On The Brink with Castle Island - Zac Prince (BlockFi) (EP.10)

Episode Date: October 21, 2019

Zac Prince, the co-founder and CEO of BlockFi, a cryptoasset financial services firm joins the show.  BlockFi provides wealth management solutions for cryptoasset investors, including interest bearing accounts, loans, and more.  Learn more about BlockFi at www.blockfi.com   For more information please visit our website at www.castleisland.vc and follow us on Twitter @CastleIslandVC.

Welcome to another episode of On the Brink with Castle Island. We're a great episode today. So we have Zach Prince, the co-founder and CEO of BlockFi on the program. BlockFi is a company that's offering U.S. dollar loans backed by crypto and also pioneered the crypto asset interest account. So you can park your Bitcoin or Ethereum and earn interest. And so this is a piece of market infrastructure that is just now coming onto the scene in the crypto asset space. And BlockFi is really at the bleeding edge of some of the lending services that are now starting to be offered in this industry. So we had a really wide-ranging conversation with Zach, talked about his background, some of the things that got him excited about starting a company in this category,

talked about what interests him the most, what is his thesis on value accrual within the crypto asset space. We talked about market structure a lot. So talked about lending, talked about some of the risks that are inherent in this market, how this market looks like traditional markets versus how it's novel. Also talked about decentralized finance and how some of the new protocols that are emerging in the defy space may or may not have an impact on lending type of businesses. We also spent some time talking about Facebook. So I think you get the sense. It was a wide-ranging conversation. Sacks, one of the really good guys in this industry, enjoyed talking to them and hope that you enjoy it. Brought down by bad mortgage investments,

Lehman, which has 25,000 employees will be liquidated. The federal government loans, American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. 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. Welcome to the On the Brink podcast. I'm Matt Walsh, and I'm lucky enough to have Zach Prince from BlockFi, the founder and CEO of BlockFi, and I'm actually in their office. So thanks for having me, Zach. Yeah, thanks for coming by, Matt. Pump to be on the show. This is always exciting when companies raise financing rounds and start to build out their offices. This is all energy in here today. Well, the last time you were in our office, we were spilling over each other because we hadn't moved into this one yet, but we've got a bit more room now.

This is how it's supposed to be done. This is what everyone wants to do. Yeah. The best thing is we didn't have to kick anyone else out of a conference room to sit down and record this show. It is. Yeah. Well, thanks for hopping on. We definitely have a lot to cover. I would love to start this episode off with just a little bit of career background and how you got to where you are. I think a lot of people that listen to this podcast are trying to get into this industry, trying to figure it out. And just walk us through your journey. Yeah, sure. So after I finished school, well, I always thought I would work in finance. And I graduated college in May of 2009, which wasn't the best time to be looking for a job in the finance industry. But I ended up working in the advertising technology.

space. I've always worked at venture-backed tech companies initially in ad tech at two different companies. Both were successfully acquired, one by Google and one by a company called Dunhumbie. And both companies were at the forefront of the exchangeification or like real-timeization of the online advertising industry. So there was a big shift that occurred there when the ecosystem switched from being the Coca-Cola advertising agency talking to the New York Times rep on the phone. They would send each other papers back and forth and sign them. And then Coca-Cola ads would show up on New York Times.com for a month. And it switched to a world where Coca-Cola's agency could target Matt Walsh and Zach Prince

when they were on not only New York Times but also on other websites. And all of that was enabled by ad exchanges. The first one I worked for actually got bought by Google. So from there I moved into fintech, which is much more relevant for BlockFi, specifically the online lending side of fintech at two different companies the first one the idea behind it was to do what we had seen work in the advertising technology sector but do it for the online lending sector so this is back maybe six or seven years ago now companies like lending club and prosper and funding circle and sofi were starting to emerge and grow really quickly and one of the interesting things about those platforms was that you could connect to an API and buy individual loans, which is something that was somewhat revolutionary. And there's some parallels to the crypto space in some ways. But it was originally called peer to peer lending. And the company Orchard, we aggregated data, standardized it from all of the largest online lenders.

