On The Brink with Castle Island - Pelle Brændgaard (Notabene) on how crypto service providers are dealing with the Travel Rule (EP.152)

Episode Date: November 30, 2020

Pelle Brændgaard, the cofounder and CEO of Notabene, an enterprise software company building compliance tools to enable trusted cryptoasset transactions between financial services firms, joins the show. In this episode we discuss: Pelle's early work in distributed systems and pre-bitcoin cyber-cash projects His path to cofounding Uport and his views on decentralized identity systems The vision of Notabene how the firm is addressing the compliance needs of financial institutions and crypto exchanges and brokerages His views on the travel rule and how this will impact market participants The unhosted/hosted wallets debate Learn more about Notabene here. Sponsor notes: Withum is a forward-thinking, technology-driven advisory and accounting firm committed to helping our clients be more profitable, efficient and productive in today's complex business environment. Our Digital Currency group is proud to partner with members of the cryptocurrency community. Get to know us at withum.com/crypto.

This episode is brought to you by Witham. Witham is a nationally ranked public accounting firm providing advisory tax and audit services to businesses on a local and global scale. More on Witham and their fast-growing crypto asset practice later in the episode. Today on the podcast, I sat down with Pele Brannigard, co-founder and CEO of Notabene, an enterprise software company that is focused on addressing the compliance needs of financial services firms that are engaged with crypto assets. Specifically, Nota Bene's product allows these firms to come.

into compliance with what's known as the Fund's Travel Rule, which is a much discussed regulation that stipulates that exchanges of value between two intermediary firms must identify the customer identity if the exchange is over a specified dollar amount. Prior to launching Notabene, Pele and his team have a rich history in this industry, and it actually dates back to cryptography projects that predate the invention of Bitcoin. I wanted to have Pele on to discuss his vision for Notabene and how he thinks this is a business. industry can evolve in a way that ensures that individuals can always self-custody their keys. I think you'll enjoy this one. So without further ado, here's my conversation with Pelle Brannigard.

Brannigard. Bratowne 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, prices. The bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. You 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. Heli, thanks so much for joining us on the brink.

Thank you very much, Matt. I'm really excited to be here. Well, it's an exciting day. Today you announced your seed round of financing that we led. So excited to talk more about the business and be able to give you the forum. to speak publicly about what you're building, because I'm really excited about it. Maybe before you do, could we start with your background and how you got into this space? Sure, yeah.

So I'm Danish and I got into the web in the very early days of the web. I'm definitely going to show my age here, but I was the first webmaster at Alta Vista, so like back in a long, long time ago. And I got really interested in what was happening with the cypherpunks back kind around that same era, and particular in the subgroup of cypherpunks,

I was dealing with money. So the whole financial cryptography world, which was, they were like David Chalm and Digi Cash, and there's Ian Grigg with Ricardian contracts, those kinds of things. I was very fascinated by that. I started going to these conferences in Inglila, where I met,

very, very young Zucco and Ian, David Chalm, and a lot of these kinds of people who are still in the industry today. So it was quite exciting. Everyone was figuring out what we're doing. The technologies were very different back then than they are now, but a lot of the same visions where they're right about permissionless innovation, permission less finance.

Anonymity, so the nominee was, anonymity was probably a bigger deal back then than it is today, which is probably also driving Zucco to do C-Cash and those kinds of things, right? So my initial area that I was working with, I was also fascinated with offshore companies. I was fascinated with like company law, all of those kinds of things as well.

So it's like looking at how could we, using crypto, using the very early nascent smart contract technology, how could we go in and create offshore companies that were managed and through cryptographically signing things, you could manage your shares online. So we built this system called court flow and we were integrating into Anguillas, yes, the little island and little British island in the Caribbean, were the first to have a fully online company registrar in the offshore world. We integrated into them as the first external integrator. Right when we started getting ready to launch, Tony Blair had decided that all offshore companies had to have KYC done on all of their parties.

And all of a sudden, this great online service that we were going to roll out and launch in the year 2000, we were like, how the hell are we going to do this, right? And after a conversation with the head of companies, Housen, Anguilla, kind of came to the conclusion. There's no way in hell we can do this right now. So I, at the same time, I joined Deutsche Bank then, like I say, okay, well, I joined Deutsche Bank, spent some time there, and I got a really good insight into how all the mess that is like banking, payment, trading systems,

all of these kinds of things within a very large global bank. And I kept tinkering on the crypto part of it, like how can we do these kinds of things without involving governments? I thought that would be cool. And eventually I left London to work to go to Panama to actually, after having watched the tail of Panama, to start working at this technology down there. And I met up with an old cyper punk down there,

and we started a new company working on essentially, something very similar to Ripple and spent the next two years trying to get regulators to okay this, trying to get bank accounts and failed on pretty much all their accounts. And even though we were, we made a lot of progress on the technology and all these kinds of things. And then, okay, this is difficult to do. So I just came, went back into like regular internet app kind of stuff in the mid 2000s and spent some time in Silicon Valley those kind of things until Satoshi came. And everything started to get exciting again.

