On The Brink with Castle Island - Anthony DeMartino (Trident) on Lending Markets and the Banking Industry (EP.473)

Episode Date: November 13, 2023

Anthony DeMartino, the co-founder and CEO of Trident Digital joins the show. In this episode we discuss: Anthony's background in the banking industry and his path to founding Trident Digital. Digital asset lending markets and how Trident is innovating in this category. Trident's US Treasury product and how he is going to market. The state of the U.S. banking system and the status of the FDIC insurance fund. The potential impact of Commercial Real Estate on the banking sector. Chokepoint 2.0 and the regulatory landscape in the USA. To learn more about Trident Digital visit their website.

Today on the podcast, I sat down with Anthony DeMartino, the co-founder and CEO of Trident Digital, a company building products and services for the crypto capital markets. In this episode, we discussed the crypto lending markets, the stability of the FDIC insurance fund, and the products that Trident is building for its customers. I think you'll enjoy this one. So without further ado, here's my conversation with Anthony DiMartino. 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 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. Bitcoin. Anthony, well, thanks so much for coming on the podcast today because I just talk about Trident Digital. Thanks for the opportunity. This is great. Why don't we just get started with your background in finance and high.

you got into the crypto industry. I know you've had a few stops here and a lot of experience in the capital market side of crypto industry. I think my career can be defined by following the wave of volatility. So I started at UBS as a short-term interest rate trader, repo financing, G-bills, that kind of thing. And then in 07, I got an opportunity to move to the agency desk, which is Fannie and Freddie. I traded Fannie and Freddie from 07 through 08 to 2012 when I left UBS. So front row seat to my first disaster of many during my career. I got the opportunity to go to Barclays to do a similar role in 2012. I did that for a couple of years and then got a chance to move into emerging markets on the macro side.

So rates and effects. And then by 2016, I was the global head of EM Rates and Effects trading. Really, really loved emerging markets, but Barclay was kind of moving away from that from my capital perspective. So I got an opportunity in 2018 to go to HSBC, which is like the premier EM shop. in a reduced role where I was just running Latin America. But the person who hired me goes, we have more banks in Latin America than Barclos has globally. So it was pretty attractive to be on the ground.

And so I was responsible for local markets trading of Uruguay, Argentina, Chile, Colombia, Peru, Brazil, and Mexico. And I was on the ground the week of the capital controls put in in Argentina. We were bidding as a firm in the TIGO auction that failed that led to the capital controls. So I was the front row seat for that one for HSBC. So just a series of rolling market disruptions part of the career. At 2020, it was probably the best year I'd ever had. We kind of sidestepped COVID and ended up being able to buy the bottoms of what happened to be the EM market that everybody was dumping along with equities.

And then we had a corporate restructuring where all of us rates guys got moved into FX. And subsequently, all the MDs were like, oh, myself included. So I thought it was a pretty good badge of hour, 20-something years without taking out back. but made it to that point. And I made a unique thing happen the next day. Got an email from this site called 99 Bitcoin. New very little to nothing about crypto. So I read the email and I read another email.

And then like 12 hours later, I emerged from my basement. First day of being laid off because it was COVID, right? We couldn't really go anywhere. And I was used to getting out of five in the morning for my old roles. And my wife was like, oh, thank God. What? She's like, I didn't want to go downstairs. I thought you might be hanging yourself or something.

I was like, well, I didn't think I was that fragile, but no, I just fell down the rabbit hole. And that's how I went on for like three months straight. It was almost every day. And then I got lucky because a couple of people had taken really significant roles that I was close to my traditional finance career in crypto. So head of digital assets of that fidelity in the UK, head of crypto brokers AG, who was a UBS colleague, and then Brett Tejfall at Coinbase, who was head of sales trading prime, who ultimately hired me to start a defiant of a trading team for quite this. That's how I got into crypto.