And then we also provided technology solutions to institutional investors that wanted to buy those loans across the platforms or create structured lending facilities with the different online lending platforms. And while I was there, I got exposure not just to the online lending sector, but to FinTech more broadly. And I kind of became the FinTech guy amongst my friend group. And they would ask me, you know, if they should use robo advisors or buy fractions of an apartment building on like Fundrise. And I started writing a little blog on the side just to document some of this stuff. And while I was working on that blog, I discovered Bitcoin. So we're now in like like late 2014, early 2015, and I was strongly advocating that people buy Bitcoin on this tiny

blog, which actually is still on the web. It's betterfinanceguru.com. There's a hilarious, cartoon image of me on there. I'll have to check that out. So this is 2014. Yeah, late 2014. So I left Orchard after the series B round of funding and went to work for an online consumer lender called Zibi that integrated with retailers and offered a financing option at the point of sale for consumers that didn't have credit scores because they weren't from the U.S. or had credit scores that weren't that good. So very similar to a company called a firm, if you're familiar with them. And then in 2016 and early 2017, I just got increasingly interested in and spent more and

more of my personal time learning about researching, attending meetups for the cryptocurrency sector. Obviously, early 2017 was a particularly exciting time in the industry. And in addition to kind of feeling that momentum build from a bit of a network that I had started to build up from going to meetups around New York City, I had an experience with a bank where I was trying to get a loan for an investment property that I wanted to buy in Texas and my Bitcoin and Ether and other crypto investments had gone up in value a lot. So I listed them on the financial statement that I submitted to the bank, who was underwriting

me for this loan. And not only did they say, we value these assets at a big, fat, zero. They also put me through some like enhanced compliance reviews because they were worried I might be involved in some illicit activity or something. And that was basically my light bulb moment for BlockFi. I felt that there would be a big opportunity for building debt and credit markets in the crypto sector for the same reason that there were opportunities for companies like Lending Club and Sofi and others, primarily that banks weren't participating or banks had pulled back from certain types of lending. And that's what led me to start BlockFind. At a certain point in the summer of

2017, I talked to my co-founder, Florey. She was going through an acquisition by Goldman Sachs at the time, told her about the idea, and she said, let's do it. That's a great story. That's great founder market fit when you think about some of the inefficiencies and some of the earlier businesses that you're involved in with the ad exchanges. That reminds me, as you're talking a lot of some of the inefficiencies that we've talked about in the OTC markets with trading and lending of these assets, and then dovetailing into the online lending. So I want to get into what BlockFi does. But first, I want to dig into what made you so excited about this industry in general.

So you mentioned seeing some of the inefficiencies with the experience with the bank. But what was it in 2014 that made you think that there was actually something here, that there was like a use case that people would actually want to own public blockchain assets in general? And I guess where do you come at this industry from in terms of what these things are good for? Yeah. So there are a couple of things that led me to, recommend that people invest in Bitcoin. The first was just that I thought it had this spectacular asymmetric risk return profile. And the second was that one of the learnings from the online

lending sector was that there really wasn't anything new under the sun. You could call it peer to peer lending. You could make a loan to someone on the internet instead of at a bank branch. But at the of the day it was still a consumer loan or a small business loan. But Bitcoin was actually something completely new and innovative. And I felt that it could have tremendous global societal value if it was adopted over time in addition to just being a fantastic looking investment from a risk return perspective. And the first time I bought it, it had come down from like a thousand to around the 300 or 350 range. And then I sold it after it doubled. And then bought it. back in at a higher price, but originally that was my thinking. And then when I learned about

Ethereum, I initially made this analogy in my head that Bitcoin was like a Blackberry and Ethereum was like an iPhone. And the iPhone's going to be a lot bigger than the Blackberry. So I invested a lot into Ethereum relatively early. And then that started performing well, which validated my opinion. But I was international studies major in college. And it always struck me when I was traveling, unfair it was for people who, you know, are born in countries that have bad monetary policy or shitty currencies that they're just at such a disadvantage. And so aside from just the potential of making money, I was really attracted to this concept of democratization of finance, democratization of access to financial products. And I loved the fact that someone anywhere in the

world with an internet connection could participate in this market that was getting built. I love that story. I mean, there's so many things about what you said to dive into. But when you talk about people accessing these markets that otherwise could not participate, I often track local Bitcoin's volume and some of the other peer-to-peer exchanges. And it's crazy how much this technology is jumping off in countries that are exactly as you describe. I mean, underserved by financial services. And there's a clear utility here for some of these things, particularly Bitcoin, I think, in some of these developing countries. So I certainly see that. So I want to dive into BlockFi. So I want to dive into BlockFi.