That's a great background. You know, what were those early days? You know, you mentioned the cypherpunk movement. And as you were talking about some of the offshore entities, I was thinking about Neil Stevenson books and Cryptonomicon. on some of the ethos that was driving a lot of that participation. I mean, was there kind of an overarching goal with that community at the time? Was it, you know, as I read about it, it was less about the creation of non-state money

than it was initially around like remailing systems and privacy. But would you say there was an overarching goal that that group was building towards? So there was a subset of cypressurunks that some people call money puns and some people call financial cryptography. And we were focused on the monetary. aspects of it and there's definitely this ethos, ethos around non-governmental money.

So there was a very, very huge group of people involved in that space who were like also very like gold nuts and all of these kinds of things. And E-gold, which it just came out. I think they launched in 95 and which was obviously completely centralized system. You interacted through an HTTP API and all of these kinds of stuff.

But you were actually, they were kind of permissionless. You could do whatever you wanted to. There's a ton of creativity with it. And because of that, just like Bitcoin and Ethereum allows you to innovate. Now, there's a ton of innovation on top of of Egold there. So a lot

of people builds like digital bearer certificate kind of systems on top of e-gold. And it's a lot of kind of derivative crypto systems on top of that. Of course, eventually the

the DOJ got them and it's still like a one of the favorite cases of the US regulators. Like they keep bringing up the EGO case all the time. That's why you need to implement KYC and any manufacturing kind of cases. But there was that, yes, remailers, PGP, all of that kind of stuff. But then there was this additional kind of let's start getting creative with with money. And there were some cool things happening back then. And at what point did it start to become, you know, clear that the centralized solutions were not going to work.

You know, I remember Egold, obviously, it was a high profile one, Liberty Reserve, which I believe was built on Egold, got taken down. Digi Cash didn't work out. And then there was sort of this troth of disillusionment maybe before Satoshi. So what was the, that time period? like yeah so digitash probably could have could have worked and they were working with a lot of large banks but i think that's that was actually ultimately their downfall is that while Deutsche bank i did meets like the head of private banking and for Deutsche bank at one point and he said but we do innovate we had six million users of digit cash in germany and i like okay that's pretty

impressive but they also didn't push it out into everything right so yeah so i think it was more kind of like innovation department kind of thing, right? But all the kind of like more crypto and archic kind of work ended up just living in in source forge repos, later GitHub repose. So people were coming up with all of these kind of like approaches. Yeah, you can do this. You can create your own kind of like, you know, digital currency you doing this. You just need to deploy it somewhere and then run it. And I kept like asking all of these kind of all of these very smart people who develop these technologies well why don't you deploy it somewhere well i live in the u.s and i just saw what happened to eagles and i

can't do it but anyone who wants to can take this and please do right so there's a lot of projects like that and i actually initially dismissed bitcoin as just being one of these guys publishing code but scared to actually deploy it and um so i was a little bit dismissive like the first year or so about Bitcoin because I just put it into that bucket. Right. The centralized part, you know, we learned that like the original theory was, ah, offshore works, right? We'll just place our servers in Anguilla or Cayman Islands or Bermuda or whatever.

And then the US can't come get us. We can do whatever we want. And that hypothesis like kind of failed pretty, pretty quickly, you know. And I don't recommend. anyone take that also for for crypto exchanges. And I know, of course, a lot of exchanges with taking that approach also. But it's a, you can't do it forever. You can't keep moving and running and doing those kinds of things. Yeah, it hasn't been a winning strategy over the long term. It's interesting what you say about dismissing Bitcoin because that was, it's something

that I've heard a lot of the cypherpunks talk about. I believe even Adam Back was a little bit late to Bitcoin, even though he was very early in that movement. So when was it clear to you, that Bitcoin was the real deal and that this was something worth paying attention to and that there was kind of an industry developing here. Yeah, when I finally understood the idea of it, the idea of the blockchain, the idea is that there wasn't like a central server hiding. Like I still, it was back when everyone still thought Satoshi was some Japanese nerd, you know, like, like, I don't realize that it's not this Japanese guy running a, running

a, running Bitcoin from a Windows server in his apartment. I started actually, oh, wait a minute, this is very, very different. And this actually solves all of these things. And I've seen all of these companies try to do these centralized cryptocurrencies and failed at it because they will always get you somehow, right? And he had this fix to that. And it was so elegant. But it took me a time while before I actually read the paper and I actually groped it. So, I mean, it took me probably about a year or something like that.

