TFTC: A Bitcoin Podcast - Tales from the Crypt #63: Zac Prince & Rene van Kesteren

Episode Date: March 15, 2019

Join Marty as he sits down with Zac Prince & Rene van Kesteren from Blockfi to discuss their new interest account product, how they manage risk with this particular offering, the nature of risk disclosures, and the utility that Bitcoin provides the world that wasn't possible before its existence. Follow Zac on Twitter: https://twitter.com/BlockFiZac Follow Renee on Twitter: https://twitter.com/rene_vankest Follow Marty on Twitter: https://twitter.com/Martybent Shoutout to this week's sponsor, 21Lectures. Head over to https://21lectures.com to learn more about their courses aimed at helping developers become more familiar/comfortable with BTC/LN development!

What's up, freaks? It's your boy Marty Bent here to introduce this week's sponsor before we hop into the interview with Zach Prince and Rene Van Kestern from BlockFi. This week's episode of Tales from the Crypt is brought to you by 21 Lectures. 21 Lectures' mission is to bring more developers to the Bitcoin ecosystem with in-person courses. These courses are lectured by world-renowned Bitcoin and Lightning developers. Some of you freaks have definitely seen them on Twitter and in other places and GitHub repositories, more importantly. the 21 lectures course is teach participants the fundamentals

of working with the Bitcoin blockchain and technologies above it like lightning they cover cryptography the structure of transactions and blocks

and how they are chained together smart contract languages the lightning protocol as well as software and toolkits to develop on top of Bitcoin

and lightning in particular to learn more visit 21lectures.com that's 21lectures.com you freaks know I'm all about education and spreading the good word

about Bitcoin. More importantly, making more people aware of what it is and how to interact with it pertinently, developers. Disclaimer before we hop into this episode, obviously, BlockFi has been a sponsor of this podcast in the past. Zach reached out to me personally and wanted to catch up and chat. We hadn't chatted since last July and also jump into the recent product that BlockFi released, the interest bearing account that got some blowback on Twitter. so we sort of sat down and walked through the product and how they're looking at it and the risk involved with interacting with it the privacy stuff every every all the stuff that you freaks want to hear another disclaimer tested out a new mic with this episode in particular

so number one sorry that if renee and zach seem a little distant i thought this mic was going to pick up their sound a little bit better number two it picked up a little bit of music wasn't expecting that either and then number three it's a bit of an awkward introduction because i'm sort of monitoring monitor monitoring the new mic uh as i'm introing zach and renee uh which produced a bit of an awkward intro but the flow of the conversation gets better as we get into more ipas insider hope you freaks enjoy it i know i did what is up freaks welcome back to tales from the crypt it's your boy marty bent here on a tuesday night i'm trying to think what night it is a tuesday night in march uh in the studio

wife set a show so i got the studio apartment as the uh podcast studio for the night very excited for tonight's uh conversation uh sitting down with two guests one of which you freaks know already zach prince from block five zach welcome back thanks for having me and it seems like the podcast business is going well your place is very nice oh thank you thank you it's uh you get to you get to write all this off with uh being a podcaster the government pays for it i'm kidding i'm kidding and uh we've also got renee your last name van uh kestern van kestern close Yeah. BlockFi's chief risk officer. And before we get into everything, it's been a fun week for you guys. Before we get into BlockFi's specific stuff, Rene, this is Tales from the Crypt. We usually hear people's tale, how they got to Bitcoin, how they got where they are in the industry, your path. We have not heard your tale. How the hell did you get here? Yes, I started, sort of, seriously started in the summer of 2017, although I heard about Bitcoin way before that.

I heard about Bitcoin way before that, but dismissed it as nerd money. I actually had some people working for me that wanted to open up a Coinbase account, and I told them they were not allowed to do that because compliance would be a problem. That was at a bank at the time. So I got involved in 2017 and quickly after that I met Zach and got more involved in Bitcoin and been a firm believer ever since. I'm still amazed about what the technology can do and in my mind it's already the killer app is the distributed ledger system that we have right now in Bitcoin and other cryptocurrencies. Yeah, so how's it been in the industry per se advising for the last year and a half, two years you'd say? So I started as an advisor pretty early on, in September 2017, when the company just started, and joined full-time in May 2018, so almost a year now.

So how's this industry compared to the industries of your prior life? Oh my goodness, where shall I start? Although... What were you doing before? Before that, I was at Bank of America Merrill Lynch, legacy Merrill Lynch, in the prime brokerage area and more Pro I was a managing director run a business where we made loans so everything that thought outside of PB the traditional margin lending stock loan and swaps that would come to me and you know they added come

to me because it didn't clear and settle to DTC a regular way so you have to do other things like as a seat on exchange or physical gold or certificates or it fell outside of the risk parameters you know someone that had 20% of a company that they want to find the stock but you know normally our system get that out like middle market stuff no you should think about this could be you know big owners of ExxonMobil stock or you know the guy that owns Oracle, Ellison, those kind of things sweet question what were you doing before that and how much money did you lose in the financial crisis Oh which one are we talking which business

prices you know and I guess it's it's it's it's very collateralized lending so in general you should be fine. The biggest risk that you have is mostly around mismatching maturities. So you make commitments to other people for a year and your financing is much shorter dated but we did not have much of that. We had everything done in the right place. And you were doing some like prop trading at Caxton before you were 15? Before that I was prop trading at Caxton. So you see some shit?

Yeah, it's still on the go actually. I don't want to talk about it anymore. I was not very successful in prop trading, to be honest. What's been the biggest difference getting into the Bitcoin world? How are these markets compared to the ones you're coming from? 24-7. It's constantly open. And there's also, there are a couple of differences.

One thing, people talk about the Bitcoin price, but such a thing doesn't really exist. Bitcoin has many prices at the same time at many different places. Bitcoin is the same thing in Beijing as it is in New York. whereas IBM stock is different in the U.S. than it is overseas, because in China we're actually still sitting in the U.S. and the U.S. government can still take it. You don't have the Bitcoin 24-7, as I said. Some of the main things. Settlement. Yeah, there's no settlement that's actually valid as they do.

