On The Brink with Castle Island - Mike Belshe (BitGo) on FTX and the impact on crypto market structure (EP.375)

Episode Date: November 28, 2022

Mike Belshe, co-founder and CEO of BitGo joins the show. In this episode we discuss: Mike's thoughts on FTX and the unfolding fraud case. His views on crypto market structure and how it is likely to evolve in the face of the FTX collapse. The regulatory landscape and the path forward for spot market regulation. Views on the MPC custody landscape and advances in zero knowledge cryptography. To learn more about BitGo visit bitgo.com  

Today on the podcast, I sat down with Mike Belchie, the co-founder and CEO of Bitco. This was a fun conversation where we talked about crypto market structure, talked about the lending market, the future of on-chain settlements with U.S. dollars on chain. Talked a lot about the MPC custody landscape and some of the advances in that category, as well as zero knowledge proofs. Mike has a lot of fun to have on this podcast. So without further ado, here's my conversation with Mike Belchie at Bitco. 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 hosts may maintain positions in the assets discussed on 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 to 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 a Bitcoin. Bitcoin. Mike, thanks so much for joining us today on the podcast.

Hey, Matt. Great to be here. I was thinking back to the first time I met you was when you came to speak to us at Fidelity in the early, early days of BitGo. And back then, you weren't running even a full-blown custodian. I think it was just software at that point. So it's been a long time. But maybe we could just start off with a very quick introduction of your background.

And then what does BitGo do today? We started way back in 2013. And one thing I like about BitGo is our mission statement has been something we've really been able to grow with. And in fact, even up to today's recent events, it still helps. It's delivering trust in digital assets. So our goal is to help make digital assets. It's usable everywhere.

And since 2013, people have been like, wait a minute, can I trust this thing? In those early days, the types of questions were like, wait, what's Bitcoin backed by? Of course, there are regulatory questions and lots of other questions. We focused in those early days on security. And in fact, I think that's where I met you at Fidelity was we had pioneered multisig. Today we do multisig plus MPC and a variety of blockchain. So, I mean, it's really scaled since then. But that particular era of trust was about, can I trust the technology?

Can I trust that I can either hold it myself without losing it? Forget my password, lose my hard drive, et cetera. Can I use it on an exchange and know that if they're using weak operational security practices, that they aren't going to get hacked and I lose all my money? So I think we've come a long way since then in terms of building that out. Now, the second wave, I think, of delivering trust was around regulatory and compliance. We became a trust company. We closed out last year with 65 plus billion in assets under custody, which is a

I think a pretty big number for a two and a half year old trust company in terms of growth. Today, those numbers are way down just because asset prices have come down, of course. But delivering trust here is like how to fiduciaries participate. And one of the things I love about crypto, what got me into this space, decentralized nature of it, the idea that we can all be on the same playing field, we got transparency. So you hear a lot of this, not your keys, not your coins, because so many people have been burned by somebody managing keys for them and then being dishonest about it, not having the trust factor, so to speak. Look, I totally get it, and I agree. I think when you're not using a

particular service and exchange, heck, wrap Bitcoin, you shouldn't be exposed to it if you don't need to be. Now, an individual level that works. And then it turns out, as the ecosystem gets bigger, invariably, we want businesses to be able to participate as well. This isn't going to be a retail only thing. Some people are going to want to hold banks, use banks to hold their assets so that they can pass it on to their kids or they can invest it or have money managers, whatever. And anytime you've got management of other people's money, all of a sudden, the not your keys, not your coins, breaks down a little bit. You want the transparency. You want the safety and the trust, but you can't hold the keys yourself. You're intentionally wanting

to hire someone to help you with your assets. And I think this is just destiny, even just accepting payments in digital assets. Well, you don't want the CFO to unfortunately pass on or quit and oops, now you don't have your keys anymore. So we do it. a lot of extra burden around how do we manage assets. And that's what becoming a trust company, a fiduciary was all about. Now, for the last four or five years, we've been working on this market structure component. And it's been difficult. It's hard to build a market structure. We've got these vertical silos. We had this very engaging and charismatic young man, Sam Bankman Fried, running all up and down Washington, talking with the CFTC and others, saying,

