollars internationally at this point. So you wouldn't want it to go down if you were in charge of the United States government. That's right. The last decade you've seen certain countries push their political agenda. You see Russia and China making payments not in USD on purpose. And that's going to reverberate in a lot of different ways for the U.S. economy. So I entirely agree with your sentiment around the importance of U.S. dollar stable coins. So you get stable coins and then maybe start to get more tokenization. That category is really interesting to wrap your mind around tokenized real world assets because on one end you have a technology shift.

So in the U.S. it's just maybe a more efficient way to deal with these assets. But I wonder if there's also just an asset growth angle here where if you can tokenize something and represent that on a blockchain, you just have more buyers internationally for this product. So be curious to see how that market unfold. I think for the more illiquid markets, it's going to be really, really impactful. For the markets that are liquid and there's robust procedures and processes and FMIs, even if we get the regulatory clarity we're just talking about, those markets will take a longer time to shift.

You have well-enrained clearinghouses and other market infrastructures that even if they're having conversations about how we bring all this on chain, it's going to take some time to make that move. But the illiquid markets, I think you're spot on. When I look out at the cast of characters in the financial services space, it seems like everybody has a blockchain labs group or something like that. There's someone that will do a POC somewhere. It must be really hard to just ascertain whether or not they're for real. Who is actually going to bring something to production versus just do a private blockchain POC type of a thing? So it's increasingly easy to tell, is what I would say, especially in certain markets where

they're racing to get into production and they tell you that up front. We spend a lot of time with clients and understand what their pain points are, what they're trying to solve, how important it is. Maybe three years ago, many of us would get excited about a brand name with a really cool POC. We're seeing less of that. We spend a lot of our time ensuring that we're not going on boondoggles and making sure that the head of innovation hits their bonus the end of the year. We want to do something that's going to help our clients, clients grow and make sure that they have that path forward. And we spend a lot of time talking to them about things that are outside of fireblocks. What protocols may make sense. We don't have favorites, but we'll help based on what clients want. We'll help make sure

the ecosystems around them. And you start to see some clients that have thought about it and others were very clear like, oh, that's nice, let's just focus on getting this POC live. We tend to spend less time there. And many of our clients are incredibly transparent of look at some multi-quarter, multi-year journey. We're on that path if they share the vision of how they're going to help delight their clients with the tech.

That makes total sense. So going back to the global custody partners, maybe talk a little bit about where that actual adoption is occurring, what jurisdictions, who are you guys launching it with? Absolutely. So we focused on a handful of jurisdictions to start with the vision that we want to make this as global as possible. And we're going to continue to add jurisdictions over the coming quarters. The initial markets focused on the United Arab Emirates, so UAE, Australia, Singapore, a little bit Thailand, the UK and US. And we did it for a variety of reasons, but broadly speaking, client demand and real opportunity with the partners. And I want to give a shout out to the custodians that we're launching with. It's worth emphasizing that they each have different business models that each are serving different types of clients, and we're really excited to have multiple custodians in each market built on Firebox. But thinking about in the UAE, where you have M2 and Komainu, Komainu also in the UK as well, down in Australia, working closely with Zero Cap and Cloud Tech, Zodia as well, a recent client of ours that's really excited to be

part of this program in multiple jurisdictions. And then looking at Rakar in Singapore and Thailand. And again, to emphasize, these are not the only custodians that we will be working with. We will be expanding to other jurisdictions as well. And in the U.S., the Fireblocks Trust Company will be the first U.S. custodian part of it, but we expect more to come. Awesome. Well, that's a great development. I wish there were more U.S. financial institutions on that list, but I think it's only a matter of time before there are. Amen. All right, Adam. Well, this has been great. You guys have a phenomenal suite of products over there and really excited to have you on the podcast today. So thanks for joining. I appreciate the opportunity. I'm a long-time listener, so this has been a lot of fun for me.

And where do you want us to send people to learn more about Fireblocks? Firebox.com. Hit the website. There's depending on whether you're a startup, we have early packages that you can just click, click, and go. And for those that are enterprise and want to learn more, go from there. We're on Twitter and LinkedIn and feel free to reach out to me. It's Adam at Fireblocks.com.

And really excited about this. So thank you. Awesome. Thanks, Adam. Take care. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit Castle Island.V.C. To listen to all of our podcast episodes, please go to On the Brink-Podcast.com

or just click on the tab in our website. Thanks for listening.