So I'm a happy BlockFi customer. I know what you do. But for those who don't know what BlockFi does, tell us a little bit about the company. Tell us a little bit about the products. Yeah, sure. So we're a wealth management platform for cryptocurrency investors. We have two products that we offer today. The first is an interest account where you can earn interest on your crypto holdings

that are held in an account with BlockFi. We currently support Bitcoin, Ether, and the Gemini Dollar in the interest account with pretty attractive interest rates, Bitcoin's around 6%, GUSD is around 8, and ether's around 4%. That product was launched this year in March of 2019 and has grown pretty quickly since we brought it to market. Prior to that, in early 2018, we launched our first product, which is a U.S. dollar loan secured by cryptocurrency as collateral. So it's the equivalent of a securities-backed loan or liquidity access line from the traditional markets, just with cryptocurrency as collateral. set of shares of Amazon. So someone who holds Bitcoin or ether or a few other assets and doesn't

want to sell them, but wants to get some liquidity, is able to do that by borrowing cash secured by the value in those assets. It rates as low as 4.5% a year today on our platform. So that's what we have now. And in the future, we'll be progressing down the road with this same theme of, you know, what are things that are analogous to traditional markets, but that we can bring to the cryptocurrency sector and enable folks to. do on our platform. That's great. So I think the consumer probably understands this idea of earning interest on an account, although I guess in the United States, it's earning less and less interest over time. It's still something, a lot less than when we were kids. But let's talk

about the other side of that trade. So why would someone want to borrow cryptocurrency and what allows you to offer these interest rates? Just talk about that market structure. Sure. So there's a lot of institutional connectivity that we need to deliver both of these products. For the interest account specifically, the way that we're generating the return that we're providing to depositors is by lending in institutional markets in cryptocurrency denominated transactions. So, for example, we might have 100 people on our platform that have each deposited 10 Bitcoin and we're paying them 6%. And then we might have an institutional Bitcoin borrower. borrowing 100 Bitcoin from us at a 7% interest rate.

And both of those transactions are completely denominated in Bitcoin. So regardless of what happens to the dollar value of Bitcoin throughout the time that the depositors are on the platform or that the borrower has the loan out, we're going to accrue for the depositor or receive back from the borrower an amount that's based on that interest rate in Bitcoin terms. Why might someone borrow Bitcoin from BlockFi? So what's the institutional use case there? The biggest one that we see right now is just optimization of a balance sheet of capital for market

making and proprietary trading activities. So demand to borrow is linked to volatility opportunities in terms of arbitrage across different markets, whether that's geographic or spot versus futures versus derivatives. And we primarily lend to firms that are active in the cruxies. crypto space, but also have large businesses in traditional markets. So we'd much rather, from a risk perspective, lend to someone like Susquehanna than Joe and Steve with a $5 million property crypto trading firm in their parents' basement. That's an important distinction. So not to cut you off too much here, but who are these counterparties? I mean, a few years ago,

this was the Wild West, but your comments give the indication that this is a maturing market with real counterparties. One of the first waves of institutional adoption that occurred was late 2017 and early 2018, a lot of the market making and proprietary trading firms that have done very well for themselves in traditional markets saw an opportunity in the cryptocurrency sector as volumes increased and started to participate. So some of them are the same types of firms that you read about in books like Flash Boys who are connected to the exchanges and co-hosting their servers and buying retail order flow from Robin Hood, the Jane Streets and Flow Traders and and Susquehontas and others of the world. Over time, we think there will hopefully be an increasing

corporate use case as well. We're seeing that a little bit now. But for example, anyone who has revenue that's generated in cryptocurrency or has a need for access to physical crypto, currency to conduct their business activities. So for example, an exchange or an ATM company or even someone who's custodying crypto for their clients in a type of cold storage that takes 48 hours to access, but they want to process a withdrawal for one of their clients on a faster time frame. They're also all logical borrowers of crypto. And we think over time we'll be increasingly active in those type of markets as they grow. But for now, it's really concentrated with a trading use case and a market-making use case. So I think people might not understand how fast

