On The Brink with Castle Island - Mike Moro (Genesis Capital) on building cryptoasset market infrastructure for institutions (EP.37)

Episode Date: January 27, 2020

Mike Moro, the CEO of Genesis Capital/Genesis Trading joins the show. In this episode we discuss:  - Mike's pre-Bitcoin career and his path to Second Market and then Genesis - POV on Bitcoin ETF viability  - The state of play for cryptoasset market infrastructure - Cryptoasset lending  ...and much more

Hey, everyone. This week's interview is with Mike Morrow, the CEO of Genesis Trading and Genesis Capital, the trading and lending subsidiaries of Digital Currency Group in New York. Genesis was the first institutional trading desk for crypto assets. It was a desk that was actually specializing in auction rate securities during the time that Barry Silbert in the second market team got further and further down the Bitcoin rabbit hole. And the business has really morphed since then, and I think you'll find it really exciting the path that they took. This is a really fun conversation with Mike. We touched on a range of topics, including the progression of market infrastructure around how this asset class is traded and custodied. Talked a little bit about the

growth of the industry around exchange traded products and when a Bitcoin ETF might be viable. And we talked at length about the lending market and some of the risks and opportunities in this nascent category. We're a big fan of Mike. We're a big fan of the whole team over at Genesis. And I think you'll enjoy this wide-ranging conversation. So without further ado, here's our conversation with Mike Morrow. 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 Conchistrateeasing. You 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 for joining the pod. Happy to be here. And thanks for having me in your office. Oh, you're welcome anytime.

We're just remarking before we started that the window is open for grayscale this week and the price is roaring. So this place is very busy. It has been a lot of activity and it's been kind of great to see from a flow perspective and that a lot of the institutional interest in the asset class has continued. We'll talk all about that. But before we do, I'd love to just hear your career. your story. So I know a little bit about this, but you have quite an interesting kind of road to getting to where you are now. So how did you get here? I did my undergrad at Georgetown. And at the time, I didn't know what I wanted to do with my career. And so I would just kind of ask around to my friends,

hey, what are you doing? What are you doing? Or during like the resume drop period, during on-campus recruiting. And everyone's like investment banking. I be. That's what I'm doing. And at the time, it was literally investment banking or like consulting. Those were like the two tracks that I went to business school. And so that's what you did as an undergrad. And so, all right, I didn't know what investment banking was. I didn't know what modeling was, but I somehow BS my way enough through interviews to get a job at Solomon Smith Barney, which became Citigroup. And I spent the first seven and a half years of my career in the investment banking world doing the analyst program, the two year to a third year analyst and then the associate promotion. Then I left city in early 2008. That origin story is very

familiar to me as I was in business school and went the management consulting path, but I guess we both made it into crypto. What was your pre-crypto role here at Second Market? Towards the end of my time at City, I started focusing on covering consumer finance companies, credit card companies, mortgage companies, and particularly student loan businesses. And a popular funding mechanism then, and still is today was the asset-backed securities market. And so I would help to originate structure securitizations of the asset-packed securities, particularly around the student loan product. And we issued billions and billions of dollars worth of ABS.

City was the number one underwriter of student loan bonds back in the day. And I was on that, the origination team at City in kind of the associate role around deal origination and structuring. And then I met Barry towards the end of 2008. And we can go into the origin story of Genesis, but I was working in fixed income around securitizations at the time with zero connection to Bitcoin or digital currency or anything. Probably the other end of the spectrum since student loans were asset backed and had cash flows. And then so you meet Barry and then you find yourself running an obviously.

Action rate securities desk. Is that basically how it happened? So what happened was, and I'm actually to refer a reference back to an earlier podcast guest you had, Mr. Terence Dempsey. Terence in his podcast talked that he got his first job in employment. First reel off actually came from me. So I joined Barry's old company called Second Market in fall of 2008. Terrence was our intern at the time. And Barry had asked me, hey, you know a lot about these structured products. Asset back securities. Could you create a data and analytics team that will help provide color around the asset, what's backing it, what are these loans, so that people can start to do some valuation work?