hey, I got it. I got the 12 key principles of crypto regulation. Just let me do a all functions and manage my functions. I'll do it great. Now, I have to admit, I actually thought Sam was generally a good actor. I didn't know him particularly well, but it turns out he's the biggest charlatan of them all. And we now know why he was advocating for no market structure. I think as we think about delivering trust in digital assets and everybody that's a Bitcoin holder, everybody that's a crypto holder, if you believe in the future of this space, of course we want to have trust. I think we're all talking about this all the time. And I don't mean like trust to other third parties. I mean building confidence so that people can understand they can use

these assets safely and soundly and not have to worry about their economic futures. Market structure is going to be a big part of this. How do we put checks and balances in place so that you can't have a single party like a Sam Bankman Fried, like a Bernie made off, act like a Bill Huang, that mess these things up. And we got to do a lot better. It is pretty sobering, actually, to be in this market right now with this huge, huge failure. But we got to look at risk really hard right now. So anyway, that's a bit about what pick has been around. It's such a good point on the market structure issue. I mean, I think a lot of people looked at FTX and Alameda together and said, hey, that's a conflict. I'm going to stay away from that. But at the same time, they were building

what looked like a huge business. I mean, they were probably competing against you guys in a number of dimensions. So as they were growing, what was your sense of what was going on there? And you mentioned you were surprised. I was too, but they were presumably gobbling up share from a lot of regulated U.S. players here. Yes and no. So first off on Alameda, Alameda being a hedge fund, actually that's a place where people are allowed to take crazy risk. And if you've got a completely isolated hedge fund, I mentioned Bill Huang a moment ago, hey, those things can blow up. Those things can have contagion into the infrastructure providers. And it did happen in the traditional finance side in that case. But generally, the infrastructure is supposed to be able to

manage that risk, mitigate that risk, not carry that risk directly. So yeah, you're right. I think everybody was surprised by how bad the crossover between Alameda and FTX was. It never even occurred to me that he might be using the full balance sheet, the full customer funds of FTCS straight into Alameda. It is absolutely criminal. So I think that one surprised us. Now, in terms of FTCS growing, we did have a few things. They've been acquiring companies around the world, they had acquired, I guess I don't want to say who it is, but one of the companies they acquired was actually looking hard at using Bicko for custody, and we were just about to agree to that.

We'd spend a lot of time on it, and they canceled it at the last minute just a couple of months ago. And we now know why. Now, there is a shining light here. FTX, U.S. derivatives, was formerly Ledger X. Ledger X has been a client of Bicko since 2016 or something like that. And the Ledger X team took the time to do it right. Those guys really struggled in those early days because they were waiting for regulatory approvals that were taking a very long time as they built that product out. They finally got it done, became one of the first crypto derivatives companies available, eventually got bought by FTX proper.

But because they're heavily regulated, they're required to use segregated custody. They're fine. They're solvent. They do not have any issues. So Zach Dexter over there deserves a lot of kudos for what he's built. Bickup being the custodian there. I know that they've had inquiries from the CFTC, and they passed just fine even in the last week after all of this bad stuff happens. So FTX generally has been growing. I didn't really have a lot of concern that they were stealing from the users.

It just didn't occur to me that that was something Sam would do. But it appears that I was in the same camp as pretty much everybody else. Sam here. I didn't have that one on my bingo card at all for this year. What impact do you see on the lending category here? Obviously, that has been tremendously understrained due to the size of Alameda with some of these markets. A lot of these lending firms have ceased withdrawals at this point. How do you see this category playing out in our industry?