And that's when I saw, oh, this is actually interesting. But it also was like, will we be able to create real value on this? And I did believe in that. But so I started looking at integrating it into some business ideas that I was working with. I was playing with something called, well, I had a startup called Pico Money. a small bootstrap startup where we're trying to do essentially personal and personal currencies, those kinds of things that are like all popular in the Ethereum world in a completely centralized way, right? So, you know, trying to get people to start getting creative about issuing tokens

around at that time. And then I was like, I actually, the minute, like, after I finally rocked Bitcoin, I, okay, we need to stop all of that. And this is way more interesting for it. And I started figuring out how to build businesses on top of it. And what was the path that led you to consensus and the Ethereum community and starting Uport? And I guess what is Uport too? Yeah, yeah. So I had, I was a brief stint where I was working on getting, building a Bitcoin service, Bitcoin wallet for the sub-Saharan African market to compete with in Pesa.

And I kept getting into these kinds of issues again with identity, KYC, all of these kinds of things. We were shut down. We had the honor of being the first to get shut down by M-Pesa, and I was called in to explain this Bitcoin thing that we've invented to the central bank. And I just realized it's so difficult to do anything without solving the regulatory aspect part of it. And I had been involved with identity through multiple things like Open ID and OWOTH, like a few years earlier, like a part of founding.

some of these protocols. And I didn't really like working with identity, but Joe Lubin from Consensus, he reached out to me and said, come help figure out how we build identity at consensus. We want to do this thing called Uport, which is identity on top of Ethereum. And I was initially very dismissive.

I was like, oh God, I don't want to deal with identity again. This is, the identity projects always fail. They always become centralized. all of these kinds of things. I'd much rather work on some of the other interesting products, that projects that they were working on. But in the end, he said, just try it. And then you can switch with something else.

And then it took me like about months to do the first proof of concept and like to actually, I can see how this could work. I can see how we could use this. And like for me, the big use case was always about using it for K.YC and then tying KYC to you to a non-codial address that you were using to interact with a smart contact. So this got me really excited. So after the initial proof of concept, you know, proof of concept that I did probably more than anything to just prove it to myself that this, this would even work, right?

We started building it in earnest. And it became, yeah, I was there for about four years. We really experimented and iterated. learned the hard way not to put private data on public blockchains, learned that you don't necessarily want to have to have multiple transactions when creating a new identity just for scalability reasons. If you're trying to build tools for like billions of users, you may not want each user have to create a transaction on the Ethereum blockchain to be able to do that. So we learned a lot of things the hard way. And then when we finally got, we felt we had the tech pretty solid. We started looking at applications. And as typical in the blockchain space back then, like in the 2016 to 2019, every single innovation department of every single company reaches out and wants a demo and wants to talk. And there's very little like real business.

It's just like talking, talking, talking. And I was really like, this is cool. I'm glad I'm talking to this and this and this bank or this and this car company or this and this education, whatever. But let's use this for like real business kind of things. And eventually I decided together with my co-founders and all of my co-founders, we work together at Uport. Oh yeah, Uport, by the way, it's a decentralized identity platform. And the goal for it was always to be able to tie identity to blockchain transact. but in a privacy-per-serving way.

So you could start having the kind of identity concepts that you're used to and more traditional finance or traditional apps in the DAP or finance kind of world as well. And the idea is we developed a wallet where you can maintain identity credentials. And at the same time, you could interact with Ethereum. It's the regulator showing up at your office. Exactly, exactly, the black helicopters. No, but so we were, you know, that was the overall concept, like user control the data, their identity, all of those kinds of things, and then they can tie that to two blockchain accounts. And through a process through U.X, that's somewhat similar if you squint to, say, Facebook Connect.

and then tie that into these blockchain applications. And the Ethereum world back then, and probably to some extent still, it's so easy to build things on Ethereum. So there's a lot of people kind of reinventing things that we did. There's a lot of people, oh, it's much more fun if I do this myself. So, but we created like probably one of the first multi-sick wallets with on-chain recovery aspects. We were able to do, have decentralized identifies, verifiable credentials, all of these kinds of things.

All of that is open source right now and people are using the same tech, the tech that we did for a bunch of different products. But unlike, like we planned this, this is like perfect for Web 3 for all the DAP developers to use. But the ones who were really interested were like, you know, banks and governments. I remember the first time we did a demo for government. There was a large non-Spanish-speaking country in South America, and where we were demonstrating how they could use decentralized identities. And we learned about the chaos that operates within a government with 10 different identities silos, 10 different identities that every citizen had to have within this particular country.

using the idea of user control data and blockchain, you could actually let them take control of this. And this was like a huge, huge like, oh, I open a formula that, oh, this wasn't just for like cyberpunk, cyberpunks. It wasn't just for like, you know, decentralized apps, all of these kinds of things. There's like real business use cases for this.