So great. So I wasn't initially on the trading team. I was tasked to head up this data analytics business. And I gave an offer to Terrence and he joined, as I think, employee number two within my group. And our job was to create tear sheets and provide information about everything second market was trading at the time. So from bankruptcy claims to the fixed income products to a lot of the private company stock that we were trading at the time, let's create profiles. Let's talk to about what these companies do, what their revenue lines might be,

all that kind of stuff just to shed a little bit of light into the opaque, E-Liquid asset market. Interesting. So there's probably no more opaque or illiquid asset than Bitcoin back around 2009, 2010, even up until probably 2012. At what point did Bitcoin even get on your radar? So in 2011, second market, which thrived in sort of a bearish economy as liquidity drying up, things becoming more illiquid, which meant more assets for us to trade. the economy started improving sort of slowly coming out of the financial crisis, asset prices recovered, things were trading closer to par. And so the business exited a whole bunch of different business lines, asset classes we were trading at the time. And our two primary businesses were the private company market and the fixed income market. And because of my expertise around asset back securities, I joined the trading team on the fixed income size. That's how I ended up on

the desk after we closed some business lines and said. that, hey, you're a good fit with us. Stay here. So in 2012 is when Barry Silbert discovered Bitcoin. And he went through the call it probably six months, skeptic to interested to fan to full-blown evangelist. And throughout 2012, he'd come to the office and he wouldn't stop talking about Bitcoin.

Just constant, nonstop, everyday Bitcoin this, Bitcoin, that. And we'd Google it. But if you think that like, resources around Bitcoin 101 isn't great today. You must imagine what this was like in 2012. BitcoinTalk.org, right? Exactly. And it was very developer focused. So a lot of stuff that like techies would understand about business, non-technical people are like, I have no idea what any of these things mean. And so it was really hard for us to understand. So I think I said to what Barry one day, I was like, look, either you tell us what Bitcoin is or just stop talking about it. It's kind of getting

annoying. So he sat us down one day and Barry's always had a very bearish view of the world and central banks freely printing money and asset price bubbles and things like that, credit crises kind of across not just in the U.S. but sort of globally. And he's always kind of looked for that non-sovereign store value concept. And, you know, he kind of thought about gold and what that might represent. But like when he heard about Bitcoin, that was kind of the most attractive thing to him. So in early 2013, We study it, learn about it. And then there's the old story of Barry giving each employee to Bitcoin. What'd you do with yours?

That was real. I think I spent, so I have my original Bitcoin. I'm sure you can find that on the blockchain that was actually delivered to my wallet in early 2013. I think the other Bitcoin I spent it on was like a case of wine. There was one vineyard that accepted Bitcoin as payment. I think it was called like Blue Plate Vines or something. So a free plug if you're still out there. In retrospect, it is the most expensive case of wine I've ever purchased in today's dollars,

certainly. But it was kind of cool. It was purely experimental. Here's how you hold it. Here's how you create a wallet. Here's how you send it and you receive something. So that was great. And then we're like, you know what?

This is illiquid. This is esoteric. This is very similar to everything else we're trading. Why not kind of give this asset a try? Maybe it works. Maybe it doesn't. Bitcoin is $80, $90 kind of at the time. And so we said, okay, let's try and create a secondary market for this. This was March of 2013. When we first had no idea what we were doing,

Barry just gave us his Rolodex. There's all of his contacts he had kind of made and said, smiling and dialing boys, we just started calling to see whether people wanted to buy, sell, whatever. And the rest kind of became history. That's a crazy backstory. At that point, where you sort of bought into this is a thing and this is going to be around for a while? No, but the process of trading really kind of helped for me to understand what this might be come. I think that we fully went into it thinking, oh, this might go to zero. That's possible at the time. Obviously, this is 2013.