this industry is maturing from an infrastructure standpoint. So you see the custodians in the past couple of years coming online with Fidelity and with Anchorage and BitGo evolving from a regulatory perspective. What is the general in Gemini, who's obviously your custodian? What is the general lay of the land as it relates to custody and how have you seen that evolve even in the time since you've started the company? There have been a ton of advancements there. specifically when we started looking for a custodian because we knew early on that building our own proprietary safe storage system for crypto assets was not the value proposition that we were trying to bring to the market and therefore not something we were going to spend our time in resources

building there's been a massive evolution in terms of what's available so back then you know mid 2017 there weren't that many folks that even had a concept of different types of access levels for different types of users, which seems like a really baseline functionality to have. And now a lot more folks have that. Assets were not as well insured or weren't insured at all really back then. And now a lot of the leading platforms have different levels of insurance coverage. In terms of audits, a lot of platforms have now gone through their SOC2 type 1 or SOC2 type 2 audits, which is really valuable and I view us as kind of being past the phase of are there reputable places with a track record with those things that I just mentioned where I can reliably and securely keep my crypto safe.

I think we're past that. And what we're moving into now is what are other add-on features and functionalities that these custodial platforms can offer their clients to help them differentiate. So on some platforms, you're seeing them go deeper in things like staking or governance for some of the protocols. And others, you're seeing them focus on things like liquidity aggregation, both in terms of spot market access and in some cases lending. So the things that BlockFi does. And I think you'll continue to see that evolve over time.

One of the things that doesn't exist yet, and I think is a bit of a barrier to entry for especially large market participants, is the level of insurance coverage relative to the size of capital that would need to be deployed by some long only investors for this to be interesting to them. So I haven't looked in detail at any of the policies, but I think directionally speaking, they offer, you know, 50 to 250 million dollars worth of coverage, which is interesting and super valuable. But if you're someone that needs to put half a billion or a billion to work in something for it to make sense to you, and the only place you can do that. is with a custodian whose name you've never heard before in the traditional things that you do

and the level of insurance that they have access to or coverage for is an amount lower than what you're going to deploy, you're probably not going to invest. That math doesn't work. The math doesn't work. So I think that'll be the next evolution in addition to adding more functionalities onto these platforms will just be increasing the level of insurance coverage that's available, which will happen over time as the underwriters that did the first deals, see them go through a cycle of premiums collected and claims not being filed and more comfort is generated for everybody. That makes sense. I mean, you bring up some interesting questions about the custodial landscape. So if you think about traditional markets, custody has largely been

commoditized. I mean, there's still fees to be made there and sizable fees. But it's compressed, and a lot of those players make money on securities lending and brokerage and other administrative type of transactions. Do you think we're headed that way for crypto assets in the near term? How do you this playing out. Is it going to be a situation where it's a race to some low number on custodial fees and you need to offer lending or staking or administrative services? Yes. The question is not if. It's a question of how long it takes us to get there. And I don't think that's true just for the custody business. I think it's pretty true for financial services in general. I guess it was just last week, you know, all the retail brokerages are copying Robin Hood and dropping their...

Schwab went to zero, right? Yeah, they're dropping their trading fees to zero, and they've got to pick up revenue in other places, whether it's net interest margin or securities lending or subscription fees. So I think that's true of financial services in general. The thing that you have to be really good at is customer acquisition and stickiness. And then, of course, any opportunity you have to differentiate and do something that folks you're competing with aren't doing yet, you have to try and seize that

because getting that customer acquisition benefit from being a first mover is invaluable. That makes sense. So just on the business model itself, you guys have correctly identified that there's a big risk issue here with interfacing with some of these brokers and some of the liquidity pools that you're tapping into. Talk a little bit about how you think about that risk management, the team that you've built to support that, and maybe just the things that one should be worried about building a lending and trading business in this space. We think of ourselves as being in the risk management business, generally speaking. Specifically for the institutional crypto lending, the team that runs that is led by our chief risk officer, Renee Van Kestrin, who prior to BlockFi

spent 15 years as an MD and the prime brokerage side of Bank of America, Merrill Lynch, he was Legacy Merrill. And he has a team of five folks now with experience alongside him at Bamal, some folks from Nomura, some folks from Morgan Stanley. So they're kind of like the traditional banking team within BlockFi. And the way that we think about risk is effectively the same as how a lot of banks think about it. So if a new counterparty is interested in transacting with us, they go through an onboarding process, which includes KYC and AML, but also financials and other types of information depending on what type of firm they are. So our data request for someone that's an asset manager is different than our data request for someone that's a market maker or a broker dealer or