They gave me some firm capital and a laptop and said, figure it out. So that was a lot of trust and a lot of fun. And I owe Brett a lot for giving me that opportunity. And in less than a year, we built a team of 10 people. We were to be set up in Singapore. We issued a structured note for $100 million. We managed a treasury over layer one. We managed the treasury over B.C. So a really interesting team. And then I moved on in June of 2022 to Matrixport to kind of replicate that business and three arrows. FTCS happened, Genesis happened. The firm tried to pivot more towards tokenization and kind of reshift to their known client base was China and Singapore. And a couple of us decided to leave and start trying it. What was it initially that actually got you to spend

those 12 hours down in the basement? What angle did you take? I'm always fascinated by people that get obsessed with either the market side of this, the Bitcoin is free money side of this. What angle did you have? So as you noticed, I'm somewhat rare on the Wall Street side that I've traded so many different products because typically people hyper-specialized at a very young age and do that one thing because mainly you're paid a lot to do that one simple thing. And I was always interested in trying to learn market structure across the globe and how different things interact with each other. And I have massive ADD, so I need to be constantly stimulated by something new. So the thing that's attracting me the most about crypto was the store of value element coming from emerging markets.

When I joined HBC, the Argentinian peso is 12 to the dollar. Currently, it's 740 to the dollar. Inflation this year is going to be 140 to 150%. I took it from the EAM angle because I think most people in crypto that I know are U.S. and they don't understand the privilege they have of growing up with the U.S. dollar and the U.S. financial markets. But when you look at almost every country in the world and now you can add Japan, to that with 151 yen. It was just fascinating to me to understand how the rest of the world

would view it. And that's really where it started. That's fascinating. And so let's talk about Trident a little bit. What was the initial insight that led you to start the company? And let's talk a little bit about the products that you guys have rolled out. So it was like kind of the sea going out after FTCs where many people left the industry. A lot of the kind of loose ideas and scams had left. but I was still deeply committed to the industry as a whole, and there was a couple of really core problems that were left unsolved. And I felt like with my team's stratifying crypto experience, that the next generation of crypto was going to be hard, and kind of similar to how hard it is to make money in the traditional finance world. So we felt like we had the right skill set to attack.

So there's three major problem errors we're trying to fix. One is spot lending, Genesis, all the respect in the world for what they built from zero to a thousand. And the downfall was something that happened during the mortgage crisis, happened under a euro crisis. You can't anticipate how quickly you're going to grow, and you never have enough infrastructure to scale alongside of it. And the market got so excited about what they were offering that they didn't, I don't say they hid the problems they had infrastructure-wise or structurally, but we got to a place where we started lending unsecured to counterparties that under no metric would you ever lend

money to. No one's audited, no one's regulated, no one even produces financials on a regular basis, and yet we're lending unsecured to these people. So I firmly believe that we can get lending back to this market via an over-secured model where the actual counterparty becomes less and less important. And I think we're never going to scale as an industry until either we have a centralized regulated counterparty or we go down this path. That's our core product offering. Let's talk a little bit more about that. I think you guys have a really unique way that you address that market structure challenge on the lending side. So let's get under the hood a little and just talk about how it actually works, the integrations with the exchanges, how the counterparties actually deal with

each other. Yeah. So what I realized during this journey was there are still a lot of borrowers of lenders in the market. They just don't have an intermediary in which to borrow and lend. There's not a structure left. So when people say, you know, when they ask us when we were raising money, they said, well, you know, no one borrows anymore. And I said, well, that's not because they don't want to, just because there is no path in which to do it in a reasonable way with the way you can prove fiduciated responsibility. So our idea is a little bit from the Tradfai world and a little bit from the crypto world. So what we're trying to solve for is not only security, because there is over collateralization available. But the problem is it's too capital and efficient,

especially in a market where liquidity is so poor, where it's harder and harder to liquidate tokens. So our approach is trying to balance capital efficiency with security for the lender. So we've set up what's called an oversecured model. From a high level, what we end up doing is we create a series of sub-accounts across top-tier exchanges. The lender would lend to a borrower that we identify in advance. Top-tier borrow are most likely a high-frequency market maker. And the idea would be is, I'll just use an example to illustrate it. The lender has 3 million Avax, they've lent it to the borrower, the borrower puts in one million of stable coins. That full four million secures the $3 million loan.