So this is kind of right at the start of the run to like 1,200. And so when price started moving and spike and we're like, oh, my gosh. What is happening right now? And I remember, I haven't really asked Barry for like price predictions. But early on, I was like, Barry, where do you think this is going? He was like, I can see about $200 by year end. And this is like, I don't know, June or July. And I was like, oh, my God, this thing's going to double. And then it just like blew through 200 and 300, 400, 400, I'm like, what is happening? And during the summer, I think it was in August of 2013 is when we created the Bitcoin Investment Trust. And here we finally had a vehicle to put the Bitcoins into and issue securities from so that

traditional investors can now get exposure in Bitcoin in a traditional securities form. And so we started getting a lot of interest into the Bitcoin Investment Trust product. But it wasn't East Coast guys. East Coast guys would not take our phone call. They wouldn't return our emails. They, I don't think, took it seriously. And you can make an argument as to whether or not they're. even there today. A lot of our first buyers were certainly West Coast Silicon Valley types,

either VCs or entrepreneurs themselves, because the 100x or zero return profile fit everything else that they have in their portfolio. You invest in a thousand companies and maybe like 10 succeed and that's a win. And so yeah, Bitcoin might go to zero, but it might do 100x, might go a thousand X. And so from a risk return profile, I was like, this is what I do. I do. take that gamble all day long, right? And so we had a lot of the Silicon Valley type, so the first movers and still, hopefully still own positions with whatever, $150, $200 cost basis. Strong hands. Absolutely. I guess it looks like a venture bet to some of those folks at the end of the there. There's no question about it because the technology was nascent, kind of untested,

but it held the promise of something that could be potentially a game changer. So when you set up the desk initially, what's the profile of someone who's who's trading? here. How do you find liquidity in a market that is that immature? Our hardest task, obviously finding buyers were hard, but getting sellers to trust us was really, really difficult at first. You might imagine, obviously, in early 2013, it's still really some of the early, early Bitcoin guys. So these are the cyphra punks. These are the anarchists, the crazy libertarians who were betting on Bitcoin. And they saw us, and we were doing this through a broker dealer. And so having a government regulated entity, you want my driver's license? You want my passport? I'm not giving you any of that.

It's going right to the U.S. government. And so there was a lot of that mistrust of regulated entities, especially kind of coming out of the financial crisis and all that and getting them to on board with us so that we could do the AML, KYC, the proper screening. That in itself was a massive hurdle to overcome. And I've told the story in the past, but we used to have people show up in office. just with a suitcase of cash. I'm here to buy Bitcoin. I'm not telling you who I am. I'm not giving you any identification,

but here's my proof of funds and opens up the trunk. And we're like, sir, I'm sorry, we cannot sell this. We do not traffic in cash. We have to screen you and the door's right this way, right? That level of stuff kind of used to happen.

And so coming from the more traditional Wall Street fixed income world, it was a huge eye-opening experience for us early on. And so what did the market look like in terms of other desks in exchanges at that point? And when did that start to mature? Back then, so there were only two exchanges, BitStamp, which was in Slovenia and you had Mount Gox out of Tokyo. OTC really wasn't a thing. Cumberland was around when we first kind of got started. But that was really about it in terms of OTC counterbarities. Things like market infrastructure, settlement processes, we just kind of made stuff up. as we went along. And so a lot of the post-trade settle protocols that are in place today, frankly, we created it in a way simply because there was no blueprint to kind of follow at the time. And you probably didn't have a custodian even at the initial outset. No, we didn't. So we used to have like our own offline laptop solution running armory.

That was kind of the software that we were using back then to store our own bitcoins. But that was obviously pre-Zappo and everyone else kind of kind of came after. So some people might not be familiar with just how a transaction works from a life cycle perspective in this market. And probably people would be surprised to know that a lot of this is still happening. I don't know if you'd call it voice brokered, but over Skype, over telegram, a lot of this correspondence. Can you speak a little bit about kind of where we are from a state of maturity for how

this asset is traded right now? The OTC market largely still focuses on larger block transactions. I think the market has certainly moved in a more electronic direction over time. We still have counterparties that still will prefer to call in and get market color before the executor transaction. But the larger transactions are larger an RFQ model where counterparties would ping us, mostly through our own platform, the Genesis trading platform and a request for a quote for a million dollars or a three million dollars or whatnot. Our trader will provide a quote.

Quote is accepted. Then at that point, the trade is done from our perspective and hopefully from our counterparty's perspective. Then we exchange settlement instructions. If they're buying, we provide them with our bank account. And then they would also give us the Bitcoin address to which they want to receive the Bitcoins. The settlement period is mostly a function of how long that bank wire takes to hit our bank account. And so there are instances in which people are set up and kind of connected through various banking systems. And so we'll get a wire in a minute or two and we'll send out the bitcoins and the transaction. The whole thing is done in a few minutes.

