On The Brink with Castle Island - Zach Abrams (Bridge) on Moving Money (EP.500)

Episode Date: January 22, 2024

Bridge CEO and Co-Founder Zach Abrams joins us for an episode chronicling the explosion of stablecoin volume and how Bridge is building critical infrastructure. In this episode:  Zach's origin story and how he arrived at building Bridge Bridge's core products today and how clients use their APIs Future issuance of stablecoins Key global use cases for stablecoins today Evolution of the stablecoin market Building a crypto company in a bear market Learn more about Bridge

Welcome to On the Brink. My name is Sean Judge. Today on the podcast, I sat down with Zach Abrams, CEO and co-founder of Bridge. Bridge is a stablecoin infrastructure company that powers a number of exciting applications in the market today. From working at Block to Coinbase to Brex, Zach's experience in FinTech is exceptionally unique. He's positioning Bridge well to capitalize on the explosion of stablecoin volume in the last half decade. Without further ado, here's my conversation with Zach Abrams. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guests and host may maintain positions in the assets discussed in this podcast.

You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. Brought down by Bad Mortgage Investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened

by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. 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. Zach, welcome to On the Brink. Thanks for joining me today. Thank you for having me. Excited to be here.

We've been spending a ton of time in the stablecoin market for a number of years now. And can't tell you how many companies we've met this year. And when we ask, how are you doing that? They say, well, we're using Bridge. So excited to have you share what you're up to building bridge with the On the Brink community. I guess just to start, you know, it would be interesting, I think, to walk through your personal background, born and raised, and kind of how you ended up starting a company in the crypto space. So I'm originally from North Carolina.

I went to Duke, graduated. My dream job was to be an operating partner at a private equity firm. So basically like the hatchet person that comes in and removes all the costs, which I didn't know was the job at the time. And then I did that. I worked at this private equity firm called Littlejohn. We bought this automotive parts. supplier in 2009, which was like a horrible, horrible time to be in the automotive parts game.

But that's what this company did. And then I spent like a year basically living in Detroit. And I went around as like a 24 year old and like closed factories in Canada and like open factories in Mexico. And after doing a year of that, I realized the job was like pretty bleak. And then I basically left private equity and had like heard about this thing that people were doing on the West Coast. I was living in New York at the time, which was like starting companies, thought that I could do that because why not? So I decided to start a company. And this was maybe 2010 or something like that. And the company that I wanted to start at the time was basically a firm.

By now, pay later on the internet. because I saw what Karno was doing and that should exist on the internet. It makes all the sense in the world. I had like literally zero experience whatsoever with anything that was related to starting a tech company, right? I'd been working at a place that made car seals that go around your car windows. And I managed to pick the most complicated business to build, right? It's like fintech, there's fraud, there's underwriting, debt capital markets,

There's the distribution challenge of selling into these, getting on the checkout page. I mean, it's like the hardest thing to do. Heavily regulated. Yeah, heavily regulated. This was before there was any like fintech APIs or infrastructure or anything. After about like four months of basically going nowhere, I pivoted the business and tried to build something that was like a little bit easier, which was to build a payment network on top of university payment networks.

At the time, I was like, naturally I'd found myself suck. into Fentec for whatever reason. And right around this time is where I met Sean, who became my co-founder, and we started building this company called Evenly. And then, like, things started kind of working. We raised a little bit of money, moved to the West Coast. We hired some people.

We started, like, having a product that people were using. And then we sold the company, maybe, like, a year and a half later or so, to square. And that's how I found my way into tech. And so I then joined Square. It was like my first real tech job. And I worked there for a couple years as a PM. And then was on like the product past.

Worked there as a PM and then led the consumer business at Coinbase for a couple of years. And then led product and design at Brex. And then Sean and I decided to team back up again and start bridge. That's how I found my way into the space. And when you were at Square, was this before kind of all of the Bitcoin initiatives? This was a couple years before the IPO. This is like pre-Cashap even. Maybe right around the same time I joined like Cash App was just starting.