I think in some traditional markets you have these couple of layers as you know you got sort of the central clearing houses like DTC and then you have broker dealers on top of it or banks that are members of DTC and then you are a customer of the bank or the broker dealer and they keep track of it in general there's this whole clearing cycle so when you actually buy or sell IBM stock you don't get it at that moment you'll get it it's T plus two now So I get two days later, you know In Bitcoin, obviously the selling cycle is much shorter

It means it's actually you know, it's like whatever 10 minutes per block. So you will know great a couple of confirmation So I guess it's like 20 to 20 minutes an hour. Yeah, it depends on your confirmation limit You want to hit your threshold? I guess I can also wait if you want to wait longer Right, yeah, yeah, that's fascinating and to if you look at regular markets you have everybody has their own record of where things are right so you have constant reconciliation that goes on over those two business days between multiple parties right so you had an account of Deutsche Bank and you sold it to someone that had an account of Morgan

Stanley and they need to sort of like oh yeah I see it and I can see it too and then he's go to DTC and they have like their own reconciliation going on that Whereas in Bitcoin, obviously, you don't have that. There's one ledger. I've been looking at the same movie the whole time. Zach, no, I yelled many times for it. Yeah, we get in trouble sometimes with product ideas where someone will say something about making the user experience

from somebody who's borrowing or depositing or something a certain way, and Renee's like, screw that. Just tell them to look at the blockchain. Tell them to look at the blockchain. Is it there? If it's there, you got it. It's done. Yeah, right?

it's cool right now yeah no like with the dtc i mean i could have brought the browser too for you but why would you ask me i just looked yourself right is that like the whole point that you can see it yourself well this goes into like a whole another conversation the theme of this podcast in particular which is the ux around the experiences of people interacting with companies like block fi or exchanges like gemini or block explorers like blockchain.info or blockstream.info i would recommend block strings now because it's a lot better in my opinion but the ux around it like you can have new experiences like things like proof of reserves you can prove on the blockchain with signatures and stuff like that and now settlement as well so it's uh it's a new

it's a new it's a new like mindset for people like oh i can actually verify this where i can't they're not going to go verify it on swift or within the banking network they just see it in their their banking account yeah they're checking it out they're just bookkeeping by one person yeah i hope they got a vibe and in general they got it by yeah the auditing is just built in yeah yeah i don't want to jump right into rehypothecation but uh this is like naturally what's going on but we'll wait we'll wait um fascinating story fascinating tower today zach let's catch up now it's been like seven months i know it's been a while you were telling me the price when we had our conversation was seven thousand dollars

we were looking on the way over here yeah i was like when was the last time i was here but um You know, even more importantly, to touch on your rehypothecation point, I was thinking on Sunday, you know, we had an announcement last week. There's been a lot of attention given to the announcement, a lot of questions. A lot of Twitter hoopla. A lot of Twitter hoopla. And I was like, all right, how are we going to respond to this? One, next time we launch a product that's as big of an attention-getter as this, we will be sure to learn from the amount of information we put out this time

relative to the amount of information we'll put out next time about what's going on behind the scenes. But two, like, okay, here we are. Where are we going to talk about it? And I was like, Tales from the Crypt was my first podcast. I want to bring Rene. He hasn't done a podcast before. He loves beer.

Marty loves drinking. and we just had to come here first man so we're pumped to be here again i'm happy to see you based on your apartment i would say that you've done okay in the bear market we found a way to keep growing throughout you know we raised since we were last year we raised some more money from some great investors including fidelity we continue to grow the team we've continued to build products including the one that we we launched last week so it's you know, I'm feeling really bullish. I've been saying

to people that the price is going to be higher at the end of this year than it was at the beginning of this year. And what that's going to do is attract attention. And then new people are going to come in 2020, and then we've got all the happening stuff too. And so if you're still alive,

still growing, still doing well, it's a phenomenal time to be in this market. Yeah. Well, first off, freaks, if you can't feel it already, I'm blushing. if you can't feel it through your butt. Thank you for the kind words. I really appreciate you thinking of us in particular. Secondly, you're looking great.

Considering the price has halved and then risen a little bit, you would think you would look haggard and out of shape, but you're looking svelte. Luckily, we're able to build our risk management system. And then, yeah, I guess, yeah, let's drop it.

So for any of you freaks who are not on Twitter and are not involved in the crazy chaos that is Bitcoin Twitter, Obviously, BlockFi just released an interest-bearing account that any Bitcoin or Ether holder can send to to gain interest on that up to 6.2%, correct? Yeah, so the interest rate in the account right now is 6% a year. It's paid out monthly in crypto. And after interest is paid out, it earns interest because it's part of your balance.

That's called compounding interest. So the yield in the account is 6.2% annually. Yeah. um all right so let's break down so you guys basically release your terms of service reset uh basically anything like everything that is possible when you're engaging with a bitcoin third-party custody uh service which is it is possible with this technology that the stuff can get stolen has gotten stolen in the past and you're just letting people know this has happened this is a risk uh this is a risk i would argue for any bitcoin exchanger or platform out there

number one and number two uh having been in the fund space and been on a due diligence team to me that just looked like clauses that were abundance of caution just trying to be as transparent as possible um but then on top of that people have uh people have worries about who's lending who's taking out the loans on the underside other side where they're doing it with it and how's that going to affect the bitcoin on the accounts most importantly is it short sellers and with Bitcoin's volatile price in the past, how is your guys' risk management system set up for that? So let's just dive into it.

Is that good? Yeah, absolutely. Look, and we can take this down a few different paths, but how about I address what I think were kind of the two biggest things that came up as feedback on the terms and conditions, touch a little bit on rehypothecation, and then we can go into some of the more risk management type things and understand how we're handling that

and what our system is and how it works. So I think the two biggest things that we heard about the T's and C's were two sections. One section that basically said BlockFi is not liable for any damages you may incur in the event that we have to suspend withdrawals.

So it was all this stuff like something might happen and you might not be able to withdraw your crypto. though. And where that came from is that one, abundance of caution. And in general, our terms of service were written with an abundance of caution type approach. We're doing something that doesn't fall into a particularly clear regulatory construct today. So when you work with your legal teams to build things like this, they just say you have to be really careful. And if you read stock prospectus for an IPO, if you read the whole thing, you're going to think you shouldn't

buy the stock because every single risk is going to be spelled out. It's going to sound like a horrible business and you're going to be like, why am I even participating in this market? So that's the bucket that we fell into in terms of our legal representation. But on that section about withdrawal disruptions, the reason we had to do that is because we're not actually, BlockFi is not actually custodying the crypto or holding the private keys. We decided early on that that was not something that was kind of our role to play in the market given what we wanted to do was build debt and credit type financial products so we partnered with Gemini and so basically the legal team is like well what happens if Gemini suspends