proprietary trading firm. We set risk limits, including collateralization levels. So one thing we haven't touched on at all yet is that in a lot of these transactions, when we're lending Bitcoin, we receive collateral in the form of other crypto assets or dollars to secure the Bitcoin that's being borrowed from BlockFi. And then we have an underlying risk management technology system that monitors all of these positions and takes action 24-7. And the actions range from notifications to customers of margin calls to liquidation of assets that were posted as collateral when needed. And fortunately, to date, we've had perfect performance across all of the different types of

lending that we do. And so some of your competitors are probably not taking this type of approach. Suffice it to say, what are the kind of risk factors that you think could be black swan type of events in this industry? Is it an exchange goes down and there's a ripple effect? effect? Is it a large market maker just washes out? What is it that you think about in terms of those key risks? What we monitor a lot is liquidity and volatility. So we look at a couple standard deviations out from what we expect and what the general trend is in terms of liquidity and

volatility. And we use that when we're stress testing our models and running different types of scenario analysis in terms of what our system would do, what our system would be. expected to do and would it be able to accomplish those things in that scenario. So that's the thing that we're focused on day in and day out. It's really hard to model for Black Swans. Renee, if you were here, would tell a story about how coming out of the 2008, 2009 financial crash, none of the banks and none of the lenders updated their model to include that type of a scenario as an expectation in their ongoing risk modeling, because if they did, they would never do any business. Now, that being said, his team and the types of lending that he was doing, which is very similar to the type of lending that

we're doing here, they never lost a penny. Organizations had liquidity issues, and there were all sorts of things going on that were obviously excessive, but modeling black swans is generally not something that you're able to test for. The biggest black swan that I worry about, like if we're just talking about, like, you know, what keeps me up at night in terms of being scared of a scenario that could happen is really a regulator changing their tune in a major market, whether that's the US or Europe or somewhere else, some type of event where the legality of owning or the ability to purchase cryptocurrency was materially different one day than it was the day before. And as a result, prices crashed tremendously.

Right. Hopefully that wouldn't happen in a one day type of time period, Bitcoin being made illegal. and then all of a sudden people not being able to withdraw or something like that. But I guess that's your job to worry. Yeah, and I think you mentioned exchange hacks. I think we've got quite a bit of market data. There have been plenty of those. So it doesn't seem like that would be something that would destabilize the entire ecosystem.

So it's really those five, six standard deviation, complete black swan events that you have to worry about. And really, I think there's the regulatory risk and something going wrong with the tech, like this quantum computing thing, comes a and breaks the Bitcoin security protocol. I think that's on the fud dice, the fear uncertainty. And I think Bank of America would probably go down before Bitcoin, but we'll see. So so much has happened in this lending space over the past few years. And one of the things that I've been paying a lot of attention to is the decentralized finance movement. So these protocols and services that are being built on top of Ethereum that are purporting

to do lending in a trustless manner, essentially pools of capital. that are aggregating. So we'd love to just dig into how you think about this. Do you pay attention to that market with compound and maker? Do you see it as competitive? Do you think that there's a regulatory path forward for these protocols? How do you think about that? Follow the space very closely. I'm a big fan of the space. I think that similar to other emerging and established markets, all of these pieces kind of come together to create the whole of the market. And we're all that market together. I think there's quite a few fundamental differences between DFI and BlockFi, specifically that for the most part right now, to your point, they are operating in a

no regulation, no KYC on the platform, which is both an advantage and a disadvantage, depending on how you look at it. Those platforms are not able to assess credit risk. So everything is over collateralized, which can have an impact on the types of firms that you're able to work with and on the design of the systems. And they don't touch fiat in a bank account. They touch stable coins, but they're not actually moving dollars from bank to bank. So I'm a big fan of it. I think that some of them have struggled with a focus on the in-user and core value prop. I'm thinking specifically about some platforms where I know that there were lots of users that started using the platform because the interest rate was really low.