And the way it secures that loan is because the borrower is free to use the $1 million in stable coins and the $3 million in Avax, freely, they just need to keep it within our sub-accounts. So it's kind of a prime brokerage-ish model where you talk about portfolio margining. And if any time that loan value drops by 20% of that $1 million, because we treat that one million like a first loss, there's a margin call, 50% to be liquidate. So from a lender standpoint, they can really only lose money in two ways. One, we still have catastrophic exchange failure risk. So if the borrower has a significant amount of tokens on the exchange that fails, but I'm optimistic that the strides that Bicko is making with copper and with Zodias trying to

bring to market. I know Fireblocks has a solution and Ledger has a solution. I think that's a problem that will get solved in the future. So then the second risk is really my ability to liquidate in my risk management around what's the right collateralization ratios. And if we can prove that we can always liquidate within that first loss, we've basically negated the concept of a counterparty from a borrower's perspective. And that's what we're really trying to solve for. The last thing I would say is we're set up as bankruptcy remote. We're starting in the UK, UK entities to start with. We're applying for a VASP license in BVI for an eventuality. And when we do liquidate, we auction the liquidations. That way we can be completely conflictfully.

No one could ever accuse me of pushing a loan into liquidation to make a profit because we don't have a trade business. That makes a ton of sense. So from your perch, you have a great visibility into just the hygiene of these exchanges, I'd imagine. So curious to get your perspective on what it's going to take for some of these crypto-native exchanges to actually make that migration to being able to serve institutional. What are the characteristics that make for a good exchange for this model? So it's a really interesting question. And I think if you asked me that a few months ago, the answer would be different. Because as I've been kind of prophesizing about this new development and lending, I've attracted more and more foundations. And these foundation deals are, you know, they lend to a marketmaker unsecured.

Maybe there's upside options or other ways to be compensated. Maybe they pay them or maybe they give them even more capital. But they have zero visibility on a day-to-day basis what the health of their loans are. And I think hosts all the CFTC lawsuit and the RIP case and other things that happen in the market, the thousands of foundations. that oversee these institutions are asking for more transparency. So the idea is that more and more of these foundations would use us to lend to their market makers to base us in between.

Now, if I could put everybody on Coinbase and Crackin and Crypto.com and those type of names, that'd be great. But in reality, if you're XYZ Layer 1 and your token trades on Kucoin and Gate IO and OKX to those other exchanges, so I guess I'm dodging your question by saying the risk appetite lands with the lender. So in the end, we shouldn't be more regaled than the king. We should be able to accommodate the exchanges in which the token straight on. And that is a risk that's worn by the lender. So my goal is to ensure that we don't have any loans that we can't cure within the first loss. And I think just to solve the exchange issue, we really are partnering

as soon as possible with these all exchange solutions to get us to a place where we can negate that risk, because I don't think there's a way. There's a method you can take, but I don't think is a sure way to evaluate the risk of these exchanges outside of, say, a coinbase, which is public. That makes a lot of sense. So it's a really interesting time to be entering this lending market. As you point out, there's been a lot of calamities. I would say credit in this market has been remarkably constricted. But if you believe that we're going to have Bitcoin ETF, it would seem to me like there would be a lot more demand here on the horizon. So maybe talk a little bit about how you see that Bitcoin ETF driving demand for borrow in this market.

So I think I just make one comment, and maybe you'd agree or not. pretty bit. How good does it feel to be the kind of leader of the pack of this new wave being Larry Fink as opposed to Michael Sailer? I mean, Michael Sial did a lot for us, but like, now we've kind of, you're definitely upgraded. No disrespect to Michael, but. Well, someone argue that Larry might be a branch of the government to some degree. So it feels like it's more likely to happen with him and not maybe like the Winklevoss twins applying for the initial ETF. Yeah. So that's just kind of a nod to the Tradfai guys that are still left here, but he's a pretty significant player.

And to have him backing what you're trying to do is fantastic. Listen, I think it's very simple that when you're a trader in the space and you actually adhere to risk management, liquidity is always on your mind. So when you decide to put on a trade, you need to understand where you're going to put it on and how you're going to take it off. So it's great to say I'm going to stop loss at 34,000 Bitcoin or 33,000 Bitcoin.