withdrawals for a while and we're like well then we can't withdraw anything they're like okay you know um and on the second thing the uh the rehypothecation section um what i'm hoping to do today and also through uh more dialogue in the future and some articles that we're going to put out is explain why i think it's important for us to make rehypothecation not like a uh boogeyman word um understand big boogeyman word it's a huge boogeyman word i mean if you don't know what it means or even if you do if you like say it you're like oh god that sounds scary like i just don't want you to do let's not do that let's not do that at all but here's what rehypothecation means it just means that an asset from somebody else that was posted as security or

is owed back to them and put in a new place, gets re-lent out. It's basically the core value proposition of being able to earn interest on your Bitcoin through someone like BlockFi is, okay, I'm going to put my Bitcoin with you. You're going to lend it out. There's going to be a return generated, and I get to make that money. That's how it works. The two things that are value add from re-hypothecation are, one in traditional markets rehypothecation has been a huge downward cost driver for access to

products so the reason that you can trade for free the reason that fees on you know ETFs and other asset management vehicles the reason that custody all those things are like either free or close to free in traditional markets is because of tools like rehypothecation the other thing is on the short selling point, if you listen or read what the SEC says when they're declining Bitcoin ETFs, they frequently come to this topic of fair and orderly markets. And the function of being able to borrow an asset and express multiple different views in terms of where you think an asset will move is a core function to having a fair and orderly market. And so the type of lending that we do uh helps to facilitate that now there's a separate question of how do you

manage the risk and how risky is that and um obviously we're very thoughtful about that and we should talk about it but those two things i think people should remember and then it's like a thematic overhang i think i believe that what we're trying to do is compete with the traditional system, whether that's the traditional financial system or the traditional fiat system. And the reality is those guys have a bunch of really badass tools that they've built over a long time that work really, really well. Capitalism is insanely powerful. There isn't some technological thing other than the blockchain. That's the one exception that the financial system hasn't figured out how to do in some way, shape, or form. They just might have

done it with legal documents and financial structuring instead of technology. And if we're trying to compete with that world, and we're not able to use the same tools, I don't think we have a big chance of winning. And then lastly, and we should jump into risk management or take more questions. Lastly, I would just say, just because something exists in the market doesn't mean it has to be for everyone. The cool thing about Bitcoin is that that stuff could go on and you could choose to just opt out of it.

Not everybody has to use things. You want a diversity of options. No, that's what I... I'm not even relieved. I'm just like, why is everybody freaking the fuck out? You don't have to use it if you don't want to. But people are worried, I guess. So rehypothecation, the big

why it's a boogeyman word is because people assume that there's notionally more Bitcoin than than anybody could possibly have claimed to. Yeah, so that's not necessarily the case, right? So if you think about it, the supply of Bitcoin is pretty given, and actually we know today what it is, right?

I think it's 80 million something, whatever, right? It will not be more. It will approximate 21 million by a formula unless somebody changes the protocol, which is obviously very likely, right? So if you actually lend out to Bitcoin the way we do it because of where we are, we would lend it out via blockchain so we'll be recording the blockchain so we have to have a

Bitcoin we cannot lend our Bitcoins we don't have yes so that's that's that's not happening with us right if you think about some of the exchanges that do offer sort of this leverage trading and shorting at 100x right and there obviously they work a lot more like the rehab application we work in a broker dealer land right so like what what Morgan Stanley and Merrill Lynch can do or swap can do for you right so they will have a thousand that they have customers that are combined long a thousand shares of apple they've got a bunch of customers on the other side that are short 500 shares of apple nets they have 500 shares of apple needed right because they just internalize the short version belongs and that 500 sits at dtc so they only record 500 shares of dtc

then with that combined with the settlement cycle of t plus two and all the things that go wrong all the reconciliation that happens, you miscount things, right, and many people use many examples that that happens, but it even happens around dividends as well, but that, you know, that's not what we're doing, right, and even that is okay, as long as you're aware of it, right, as long as you know, hey, that's happening and that's why I get the leverage, right, so the guy that has the thousand shares of Apple now only needs to put up, you know, 10% or 20% of the value of this apple shares because the broker is around to lend them out make money that way etc right yeah how how much uh of bitcoin being a bearer asset comes into play here like how how big and

changing sort of the structure of these debt markets uh if at all i don't know sorry i didn't get the question yeah hold it like you can hold yourself right like i can't so bitcoin is a better asset right yeah i mean you could you can do indices around it right so i mean you you you you can reference the value of bitcoin as a trade somewhere but actually owning bitcoin that is a better asset that has to go you can have somebody else can hold it on your behalf right by opening up an account at many of these places you can but the beauty of bitcoin is unlike securities or money you can actually hold it yourself yeah you can transfer it to your own private key yeah no it's i mean i failed miserably at that once and twice

somebody else you go download that ethereum wallet that's not easy yeah i tried it i tried to set up anything i couldn't and this couldn't work election wallet i got that done in a couple of hours but uh yeah if you're gonna be there it's like i couldn't get it done yeah this didn't sync with notes or something it says yeah that's a big problem we're having we're not sure what a full note is or it's okay there um apparently there's only one one to three full minutes in the world yeah that's black cypher let us know earlier this week but i guess what i was trying to get as like so like gold and like using gold as collateral but people like rarely like call the physical gold or like tape yeah that was actually good so there was a couple years ago

four or five years ago that was oh my god there's actually enough gold in the world right but first of all is actually that's even a very interesting topic right because we even don't know how much gold there is in the world we actually don't even know how much gold is above ground we actually don't even know how much gold is in ford knox right right which is bitcoin we know all these things so at least one side of bitcoin we know very well right now you can still have all these other claims and people say oh you know well if i'm going to ask him to give me my call back he's going to ask you know he's going to ask that guy and then i have to cut my gold over there and mind i'll be there so let's not do this right i got that but that's that with bitcoin is not

really possible because they actually know exactly how much gold how much bitcoin there is yeah so you know could you design claims on bitcoin yeah you can always reference the price and actually that's happening today cme you know it's 100 million dollars of futures a day no bitcoin no bitcoin right right they have no big one at cme whatsoever right i mean it's just referencing the price they find the buyer and the seller no it's like no it's just fascinating watching these markets develop and sort of the fear like people are like i think people just have an existential fear of repeating the mistakes that led us to 08 and shit like that um so i guess let's drop into risk management so how are you managing the margin risk in particular especially

if short sellers are lending us on the other side and bitcoin's volatile price history well Well, there are sort of two main ways of managing it, right? So one, you can do it like you do with equities or securities in general, where you just get collateral. So you say, hey, I'll give you a value of a million. You're going to give me $1.2 million back in dollars. And then you monitor that. And with Bitcoin, the interesting part