And then fast forward three or six months and the interest rate got really high that they were being charged. And everyone learned, you know, what variable interest rate versus a fixed interest rate is. So there's a lot of stuff to be worked on there. But I think it's amazing. I mean,

I think it's amazing that you can put something like that out there that literally anyone in the world can use. I mean, we're relatively global at BlockFi, but we're not nearly as global as a truly decentralized platform. So yeah, I think it's great. We haven't done anything with them directly yet at Block 5, but I think over time it's certainly an option that we'll continue looking into. And I think there could be some really interesting partnership opportunities down the

road. It's crazy that it works, first of all, to your point, I mean, if you would have told me in 2013 or 14 that we would have some of these things and you'd be able to lend and borrow in a trustless way, it would be kind of mind-boggling. And it's clear that there's a product market fit there in the sense of people who don't have to reveal their identity going levered long on a particular asset and being able to lend and tax evasion, like things like that. In a bunch of these protocols, however, have been funded by traditional venture firms. And so there is a central person to go after. And if we think that

this is it a security, is it not a security debate is going to keep on progressing, you would think that we might move to a point where there's a choke point there to implement KYC, know your customer protections. Do you think, that these things make any sense if you have to fully authenticate and reveal your identity. And the reason I ask is because let's say that you have to KYC to get down to compound or maker. In that sense, the real value proposition is really not KYC and going levered long. And why would you sacrifice the rate and over collateralize if you could just go to a centralized facility? You have to put your name on it anyway. Does that make any sense? No, it makes a ton of sense. I mean, it's the, I think it's

exactly what some of these platforms are struggling with right now. I think that the term decentralization is thrown around relatively loosely. We started the company in the middle of the ICO boom. We thought a lot about should we just be creating our own token, throwing up a splash page and raising 50 million bucks. Good job not doing that. It never made any sense to us. So I haven't seen a lending business with a token that I think makes any sense whatsoever. And the question is, if rates don't change, and there continues to be this kind of defy premium where the rates you earn for depositing are lower versus blockfi, the rate you pay for borrowing are higher versus blockfi. And they start to have KYC then like what is the value prop? So we'll see over time. But those businesses are all

early, just like blockfi is still early. There's a long way to go and we'll see how it evolves. Switching gears a little bit here. Now you guys had a great blog post on the rehypification debate. and I'll put that quote unquote rehypification debate. This turned into kind of a real topic on crypto Twitter for a little while after some of your product announcements. So I'm wondering if we could dig into this and maybe if you could just characterize kind of what the debate was about and then get into how you think about rehypothication from a Bitcoin perspective at BlockFi and from an Ethereum perspective.

Yeah, sure. So rehypothecation as a concept is the notion of taking an asset that was pledged, as collateral for a loan and then relending that asset that was used as collateral for a loan. It's a very common practice in traditional markets and it's a contentious word in the crypto community. I think partially because it's just a scary word. Like rehypothecation sounds like something you don't want and partially because there's a view held by some in the community that the act of re-hypothication puts the 21 million hard supply cap of Bitcoin in potential jeopardy. There are articles about this on both sides. I think that there's also a spectrum of that fear of

the hard cap not being valid anymore because of re-hypothication or other things. And on that spectrum, blockfies on the most conservative end, because when we're lending Bitcoin, we're lending physical Bitcoin to someone that's borrowing it in a Bitcoin-denominated transaction. And on the other end of the spectrum, you have things like fully cash-settled futures, which don't touch Bitcoin at all, but give people the ability to get exposure to the asset. So I think the core of my view is that if we, and this is true for a lot of things, not just re-hypothecation, if we want to compete with the traditional financial services sector and we bring a knife to a gunfight, we're not going to win. These things exist in traditional markets for a

reason. They're actually very effective. My view is that re-hypothecation played no part in the financial crisis, and it's actually something that works very well in traditional markets, and it's one of the reasons why things like no-fee trading have come to exist for retail, and ultimately these things drive value creation for end consumers in the form of price reductions. And it's going to help build a scalable liquid market for the asset class. And so we believe it should exist. But the best part is people always have a choice, right? If you don't want to trade cash settled futures, you don't have to. If you don't want to earn interest on your Bitcoin and thus have it be at risk of being re-hypothicated, you don't have to. But a diversity of services being available is something

that generally is really valuable for the ecosystem. And I think it's interesting that this is an asset class where you can have levels of provable fairness that could not be possible in other asset classes. So if you think about a traditional security, having visibility into who owns that underlying security, who is controlling it at any given moment, there's some problems there. With Bitcoin and with other crypto assets, you can have proofs of reserve. You can have on-chain proof in a provably fair way, right? I mean, you can have third parties that attest that the asset is under their control. So I think the design space is a lot larger on the crypto asset side. Yeah. I mean, just the fact that the backbone for the entire space is a public ledger.