But if you don't do proper liquidity analysis, you don't know if you can get out of that position. And then the losses, then you blow through your, stop losses. And what I'm trying to say is that I think lending is constrained and borrowing is constrained because liquidity is so poor. But as liquidity comes back, I think you'll see many more people trade because they feel comfortable they can exit. I've never seen an environment where prices rally 100% for some tokens. And actually the bid offer gets wider. That's a very unique scenario. And it only really happens in like distressed credit scenarios. But in rates and FX markets,

I believe that crypto is more equivalent to from a training aspect. You almost never see that. It's a sign that there's a sickness of the market structure. So I think by bringing liquidity back to the market, you will see demand for liquidity show up. And I know that may be somewhat counterintuitive, but I think demand gets demand. And once we get that liquidity back, you'll see it.

As a relation to the Bitcoin ETF, I think there'll be a lot of borrowing around filling orders from the LPs as they start to fund this structure. but because it's a spot-based ETF, they're going to have to physically own it. So I think it'll be really to finance the delivery cycles and the anticipated demand cycles. But I think we're really focusing on is bringing the liquidity back in the G20 tokens, the next 18 tokens down from Bitcoin and Eath, because that's where the problem is most acute. Yeah, that makes a lot of sense.

Moving on a little bit, you guys have been active with this treasury product. So maybe talk a little bit about how you thought about the treasury side of this and where you see demand. We didn't initially try to build this product. None of us had raised money before, and we felt really lucky that we got a Chase bank account to take in our investor funds until they flagged almost every wire, even though we told them they were coming in. And they were all coming in from like top tier of VCs with U.S. bank accounts. So they flagged like three of the five wires. And then they flag every payment we make to ADP, which is our payroll providers.

Did that have that happen like five or six times. So basically from a transactional basis, Chase is somewhat unusable. And then when we set up our account, and just you mentioned, we raised $8 million, we wanted to buy some T-bills or money market funds. And they said because you set up as a fintech, not even a crypto firm, we can't give you a securities account. We'll pay you two basis points, but you can't have a security account. So I was kind of a bit blown away, and I was a private client of JP. So I'm like, I have T-bills in my personal account. Why can't I do the same thing?

So that was kind of the first aha moment of the banking system because I came from a Coinbase. where we didn't necessarily have the same challenges. I couldn't appreciate the challenges the rest of us face now from the banking perspective. So that was the first challenge. Then I was like, okay, we're going to set up a Fidelity account and do this, that, and the other thing. And it was really cumbersome, and especially when you're a startup, providing all the details it takes to onboard with some of these accounts. And then what I realized is that most of these accounts, when you set them up, they re-hypothicate your securities unless you tell them not to. So I feel like there's a lot of people out there who are buying T-bills who don't realize,

they only have 500K of SIPC insurance, even though they had 10 million of treasury bills. And I don't want to be the guy with the tin hat, but when SVB happened, Charles Schwab's stock got cut half. Because a lot of people use Schwab, and Schwab has a bank. Schwab could potentially go down,

and if you have securities there that are not insured or are not segregated, you could lose money. So long story short, we decided to create this product for ourselves. So it's a very simple overnight reverse repo product. where we take our cash, we lend it to a SEC and FINRA regulatory broker-dealer, and then they collateralize it one-to-one with treasuries daily.

The rate resets daily, and that collateral is held in a segregated account at the Bank of the York. So if any one of us go down, we know where our collateral sits. And that's what I think is really important. So we've solved the security problem. And because it's an overnight repo and now the market's starting the price that had cutting rates, the overnight yield product starting in my macro view in January, the highest yield in the treasury curve. So you'll be in a scenario where you're buying Teebles six months out, one year out, and you're getting a lower yield in the overnight rate. And you still have

that duration risk in case the Fed decides to change its mind. They sell off and maybe you may use your money sooner. So our product is one business day and liquidity and resets daily in your collateral one-to-one all the time. I'd imagine this is not only an attractive product for startups, but there's probably a lot of foundations out there that would like to be earning some yield on their funds as well. Yeah, that's been our focus is crypto-native startups and foundations. And the foundations, we allow them to subscribe in stablecoins. So that makes it a lot easier for them as well. If they have offshore bank accounts, we can K-YC and onboard Dows and foundations as well. So, yeah, it's been helpful. The other pieces, we've actually partnered up with a couple of payments

slash fintech banks to potentially white label our solution as their deposit product. So it essentially solves two situations where these fintech providers aren't really. banks. So they sit on top of these second tier middle America banks, which are heavily exposed to commercial real estate. And leaving any money there above 250 is a bit of a challenge. So we're pitching them from a security standpoint, hey, why don't you just white label our product and people can leave 10 or 15 million and you don't have to have the funds leave your back. So that's really where we're making some strides. You've been putting out some good medium posts here on just the state of the banking industry.