Let's see. There's a bunch of problems here. A, there's been really bad risks being taken. Now, I think the most egregious of those, the Celsius's Voyagers, blew up earlier this year already. Then there's a little bit more subtle ones with weak forms of collateral that may not have been stress tested appropriately. For those of you that don't do lending, stress testing is where you basically look historically at a market and you look at a collateral type and you say,

what's your exposure in terms of how the value of that collateral could change in the market? And if you're using digital assets, which are highly volatile, even if it's Bitcoin as collateral, you've got to really understand what stress factors you may be up against. I think also back in May, there was a little bit of timing mismatch, which is sometimes you've got assets which have lockups where they are not liquid for a certain amount of time. I think that's bit people a few times in this summer and now fall. Some of that is containable. Some of it's not. If you were using GBTC as collateral, there's a lot of discussion about a gray scale, which as the trust company, which is what derives the GBTC value, I believe confidently that they actually

do have the one-to-one backing of the Bitcoin. However, the ability to turn your GBT into BTC, is something that's locked up over an indefinite period of time. That seems to be consistent with what Very Silbert has said about DCG's solvency and Genesis of solvency is that they have the assets. It's just they're not liquid right now. So I think we're learning those lessons. But actually, I'm going to draw this back to market structure where there's risks being taken that cannot be measured because of the market structure.

So let's say you're lending in the space today. Who are you lending to? Who's borrowing? As of right now, like nobody's borrowing, nobody's borrowing, but a few weeks ago, who was borrowing? Well, traders, like Alameda, well, where do they trade? Well, they take it out to exchanges all over the planet. And, of course, they're doing all kinds of arbitrage techniques. They're doing market making.

They're doing all types of quant mathematics. And because the market structure is such that you have to pre-fund exchanges today, that means they're taking the assets that they borrowed from you and then they're putting it on these exchanges. some of them are ricketying. Some of those exchanges run into trouble. Obviously, FTX just ran into more trouble than we expected. But we've seen this before.

We've seen a Quadriga CX. We've seen it at Mount Cox. We've seen, it's another case on tip of my time. There's a dozen of these. But BitMex is solid today. But there was a huge scare just a couple years ago. The BitMex founders were indicted and which are all stopped for a moment. And everybody's like, oh no.

If I had $20 million and I'm trading there, is that going to be locked up and gone. That one had a happy ending, but it was a spook. Unfortunately, we as humans, we're going to get through this period. I think our biggest challenge right now is not forgetting what's happening to us right now. It's going to be so tempting in four weeks to go back to Christmas and holidays and come into the new year and go back to business as usual. And if we do that, we're just setting it up for the next failure. So the market structure where you have to put money on exchanges is fundamentally flawed. It will never work in traditional assets.

And I'm not a huge CIFI centralized finance advocate or anything like that. But there's some risk that they mitigated that we in crypto need to fundamentally learn. And exchanges never hold the asset. Never. NASDAQ walks into the SEC and says, hey, we want to be our own custodian. It's not a discussion that's going to happen. And same thing in the CFTC world. If you're a DCM, which is equivalent of exchange, you have to use an external DCO, which is a clearing organization.

Anyway, this is just a fundamental thing that we have to learn. The problem is you can have a great counterparty. Matt, you might be borrowing from me, but if I know you're trading, I can look at your balance sheet, your balance sheet can be awesome, you know, a billion dollars on that thing. But I know you're taking all these assets, you're putting on these exchanges that are weak. And if those exchanges go belly up, whether it's FTCX or others, that's going to hit your balance sheet, then now that's going to hit me. So I can't possibly measure your counterparty risk because it's the sum of you, plus whatever

markets you're participating on. And we're just not there yet. So we need the market structure. I totally agree on the market structure point. And do you think that there are things that the industry should be demanding from these exchanges in terms of solvency proofs and things like that? Are there tactical recommendations that you'd have coming out of this that would improve some of that market structure?

Bick has been advocating separation of trading and custody for a while. And it's in part, I mean, it sounds selfish. It's not selfish. It is our vantage point that we know how to do security in a regular way. So what is custody? Custody is segregated storage on behalf of the client, and it provides bankruptcy remoteness, which means that if BitGo goes bankrupt, the regulator knows how to step in, knows what controls we have in place, will be able to return assets, the rightful owner in a very quick period.