This was like before Square realized that Cash App was like this phenomenal least amazing product and business. Well, well, well, well, well, before that. And what pulled you, I guess, into the crypto world? Obviously, you were at Coinbase. Was it something ideological or was it just, hey, this looks like a really interesting, fast-growing fintech company. My interest in crypto broadly has always been from like a fintech angle. I'm just interested in money, the way money moves, building money products and changing people's relationship with money or giving people access to money. And I saw Bitcoin and like blockchains as a

new way of moving value. And it took me years to like crystallize this view, but like big changes in financial services broadly tend to come with new ways of moving money. As an example, the card was the last really big way of moving money, and out of the card created like a whole new set of enormously successful financial services companies from Visa to Stripe to Brex, where I work. Blockchains and these digital assets are the same, right? It created as much, if not more value than like all of FinTech combined. And so I found myself drawn towards this like new medium for moving money.

That's great. And what was it that led you to start bridge and what is bridge? Along these same lines, our view was that stable coins would become a primary means through which value would be moved. You know, would be a core payment rail, the same way that cards are a core way of moving value, the way that ACH or SWIFT or SEPA or PICS or SPAT or any of these payment networks or means of moving money. Stable coins on blockchains are a way of moving money. And so we wanted to build a bunch of infrastructure that would enable people to move value

with the same sort of performance and flexibility and so on with stable coins and blockchains the way they do with all these other payment networks. We kind of started off trying to build, and we're really have continued down this path, building core payments infrastructure for this new medium of value transfer. And that's what we started on when we started the company, which was like 18 months ago. And we obviously went in like fits and starts because Taraluna happened, which didn't impact us directly, but obviously changed perceptions of stable coins broadly and then FTX and then SVB and then the USDC DPEB. and so on.

Very interesting time to start a company would be about 18 months ago now. I don't know if it's good or bad. I guess you had to go heads down there for a bit and just build. But on the product side, there's the orchestration and issuance APIs that you guys offer. What do those look like today? What is a client coming to you and saying, I need this? How does that work? We basically have built a series of APIs that enable people to

on the orchestration side to move one type of dollar in and another type of dollar out. You could think about it very similar to a SWIFT payment, where on SWIF, you might send in euros and get out pounds, or you send in

dollars and you get out pesos. So you send in one type of dollar through the SWIFT payment rail. Magic kind of happens, and then a different type of dollar is settled into a different bank account. For us, We kind of do the same thing, but one or both sides are a stable point.

So you could send in dollars and get out USDC or send in USDC and get out USDT or send in USDT and get out Euros. Those are the orchestration APIs. They're very low-level APIs, so anyone can embed them in their product and whatever way makes sense. Some use our APIs or infrastructure. They've built a card that enables people to spin back. balances and stable coin balances held in wallets.

And so then they use bridge under the hood to take those stable coin balances, convert them, and settle them in dollars so that they can pay the card, pay all the merchants, and settle transactions associated with that card. Or they can be user-facing. So like a bank could integrate our APIs to same way a bank integrates ACH to be able to move money from one bank to another. They could integrate our APIs to be able to have a user-deprize. deposit stable coins with the dollars landing in the bank account as U.S. dollars and so on.

So there's a bunch of different ways in which those APIs are used today. And then on the issuance side, as part of moving value through our payment rail, you can convert into an existing stable coin, USD, U.S.T, PYUSD, so on, or into your own stable coin, a dollar that you control, you benefit from where there's total transparency. You could use our APIs to take in a bunch of different dollars, settle them as your own stable coin, use that internally. Then when someone wants to spend, hit our APIs again to take your stable coin, convert them into fiat or convert them into USC to send out. You have the view then on the issuance side that there will be a lot more stable coins than what exists today, it sounds like. So what do you think that world looks like?

I think the distribution of stable coins will kind of follow like a barbell type distribution, where at the high end, there will be a few really big, really successful, quote-unquote, branded stable coins, like USDC, like Tether, like PayPal, USD. There will be a few really big assets at the high end, large, large, large end of the market. there are just inherent network effects that make it such that there's probably only space for four to ten or whatever, some relatively small number of use assets. And then on the other end, there will be thousands and thousands of other stable coins that are used as settlement, primarily as settlement assets or internal assets.