It's a little bit alarming. Obviously, we went through this with the SVB crisis. It seems like people aren't talking about this as much. But it seems like your take on the FDIC insurance fund here is that this could be in jeopardy. Yeah. So when SVB went down, I decided to begin a little bit. I thought I knew what I knew about the FDIC. But once you start to read through how it's changed, everything's really changed since 08

and then Dodd-Frank and 12. So I'm just going to start with some facts and then you can make your own assumptions or value the risk. So there's 19 trillion in deposit. as of mid-year, a few months ago, I got the numbers from the FDIC website, 19 trillion in deposits in FDIC insured banks. Only 12 of those are insured. So there's $7 trillion sitting in FDIC insured banks above the insurance limit. Now, during SVB, everybody got bailed out, insured or uninsured. And I thought that was the right thing to do because this was a crisis. But what's about to happen is we're going to start to see a series of rolling banks bailing.

And I don't believe the government's going to step in for a small bank in Iowa or a bank in Idaho that loses 10 or 20 percent of their investors uninsured cash. And I think that the scale of this problems is in the hundreds of banks, and it's already started. So then the question would be naturally, what's the catalyst and why now? The catalyst is commercial real estate. We've all heard about the problems of commercial real estate. But let me just put a couple numbers to it. We have $1.5 trillion in commercial real estate that has to roll, which means the loans that may have to re-roll in the next 18 months. About 700 billion of that sits in banks with less than 10 billion in assets. Now, just for context, there's 4,800 banks in this country. 90% of

those banks have less than 10 billion in assets. So Bloomberg came out two weeks ago and said that they believe the stock of commercial real estate's rolling in the next 18 month could be marked down as much as 40%. So a 40% markdown of that commercial real estate sitting at the smaller bank, is equivalent to about 130% of the equity of all these banks combined. Now, it doesn't mean every bank's going to get wiped out. It's obviously concentrated pockets. But this is the why now. And the timing of this is really interesting because we had our first bank go down on

Friday post-SVB. SVB first republic, that whole situation. And it was first citizens in Iowa went down on Friday. And then today's November 7th, we worked just fly. And the estimates of all the property that are going to get sold at rock bottom prices in large metro areas is going to be the catalyst that starts to remark all these portfolios. So this is the world that we're in. And listen, I'm not trying to bring the fire in the brimstone here, but if you have a deposit at a bank above 250, you are making an unsecured loan to that bank. So you better be doing your credit due diligence on who that bank is.

And so the natural question is what happens next year. Do you envision just a massive consolidation here into the top 10 banks in the country? When Jamie Diamond and all respect the world for him, but every time he advises Congress, they get bigger. Right. The regulation only ends in one direction. You end up being bigger and bigger to the national champions. There were the comment that Yellen made that she's going to try to bring more institutions within the purview of the Treasury. I don't know if that's pointed at us in like the payments community, like the PayPal's of the little. world and the pieces of mass cards or to smaller banks. But there's definitely consolidation

on the horizon. But I think the real problem with this is that it's not going to be a big bang. It's going to be a series of default. And this guy and that guy and that woman are going to lose their money, but it's not going to be national headlines. So there will not be a bailout this time around. That's interesting because the one that failed in Iowa, I think, was trucking related. It wasn't even commercial real estate related. So there's pockets of contagion here in other parts the economy, it seems. It's a couple of things. So it's the loans themselves,

but the fact that all of their deposits are getting drained into money market funds and the fact that mortgage rates are at a place where demand is almost zero, they have no ability to earn revenue to offset the losses. So they have these sour loans and all their revenue capability is gone.