But they're also like sometimes we have international counterparties and the bank wire might take two days or three days to ultimately kind of get there. Then they value the value of Bitcoin blockchain when value can be transmitted instantly in seconds as opposed to waiting for three days for an international bank. require to arrive. I've often said that if you ever want to understand why Bitcoin and blockchain settlement actually matters, just go through an OTC workflow and just see how inefficient US dollars are as a settlement mechanism. That's the slowest leg of the entire transaction. Yeah. How do you see this market playing out just in terms of that settlement workflow in the future? Do you think that there are things that will evolve over the next few years to make this safer, easier? Is there an appetite from your customers for this? Not necessarily.

I think the biggest drivers of change in that front are going to be if and when the big banks ever get involved where they'll want a clearing agent, where they'll want the DTCC to clear things. And in the absence of those guys, current market infrastructure I think is going to be in play for a little bit longer. But I have to believe that because in the current world, somebody has to move first. somebody has to send cash or crypto first and then hope and pray that the other side honors their leg of the trade there isn't kind of that simultaneous settlement aspect of things and my sense is is that that won't fly when the big guys ultimately get involved so I think they'll expect

things like deliver versus payment and kind of those kind of settlement mechanisms that they see in traditional markets kind of come to the crypto world and how does that work now is just the big guy goes first or the big guy goes second right? For us, we're the regulated entity. And so should we fall down on a trade, there are obviously consequences to our business from the regulators. And so we do act second, whichever way coins or dollars, we receive it, either the fiat or the coins first, and then we'll follow up with our leg of the transaction.

But my sense is as players evolve and kind of the bigger guys into the space, if a DTC isn't created, maybe there's a good escrow agent. that steps up and sets as a middleman, but it'll feel a little bit weird to start using middlemen in a technology that is supposed to cut them out. There's a little irony kind of in that one. Or market convention might be cash goes first. Whoever sending the cash moves first and the kind of crypto is the second leg, there's going to be market conventions like that that I think will develop. That's inevitable that we'll have to have those market conventions. It is perverse that you look at this technology that allows for the elimination of middlemen and we're going to re-intermediate the whole

market. But to your point, I think if we're going to see large financial institutions play, then some of the stuff just needs to happen. I think that's right. Let's stay on that thread a little bit. So when you first started trading this asset class, you're dealing with individuals, cyphre punks and it's evolved over time as the infrastructure has built up. You've had over the years institutions like Fidelity that start out just kind of kicking the tires in a lab and all of a sudden and now have a business unit. But where are we in terms of regulated financial institutions actually participating in this asset class? How do you see that right now? For the most part, the banks don't seem to be in a hurry. I don't think there's any question that there are blockchain working groups

within every single bank. But what I've seen is really, really talented, passionate crypto people within banks, try to get something going and then like give up after 12 to 18 months and then leave. The old brain drain that tends to kind of happen just out of frustration and and the ability to kind of not get something done. My sense is that if you're not doing anything in the crypto world, making the leap to suddenly trading spot is a big leap. My sense is that they'll move in increments. And so maybe they try to figure out some custody solution. But I don't know whether like Bitcoin custody market is big enough for these guys to ultimately care about.

Maybe they get involved in security tokens. Maybe they get digitized equity, tokenized shares of whatever as a larger addressable market, frankly, and kind of create infrastructure to support those efforts that may tangentially be more crypto. But I'm not sure whether anyone is really ultimately like really close to kind of getting involved, reputation risk is certainly looming large. How do you see the emerging derivatives and products factoring into potential participation with some of these big financial institutions? I think it certainly helps. I think cash settle is certainly a feature that makes involvement

for the regulated financial institutions to get involved, especially because the CME was so early to kind of create that regulated product that is cash settle. And so now there is a way for folks to kind of play the futures market and certainly the options effort to see me and we've seen what backed has kind of done and working on. And so some of those volatility types of products I think certainly makes it interesting. But because still today, the spot market is still larger. In other commodities markets, the derivatives market is magnitude greater than the spot market. And Bitcoin is kind of the other way around. And so at some leg, if most of the liquidity, if that's still kind of in the spot market, then that makes it tougher, I think, for regulated