is that you can monitor 24-7. And you can even make margin calls 24-7, because they can send it right back if there's a problem. And that's sort of what we do in some part of it. The other part is more you act like a bank. So you say, hey, I got people depositing money with me, I'm making loans. And I then now need to manage the credit risk

to the other side. So you do obviously the credit diligence on the borrowers of the Bitcoin, as if it's like borrowing yen or euros, right? And you diversify, right? And then you have capital against that in case one of them doesn't work out. but in general the diversification is probably the biggest do we have and how's that the first

case you work as you guys scale up and your book gets bigger finding a lot of counterparts yeah yeah it gets stronger the bigger there's uh there's there's benefits to scale yeah um so the uh you know when you're doing the lending over collateralized that's pretty easy even with the price gapping up because that's just you just model and look at the data and you say okay I want to be okay and 99.9% of the scenarios and like if a .01 happens then a .01 happens and you figure it out then but that part's pretty easy and that's by the way that's the same system that we've used since January of 2018 on the USD loan side of things except now instead of

needing to take those actions when Bitcoin prices go down we also need to take those actions with Bitcoin prices go up and it's modeling the same way you're modeling volatility you're modeling you're modeling volatility over time and then you're modeling liquidity access the other part the the counterparty credit risk part to understand how we think about that I think it's helpful to understand how we've kind of like segmented that market so right now we think that right now we think of it as having five kind of distinct segments the first segment is CME and CBO futures these are ranked

by kind of as a general rule credit quality of the counterparties in the segments number one is like CME and CBO I mean that's they're like less risky than the U.S. government. If they default, we're fucked. If you haven't defaulted... It's so much for decentralization. Yeah, like if those things go down, we've got bigger problems.

This is actually, by the way, interesting. If you look at the U.S. government, or actually bank regulations, they all force you to go to a central counterparty, which is completely antithetical to the Bitcoin concept. It's about

you know much more being diffused and zenish and have a very small attack service instead of here like you know you have to go after one guy right see me in the cboe and you can stop a lot of the u.s financial systems and you know somebody pulls it down you know yeah rabbit hole i know i'm sorry we like that here we can go down yeah no but it's uh it's fascinating um especially with like the price movements so I guess what we should jump into is how like one thing I'm fascinated is you guys are

sort of getting your bearings in a bear market I would say like and how's that been how have your risk models sort of reacted to price reaction or less gone down 50% and up a little bit since we last met we were too conservative

that's how we concluded that was one of the conclusions we had We had, but at a higher level, I mean, we, you know, the risk system worked perfectly. We, you know, our portfolio never even came close to losing a penny on the USD loan side in terms of being upside down with how much collateral we had relative to the lending balance, and so that, you know, that performed as expected, worked as designed, no issues whatsoever other than something that i think is interesting to mention because it brings up a point that i think is important around just code versus around valuing a client relationship so

one of the times that our risk management system was firing on all cylinders was like it was like thanksgiving night at 10 p.m or something the market was you know the market was going down aggressively and our risk management system was working which meant that we were selling Bitcoin the next day of course we wake up and some of our clients are like guys I have more I didn't want to sell I could have given it to you but you know I was passed out from eating too much turkey and uh you know and our response was basically no problem let's just send more we'll unwind the trade and it's all good and we're able to do that because we have rules but we get to choose whether

we implement them rigidly or not you bring in a personalization by the way it's not unwinding too it was actually we did an opposite trade not yes you can't undo the trade right so you're correct yeah it's sort of even or nagged it out right yeah yeah um no that's that's another thing so how we just bought the bitcoin back and didn't charge people for any of that we're like okay cool all right and so we can just do that we'll do that right now for you thank you for being a client what's that experience been like on the customer service side uh how so how do you guys view that like uh like how are your competitors doing it and how are you guys trying to do it differently on that side we our business strategy is to try and get to a place like the place that

the first bank you ever had might have with you and what place is that it's like for me uh i have four or five different accounts with chase bank i have a debit card credit card checking account savings account and maybe some insurance or something and i get letters in the mail all the time from bank of america or somebody else and it says we'll give you 250 dollars to open up a checking account with us and that's free money but i just throw it away because i'm like that sounds miserable what am i gonna do like get rid of all my accounts like i just do everything there our business strategy is to try and do that same type of thing have that same type of relationship with our client where we have like three, four, five things that we offer

that they like and use, and therefore, we're able to have stickiness. And stickiness, having stickiness with your clients is something that's incredibly important in financial services. If you listen to the first podcast, you know I come from like a fintech background, specifically in the lending side where you had a lot of new companies competing to build big businesses and one of the things i learned was if you can generate client satisfaction and like affinity to your brand or just happiness with your service then you can win a little bit in financial services which are hyper commoditized like generally financial services you're giving me

a product and i can price it against somebody else's and if they're cheaper like i don't care about you it's a it's a loan like what i'm going with the cheaper one right but if you can do things where you build enough of a relationship you have enough of the diversified products that you're delivering enough value and frankly if people like just kind of like you enough then you're able to get a little bit of pricing power so that's that's our strategy and this is our second product we'll probably have two more products that come out this year and then another one to three over the following two years and we're going to try and make each one of those applicable and valuable to as many of our clients as possible that's awesome

what have most blockfi users been using the either the usd loans or obviously they'll be using the interest account to get interest but uh the usd loans in particular what are most people using it for or do you even know uh we ask as um as part of the kind of loan application process what are going to do with the money um the only wrong answer there is if you say something illegal which we've had some like a few just random hilarious responses uh what's the funniest one i've thrown off the platform you know what i can't remember the word anymore but it was some slang word that i hadn't even heard of before that meant like i'm starting a blue ice factory or something like that yeah it meant like it meant like i'm gonna i'm gonna like your own deal yeah there's some word

for like slinging sloppy tunes. I don't know what the expression was. Breaking bad, for sure. It was something like that. So we see a split depending on the size of the loan. So for loans under $20,000, we generally see that they're being used to pay down higher cost debt.