And just finally bringing this back to crypto, and again, I'm not going to name any names here, but if you think about all those significant players in our space and even the people that have deemed to be safe, go take a look at who they, bank with. I think you'd be shocked to see even the top-tier names in our space have banks you never heard of. And I'll guarantee you some of the top exchanges have banks that have less than $5 billion of assets that they use the whole customer funds. They don't have any options.

Yeah, a lot of that is unfortunately driven by this operation chokepoint 2.0 where there's been some kind of soft guidance, but maybe not so soft around capping exposure to the crypto industry, really at the same time where the banks are just structurally unable to compete in this industry in really meaningful ways too, which I'd love to get your perspective on. Just a lot of the banks that do want to build things like crypto custody have really been hamstrung in this market. I was always a FINRA licensed trader and I had all my licenses and had to deal with regulators. And when Dot Frank came out, I was upset.

Not because it wasn't the right thing to do. And we can debate this 10 ways for Sunday. But what it really did was take the risk takers out of the bank and I was a risk taker. So I was personally didn't like it. But I think post series of crises, we see the big banks have survived and now are thriving in these environments. You know, I think it worked. So what's happening now is extortion, essentially.

So they're not going to pass any laws. The regulatory bodies are being unconstrained by Congress, which has its own problems. And basically, they're going to institutions and saying, listen, you can deal crypto. They're not saying you can't. If you're a bank and you have to file one report a month, if you have one inch of crypto on your balance sheet, you have to form a thousand. And I'm making numbers up. But they're basically just saying, we're going to make it so painful for you that you can do it. But we're going to make it so hard for you to comply that you most likely won't.

We tried to get a bank account from 38 banks. I have a spreadsheet here. And it still boggles my mind. We had four banks that came through. And I had to create a presentation to explain. who we are and what we're trying to do and what areas of crypto we're actually touching and what's going to touch the banking industry. I mean, every application I send in blind immediately outrejected. So it took me in almost three months to get real banking relationships.

There's no laws being broken. There's no criminal intent here, but the top-down push from the regulators, I don't know, is extortion the right word, bullying the right word? It's just making it really hard to be an American technology in crypto. Yeah, it's really the politicization of the regulatory apparatus around banking. It's also kind of interesting to me that it seems like the bank lobby is starting to get a lot more active with this. You can read through the comment letters on the recent SEC custody rule that the bank lobby wants its firms to be able to compete for the custody business here.

There are not a lot of assets in the world where you can charge 45 basis points to just sit on them and do nothing with them. But that would be a great revenue line for global custodian bank, but they just can't compete right now. Yeah, I think you were referring to BAS 121. which I'm not an accountant, but it's an accounting rule that kind of backdoor slapped a capital restriction on custodians. If you're a boning and you want to get into crypto custody, if you take a billion dollars of assets from BlackRock, you have to put up a billion of your

own capital. The regulators have said, hey, BlackRock, I know you're about to get an ETF, but you're going to have to custody at not bony or not J.P. Morgan because we're just not going to make it feasible for them to do your business. I mean, how is that not criminal? It does seem to me, there would be a strong case for an administrative procedures lawsuit from some of these custodian banks because they're truly not being treated like-to-like across other types of assets that they custody, not to mention all the global banks that actually are competing for this. It's the U.S. banks that are not winning it. And listen, I worked for primarily offshore banks, and I speak to a lot of these banks on a pretty regular basis in quasi-advisor roles and hopefully soon-to-be advisory roles. But you think about just my past

from HSPC, Barclays, UBS, all foreign banks. There's no more MUFG in Japan. They have regulation. You have banks in Hong Kong. You have banks in Singapore. These guys are running 100 miles an hour. These guys have a framework to operate with them. And I think we're just asking for a framework.

And by not giving us a framework, they're just choking the innovation here. And it was funny, too, when we originally launched, we thought we were going to be in the U.S. because people weren't reading the laws right. they weren't doing the homework. And what we came to find out is it wasn't even the loss. It was people were allergic to facing us. So we could say, yeah, this is right, but they can choose not to service. Right.

So we were like a relegated class. And it's just, I've never experienced that in my whole career. It's interesting. You kind of go back and you have to revisit how a bill becomes a law, stuff you learned in middle school. And it's Congress that's supposed to pass these laws. It's not supposed to be some administrative agency that just puts out guidance. and all of a sudden starts to enforce based on that, which is not a law. Right.