institutions to really touch and especially kind of hedge out exposure efficiently. Yeah, definitely. I want to talk a little bit about your lending business. So maybe could you set the table for how that came to be and what you're doing in lending? When we started the trading business back in 2013, Barry had used firm balance sheet to buy a bunch of Bitcoin. And that's how we got our trading desk started by seating us with some of that Bitcoin. that had been purchased, and we were using it to kind of settle transactions and as working capital to effectively kind of run our business. And Bitcoin was, whatever, $100 at the time. As the price of Bitcoin grew, we were now sitting on a bunch of Bitcoin that we couldn't efficiently use

for working capital purposes. What we had is way more than we actually needed to efficiently kind of run our business. So in 2014, 2015, we started getting inquiries from people. saying, hey, can I borrow some Bitcoin? And, hey, I have this working capital need or whatever it was. And so friends and family companies, kind of especially within the DCG portfolio, we would give like small loans to and say, hey, yeah, sure, we'll help you out type of deal. And it wasn't very much. It was probably 100 Bitcoin's here, 50 bitcoins there, that type of stuff. But I was like, maybe there's something here. And in 2016, I went to Barry. And I said, hey, I really think there's something here for the lending business.

And we could maybe create something akin to an equity sec lending business in crypto. And he cautioned to me at the time that we were a bit early. I was like, I like the idea. There's promise there. But timing may not be right. And so I said, okay. And then in early 2017, Barry called me into his office and said, hey, you still want to do that lending idea. I said, yeah, sure.

I was like, all right, let's, I think now maybe a better time. to kind of get involved. So I hired a team. Now created a launch plan. I'm kind of going in March of 2018, knowing that there was an appetite for it. And this is 2018. So this is following the massive bull market of 2017.

And I wish I could tell you that we were market savants and expected a 90% drawdown in which having borrow an ability to short would be fantastic service to offer our clients. It didn't. It just so happened that we were ready to launch in March and that's what we did it. But our initial customers were certainly folks who were looking to borrow anything they possibly could and either hedge out their exposure or take a downside bet and short the market. So I think that was a significant tail win for our business. So let's talk a little bit about some of those use cases. So I think a common refrain is just that the use case is shorting. What are the customer journeys there

and what are people actually using the borrow for? Obviously, in a downward price environment, for the first six months of our business, I think the prominent use case was shorting. I don't think there's kind of any question about that. And frankly, there were a lot of hedge fund customers that, quote unquote, beat the market because of their ability to go short the spot.

But as the market turned, there were, well, there were still kind of speculators who still didn't believe that the market was coming back, but people tend to sort of get out of the way of a speeding train. And so shorters close out their positions. And then we were like, what happens in a bull market? What happens to our business in a bull market? Do all of our borrowers kind of go away? We don't really have a business. But our theory had always kind of been that, yeah, it's possible that shorters close their positions. But the price of Bitcoin and everything goes up. The pie is bigger. That has to be good for any business that is in crypto. If the pie is ultimate. bigger. So we said, okay, I bet you that there'll be other use cases. There'll be other ways in which there's going to be the borrow scenario. That's exactly what's happened. In third quarter of 2018, we started lending cash. So our typical borrow looks like people borrow Bitcoin and post dollars as collateral. Then we started saying, okay, maybe instead of dollars, we'll take

Ethereum or like coin or other forms of crypto. We started doing a lot of crypto, crypto loans. And then we saw a demand for the reverse of saying, hey, can you lend us fiat against, or stable coin against crypto as collateral? So we started to kind of pilot that in the third quarter. And the business has just absolutely taken off from from there. We're about to release our fourth quarter lending report. We put a snapshot each quarter, but our numbers are at all time highs. And I think we will originally, having originally like four and a half billion cumulatively of loans. And use cases are going to be not as many people are shorting. And I have to imagine that most of our alt coins are probably used for shorting, frankly, but it's such a small part of the

portfolio. Our loan portfolios predominantly two things. Bitcoin is still the largest, but now it's cash and stable coins. And Bitcoin, in fact, the guess is about 50 to 60 percent, and the majority of the remainder is all cash. People are borrowing Bitcoin. What are they doing or borrowing anything? Primarily it's for two different things. One is still a market neutral strategy where I just need working capital parked across a bunch of different exchanges

and so that I can efficiently trade on any of them without having taken market risk on the entire slug. Two are arbitrage opportunities that come across between the spot market and the futures market. So basis trading. And so in a bull market, what tends to happen is that the spot market is the market. The futures market trades at a significant premium to the spot market. And so what they do is people will buy spot and then short the future.