So that's a positive. Bitgo's been pushing for market structure to at least separate these two things because it provides a check and a balance. We need to know earlier if somebody's starting to go into a fractional reserve capacity. capacity. And I think the only way you can actually do that in light of outright liars like Sam Bankman-Fried is to have a second party involved. So the exchange can say, hey, I got a billion of this type of asset. And then somebody else can say, yep, I got a billion dollars for that guy. Now, if they're in cahoots together, there's still potential for failure. Nothing's perfect.

But you get these things regulated. You make sure you've got jail time and known entities behind it. I think we can do a lot better than where we are today. But when I do look at what Bickgo's been advocating. Although it was a good first step, it is still a good first step. I think we now have to look deeper. If we had had this setup, let's say FTX was using Bickgo as a custodian. The good news is we wouldn't have had any of this hacking and stealing of assets that happened after the bankruptcy. We would have had a lot more view on it. It could have been that there was somebody to raise their hand and say, wait a minute, something doesn't look right here. But at the end of the day, it means that the team at FTX would have been directing in and out of Bicko custody.

and we would have had a limited view as to what that means in terms of the referral balance sheet. The people that we're trying to protect here are the investors in FTX. And while FTX would have been protected in that model from Bickgo's insolvency, what we wanted was for the investor to be protected from FTX's insolvency. So to get there, we have to go deeper. Starting with CUSSE is still a key element. But now how do we make sure that the custodian has all the way visibility to the client's assets? So there's another product that we have at Bicco, it's called Off Exchange Settlement.

It's about making it so that you can settle from direct custody as opposed to having to move the assets to the exchange. Now, there's other things we're going to have to do. I think in terms of market participation, we need the custodians to be 100% rock solid safe with no possibility of exposure or taint. And here, I think you have to look around and say, hey, what activities are allowed or not allowed. And so let me just be very clear. So Bickgo has no exposure to Alameda or FDX insolvency at all at this point. But we have been doing borrowing lending a little bit. Now we're doing a very

conservative borrow lend. As of right now, it's almost down to zero because the market has unwound positions. But should that activity be allowed and how do you do that activity? And although we do it through a different subsidiary way from Bickgo trust company, I think we got to rethink kind of how we get the risk nailed on that. Prime brokerage is a real thing. It's going to I don't think anybody solved it in crypto yet, but we got to nail this risk part first, and there's some building blocks that need to be played, laid, but all right, there's a lot of work for us to do. And I think every single infrastructure provider like Bitcoin needs to be really looking at

every counterparty risks they have, whether it's on trading, which is generally a little bit easier, especially with spot trading, but still got real risk to lending and borrowing, etc. One of the things that I think will be interesting to see coming out of this is will some of this market structure be forced upon the industry by regulators. I would argue that a big reason why FTCS was able to get to be such a huge fraud was because they were offshore. And there were a lot of U.S. persons that were finding ways to trade on that venue because it was objectively a better product experience because Crackin and Coinbase could not offer trading under that framework. There was basically just this regulatory arbitrage play here that resulted in them getting really large, partially due to the fact that the U.S. doesn't have clarity on who regulates the spot market and whether or not certain tokens or securities.

So, I mean, is there an optimistic view here that some of that stuff gets addressed here as a result of this? I don't think we can really count on the regulators to guide us through this. And I don't know if I were anybody listening to podcasts, listen to industry saying, hey, industry needs to fix it. I'd be like, yeah, right. But I actually do think our community, the digital asset space, those that are trying to build trust and make it so everybody in the world can use it. I think we have to demand it. I don't think we can expect the regulators are going to fix it. There's also a lot of viewpoints going into the U.S. regulatory, but maybe before I hit that, remember operating out of the Bahamas as FTX was doing, obviously it allows them to provide service and function that you wouldn't be able to do here in the U.S. safely. guess what? Every hedge fund in America has offshore feeder funds to allow them to, A, access

international clients and then B, to sell products that they otherwise couldn't sell here. Everybody operates out in traditional finance. So this isn't new. I mean, I saw some of the crypto Twitter was surprised by the org chart of affiliate entities underneath FTX. I look at it, I'm like, yep, looks like a hedge fund to me. That's a good point. And this happens. And I think the market structure being very defined around where your hedge funds participate, which take huge risk, versus where do infrastructure providers like exchanges, custodians, brokers fit. If we get that right, we'll make a lot of progress on that front.