They just basically discourage you from getting anywhere near it. And the question is, if the SEC came after me, I don't have enough money, even if I'm right. And if you think about the lawsuits they filed prior to Coinbase Cracken and Finance, they went after people who couldn't defend themselves. They just didn't have the money, right? And I don't want to get into individual cases, but they took some victims because they just knew they had a bigger war chest. Yeah, that's exactly right. Well, maybe pivoting a little bit towards what the banks actually are trying to do here in the absence of being able to be full blown in the Bitcoin and ETH market.

What's your take on tokenization? I mean, depending on the bank you talk to, I'd say you get different answers to this, but there seems to be a lot of activity around tokenizing real world assets and bringing these on chain. Are you bullish on this category? I am, but I have a pretty different approach. The overall solution, the most attractive component of the technology, which is blockchain and stable coins and tokenization, to me from the bank's perspective at a high level is efficiency of capital. And what I mean by that is I could be proven wrong in, but I believe when Dodd-Frank came in, there was a lot of restrictions put on capital having to be put up for settled trades. So if you want to settle,

T-plus-something, which is all traditional finances, T-plus something, you have to put up a certain amount of capital for every single trade that you settle that hasn't settled yet. So it's unsettled transactions and you have to put up much of capital. And all the banks have to do it. And And there's very limited ways to net that. And the amount of capital that's tied up in banks because of T plus something is enormous. And I'm going to use big words because I don't have the resources to go through the numbers. But I worked at banks where we stopped trading on December 29th because you do certain things for window dressings, for tax treatment, things like that. But in the post-d-Frank era, we basically stopped trading securities that didn't settle over your end.

and we limited our financing that things that went over your end because of how capital intensive they were, putting up that amount of capital, settled trades to 363 days a year is fine. But that one day or that quarter end is so punitive. And that's what gets reported. It doesn't matter that you didn't use a bunch of capital the other days. It's the day of the end of the quarter that gets reported. So I think the way the banks and the banks I've talked to, the really focus on is tokenization and stable coin payments and distributed leverage of protection.

or blockchain, whichever executive you're talking to, is about going to T0. That has a tremendous capital savings for these banks. And in backdoor conversations, I've had with these banks, they're like, listen, if I can eliminate this settled trade transaction capital, we can start trading multiple times a book. When you're a CEO of a bank, and maybe it's not multiple times, maybe it's one and a half times, but that's a huge number, and that's where you get paid, right? You're getting paid on the stock price.

that's the biggest unlock for these guys. So as much as they poo-poo crypto and blockchain, they all know that if we go to T0, now they don't agree how we can get there. And other people are more advanced than others. And we've seen guys like NoMora go right into the asset management space. Right. And some of the more Swiss and European banks are looking at payments,

using stable coins for payments, cross-border payments. Obviously, this tokenization has come from a couple of different money market funds. I think Franklin Templeton has been the most talked about. but is also Aberdeen has tokenized the funds, a couple of funds as well. So I think of tokenization in the context of capital relief and settlements and ease of operations. As far as the individual tokenizing of T-bills, I have less of a positive view on some of those things, just because tokenizing a T-bill for me is an increased risk than buying a T-bill.

So I should get paid more to take on that technology smart contract risk, and I get paid the same or less. So now I understand it's an access thing too. So obviously I have access to devils. Maybe somebody who's buying tokenized products doesn't. So it's a bit of an access tradeoff. But I think that's what's really been challenging some of the adoption of the RWA platforms is that mix between who doesn't have access to it and what the right risk reward is. Right.

Yeah, that makes sense. And definitely makes sense on the cost saving side of it. Maybe switching the income statement towards more of these products that you could see being built. we'll have to get your take on staking. So if we live in a world eventually where Ethereum is clearly not a security and maybe we get an Ethereum ETF, it would strike me that there would be some new product development opportunities around staking and how you can use that yield, maybe some derivatives that you could build off of that. How do you guys think about staking as an opportunity?