And as that mark and the pricing converges closer to expiry, then they've basically captured that entire arbitrage for free without taking that market bet. But to buy spot, you have to have cash. And so cash borrow out the door spikes when the futures market ultimately spikes and the premium kind of gets greater. But in the other way around, if the market goes into what's known as backwardation kind of in the futures market and futures start trading at a discount the spot, you'll see the other way where people need to short Bitcoin. So they'll borrow Bitcoin and then they'll buy the futures market to capture that arbitrage. So the direction of the futures curve actually has a ton of impact on what gets lent out. That's really interesting.

I want to talk a little bit about one of the things you mentioned there around the exchanges and just the fact that you need to pre-fund these accounts on various exchanges. What does that exchange landscape look like now versus when you started? And what type of maturation are you seeing on that side? I mentioned earlier there were only two exchanges when we first kind of got started. So for us, seeing, you know, a lot of the, whatever, the 30, 40, 50 exchanges kind of around the world, the infrastructure is different, the services and products that are offered are different. I think the market is fairly well covered, not just kind of in the U.S., but kind of globally.

I mean, the growth in Binance is obviously a tremendous story. And a lot of these companies have now started to offer lending on their own platform. If you're a high volume customer that keeps a bunch of cash, they will lend you crypto to kind of trade against and create like a trading line to with it. But there are lots of businesses that have knees over and above what an exchange might be willing to kind of give you. And it's really hard from a trend. treasury management perspective to really have a good handle on your cash position, your Bitcoin, whatever crypto position that you may have across 30 different exchanges around the world so that you can capture any arbitrage or to kind of trade efficiently.

So if anything, I do think that the exchange connectivity functionality has become much more important than ever in addition to like a treasury management function that lets you rebalance across exchanges really, really quickly so that you don't really kind of lose that trading edge. That's really interesting. Obviously, there's some risk factors here associated with any lending business, particularly in the crypto asset business. What are the categories of risk that keep you up at night or that you spend the most time planning for? So I have a risk team here, Genesis, and we collect financial statements, the balance sheet income statement, in some case, bank statements to confirm cash balances before we kind of get into any kind of talking about specific loan terms or anything like that.

And the underwriting process is fairly rigorous simply because our client, our target client, is going to be the best of the best in crypto, who we think are the best credits. And so all of our loan portfolio, we only lend to about 40 different counterparties. And so if our loan book is 600 million or 700 million or something like that, and it's only going out to 40 counterparties, we're picking large bets. but not a lot of names. Because at this point in time, I really don't think that there's hundreds and hundreds

of credit-worthy counterparties in the crypto space. It's too nascent. It's too immature. And frankly, as we all know, the big boys still aren't getting involved. And so the types of credits that we want to serve and the segment we want to serve is still that the cream of the crop and what we view as kind of credit counterparties. Having said that, the things that are going to keep us up at night

are folks who are shorting. because, hey, you caught in a short squeeze and you don't have enough cash to buy it back. There's going to be situations where, like, credit is one thing you can measure. What's harder is operational security. How do I get comfortable that my counterpart that I lent Bitcoin to doesn't lose their private key? That's the stuff that you can't assess. You can't really diligence because things like that can happen. So those things that we have no control over are going to be the situation.

which are going to cause me to lose sleep. It's not our decisions. It's stuff that we can't control. Fortunately, and I'm knocking on our table here, we've had zero delinquencies, we've had zero to faults, we've never had to liquidate anyone's collateral position, which means we're working with the right counterparties and keeping our fingers crossed that that continues throughout 2020 and beyond. It's got to be an interesting asset class from a volatility perspective managing that counterparty exposure, managing that margin. And I guess to your point around losing the private key scenarios, I guess that would be an exchange going down or something like that would have potentially a big impact on the whole market. No question, right? Because our counterparties may borrow

from us and they could have great credits, but if they park their coins on an exchange that gets hacked, it's like we're indirectly in the line of that risk that the exchanges are ultimately taking. And we're obviously assessing, okay, do you have enough cash? elsewhere in your balance sheet to potentially cover that. Where else are you investing? There are counterparties that are not just in crypto. Crypto might be a small thing, but we'll lend to them. But let's say they're investing in real estate.