Back to the regulators. I think regulators are hearing different voices from different people. I think the crypto ecosystem is also fighting and not actually saying what the fight is about. I'm a fan of innovation, digital assets. Obviously, Bitcoin is my favorite. I think anyone that's been in the space this long, usually they lean further and further towards Bitcoin and away from other things. But in spite of my huge affection for Bitcoin and loving the use case, I also believe

there's a lot more coming. But I think that when you look in our ecosystem, there's a fair number of, they're called the Bitcoin Maxis, the Bitcoin Only guys. The Bitcoin Only guys actually don't want more regulation. I think this needs to be said out loud. All right. So the SEC has jurisdiction over securities. The CFTC has jurisdiction over derivatives.

Spot Bitcoin markets are just commodities. They are unregulated in the United States. They've never been regulated. And why is this? Well, it's because commodities typically were things like gold, barrels of oil, corn, soybeans. These types of commodities are hard to trade. You don't trade them quickly.

They don't have divisibility and liquidity the way cryptocurrency does. So the Bitcoin maxis are like, hey, Mr. Regulator, we don't need anything. We're just going to fit into the existing market structure. It's not that they're supporting regulation for Bitcoin. They're actually supporting no regulation for Bitcoin because it happens to fall through the cracks. So Coinbase, as you might have read, I don't know, a year ago, they proposed like a new crypto regulator separate from the SEC and the CFTC. I'm not sure I really like that idea, but I can at least sympathize with how they got there.

I do think cryptocurrency has some properties that are unique. And although I wish we could kind of say it's a commodity and doesn't need any regulation, look, the stuff that happened with Sam Bakeman-Fried, although it hit a whole bunch of different types of assets and a whole bunch of different activities, could very well have happened just with Bitcoin alone as well. Spot markets for Bitcoin, they do need to be regulated. And the idea that it's a commodity and nobody regulates it, I think does it as a disservice because we won't be able to grow the market holistically and bring business and additional products and build on top of a solid foundation unless we get there. The Bitcoin Maxis are kind of anti-regulation, but they don't say that. They say we're supporting the current regulation, which is anti-regulation.

All right. Then you've got the securities thing and what is a security. People say, hey, Mr. FCC, we need regulatory clarity on what is a security. I would love to see that as well, but I don't think that had much to do with FTX here. This was about market structure and how do you participate and what activities are you doing and how you can manage that risk. And it didn't matter whether it was a security or not a security. We would have still had this failure.

I don't think the regulators are by themselves going to be able to quite get there. I think consumers can demand that their exchanges, take appropriate steps, make appropriate transparency, and we start to build this. I think regulators will come in with their own definition, which will help. And I think it's going to be a windy road. It's probably going to take another five years. But we're getting into the right place. It's going to take time.

The interesting thing is that it's actually elected officials now that are starting to push for some of this. So people used to say this might take an act of Congress, but maybe that's what we're going to get coming out of this. Well, you've got your legislators and you've got your regulators. And I think we have a zero to one problem. So you read Peter Thiel's book. And there's people that know how to solve problems from scratch.

And there's people that are good at operational. and getting efficiencies as it goes from a real business to many. I think we have a little bit of this problem at the regulatory level. How do you architect a new type of structure that protects it against risks in a digital forward way and not just inherit the things that were created for that old legacy system? Because that old legacy system, if we just apply the same rules, we're going to end up with that old legacy system. We have to do it differently.

I can be wrong on this, but it's been thinking of mine over the last couple weeks. maybe we really need to make a push for a really digital-only infrastructure. Today, we're not doing this. Coinbase is not digital-only. We're not digital-only. We're hybrid systems. We combine fiat, which cannot be represented in a digital way, along with all these digital components.