And that's actually where Uport ended up going. Most of the technology there is not really used that much in the Web3 space, but it's, the basic technology is being used by like the EU is rolling out a project for integrating all the different digital identity systems across the EU using this tech. So it's kind of cool that this just happened. Yeah, it's interesting because you know, you talk about doing all of these R&D lab presentations and things like that. There's so much innovation theater that was happening during that time period. Oh, for sure. You wanted to be able to say you were doing a blockchain project.

not a crypto project, but a blockchain project. But, you know, if you look at identity, that's something where the use cases really go across just every industry under the sun. And so you could, you know, you really could be any type of company in the world. And my guess is that at some point you're going to be integrated with an identity system tied to a public blockchain. So it might just be a matter of when we get there. Yeah. If you're a regular listener of this show, you know that we take accounting and auditing pretty seriously. And that might seem a little bit strange in an industry that prides itself on the removal of intermediaries,

but we think when it comes to digital assets, trust relationships with counterparties like custodians and brokerages is critically important. Witham is a top 25 ranked accounting, tax, and advisory firm. They have a digital currency and blockchain group that's working with some of the highest profile companies in the industry on things like tax advisory, financial statements, token sales, stable coin audits, and much, much more. To contact their team, go over to witham.com. That's W-I-T-H-U-M-com slash crypto and get in touch with someone on their team. Now back to the episode. So from there, you kind of come up with the idea of Nodabene. And so why don't you tee that up and talk a little bit about the company, what was the impetus to start it?

And what do you do? Yeah. So there are several of us. We all work together at U-Port, like all of our co-founders. There are four of us. And a couple of us had gotten a little bit tired. just working on out pitching protocols and pitching innovation departments, those kinds of aspects. And we actually wanted to go in and build a real business and not an open source protocol

and actually solve some of the real problems that we had seen. Like we've seen a ton of people have these problems. I mean, we felt this ourselves. Like my co-founder Andres, he ran the first Bitcoin exchange in Chile, and he kept losing access to banks one by one, all of them cut him out, right? You know, because of lack of a regulatory frame or no travel rule, all of these kinds of things. And that's the same that happened with us with Kippochi in Kenya. So we felt these issues and we felt we needed to get to, we needed to actually start solving these issues.

We had a lot of good learning from building Uport. And a lot of the tech that we designed, a lot of principles there, we can use. I mean, they're all great open source protocols, but we came at it more. Let's actually step back. Let's not try and find a problem for the tech. Let's actually look at what the real problems are. And we actually saw one of the most fundamental issues for compliance and for many other parts of like really bringing blockchain technology, whether it's cryptocurrencies or defy or any of these kinds of things, into mainstream,

is actually building trust in transactions. Who is behind the transaction? And I just want to stress this. This is not about putting identity information on the blockchain, not at all. And it's also not about implementing KYC or permission blockchains and all of those kinds of things. We are huge believers in public blockchains that are not permission, all of these kinds of things. They're decentralized. they don't need to be permissions.

They don't need to have KYC. However, anyone who's interacting on top of that blockchain do needs to know who they're interacting with in many cases. Not all cases, but for example, if you are, if you have fun, you have Bitcoin on your ledger nano and you want to send it to an exchange. You want to make sure you're sending it to an actual exchange, the one that you are trying to send it to.

You need to know this. And there's really not a good way to ensure that kind of trust. And also if, you know, what happens if they lose my money? You know, I mean, you know, we're in an industry where no exchange has ever lost our customers money. There's never been any fraudulent exchange at all, none of those kind of things. But there, so there's a lot of importance, we believe, in actually understanding who is behind this particular transaction.

And that can be done. And really at a peer-to-peer level, like, I want to transact with you, who are you? This is me, right? And now we have that exchange. And from a fundamental part of it, that is also core at solving a lot of the actual compliance issues that people have in this space. Because a lot of the compliance tools people use are set up to work in a bank environment. And banks operate very differently than crypto exchanges do.

and the compliance issues, while they, in theory, are roughly the same, like in practice, they're very, very different. And so a lot of the people who came from banking and were starting to work on compliance, first of all, there's a huge learning curve for them. But then all of these many years of experience I had in, like, for example, doing AML, doing analysis of transactions within their existing systems, they've had to learn completely new way of doing this. And also a lot of the tools weren't there. I mean, we, thank God we have chain alices and these kinds of tools. I know a lot of people don't say,

thank God for chain analysis, but I say, I say thank God for chain analysis, because chain alias had probably done more than any other single company to legitimize Bitcoin in the eye of regulators, because they've said, this is actually so much better than what I've already. called the real dark net which is like the actual financial backbone behind the banks like with the with the mixture of payment messaging systems settlement systems correspondent banking all of these kind of things it's extremely difficult for people to actually if you're doing an investigation to actually follow that information in the traditional world with something like chain analysis is really easy but there also there's missing one part here like chain analysis has this public

public information, but it's also like, who is my actual customer? Who is this person that I interacted with? If you actually know that, that's kind of the final piece. Then we start actually having something where I think regulators will be very happy with it. Just from talking with regulators, I think for them, travel rule and a few of their other concerns, together with chain analysis means that they actually have a way better tool, you know, way better place. Like they see it's being way less risky. If we can just get past one of two like little headaches here,