Great, your balance sheet could look fantastic. But if your remaining assets on your balance sheet is real estate, that's E-liquid. You can't just turn around and sell that overnight to meet the margin call. And so we are taking the time to kind of look through your assets and how liquid are they? because time is an element to all of this and is obviously important for how quickly the market can move and your ability to kind of return the loan to us. That makes a lot of sense. I want to talk a little bit about DCG just as a whole and how the various businesses interoperate and the synergies between them. So you can talk a little bit

about just the organization in general and how the different business units work together? DCG is the parent company. That's the umbrella business. It is not a fund. It's a company. that gives Barry and his team kind of the operational flexibility and permanent capital to effectively execute whatever strategy they want over the long term. So Genesis, we're the trading firm, the lending business with a lot of services that will announce over the next few months, like new products and offerings and things like that. Then we have Grayscale, the asset management business. They have, I believe, somewhere around 2.5 billion assets under management.

They have 10 different products, nine single asset vehicles, and one that is a basket of the top four or five different cryptocurrencies. And then there's CoinDesk, the news media and events business. And there's one more business that is currently still being incubated around that's called DCG Foundry that I don't think is marketing publicly yet. How do those businesses kind of ultimately work together? So we're the broker-dealer, so we're the marketing and distribution agent for all of Grayscale's products. And so customers that are subscribing into the Grayscale product are actually

onboarding with Genesis. We're marketing the security on behalf of Grayscale. And when a customer wants to buy a million dollars of the trust, the cash is actually coming to a Genesis bank account. We go out to the marketplace to source the million dollars worth of Bitcoin. We give it to the trust in exchange. We get the shares and then we get that shares cut in the name of the investor. We're the authorized participant and we are the only authorized participant. for the grayscale investment products. And so the fantastic sort of working synergies between the two of us, like we can't run each other's business,

but we work very closely in hand. CoinDesk is an independent company. We help sponsor and kind of support their various events, but it's run entirely separately. But like having the events and the kind of the gatherings and some of the smartest editorial staff, I think ultimately out there is certainly a value add to the DCG network.

And the one piece we have in touch is the DCG VC portfolio, which is now 150 different companies, all kind of in the Bitcoin blockchain space, I think in 30 different countries around the world. It's less about the investment because they're investing at the seed stage. And so they're writing relatively like small checks to these businesses, but what they are able to get is kind of fantastic data.

They know what is happening, what's hot in Japan, what's hot in Nigeria, what's going on in various markets in Europe. And so they're gathering data and insight as to kind of what's happening. So I think that is a very valuable network that we as a business are constantly tapping into. So some of our largest trading clients, some of our largest lending and borrowing customers come from the DCG portfolio. And there's a certain level of comfort that we certainly take from a diligence and

perspective when DCG is already an existing investor. Right. It's great to have the business in the family for sure. One thing that I wanted to get your perspective on is you've seen the various Bitcoin ETF proposals over the years, starting with the Winklevost Twins. Grace Gale actually had one at one point. Bitwise has had one. What is your take here on the future of a Bitcoin ETF? Are we going to see one and what will it take if the answer to that is yes? Yes, I do believe we'll have one. No, I do not believe this is a 2020 event. I actually, have said that I think there is strong feeling and a general consensus that nothing's going to happen until Commissioner Clayton is no longer the chairman. If we get to a point where we have just a

different regime and a different person sort of ultimately kind of calling the shots at the SEC, I think we'll certainly kind of get closer to having one. I think over time, the rationale for not approving one slowly starting to go away. That's my view. And, There's going to be a way for people to come to the terms that this isn't going away. Bitcoin is around. And frankly, GBTC is out there. It is freely traded. Any mom and pop investor is able to buy it.