Maybe we should really do pure digital. So you mentioned proof of reserves a little bit ago. Look, I love proof of reserves. It's an element of transparency with clients do this. Okay. But it's not complete for solving the discovery of who's, solvent and who's not. And it's not complete for two main reasons. One, you can't do proof of reserves on Fiat. It's not digital. And then the second one is you can't do proof of non-liabilities,

which is really the thing that matters most. Proof of reserves is a good step, but not complete. Now, let's say we went to pure digital exchanges. And there's an innovation we have in our space, which is sitting right there that the regulators could really help with, and that's stable coins. And you can be talking about a stable dollar. You can be talking about a stable Bitcoin, in terms of rap Bitcoin, Biko does those. But if you regulate the stablecoin part and you force really good process and procedures, let's say we could just trust the stable coin. I'll use USDC for a moment.

And we know that it's regulated. By the way, because it hits with the banking system, the lender of last resort, Mr. Uncle Sam can probably have some role in backing it up. It can be interfaced to CBDCs over time. But let's say we just had that and it was perfect. We don't have to worry about that. Now imagine architecting the digital system. Well, now we can have a full digital system.

We can have proof of reserves for everything. We can get proof of reserves in a real-time basis. Now the last thing you have to solve is the liabilities component. And then I think if we fixed settlement and clearing of it so that you could clear your digital assets between parties, we could build a pretty damn robust system that's got compliance and regulatory in there so that Mr. Sanction screener, Mr. Traver Rule, anti-money laundering components can be put in. we can build a really efficient system. I think that is an interesting idea that probably takes what we're talking about

into other asset classes in a hurry. You could imagine a world where the overnight repo market, if you had a U.S. dollar on a blockchain and you had a tokenized representation of a treasury, all of these clunky Fedwire movements that happen between three parties at the end of a day, they don't really have to happen like that anymore. You can just move that atomically. So you could actually see where crypto would influence real market structure in the equity world or the fixed income world, I think.

It's just a little bit of design about what do we want the digital markets to look like? And today what's happened because Coinbase and FTX and Gemini and all these guys are trying to build businesses. They're having to live in a hybrid world. They don't have a choice. They're just trying to get business done so they can grow. And they probably support this general idea in the long term if they can make a good business out of it, but they can't do it today.

All right. So let's separate the hybrid part out. We'll put legacy fiat out here, regulate that as a stable coin. We can put legacy securities for how you bridge from the traditional world to the digitized world and then create the digital marketplaces. And now once we've gotten rid of the legacy wrappers, the things we can do in the digital component is so much stronger. I totally agree. So, Mike, switching gears a little bit. I did want to get your current views on MPC.

So I know you guys have been really active in building out MPC capabilities. But maybe for the uninitiated, talk a little bit about the tradeoffs here on the MPC side. and where you see that market going. Obviously, there's been a lot of M&A in that category as well over the past couple of years. It comes down to the base layer, just security. How do you secure these assets? How do you make sure that you don't have a single private key that can steal your funds? So there's two main ways to do this. One is this thing called a multi-signature. In the case where you've got a layer one protocol like Bitcoin that supports multisignature on chain or signature aggregation on chain, you can do this natively. Some of the blockchains like Ethereum don't have a way

to do multi-signature on chain. So now you need something like MPC. So I believe Bicco actually is the only wallet as a service platform that provides both. It's actually pretty cool. When you create an Ethereum wallet, you have a radio button and you say to want MPC or don't want multisic. And other than that, the rest of the interface, policy management, HSMs behind the scenes are all the same.

Fundamentally talking about the technology, though, and when do you use each. So MPC, which is short for multi-party computation, is a feature. field of cryptography that's been around all the back to like the 80s. I mean, it's been around for a long time. In those early days, it required a lot of computation so much so that it wasn't really practical to use. And then in the last 10 years, it's gotten pretty good. So there's a number of applications you can use for it. The early versions that were starting to be commercial ready, we're using this two out of two model, meaning that you could split into two key shares, and both of them can participate to enact a signature while keeping the underlying key material segregated so that you have multi-party.