So I think there's plenty of technology for staking. I think there's plenty of technology providers, maybe too many at this point. But I look at staking, and I look at it from my traditional, finance view in it's a large target, right? It's the largest asset to stake. And it's also heavily understaked. So there's room to get people's market. And I think what we're trying to work on as Trident is there's a couple challenges for U.S. type funds to stay phe. There's a regulatory component because there's some lack of clarity around is it security, it's a non-a-security. I think most people can get over that. But I think because of the low interest rates and the super tax

and efficiency of staking ETH, I think many people have stayed away. And we actually think the tax piece is by far the bigger reason why people are staying away. So we haven't solved it yet, but we've spent a lot of our investor money and given it away to our law firms at this point to in our accounting firms. But we think we are close to finding a way in which U.S. funds can stake ETH with us via a loan structure and an equity structure where we can transform from eat staking from interest income to capital gains. And I think that's pretty significant, depending on what jurisdiction you're in and where your portfolio sits.

So from an extreme example, let's say you state X amount of ETH, and then every EOP you received ETH for that course of the year, and then right at the end of the year, ETH drops by 50%. So even though you're taking an ETH at 5,000, you still owe the tax at 5,000, even though you you have to sell them at $1,800. So you could either sell frequently, which causes a lot of friction and transactional costs, or you wear this risk of a massive revaluation to go sell the rewards for taxes. So there's that component of it.

So what we're trying to solve, we're in this scenario where that happens, that the net value of your ETH plus the received value of the ETH the end of the year, if that's a net loss, you get a tax carried forward. Currently, you still have to pay the taxes on the ETH of the current price. So there will be some restrictions where you don't have access to it instantaneously. But think of it from the traditional finance where it's like tax efficiency cross-border structures, which we've done in the emerging markets. We've done in credit.

So it's really a copy paste that structure with the unique landscape of crypto being assimilated. Yeah, as you say, it happens in other asset classes in kind of analogous situations. But I mean, as you're talking, just really highlights the need for software to manage some of the stuff as it relates to blockchain and assets. You're talking about a lot of inputs here and prices moving around like crazy. So highlight some of the infrastructure that's definitely needed. I think the staking dynamic, especially around crypto when you have these lower yielding products, is just from a training standpoint, if something can do 3, 5x, why do I care about 3%? You know what I mean?

I'm not answering your question directly, but I'm saying, like, so as you get more and more traditional finance people into the space, they're like, away from the diehards and the incumbents that are like, you know, we want to secure the next. network and these other kind of ancillary benefits, they're looking at it for commercial reward. I'm giving up one penny of liquidity is the yield high enough. So I actually think the way I'm going to answer your question is that we need liquid staking to evolve. We need to get scale. But I think one of the challenges we're seeing with liquid staking away from Alito, which is,

I don't think there's too many regulated institutions that will use Lido. And I don't think Lido cares. They're doing a phenomenal job. They dominate the space. but I think a lot of these liquid staking startups, it's really chicken and egg from them is they don't have their own capital to get started and they don't have a hundred million dollars sitting around to start the secondary market for their liquid staking token. If you can't make your token liquid in the secondary market, what's the point?

And you've seen a lot of these guys launch and they don't have the capital to get started, so they're just constantly chasing their tail for who's going to invest the capital in me so that we can launch, like get to the proper liquidity, which is the benefit we're offering in this product. So that's kind of my ticket at least taking side. That makes a ton of sense. Well, Anthony, this has been a lot of fun. I knew you guys recently closed to seed round of financing.

You're going to be hiring a bunch of people in the coming months. Where can we send people to learn about the company, learn about the products that you guys are building? We have a website called tri-dig.io. It has all of our high-level products and our kind of LinkedIn bios and, you know, what we do. But yeah, reaching out on LinkedIn directly is great. We are looking for people to help us in the business development roles for sure. and market technical kind of quants is something that we're looking for as well.

But I think because we have so many senior people that started the firm, there's four founders. We're doing a lot of that stuff ourselves and are really waiting to get to our proof of concept stage before we, you know, we want to conserve our investor cash for a rainy day. So we're looking at talent, but we're probably scaling a little slower until we launch our first project. Well, hopefully the rainy days are over here. It seems like we're about to enter a pretty interesting time in the market. man I hope so well enjoy it having you on Anthony thanks for joining us thanks for listening to another episode of On the Brink with Castle Island

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