But in the public markets, it's trading at a premium. And so wouldn't it serve the better investment public good for things to trade at that asset value and for things to actually trade along with the price of the underlying? There has to be a consideration there for it to be like, hey, you know, what, this is for the public good. Yeah, and I guess everything that we've talked about in the time leading up to this on the podcast is around market infrastructure improvements and the spot market. Custody appears to be really well addressed since the initial ETF application. So you would think that a lot of these barriers are slowly falling. I said to somebody in a meeting earlier

today that I'm unaware of a custodian getting hacked. I'm not either. Exchanges have incidents and and people's personal wallets are affected, but I'm actually unaware of a custodian being hacked. And so I don't want to say like security is solved. These hackers are really smart, and they'll come up with new avenues of attack. But there's got to be some level of comfort that people take and the fact that these real legitimate custodians

that these ETFs are naturally going to work with have their security in order, and that it's not as easy as to just steal a bunch of people's Bitcoin. Sure. And I guess on the spot market issue, there's just some level of comfort that needs to happen around some of this trading volume at the spot will always be on unregulated exchanges. It's just what is the critical threshold that needs to be under U.S. regulated? Here's my view on that.

I think a lot of the unregulated venues have so much liquidity because it's still a retail game. And they're not as sensitive to counterparty and regulatory risk as institutional money managers are naturally going to be. I have a hard time believing that especially if you're using LP funds, you're using investor funds to invest in the asset class, that you're going to get comfortable putting your money and kind of trading on unregulated venues. Today, regulation is a hindrance. There is no benefit to being regulated because people don't want to touch it. There's no volume. There's no liquidity. Whereas if you ran a business unregulated, you're free. Like, you get all the volume in the world. The flip side has to be true in a regulated market when the institutions

are actually playing in it. And so they will come a time in which being regulated is going to be a reward. That'll be a feature as to why they're using you, but that naturally kind of won't happen until the mix of investors is more institutional than retail. That makes a ton of sense. So it would follow that what you're saying is true, and I think it is that every net new institutional dollar that comes into this market will influence that proportion that goes into the regulated spot market as opposed to the unregulated spot market. That's the view. That's the pieces. Yes. Yeah, I think that's very logical. This has been a fascinating conversation. Why don't we close with what are you the most excited about in this industry?

You have a great purview to be able to see a ton of interesting startups, a ton of institutions that are kicking the tires on this stuff, a ton of new assets, crypto assets coming into the wild and becoming traded. So what is the most exciting to you as you look forward five years? I think there are a lot of businesses that during kind of the crypto winter of 2018 and some parts of 2019, that just put their heads down and built that we really haven't seen yet kind of hit the marketplace and kind of go public with everything that they worked on. The entrepreneurs and the people that I meet within the DCG ecosystem and outside it are still some of the most smartest, most inspirational, focused people.

that I've ever met and I remain incredibly bullish for their effort and dedication to actually building something. And I'm so excited for what they have to show us when it's market ready. There's going to be people that are certainly rewarded for their hard work. But you may not really see a lot of those fruits of their labor until the market comes back, until the investors are more excited about the space again, until we see, you know, hey, wow, that fund is getting involved or that state pension is now doing what, those types of things tends to have a domino effect. And we're all optimistic for a really good 2020 from a price perspective. But all the signs and the conversations that we're having is that the products are about to kind of come to market are going to be

worth the weight. So I'm incredibly excited for what that might look like. Well, certainly some of the infrastructure that you're building with Genesis and with DCG more broadly is making a ton of that possible. So it's really exciting for us all to see. Where can people learn more about your business and stay in touch? So our website is genesistrading.com. Most of the information is available through that website. But I'm on LinkedIn. I'm on Twitter. You can come find me and get in touch. I'm happy to chat with any of you. That sounds great. Well, thanks so much for joining the pod. Matt, thanks so. This has been another episode of On the Brink with Castle Island Ventures. To learn more or to subscribe to our newsletter, please visit castleyland.V.C.

The big thank you to all of our listeners, except those of you who believe in the underlying blockchain technology, but not cryptocurrency. You know who you are.