So we make loans at rates as low as 4.5% a year now, which if you have a you know unsecured personal loan certainly if you carry credit card debt and you also own crypto it makes perfect financial sense to just take a loan from BlockFi pay off the higher cost debt and now you're you still have debt but it's at a lower price above the $20,000 loan size it's a wealth management tool so we we see people who buy houses specifically investment properties diversify into other traditional assets like stocks or bonds or private equity investment vehicles all without selling their

crypto so they still keep their long Bitcoin position and they don't trigger a taxable event and then in emerging markets we're just kind of starting to get into emerging markets everything you know which ones well we're focusing on LatAm on the emerging market side. We're also focusing on Japan on the mature market side. So, you know, down there is this story of like governments and corporations have been able to borrow dollars, like that's been a thing they've been able to do for a really long time. And that market hit new highs last year, crossed 11 trillion, but retail has never been able to borrow dollars. And now they

can if they own Bitcoin and they can do it at a cheap rate and that's really valuable it's a really valuable utility for Bitcoin to have so it's just a way to keep their Bitcoin get access to more liquidity at a low cost I mean if you're in Argentina I think you know consumer credit rates down there it's like 50% because the inflation in the economy is so high the pesos crashed three times in a hundred years so you have this dramatic diversity of rate environments in the world and in places where the rates are really high Bitcoin as a vehicle to secure low-cost financing can be insanely valuable so

we're trying to do more of that like we're starting to put out press releases in Spanish we're interviewing with some of the crypto you know Spanish language media sites and stuff so we're excited about that that's dope uh yeah all right what what are the different obstacles like with the governments and banking systems down there than you have here in the u.s are they like welcome you with open arms like we're not touching them no we're not touching them yet so uh if we wanted to um make a loan in argentinian pesos and transfer it from an argentinian bank to another argentinian bank account we would need to we would need we probably to do the same thing that we did in the u.s like understand exactly which licenses we need and have

local bank accounts um but we're kind of deciding not to do that yet and so when we fund the loan we either fund it with an international wire or we fund it in a stable coin um and when we say when we say stable coin block cry we mean uh one of the ones that has like verifiable dollars in a U.S. bank account like GUSD or PAX or some of the others that are in that camp not like the Tether or DAI camp

so we fund it either via international wire or one of those dollar back stable points and they just eat the conversion fee so they don't like they want to hold the U.S. dollar on your platform

and then use it from there no but we want to enable that the future so we've been looking into options where we could for example create a virtual debit card that could be spent anywhere denominated in dollars uh but available to be issued to someone who's in argentina or brazil yeah um haven't found the answer to that one yet but i think that would be really cool yeah no it's crazy how so how much has bitcoin enabled this creativity that you have and this ability to yeah all of it yeah i mean neither one of our products that we have right now would work without bitcoin yeah bitcoin is the thing i mean it is the thing

and if bitcoin weren't in the market and you didn't have a market leader like bitcoin with a 60 70 i don't know if the market cap of bitcoin is right now but you know 60 70 billion ish market cap then businesses like ours could exist because our addressable market would be too small So without Bitcoin, there's no any of what we're doing. It's great to know. Thanks, Bitcoin. Thanks for enabling all this cool shit. Back to the interest-bearing account, I think another question I forgot to ask.

So the interest rate is 6.2% annual potential right now. How does that fluctuate? Obviously, it's supply and demand for the book, correct? And how are you sort of coming to that inflation rate on an ongoing basis? It's two things. It's supply and demand for the book plus our customer acquisition cost budget for this product. We are, for better or worse, the business strategy and path that we're on is a venture capital funded path. So in the same way that it took Amazon a long time to actually become a profitable business, we're in general going down the path of like, maybe we're not profitable until six years

from now. And as long as our growth rates are really high, VCs are like, yeah, keep going. Keep it going. We'll keep buying more of your company, you know, every year when you need another round of funding, as long as you're growing. um so it's it's the market plus uh a budget of our equity capital that we're comfortable spending on delivering a product that attracts new clients to our platform yeah and what do you think you need to do to hit like breakaway speed where you become profitable like how big does your

product suite need to be how big does the liquidity pool on your book need to be Well, we don't think about necessarily profitability from a single product line perspective. We think of it from a, what does it cost to acquire a customer? And then how much revenue do we generate from the multitude of things that that customer may do with us, less our operating expenses of delivering that product. which is a fancy way of saying we have no clue right now we're going to keep

building a bunch of things and as long as we're growing as long as we're still growing and you know the interest account was a huge success in that regard we set what we thought was an aggressive target when we launched the beta

in January, we blew past it for Q1, we blew past it mid-February, so then we like reset an aggressive target and then we blew past that in in the first week since the press release so despite some of the sentiment on twitter the sentiment and the data in terms of you know signups and clients and all that has been uh overwhelmingly positive um so it's working really really well as a matter of fact we decided to start raising our next round of capital on a slightly faster timetable than we were planning because the metrics look so

good. All in a bear market. What does that say? We're bringing, we are bringing products to the market that weren't there before. I mean there wasn't an account like this interest account before from a company that is legitimate and by legitimate I mean doesn't have an insanely high level of counterparty risk and didn't do an ICO right so we were you know if you exclude those two things we were the first ones to do this and it's an attractive rate and we thought a lot about you know where do we set the rate we know how much we can live it out for to some people but as your supply that you have to lend out goes up the

rate that you're able to charge generally goes down so there's a little bit of finger in the air right like okay what works at five million might not work at 50 what works at 50 might not work at 500 so you have to use you know data plus judgment and yeah so we wanted to put something out there that we thought was attractive but also sustainable and that's how we got to that number how long do you think somebody would have to keep Bitcoin or ether in this interest bearing account uh to a point where it's yes it's like 6.2 but with taxes and stuff when you take it out like how long would you recommend somebody lock up bitcoin in this

account to sort of get the best bang for their buck in the long run like from uh forever right from a time from a time perspective how long do you keep dollars in a bank account yeah so like What is the target customer? If somebody's just looking to stash Bitcoin away for a couple decades, five years, a year? We want to be the hub where if you're okay storing your Bitcoin with a centralized party,

which we know is not for everyone. Honestly, that's the question I have. Which we know is not for everyone. Do you want to dox my UTXs? I'm taking my hat off. Yeah, we know that's not for everyone. That's great. But if you are okay with that,

we hope that you know at some point in the near future you try it you like it one of the you know things we saw in the beta was that every time you pay interest which is once a month at the beginning of the month people refer their friends and like deposit more because they're like this is great this is all yeah I'm getting more Bitcoin so we want to be the hub right so like in the same way that you don't take dollars out of your primary bank account at some point in time uh we would like to be that same account but in a world where in the world where you're doing things with your bitcoin no i think that's uh and going back to like the tax thing