then the traditional world. And I think this is going to help push blockchain, even if it's just central bank digital, you know, currencies together with Bitcoin and a bunch and a few of these alternative kind of layers, next to it. I think, yeah, I think the, I think this technology is open and the regulators are open for it and even banks are open for it. Yeah, that's a great point. And, you know, kind of how I think about this space is it's a, look, it's an open technology. These are public blockchain assets. People can engage with them however they want. You'll have people that engage in a completely self-sovereign way

and they will, they will do transactions peer to peer without a third-party intermediary. And that should always be something that's possible. It's the equivalent of cash. In any effort to clamp down on that, I think would be a terrible thing for the industry. I agree. Now, at the other end of the spectrum, you know, this is a financial asset. And in the same way that individuals can have the ability to treat it and hold it, however they want to hold it, financial firms are going to want to hold it in a way that

makes them feel comfortable in a way that they hold other assets. And so if you think about kind of the history of this industry from a financial market infrastructure perspective, I would say we're going category by category to address these needs. And so the first thing was, well, I need a custodian. And none of those existed, you know, four or five years ago. So, hey, I can't do anything. Well, that's starting to get chipped away. We have some big custodians in the market. Well, okay, I need trade execution. I need the ability to go out and do direct market access and OTC buys of this, RFQs. Boom, that gets built. Then I need things like network forensics. I need to know that my,

customer is not taking money from a dark marketplace and moving it on to my platform or they're not engaged in illicit activity. Chainalysis comes along and addresses that. Now, there's one category that's always sort of been out there and people have not been able to address it thus far, which is around this travel rule and enforcing the ability to actually send data about a customer transaction when you're doing a transaction between a brokerage and another brokerage. So, you know, if you're sending a million dollars of Bitcoin from FedEx.

to Coinbase being able to look through that transaction and for those intermediaries to know who's behind that million dollar transfer, which, you know, that's how I think about the travel rule. I'm sure it's much more broad, but maybe speak a little bit about that travel rule specific use case and how that's being addressed right now in the industry. Sure. It's a really good question. I actually, you know, I came from when I first, you know, read about the travel rule applying it to blockchain, I was like many people in the industry are like, well, you can't do that on the on Bitcoin, right? And I mean, the initial thing people, everyone goes to is, oh, we have to solve this by attaching this data to a transaction. And no, you don't really. There's other ways of doing it,

right? And just, yeah, basically a travel will just, just as a very, very brief explanation of what it is, is that a originating VASP or an originating exchange, when they send a transfer to an account at another exchange on behalf of their customer, they have to provide information about their customer to the other side. And that's basically what the travel rule is. But the big, I think one of the big problems that people have when they look at the travel rule is they look at it, oh, this is just another annoying requirement I have to do. You know, this is not compatible with Bitcoin, you know, privacy, a lot of different kind of issues come up. But it's actually, it's a tool and it's intended to be a tool. I believe the regulator, I believe FAD, I believe

FinC and originally they started requiring this specifically because without this, how can you perform sanctions checks? How can you actually properly perform KYC and AML on a, on a, receiving institution side. And that's really what it's set up to do. So it's not about transferring information from point A to point B, which is what most of the protocols are concerned with. And there are a lot of different,

I can get a little bit into the protocols afterwards, but there are a lot of different protocols who were set out to solve this issue. But they're all really just, they're kind of like SMTP, the email protocol, right? So it's like, here I want to send this message to you and here's the details for it. That's how the industry has looked at solving it as a whole,

but there's so much more to it than that. And so we're kind of at this point where the industry knows that this is a problem that needs to be solved. There's been some very clear guidance to get in compliance with this. And now we're sort of at the phase. When you say protocols, I kind of think about these as almost like the swift equivalent in this industry. to solve it. And you have a lot of efforts maybe to own that protocol and maybe some that even think

that that's a business model to own the standard. You guys have taken a very different approach, really just selling enterprise software and kind of taking an agnostic view and, hey, we'll see which protocol wins and we'll aggregate all of them for now. How do you, I mean, obviously you have a view on how this unfolds, but how do you see these protocol wars, so to speak, evolving? I think we're going to see a lot Well, we'll probably see a couple more protocols in the next year appear, but I mean, there are several different protocols. All of them were created to solve very specific reasons. So Open VASP, which I think is the most complete of the protocols, came out of the Swiss crypto banks like Seba, Cignam, those guys. And it's designed really about how do we get exactly the same functionality that we have in banks for managing risk around transactions.

How do we get that and apply that to crypto? And it solves it very, very well. However, it's a difficult thing to implement for many crypto businesses. Then there's TRP, which came out of standard chartered, INJ, Fidelity, and a few other large institutions are part of it. It's designed to work. It's a very simple protocol designed to work between very, very trusted institutions, but not as a general purpose kind of open protocol.

But it allows ING to send a token transfer to standard chartered fairly easily and safely because they trust each other and perform due diligence on each other there. Teresa is another one that comes out of cipher trace. And they're pushing it. It's an open standard. It's a pretty good standard there. I haven't seen anyone actually. say 100% that they are going to use it, but there are a lot of people testing it.