So MPCs come further than that today. So everything BICO does is this 2 out of 3 model. It's where any 2 out of 3 can enact a transaction. And we're very explicit about how we manage those. There's a user component that the user holds. There's a BICO component that we hold and we use it after we've applied policy, which comes all straight out of HSM. We had to build custom HSMs for that. And HSM, if you're curious, is a hardware security module.

It's a specialized computer that's tamper-proof and break-proof. It keeps the secrets inside of it and they never leave. And then third, we have a backup key. And the backup key is really important because humans can and will lose key material. It doesn't matter whether it's an MPC key share or whether it's a full key. People make mistakes. So we build processes for that. With MPC technology, it's an online iterative process.

So if you and I were signing a message, a transaction, using MPC, I would do a little bit of math. I hand it to you. You do a little bit of math. You hand it back to me. And we go back and forth like ping pong eight or nine times. That's just the way it works. And that lends itself towards an online process. Frankly, MPC can't really be used with cold storage because you'd have to do this offline

between each of those iterations. And it just becomes impractical to do so. So we use now the multi-sig components for all of the offline. capabilities, and we tend to use the MPC on blockchains that don't support multisignatively on chain. And then there's other cryptographic fuchsies that are coming, which are just better. I mean, why are we using MPC in its form on Bitcoin and Ethereum today? Well, both of those two protocols use an underlying crypto called ECDSA, which is a very old signature

format, which doesn't have a lot of flexibility to it. Frankly, there's better signature formats. On Bitcoin, we've got Schnor signatures, which you might have heard about, which is a signature aggregation scheme. On Ether 2, we've got BLS, which is also a much more flexible, better cryptographic scheme. So the future of digital assets, I think, is almost all BLS and Schnor, et cetera. The MPC on top of ECDSA, that was a thing now, will eventually just fade into history. And it seems like the MPC stuff is going to be a critical enableer to settlement networks here in the future, a huge accelerant to the ability to build some of these things

I'd imagine. There I think it doesn't actually matter. I think if you don't have multi-sig, then MPC is good. Now, there's one difference. When you look at multi-sig on-chain, you can actually verify who participated. So let's say you had a four out of seven signature scheme, which means four participants had to sign out of seven possible keys. With multi-sig, you can actually see who participated. By the way, in BLS, I believe you can do that as well, even though it does signature aggregation with certain techniques. But when you use MPC, to do that, the resulting signature online, you can't tell which four participants participated. So when you talk about things like settlements, especially cross-custodian settlements or cross-infrastructure

provider, understanding who participated is going to become very important. And MPC in its current form that's used does not have that capability for MPC on top of ECDSA. Cryptography is a tool that we will use to continue to make better systems, more transparency, systems for digital assets, and those who get upgraded over time. The challenge with cryptography is that it's really subtle and it's super easy to screw up. Bruce Schneier, you probably heard his name. He's like this security curmudgeon that's been around for a long time, but he's got a lot of really good pearls of wisdom. And he says, the problem is that every person on the planet, I don't have his quote quite right, but can devise a scheme that they themselves can't crack.

You might be a mathematician or you might be a philosopher. Can you come up with a scheme that you think is safe and secure. The other thing is that a lot of cryptography is never mathematically proven. And this surprises non-technical people. They think, wait, what do you mean? There's no mathematical proof? That's right. There's no mathematical proof. A lot of these, it's like medicine a little bit. The way you decide it's safe is through peer review and time. You can't just create a new cryptographic primitive and put it out and use it to secure billions of dollars. You have to put that through a process, which includes academic review, it includes peer review. It includes waiting time, testing, which frankly takes like 10 years. So this is why the

cryptography elements are going to move much more slowly. And then there's other fantastic innovations. I mean, of course you've heard of zero knowledge proofs. And that's a whole range of cryptography and computer science, which is going to enable privacy capabilities that we haven't put on our current blockchains. And yet we should. And by the way, the regulators are scared of all that stuff because I think anytime you say privacy, you mean not letting them do their job. That's so not true, but it does create a bit of a burden. Well, it's been such an encouraging thing to see how fast some of this hardcore cryptography has advanced in the age of blockchains.