like is there an amount of time where it just makes sense to keep it in that like is the tax thing is is interesting so yeah um uh this will be taxed at like interest um uh interest is taxed a general rule unless it's from like a municipal bond or something as ordinary income so uh what we do every month is we take the price that bitcoin was at the time we paid out the interest um and then that dollar number is what will show up on your uh 1099 uh div which will will provide everyone a 1099 the 1099 div is like 1099 forgiveness um or actually it might be sorry not div int 1099 int everybody will get one of those from uh tax year 2019 from blockfi and it'll be in dollars but you will have never had dollars hit your account

at blockfi it will all have been in bitcoin but one of the challenges operating in the crypto world is that taxes can be just a royal pain in the ass and so we were like okay if we're gonna do this we need to figure out how to not make it a royal pain in the ass from a tax perspective so that was the way we decided to do it yeah yeah so like it's a tax form just like the tax form you get from an account at Betterment or you know so it's USD denominated so you don't have to worry about like inverted costs and stuff like that yeah you don't have to do all that all that math and backtracking and transaction figuring out yourself and hopefully they figure

that out and just streamline it hopefully they just remove they put some beneficial tax rules around Bitcoin right I think I mean no clarity will get to because I'm not sure it's the interest actually it could be just a dividend too since you started with that which means zero cost basis until you do something with it let's jump into that so explain how dividends work opposed to interest when comes to taxes well i actually don't know that well so well okay well why you why do you think there's a concept of uh qualified and unqualified yeah right i don't remember the difference between the two but probably you paid less taxes on one and more on the other you get yourself it's a

stock dividend right so you start with having 10 shares now you have 11. can dividends only come from so would it be a dividend it would be a dividend for block fighting not from bitcoin obviously so yeah i'm pretty sure it's not a dividend i just misspoke on a tax form yeah i'm pretty sure it's it's the int it's interest i've been looking at it a little bit you know and that's another thing we're sort of part of this expanding universe where you don't know what you're expanding into and sort of figuring out how people are interacting with these products how these products are interacting with traditional markets and liquidity pools and traditional

trader tendencies and mindsets and how they interact with financial products. Bitcoin did pop 3% one minute after we put the press release on. I'm taking credit. That was actually a day after I dropped the Jack interview. So I think we can... It was like,

the news was 8am and then Bitcoin, it was like... Yeah, I think That's what I dropped the pod to. We'll figure it out. I'm kidding. I'm kidding. I'm kidding.

I would be happy if I could just say that we did that. I'm like, hell yeah. I started a company in the crypto space. We moved the price of Bitcoin up 3% on some news that we put out there. That definitely makes me feel great. What do you think that is? Here's the thing. I mean, having a yield on an asset is insanely valuable.

You know, if you take my stone IPA and it pays a 3% yield versus Rene's stone IPA that pays nothing, my stone IPA is way more valuable than Rene's. I'll take the one with the yield, thank you. It looks like you need another one. Well, you've got yourself one, but you didn't get me one. I was a bit surprised. You're in my home. Get whatever you need. Thank you. What was I going to jump into? what were oh back so basically to produce the yield that you guys have with this interest

bearing account the people lending the bitcoin on the other side need to be a profitable endeavor so i think going back to like the five counterpart risk yeah the five the five buckets of sort of counterparties that you're looking for and sure your risk models for that so there's five right now we're primarily operating in the top two and we're doing a little bit in the third so The first one I mentioned already was CME and SIBO. Second one is traditional financial institutions who have large businesses in public equities or other traditional markets,

but are now starting to get active in crypto. And the ones we're lending to the most are market makers and proprietary trading firms. One of the interesting things that happens that I think is important to note that when you have a relationship with a firm like that you are under very strict non-disclosure agreements about saying that you lend them anything really you can't you're not allowed to disclose specifically who it is but one of the

things we've been saying we get this question is you know look at who invested in our last round at BlockFi to get an idea of the types of people we might be lending to. Fidelity, Susquehanna, Acuna Capital, CMT Digital, and others. The third group, so that's the second group, traditional FIs. Those two we prioritized the most. And the vast majority of the lending activity that we've done to date has been in those two buckets. Third bucket we're active in a little bit, which is the crypto business bucket and there's a few different sub segments of the crypto business bucket there's long short crypto funds so like crypto only there's

crypto OTC desks so you're you know Genesis Circle Cumberland all those guys and then there's crypto ATM businesses or kind of crypto corporates right so it could be an ATM it could even be Jack with the cash app they have to have the Bitcoin available to deliver the second somebody clicks buy on the cash app so they might borrow that at some point in time rather than just hold the balance sheet risk of the price volatility fourth bucket is more traditional corporates which actually Jax would be in the fourth bucket not the third but more traditional corporate so in the US you have Square in Japan you have

Rakuten, anyone that's a traditional company, not just a crypto company, who might want to borrow because they're in the purchase and selling flow with crypto. And then the fifth bucket is DeFi. And we're not active in buckets four and five at all yet. Your biggest competitor. What's that? Your biggest competitor, DeFi. That's DeFi.

We don't think of them as competitive. I mean, look, I think as a general market, we're kind of like pre, no, I just feel like it's still so early, man. We're in the addressable market of this stuff and we don't think of them as competitive. We think that we could be, we could leverage those platforms to help our business and vice versa. and like how banks prosper and lending club well I think because you're

the fifth buck you're a little apprehensive and how much not apprehensive it's just not that big yet yeah well exactly

so how much of the nations of like this technology and this space in particular like do you take into consideration

like does that keep you up at night like holy shit it's so early like are we too early are we going to get

caught in something because we jumped in we jumped into the pool so you can't worry about that that much it's too late it's too late

I'm already pocketing it we've raised 60 million dollars and we're doing this and there's people who expect us to do this

so you can't just like wake up one morning and be like ah I think we're a little too early we're getting out no I'm not saying you're going to

think about getting out I'm saying like what keeps you up at night like thinking about I'll tell you what keeps me up at night right now it's less business stuff

like honestly it's um it's trying to find a balance between like working with personally and with the team uh working all the time and having a good quality of life um that that's what keeps me up at night like literally right now so prior to launching this product there was a period of a month where it was i mean it was it was just non-stop work and then we launched it

and we had like thousands of people on the first day signing up and getting through we've never had that before in the company's history everyone like it was yeah I mean it was controlled it was like controlled insanity it'd be radio silent in the office and everyone

was just like I mean it was crazy we're working a ton it's like you turn it down it's like oh people like this yeah and that's good and it's very very exciting but um you know everybody's got their tolerance before they hit burnout and uh we have really great people on the team and i also like you know there's parts where like this is my company and like that person didn't sleep last night or

like that guy's got the flu and he was like coding at 3 a.m because we like needed to get this product out and so um how do we resource the company properly so that throughout our next stages of growth when we're releasing the next products there's maybe not as much of a pressure field situation but that's what keeps me up there now I'm not worried about the market I feel like you I feel actually great about the market I do too the fact that we're still alive the fact that block five is just part of a theme of lots of companies and people who are still here still building

good stuff smart stuff stuff that helps the market it's that doesn't worry me at all I haven't sold

since the last time I was here I haven't sold a single thing I actually bought some more because I try stuff all the time