But we will likely support that. We're planning on supporting pretty much any protocol that actually has at least two entities that actually want to use it in production. We will support it. It's easy for us to switch in. Finally, actually, another interesting one is the US Travelable Working Group, which is where it's been led by Coinbase and it's a very, very US-central. approach where instead of solving the FADF travel rule, it's focused on solving the FinCent Travel Rule, which is roughly the same kind of thing, just different transaction limits until recently. But it's designed from a very US-centric point of view where I'm only ever sending transactions

to exchanges within the US. And we're in a very international business. So anyone who implements the US Travel Rule working group, they also have. we'll have to implement multiple other protocols. So I don't think there's going to be one protocol that's going to win for a while, but eventually we'll probably have a couple of them. But with us, we saw so much confusion

from compliance officers who were handed white papers and read this, and they're like, okay, so the package should be this large and that, blah. You know, they're not necessarily technical people. They're compliance people, right? and sitting to evaluating these technical protocols has been a nightmare for them and they've been confused.

And this is actually, frankly, what's stalled a lot of the rollout of the travel rule. So we decided to just solve it very simply, like we have a switch on top of it. And if you're trying to interact with a counterparty who hasn't picked a protocol yet, or isn't on our platform, you can initiate, easily initiate a transaction.

As the originator, you can send out a message to any other kind of VASP initiated through an email. Obviously, we're not sending private detail through an email, but you can initiate through this, and then you can actually start implementing the travel rule with all your counterparties, all your current counterparties and new counterparties, even if they have no interest in solving the travel rule right now.

That's great. So what does the product look like for the exchanges and the brokerages that you're onboarding here? How does it actually work? So the first thing that we do is that we build up a profile for the VASP. So we help verify some basic information about who the business is, what's the regular status is, et cetera. And this is actually an area that we're focusing a lot and we're expanding out a lot on this

because this helps solve the due diligence aspect of it. So once you've done that, you can actually start receiving travelable transactions without integrating anything into your backend. So it's a very simple solution. We've had customers sign up 15 minutes. They're receiving travelable transactions. And often compliance officers, they complain, the technical team, you know,

they never have time to prioritize their work because, you know, it's like some new commercial feature to support some kind of new protocol or, you know, add a company. compliance function that they're not super excited about. So we've made it as easy as possible for the technical team to integrate. So with just one or two API calls, it can strategically be implemented into the back end, either as what we call it a passive implementation where you're just, you're being part of the travel rule transaction,

but you're not actually making compliant, active compliance decisions like to, to stop a transaction or allow a transaction. You just let everything go through, but at least you're sending information across so the other side can make an active decision on it. And then it's a slightly more involved, but not that involved way of doing full active compliance. But everything you need to do about managing the risk

about transactions, setting up rules for managing transactions, you can do on our side and just through the small little integration, you don't have to go in and and really, you know, fight with a technical team for resources, which is a big problem for compliance teams. Yeah, the compliance officers must love that. It's a quick way to get in compliance. What is the kind of general state of regulatory affairs right now for participants in this industry, startups and incumbents? I mean, presumably there are a lot of companies that are actually just not doing this right now. So what does that look like over the next year or so in terms of getting into compliance and how serious of an issue is this? The companies that have been most eager at implementing and now are the ones where the regulators are

are making this a requirement for getting a license or maintaining a license. So Singapore is one. Switzerland is another. Netherlands, they recently started making this a requirement as well. And it's rolling out broadly. FinCent says this has actually been a requirement in the U.S. since 2013, since any exchanges is an MSB, and any MSB have to implement the travel. rule. They say they don't really need any specific extra guidance on this because it's the law,

right? But that said, US-based exchanges have kind of taking a, they're taking a kind of slow approach to it, pushing in a little bit. And from our conversation with FinCent, FinCen is extraordinarily frustrated with this slow process for it. And I do think it will probably suit. people to start taking a little bit more serious like, you know, starting implementing it sooner rather than later. Not like Q1 rather than Q2, particularly not Q3. I do not think it would be a good idea to rate that long for a U.S.-based company or a EU-based company. Really, any of the large major economies is going to be a requirement over the next year for sure. Are stable coins a big piece of this in terms of what is driving some of this participation

and the surge in new exchanges and brokerages and incumbents that are moving into the space? Is it being driven by more than just Bitcoin and Eath? We definitely see a lot of people that are using stable coins as part of managing, for example, new settlement systems. We see a lot of that in Singapore, for example, but quite a few other places as well where a lot of these regulated institutions have stable coins, like down here in Switzerland, Bitcoin Swiss, for example, they have a stable coin based on the Swiss franc.