You've started from square one with something that creates opportunities that don't exist in traditional markets where you're not starting from that same point from a technological perspective. And so transitioning to just the general industry, there's a lot of competing investment thesees out there. I mean, people at various funds will be excited about this for different reasons. You have people that think that it's all about just non-sovereign money, digital gold. You have other schools of thought that it's about disrupting centralized tech monopolies like Facebook and Google. And a big part of that is through smart contract platforms that allow you to run permissionless applications without trusted

third parties. You have another segment of the market that is looking at traditional securities markets and putting security tokens in place in order to transact more efficiently, rip out some of the legacy cost structure maybe of the financial services base. And I'm sure there are other reasons to be excited about this. But those are probably some of the bigger ones. Is there a category that you just personally identify with the most? What excites you about this industry right now? I kind of think of it as there's Bitcoin and then there's everything else. And I feel very confident in what that value proposition is for Bitcoin and what it will likely continue to be for the foreseeable future. And then I think a lot of other things in the space

besides Bitcoin are still a bit of a question mark. When I tell someone who doesn't understand Bitcoin, which to this day includes folks like my parents like, what is Bitcoin? I say it's a store of value, it's a digital gold. Just think about the gold bugs in the 80s that loved gold and take someone who's 25 years old now, like Bitcoin is their version of gold. And, it's a new payment network that's global and decentralized by design. I think those two things are what is going to drive the value story for Bitcoin and the investment thesis around it or the value of it will kind of depend a little bit on who you are. So if you're someone here in the U.S. market, you might be a lot less attracted to the payments angle and a lot more attracted to

the store of value angle. If you're someone in an emerging or frontier market, you might be attracted to different parts of that. And there's other qualities there too in terms of self-sovereignty and the ability to self-custody the asset that are really unique. And then the rest of the market, I think, is a little bit of a flyer on like a ton of different things. Is it Web 3.0? Is it decentralized finance? Is it new types of money that may catch on in certain places with certain communities? But I think that all Bitcoin has to do is stick with those two things and keep fighting to gain more adoption with that story, and it's got a long way to run. So like my personal account right now is very, very heavily Bitcoin weighted, and I'm massively

over-allocated to Bitcoin in general relative to other stuff. Like if a traditional financial advisor looked at my portfolio, they'd be like, you're a crazy person. They're a little risky. Yeah. You've got a high risk tolerance, sir. Well, there's a lot of good things going in Bitcoin's favor. One of the other things that I find interesting, and it kind of ties into some of the

product direction that you guys have taken with the Gemini Stablecoin is it appears to me that there's a huge demand for dollars internationally. And part of the like the proof points that I look at for that is just the market cap of tether being won. I mean, so this is kind of an embattled asset that has a ton of controversy around it, but continues to have a ton of use. And it's clear that there is a product market fit there. Largely, as far as I can tell, capital control evasion and kind of offshore trading. But I mean, that's a use case. And the, demand for dollars is certainly there. And I think it also probably reflects in the lending rates that you're seeing on BlockFi. So do you think that we are seeing this kind of dollarization happen outside the

United States, outside of the traditional financial guardrails? Is that kind of what to read into that? Yeah. I mean, I have a contrarian opinion, at least in the crypto world, in that I think that dollars on the blockchain will have a larger market cap than Bitcoin at some point over the next call it two to 10 years. And I think that right now with Tether specifically, you've got this capital control evasion use case, which is really, really strong and very, very valuable. But getting access to dollars globally is a massive market. So governments and corporations borrowing dollar denominated debt is an $11 trillion plus market that's hit a new all-time high probably every year since they've recorded the data. If you're someone in emerging market with,

enough wealth to buy a plane ticket to the U.S. and show up with 50, 100K, 250K or more and open a bank account here, then guess what? You can have a private banking relationship, store your wealth in dollars, get access to dollars in nominated investment products. And those last two things, being available to retail at a much broader scale than they were before, are use cases that I think will be a big part of the narrative for the ecosystem overall going forward. And I also think that people moving into those use cases will be a net positive for Bitcoin and other crypto assets because you're just going to bring more value into the crypto ecosystem. And inevitably, some of that value is going to flow into Bitcoin and other assets in the space.