I'm like oh new thing over here I'll buy some through that you know personally I guess it's a good time to throw

a disclaimer BlockFi has been a sponsor of this podcast in the past but you know I've been stacking sats

I've been stacking sats like crazy man via the ad sales you know that's how that's how i've been stacking stats recently um but going one thing i'm fascinated like outside of product stuff but like growing a company in particular as ceo like how much do you weigh like spreading yourself too thin verse like by hiring too much people versus like keeping it like a core let's grow slow and steady like with people that you fucking want to build this

out like how do you how do you weigh that um something that i read a while back that resonated me resonated with me a lot was that um if you're if you're the ceo of startup or even if you're just one of the first people uh at a startup or a leader at a startup you actually have to be good at operating like four different types of companies in the beginning you have to be really good at operating the you know 10 people or less startup where it's just like hey every day we can decide something and then like by the end of the day it's done like we just did that boom everybody knows what's going on and then you get to like the 10 to 50 or 10 to 75 people stage where somewhere as you're going through that you're like whoa whoa guys we need to have um ways that

we communicate things with everyone like just saying it now in a certain meeting doesn't work anymore because then you know sally steve and john were on vacation that week and then they come back and they have no idea what's going on so you've got to learn how to have communication that's scalable that's also the stage where you start building a culture um and talking about that culture because you know person number 60 shows up and if on day two you haven't told him kind of like the vibe we're going for here he might do some weird stuff and you know that's no fun for anybody and then you got like the 75 to 250 people stage where all of those things kind of just get exacerbated and then you've got the 250 plus stage which

actually I'm not familiar with yeah I don't even know what that stage looks like I've read about it but I've always kind of been like a high-growth startup guy so the companies I've worked at have already have always been bought before we've been 250 people so I've been a small company guy myself I can't imagine work for a company like bigger than 250 I worked at Google for a month and I quit through an acquisition okay no that's one thing that fascinates me I've been in the company yeah yeah how is it yeah to talk about working in a big bank so I knew Renee while he was still at Bank of America Maryland you know I knew

him after he left and started working at Blogify full time. It was night and day. He used to come in like when he was advising us, like in a suit, you know, scowl on his face, like super smart, nice guy, like scowling kind of. And then afterwards he's like dressing cool, smiling, his shoulders are like two inches shorter, you know. You're looking like you just hopped out of Flatiron right now. So what's working at a huge company like? So, there was actually a time when it was a lot of fun, to be honest, and that's what worries me a lot about crypto as well, is that when the regulators get around to it,

to sort of say, okay, let me tell you how to do things, it becomes a lot less fun. And I, as Zach knows, I have a lot of prominent authority, I do as well, no, no. But it's like a little bit like, you know, I mean, I know what's good, right? I mean, we can talk about it, but you don't need to tell me what's good and what to do. And I find that the regulators tend to sort of go down that path, right? So, yes, I do think, I agree with, you know, of course regulations need to sort of adopt crypto and we sort of need what we have already, make sure that crypto is incorporated because crypto is just not addressed like in many ways.

But I don't think we need like special new ones, right? we have plenty of it as well and it definitely does something regulation right so how do things change at the bank between yeah so um before uh how are the lure or neary days yeah so before that before that before the the financial crisis it was uh there was a lot more i would say um It was not as hierarchical, and it was a lot more like, you know, okay, let's do things. Let's talk about it. Let's get to the right people. You would, you know, you have the credit department.

You have the business side. I was on the business side. The business side wanted to do something. We talked about credit. We would go to our bosses. We would all go up together. If it needed to be the CEO, we'd get involved. It was an idea we wanted to do.

That changed after 08. And, you know, how it changes a little bit, you should think about it. The regulators find a problem in a business that's like, you know, far below, right? So it's like seven levels from the CEO. They find problems there. They actually type up a letter to the board of directors. And the board of directors go, what the fuck? And they're not going to go to the business owner.

That's seven levels below. They go to the CEO. And then the CEO says, oh, shit. Okay, let me get Tommy to come in because I don't know much about this, right? So everybody's sort of on their back foot and it gets worse as it comes down and that creates sort of a culture where decisions are just completely centralized. I'm becoming DeFi or the decentralized of die, right? it is like it's completely the opposite that you want right and it it it kills innovation and it kills morale as well and people become like a little bit like you know i got you kind of culture like let's let's see how uh i can um i can demonstrate how you how you tripped up what

you did wrong instead of actually hey let me help you let me make it work it's very different i've I've got two... Very political, too, by the way. I know, I know. I'm very anti-authority. I have a physical aversion to authority. When somebody tells me what to do, I shrivel up and stop.

You got married, though. Well, I love my wife. I love my wife as well. I did get married. I'm not authority. I asked her to marry me. All right, if you work for the boss. It's a partnership, okay?

Renee. I've got two follow-up questions. One, so the regulators came down, obviously, because we got way too over-levered going up to 08. And a lot of people would argue way too over-financialized. So essentially, 08 was a run-on. I think we should talk about what we thought caused 08. All right. All right.

Let me get my question out. So regulators came down because people would argue we're over-levered, too financialized, with too much intertwining leverage in particular, specifically with CDMs, or excuse me, CMS. CDS. CMS, yeah. CDS, credit default swaps. Yeah, credit default swaps,

which were basically insurance policies on the securitization. So the collateralized mortgage. The MBSs, excuse me. Mortgage-backed securities. The CDSs were the insurance policies on the MBSs. So people think that got out of hand, And that's why the regulation sort of came down with the hammer. You guys seem to think something else was the cause.