So all of these, obviously, you have to implement the travel rule for all of these stable coins as well. And I believe in Singapore, a lot of the ones who were actually more on the payments side, they were actually the first to have a requirement for. it because it was already part of their license that they had to do it. So they were some of the first to actually start implementing. And then they have a new license for more crypto-oriented companies. But a lot of the companies that had this more generalized payment license, they were already using it with having stable coins and those kinds of things, integrated into

payment infrastructure. So they've had to solve this fairly quickly. The other area that we're seeing a lot of interest in is a lot of institutional players are, yeah, I mean, I'm sure a lot of them are, are, you probably have bigger insight in this than, than we do. I'm sure a lot of them are, are offering Bitcoin for their customers and a lot of these kinds of things, but what they often talk to us about is securities offering, you know, those kinds of things. So, so there's a lot of interest and now we've got the custodial service running, all of those kinds of things. How can we actually start tying it into into more more kind of products such as such as token issuance like like

security tokens those kinds of things and of course all of that requires travel rule different kinds of things all of these kinds of things to be in place before they can do yeah yeah yeah certainly from my perspective the just the institutional participation in bitcoin and to lesser extent eth but probably also just US dollars. That use case is driving a lot of it. Security tokens are interesting because I fully agree with you. I think there's oddly just a lot more regulatory complexity around some of those use cases. And the SEC and FINRA have been less active in approving ATS venues to facilitate the secondary

trading in some of those devices. But who knows? I mean, with the new kind of changing of the wins at the SEC, it's quite possible that we'll have more innovation that becomes possible as a result of regulatory clarity on the token front. So that's something I'm definitely optimistic about it. I also think like, you know, travel rule isn't just about doing a crypto transfer. Like as it's if you look at it in general, like if you just take the, you know, the, you know, step up and don't just look at directly at the requirements.

What it is is about adding a counterparty layer to a transaction, right? Who is your, who are all the counterparties and intermediaries involved with this particular transaction. Now, if we now add a security token to that, now we have a whole bunch of different kinds of parties we can add to this, right? So we have who's the issue or who are the different counter, who are the different intermediaries or service providers, custodials, whatever, who were involved with the issuance of this token, all of these kinds of stuff. And if you're operating on public blockchain, you don't necessarily want all of that information on the blockchain, but through something similar to the travel rule, you can use, you can use the

travel rule as a way for adding other kind of information for managing counterparty risk and many managing many other kinds of risk. So we actually think that there's a lot of interesting things that the travel rule opens up for us. If we stop looking at it strictly, this damn checkbox, we just have to fill right now, you know, because those regulators want us to make our life difficult. I think it can actually start opening up for a bunch of new, bunch of new applications, of new products and really build trust in a whole bunch of different kinds of things. Because if you add information about token issue in there, that is, then you can start really scaling up a lot of information, you know, a lot of risk management.

Yeah. And how do you think about that as an entrepreneur in terms of you have this great initial wedge product, which is really selling a service that people need? It's like the ultimate painkiller that people will absolutely have to get in compliance with. But how do you think about the addressable market for where that goes in terms of other types of services? So the old thing about the travel rule is that it builds, it's like if you look at people in traditional banking and say, you know, so which travel will provide it do you use? And most people like both swift maybe. I'm not sure, right? You know, this is, that's kind of how they do. do these things there, right? And if you look at SWIFT, these a master card,

all of these payment systems, they're really, they're not about settlement, they're really about exchanging information about metadata about the payment. And this metadata, yes, it's used for regular to car, you know, for AML, it's used for fraud, all of these kinds of things, but it's also used for, you know,

figuring out who my merchant, who this merchant is, you know, that just charged me. figuring out how to send a payment. I think travel will even opens us up for things like pull payments, you know, subscription payments, those kinds of things. That can be done now in a way where we can manage risk around it, which you just can't do if you're just doing it directly on the blockchain. So there's a lot of different ways that we can take this and start innovating. But it in some ways it takes really, you know, yes, you're in the middle of this panic right now, you need to implement this kind of thing. Let's get this done as quickly as possible.

And then we're actually, we're trying to really show people that this is actually, it's actually it allows you to do new things within your product that you couldn't do before. And this is where this is actually, you know, what I'm really excited by this. I mean, I mean, obviously, I've always jokingly, I was writing a bunch of blog posts like like many like 10, 15 years ago, like trying to teach people. like programmers to avoid programmers going to jail for writing like, you know, stupid code and those kinds of things. And I don't want people to go to jail or get fined or all of these kinds of things. So it's important. Compliance is super, super important here. But once you actually

start learning what this technology is, you can start building applications that can really compete with the traditional world when it comes to these things like tying counterparty to it. And I believe very strongly that this has to be done in a way where it's the permission sharing of data and none of this private data should ever touch the blockchain. And with that, I think it's completely compatible with public blockchains. And I think it's a requirement for really to getting blockchains up out of this speculative kind of thing into actually getting to some of the uses scenarios that we were always talking about. And I very clearly remember like having having, you know, well, having discussions with people like in 2012, 13, hand waving away a lot of these guys. No, we don't need information about the merchant.