Let's say you're building a bank that's based on stable coins. people are primarily going to send money into your bank via USDA or USDC or USDT or PYUSD because that's what people have. But then in terms of the reserves that you're sitting on and how you're costing those balances, you could sit on all those funds as someone else's stable coin or you can programmably convert them into your own stable coin. This has lower risk for you as an entity because you have total transparency over the reserves and you could gain the economic benefits from those reserves now because you can access the yield.

And then whenever your users want to send money back out, you could convert back to USC. So through infrastructure like ours, you can remain compatible with the world of stable coins that exists today. There's like the high end of the barbell distribution of stablecoins while gaining the economic benefits and the risk benefits of settling assets in a stable coin you control. outside of that banking or financial services use case, is it also something you think about in terms of brands, Starbucks jumps to mind. You have to prepay at this point. They have this huge balance of U.S. dollars. Is there a world in which Starbucks or Starbucks-like companies will have their own? I think so. And I mean, in this respect, stable coins are really not that different from prepaid cards. They're basically closed-loop prepaid payment assets. And I think that there's

a pretty clear use case, just like the same way there was a bunch of infrastructure to facilitate prepaid card issuance and spinning up these store value accounts and so on. I think the same thing will be true here. Most of those will kind of be on the lower end of that barbell. Maybe Starbucks will be different. I don't know, but most of them will be in the tens or low hundreds of millions. The higher end is going to be in like the hundreds of billions or more. These are two huge categories, obviously, that you're servicing. But when you think about kind of five or 10 years from now, anything else on the product roadmap that you'd like to build that bridge? It's hard for me to predict where the market will be in five or 10 years

beyond like the belief that we have that there will be more, more of like everything, more payment volume, more stable coins, more people participating. I think that the market itself will change really dramatically over the next five years, though. Right now, the market for stable coins is primarily outside the U.S. If you're a person in the U.S. or you're a person in Europe or what have you, you have access to a stable currency, you have access to tons of fintechs that have solved the inadequacies of whatever financial infrastructure that you, you have you, you use, there is very little value for you to use stable coins today, unless you have to because you're trading on like a Dex or what have you. However, if you're outside the U.S.

and you're living in Latin America or Africa or Southeast Asia and you want access to an asset that will maintain its value, or you need to pay suppliers and your suppliers only accept U.S. dollars, but it's hard to access those BF dollars. So you're looking for payment rail to move value across borders that's cheaper, there's enormous benefits in stable coins. So right now the value primarily lies outside the U.S. And if you are a business or an entity that focuses solely on the U.S. market or the European market, it's hard to come up with use cases that are really big and really beneficial. I do think that once there is stable coin regulation and more fintechs, more financial institutions,

are able to participate in this space, that will materially change the types of customers that we serve and sort of the dynamics of the market itself, where the speed, where the economic benefits and so on of stable coins, a whole new set of folks will be able to take advantage of them. That will require us to change the infrastructure that we built to serve some of those markets. I think like in five years, it's less about the products that we build. I certainly hope that we're pulling the space forward, but I think in five years, I really do believe this will be a core payment rail for settling and moving dollar-based assets like anywhere in the world. As more and more regulated entities participate, the infrastructure that we need to build will change.

You know, if you had to explain to someone that was completely outside of crypto, what you you and Bridge and what stable coins enable when you compare it to traditional financial rails. Are there things that I'm missing? So it's speed, it's access, it's 24-7? There's another benefit of stable coins that is getting like really deep into like fintech nerddom. With a dollar today, you have to pick how you use that dollar. So a dollar can be used for lots of things. It can be used for saving.

It can be used for spending and so on. But generally today you have to pick. So you either pick, I save it, or you pick, I spend it. And the clearest manifestation of that is that you either get a savings account or you get a checking account. The whole system is designed such that you have to pick one or the other. And that kind of makes sense. Everybody has grown accustomed to it. From a checking account, you can pay your bills and you get a debit card and it's meant for high velocity of dollars.

In a savings account, you earn some yield on your assets, but it really is not meant. to send wires or do any of this stuff. One of the interesting dynamics of a stable coin is you're able to take a dollar and save it. And what most folks do today is that means investing it in treasuries, but you're going to take a dollar and save it. And then you're able to get a transactional asset that you can use to spend. And so you're able to gain both benefits of a dollar via one asset. So you actually have a transactional asset that generates yield.