That's interesting. You said that. That was one of the reasons why I was so excited about Libra, as much as some people who are purists, maybe we're not a fan of that project. are not a fan of that project. But I think if you think about the distribution advantages that if that project is allowed to launch in the amount of people that would be brought into that ecosystem, it could be really remarkable.

Yeah, I'm worried that they whiffed it already. Do you think it's not going to launch? They should just launch it. Once you kind of like hesitate and give everyone a chance to give you their opinion and you're already an organization that's large and has as much value to protect as Facebook does, I worry that it's not going to come out. I don't know, though. I'm not familiar with the planning. I just think if you're waiting for a green light from U.S. or EU regulators, you're going to be waiting a really long time. So I have no knowledge of the project, but it seems to me that the basket is really where the regulatory battle is going to be fought. It's what is in that basket, right?

And how do we know you're going to keep the basket there when you get really big? Right. So one path that this might go is pushing closer and closer to a dollar back stable. I mean, you could imagine a world where the initial posture is that we're going to have this weighted basket. The dollar is going to be a part of it. It won't be the majority of it. The end state is that the dollar is 75% of the basket. And at that point, you're really talking about a private U.S. company pushing the will of the U.S. dollar globally. It could be a posture that works. It might make it less appealing internationally, certainly. Yeah. I mean, I think the simple act of having it be a basket makes it untenable to certain regulators because the amount of trust that goes into Facebook always deciding to keep the basket allocation the same and never deciding to

reduce the reserves in the basket relative to the number of Levera tokens outstanding. All of those things come into question. You could just have Libra dollars, Libra Euros, and then offer a really liquid FX market on your platform and accomplish the same objective. so like why do you need the basket? And it's interesting. Like I was saying yesterday that I think Facebook is like the new vampire squid. Goldman is burning $1.3 billion to launch this consumer bank that doesn't even try to collect money from people it lends to and has a really great rate on savings and everyone's afraid of Facebook taking over the global financial system. So I think we should start

calling Facebook the new vampire squid. We'll get Matt Taiibi on that to write an article. I mean, the interesting thing to me about the Facebook effort is that it is kind of entrepreneurship on a level that we've never seen before, the invention of new money, right? It kind of reminds me of the free banking era in the United States where you had private issued currency and the Federal Reserve didn't exist. And so you'd, you know, if you wanted to travel from Massachusetts to California, you might have to switch in and out of 12 different currencies. And at its end state, at its most ambitious state, Facebook is really proposing to be an issuer of money. at the end of the day. I mean, if this works. Yeah, the ultimate reflection of power. Yeah, it's fascinating. So we could talk all day, but we're just about out of time here. What is next for BlockFi? What's on the roadmap? What can customers expect in the months to come? We're continuing to grow the team and just execute on our roadmap. Fortunately, we're growing really quickly right now. So there's plenty of wood to chop there. But we are planning on launching two new products over the next year and a half. The first is the ability to buy and sell on BlockFi,

which we're going to bring to market in a way that feels a bit more like a robo advisor versus an exchange because we've got this concept of being able to earn interest over time. And so your balance grows. And we're going to incentivize things like dollar cost averaging, given that the assets volatile versus just trading all the time. And that's coming really soon. That first version of that will be out this year. And then next year, the thing I'm most excited about, I'm specifically excited about marketing this and using it is we're planning on bringing a Bitcoin rewards credit card to the market. So somewhere between 1.5 and 2% cash back on a normal credit card, but in Bitcoin.

So swap your airline miles or regular cash back out for getting your cash back in Bitcoin. And you're hiring? Yeah, we're definitely hiring. We're always hiring on the engineering side. We're hiring on the marketing team, the finance team, risk management. team. I think we've got between 10 and 15 rolls up on our site right now. So definitely check that out if you've got some skills. That's great. And so where can people learn more about blockfi? What's the best way to get in touch? Yeah. So our website is blockfi.com. I'm on Twitter,

BlockFi, the company's handle on Twitter is at the real BlockFi. And we've got phone numbers in a support email. So we're generally very easy to get a hold of. So don't hesitate to reach out to us. Well, you guys are executing relentlessly. Congratulations on all the success. And thanks for joining the podcast. Thanks for having me, Matt. Great to see you. This has been another episode of On the Brink with Castle Island Ventures. To learn more or to subscribe to our newsletter, please visit castleisleisland.vc. And a 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.