You just trust the address. I've been using Bitcoin for 10 years. I'm scared every time I paste an address in somewhere. I'm scared. Now, if I pasted that address in, I immediately got, oh, this is going to my finance account, right? And I'd like, oh, I'd feel a lot better and a lot happier, you know, doing this, right? You know, being able to do these kinds of transactions. So once you start seeing what we can actually do with this, I think it's going to be better for the industry.

I think we can grow the industry. And one other point I have, I am a little bit passionate about this particular aspect of it. But when people say that, you know, blockchain is permission, we can't have things like travel rule like K. K-Y-C, all of these kind of things. Blockchains themselves are and should be permissionless and public, for sure. 100%. I'm as much a libertarian as the best, you know, crypto, Twitter kind of people or whatever. I believe in the permissionless innovation on Bitcoin.

However, if you also believe in that, you also believe in that a person or a business wanting to operate on the Bitcoin should not be required to do a transaction that they don't trust in, right? Exactly. Yeah. Yeah, exactly right. I think it's the very first principles line of thinking there that these are public permissionless systems that people are empowered to use however they want to use them.

And if you want to have a relationship with a custodial brokerage, that custodial brokerage has the ability to make their decisions on how their customers, act on the platform and they will be presumably in compliance with local regulation. And so, yeah, it builds from that first principles. And I think it's your point earlier, you know, Chenalysis has been a somewhat controversial company in this area, but they've done such a great job in terms of just promoting education from the regulatory side of the house. And in really advocating things like the ability to have self-sovereign ownership, they're not

telling regulators to shut down the ability for users to hold their own keys or to get away from hosted wallets or anything like that. So I think there's kind of this vocal crowd maybe on Twitter that doesn't understand that, but I agree with you. Yeah, I mean, it's exciting. No one's, like I've been at a lot of the FATF meetings. I'm not sure how much of that is supposed to be kept inside there, but I think I can say that no one has been out there defending unhosted slash non-custodial wallet more than chain analysis has done. And really with them, there's not that much of a risk in allowing peer-to-peer transactions, right? It's just that point between, you know, the businesses who build on it. I think this is actually, you know, we

We talk smack about the regulators in the industry a lot. And I actually, and there are some regulators that, yeah, you can talk smack about FinCEN. I remember when I read the 2013 guidance, I did the, I moderated a panel at the San Jose Bitcoin conference about it. And I was like, wow, this is actually really, really good to the industry. I could not believe that they said, oh, yeah, we're not going to regulate Bitcoin. It's decentralized. But if you build a business on top of it, we're going to regulate you, right? You know, then you are just an MSB.

That thing, that means that they have actually shown how open they are to innovating and to applying the existing rules and to it. And that shows the difference. There are some regulators who are, let's prescribe down to down point by point how you're supposed to do this, right? And that is very helpful in the early stages if you're trying to get a license. Okay, we need to do this one, step one, follow exactly what they do. But as technology changed, these specific steps changed. And then the regulators, it starts getting slower to update.

And FinCEN, I think, I've been really good at saying, you know, this is what we want. These are the overall rules. Now figure out how to apply it to your technology, right? Yeah, and hopefully that continues to be the case. I mean, I think at least in the U.S., there's a, there's kind of a pattern matching between the early days of the internet and the Telecommunications Act of 1996 and how that really opened up the commercial web. And there's the ability to do that. I mean, obviously there's the darker side of this where something crazy could happen and there could be enforcement actions and they could go after self-custody or something crazy like that. But I think you're right.

I think we have some forward-thinking regulators out there, certainly in the SEC that we've had Hester Pierce. really been on the bleeding edge of this industry. Like it probably understands it to a greater degree than any other securities regulator that I've read. I mean, probably more bullish on certain pieces of it than even certain crypto VCs. So hopefully that continues. Well, Pellet, this has been great. Where can we send people to learn more about Nodabene and to get in touch?

You just raise some capital. So presumably you're going to be hiring. Yes, we're definitely going to be hiring. You can go to our website, which is notabena, n-O-T-A-B-E-E-N-E-E-D. And from there you can learn all about us. You can, if you're, our mission is to really give people the confidence to perform transactions. And initially, you know, initially this is going to be crypto exchanges, regulated exchanges, banks wanting to work with crypto, those kinds, but it's also ultimately.

about allowing everyone to have trust in transactions and users as well. And if you believe in this vision, we're very, very interested to talk with you. We're particularly looking at front-end, backend developers, typical kind of crypto, JavaScript kind of stack. But please, if you really believe in the mission, that's probably the most important thing and that you are able to work hard in a global internet, you know, in a global crazy, crazy world like we're working. We're a very remote team all over the place.

We're ex-consentzance with all of us. Please come join us. So back in front then, and we are also starting to look into certain ops roles that we are looking to hire, particularly in the Far East. Awesome. Well, thanks so much for joining us, Pelley. Thanks a lot, Matt. It's been great.