I guess there's a new funding mechanism, really, just startups in the blockchain ecosystem that are funding a lot of this really interesting ZK research. It's going to get so much better. I'm here in Palo Alto, which is right next to Stanford, the head of the cryptography team department at Stanford's guy named Dan Bonnet. He's the B and BLS signatures, which I just mentioned. And he's been there, I don't know, 20 or 25 years. He's one of the top cryptographers in the world.

And he'll tell you about six, seven years ago before blockchain's become really exciting, nobody wanted to talk to him on campus. And now he's like the most popular computer science professor on campus. The young generation is super excited about what you can finally do with practical cryptography that, frankly, we didn't have use cases before. And now it's just unlimited. So huge innovation is about to come as the great young minds are all tackling this problem like never before. I couldn't agree more.

So, Mike, this has been probably the most tumultuous time period I'd imagine for Bitcoin, just from a market perspective, everything that's gone on here over the past year. What are the next few months look like for you? What are the priorities of the company? Well, tumultuous for the market. To me, it doesn't seem that tumultuous. Maybe people say I have a high tolerance for risk. Look, I am a full believer that what we're doing here is going to have massive impact.

on financial markets down the line. So as we build this thing, it goes through ups and downs. This is, I don't know, the third or fourth winter. People still want to call it crypto winter. This is a macro winter. The principles of what we're doing, the reasons we're doing it still are 100% applicable. I think as an industry, we need to do more to deliver trust, like I said. But it's a great time for Bicko. I think a lot of what we've been advocating for a long time is front and center right now. We've seen a lot of flight to safety. so to speak, as people will seek out our product and how we differentiate. So we're going to keep building through it.

And one of the last things I think we haven't mentioned on this call yet is where does Defi and some of the future-looking parts of crypto fit in? Bicko deals with institutions. Who needs this right market structure and heavy-duty security and et cetera? I mean, it's all institutional. But Defi can play a big role here. And we talked a little bit about counterparty risk. Defi has figured out ways to use cryptography to measure what your risk on your other party is.

Get it down zero. I think there's a huge opportunity right now for Defi to start playing a role. There's been concerns about defy in terms of compliance, in terms of tainting, things like Tornado Cash and others have cast some doubts there. But these are solvable problems, and we can bring identity as needed into the system. So for us, we're building. We just had our developer conference about a month ago. We unveiled our latest set of Web3 compatible APIs. When I would say Web3 is not institutional ready today,

but we want to help our clients get there. And although we're known for this institutional custodian, the way Bicco got started and has seen growth is you come to Bicco, you sign up, you get an API key, and you start building your app. And in the old days, that was a broker dealer or it was an exchange or was a payment processor. Today, we're looking at Web3 apps, which we've got NFTs and other things in them.

How do we make it so that those apps don't have basic fundamental security problems, like what we saw with the slope and phantom hack a few months ago? How do we make it so that they don't have basic problems where you're authorizing a defy app to have access to your full portfolio and then getting ripped off or robbed that way? These are solvable problems, and we want to be there. So in addition to helping make sure that the market is starting, gets done right, we're also really looking harder at how does D5 play a role with making

sure that the market structure is right? And I think we can eliminate risk. So I would call on everybody in the industry to really be enumerating risk right now. We need to start showing serious maturity around understanding what risks we're taking, mitigating every single one of them, and putting forth proofs that we're doing so as much as we can. And if we can't, industry needs to hold us to account until we do. I'm sorry, clients need to.

I think that's a great message. Mike, well, this is been a pleasure. Where can we send people to learn more about Bitco? So, super easy. I mean, it's wwwbidgo.com. Everyone can always find me on Twitter, and you can email me as well. We are a known team. We try to be transparent.

So reach out anyway, and we'll see what we can do the work with you. Appreciate you coming on. All right. Thank you, Matt. It's been fun. 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.