And that's why like Circle or PayPal or Tether, whomever, they have all these transactional assets that are out there in the world that are people using for whatever reason they want to use them. And then the underlying dollars are earning yield. It unlocks this whole world where you can have transactional assets that actually generate economic interest. And then in fintech specifically, the way most of vintech is built is on top of FBO bank accounts. So an FBO bank account, almost every fintech, if they store a balance, it's technically for the benefit of their customers. It's this bank account. And all the assets in an FBO bank account have to be held in cash. Well, if you build like the exact same infrastructure on stable coins, now you can actually start generating yield from the underlying assets.

And so there's a whole new set of benefits that can be unlocked as more infrastructure moves over to this asset. And then there's one other thing is like if you're a developer building on this, it is a thousand times easier to build infrastructure on top of stable coins than it is on top of like traditional fintech infrastructure where you have to build your own ledger because you actually get the ledger for free because you're using a blockchain. I think there's like a bunch of other benefits that will be unlocked to. You mentioned legislation around stable coins. What are some of the regulatory hurdles required to run bridge today? We're basically a core regulated financial services provider in the U.S., basically the same thing in Europe. We comply with all of the U.S. regulations that are required to move in exchange value, and then we comply with all the European regulations that are required for us to move an exchange

value. And we very much sort of straddle this line between being like a core regulated financial services provider that then builds and operates a bunch of this digital asset infrastructure to sort of move value. So is there any proposed U.S. legislation relating to stablecoin bills or market structure that you think could help shape or catalyze bridge? The market structure bill, I'm just less familiar with. There's also this stable coin bill that seems like closer and much more directly relevant to what we're doing. I mean, I think

the big thing that it does or could do is it provides like a clear legal framework through which folks can issue stable coins. And it creates the regulatory oversight that's companies need to use and transact using these assets. We want regulation to be clear. We really want regulation because it is what will open up this market. To be more specific about it, like a bank, let's just say a bank could touch digital assets, could touch stable coins. It's hard for a bank to hold stable coins because there aren't clear legal requirements and legal guarantees as to like how the assets will be managed and what happens in the event that something bad happens like a USC DPEC. And so without the regulatory frameworks and some of the protections that like

money market funds and other assets have, it's harder for lots and lots of value to move into these assets because there isn't the same level of trust and understanding. I guess when you reflect on the last decade plus of your experience in the fintech space from Square to Coinbase to Brex, some of the more iconic fintechs of the last decade, what are some of the biggest lessons you learn from working at those places? One of the big things is how much all of those businesses have had to change in order to be successful. I look at it and like, oh, it was like predetermined that this thing would be successful.

and Square, for instance, was just a card reader. And if Square did not change, it would have been completely commoditized and pushed out of the market. But it moved into being the point of sale. Obviously, it moved into cash app, moved into Lent, it moved into a bunch of different financial services. Coinbase was just a way to buy Bitcoin. And it didn't even operate its own exchange to start. It had to effectively vertically integrate and then expand across a bunch of different assets. and Brex is kind of the same thing.

It started with its innovation in the underwriting model, but had to change pretty materially. And so one of the biggest things for me is seeing how much all of these companies have had to change to be successful and evolve their product. Sometimes we talk about product market fit as like a thing that you just have and then it is like a wind in your sales. There is you for some period of time.

But every one of these had some product market fit, but it had to like build new things on top of it to really compound that value and be as successful as they are. I would say the other thing is it's just really hard building and scaling and financial services. And so the stuff that Coinbase had to overcome to build what it's built is phenomenal. And the same thing for Square and same thing for Brex. It's like playing a startup game on hard mode for sure. Well, Zach, this has been great.

Any closing thoughts? Where can people find you and learn more about Bridge? Thanks for having me. And in terms of Bridge, our website is www.combridge.com. Z. And then folks can find me on Twitter. I'm just at Z.C. Abrams, A.B.R. M.S. And yeah, if you're at all interested in learning more about what we do or collaborating with us, just reach out to us on the website and we'll follow up. Awesome. Thanks so much, Zach. Thank you for having me. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island. Visit castle island.vc.

To listen to all of our podcast episodes, please go to On thebrink dashpodcast.com or just click on the tab in our website. Thanks for listening.