And then number two, in Bitcoin, so the episode I dropped today with Jake Stravinsky, we talked a lot about regulation and how you sort of foster light touch. And how do we engage regulators? Should we engage them? Should we try to get them ahead of the problem and say, hey, this is what we're doing? And how do you face this? Like, I would love no regulation, but obviously it's not going to happen. So how do you get ahead of it?

so yeah let's start with uh oh wait and yeah so wait i mean you know there are probably many things that cost it right but one of the things sort of like so what was the immediate solution actually right so the solution was just turn all the big broker dealers into banks yeah right so uh what does a bank have that nobody else has well the bank can call the federal reserve and said hey give me more money right let's bring some more money basically and that was just needed so In my mind, it was mostly a liquidity issue that maybe turned a little into a capital issue as well. So people didn't, there was not enough equity

to support the business, not enough risk out. But it for sure started with liquidity and that's what sort of said, okay, certain banks had no capital left, like say Merrill Lynch, so let you go and be part of Bank of America now. And others, they were told, you're now a bank. The banks are obviously like,

they have a really special status, right? So, as you know, they create money that the people in Bitcoin don't like as much, right? Bitcoiners are not fans of the quintillion effect. Yeah. You know, it's a way of organizing, right? So, it went exactly the opposite, and that's probably also why there is something like Bitcoin, right? It went completely central, right? Every decision is made by the Federal Reserve then, right?

And the OCC. they determine what's going to go what's not going to go right they're going to say i don't like this business you're out of it and you say as a bank said well i like it well guess what you're no longer taking deposits in the united states oh wait a minute you know what i i'm not going to do this anymore right they did everything to make it central clearing so you can say like okay well at least now we have one counterparty and the account is great like say the you know they have made it so that your capital requirements if you face the CME or any central clearing firm that you have a lot less capital. So that forces

people to go into the business and if you don't do that, that's okay too. We're going to set universal margin rules as well. So we're going to say you are like as you're facing exchange. So you might have liked the fact that now you have to put up 20% margin and can be, or should I say 20% margin can only be five times leverage you want to be ten times lever you cannot do that just just amongst each other because we're gonna set rules around that as well but it's completely opposite but you know but in the end people won't because people keep talking I was well okay the billions of banks are too big and want to break him

up we got all this centralized risk well actually that's that's what the rules No, you had that famous chart of bank consolidation over the last three decades. Yeah, so not a lot of Citibank's left. But yeah, it's not what you want, I think. But do the J.P. Morgans, the Bank of Americas, Chase, or who are the other big four? Wachovia, Wells Fargo. Do those big banks, do they want that consolidation? Are they happy about it and if so, like? Well, think about it. I think Wells Fargo...

Do they have feelings? Bad feelings towards Bitcoin? Well, you didn't want it, right? So I think at the sort of management level probably makes it a lot easier if you're one of the four, right, instead of one of the 40, because you've got to actually compete for stuff. If you're a banker that gets paid on the amount of deals you do, you'd probably be much more decentralized.

You'd go back, like, look, guys, I mean, I'd rather have a whole bunch of smaller broker dealers and I get a decent compensation, or an outrageous compensation, it depends on what you think you're worth, or who you think you're worth. Yeah, I mean, you know, Wells got to a place that they had 10% of all the deposit in the United States and they were not allowed to acquire any more banks. It was that big, and it's still that big. Yeah. Yeah, so, you know, it's got more centralized, right? I think people that listening to podcasts will probably agree that it should be a lot more decentralized.

Yeah, well, that's what scares the shit out of me. I think that's why a lot of people who listen to this podcast are into Bitcoin. And that's why I'm into Bitcoin in particular, because I worked in the finance world. My job in particular was to follow the Fed, and I realized how much influence the Fed had over the markets, and what everybody did. And I was like, this is just fucked. Did you follow the narrow bank story at all, TNB? It's pretty interesting.

It came up recently. It's ringing a bell. Yeah, so there were these guys. I read this daily newsletter called Money Stuff from Matt Levine. I read it in like three weeks, and it pains me to say that because I love this newsletter so much. I follow him on Twitter, so I'll see it fly down my tweet deck every once in a while. So he was talking about the narrow bank. Basically, the idea for the narrow bank was we're going to create a bank that just does one thing.

We're just going to give people access to the Federal Reserve. Oh, yeah, I remember that. We're going to have one product. So if you hold your deposits with the narrow bank, they're at the Fed. That's it. That's all we do. That's all we do. And they got declined.

The Fed said you can't do it. Because they're not taking on enough risk? And this is a recent thing, yeah, because they said, we think that if you do that, if we approve this, you're going to be a big vacuum and all the deposits are going to come to you. because why would anybody who's depositing want to deposit anywhere else if they could just actually get a risk-free deposit by having you as their counterpart? And make 2%. And you are basically the Federal Reserve. And make 2% instead of the 50 bips you get.

50 bips, yeah, exactly. So they declined it, and their argument was centered around the broader economy. They were saying, if we let this happen, it's going to be a net negative for economic activity and it's a valid argument so you get

into these kind of like catch 22 situations where too big to fail or in BlockFi's case, not to bring it back to BlockFi but like you have lawyers and try to do the right thing and disclose everything and then you're called out on Twitter

for the same result This follow-up question was about regulation of Bitcoin, it's pretty raw right now. Yeah, so obviously, you know, we need to hold their hands. What's the minimum getaway? So the interesting thing about Bitcoin, obviously, I think is also, it's a global thing, right? So if you regulate a lot of stuff in the US, then why people don't do it somewhere else? So I think you want to keep it to a minimum, and you can sort of regulate in the US people going from Bitcoin into dollars, so to regulate the fiat aspect of it.

Well, let's pull the anarchist out of you. Can you regulate this? No. Can you? How can you? Right? How can you? Right?

And is there a point at which the authorities recognize this and throw their hands up and say, what the fuck? But that's not in the nature of people that are called regulators, right? So regulators, they like to tell you what to do. How do we get rid of them? God, man, I wish I could, you know? There are a couple of buttons you can push for me and this is probably one of them. So I'm also a firm believer that we get to this down this path. like it's it's like right i mean the united states was founded right as we all know with

the boston tea party and said you know no taxation without representation i wasn't believing the opposite right so yeah like the government does does whatever the money you paid him but i don't see much in return if i could like say no do you see much in return but you give them their money you give them your money and they turn around and piss in your face by completely spending it inefficient spending it completely inefficiently like a story so if you pay taxes and you can say what happens to it like even if it was like 10 because 10 i can say what happens i feel so much about paying taxes right um yeah it's uh it's a note out there i

think that's the fifth time i said right on this podcast i'm trying to stop saying right uh it's uh it's a it's a sort of tick of mine that i that i fall back on i'm just trying to stop saying right on the podcast freaks but going back to taxation that is something when i was like 22 working at the managed futures fund like that was one thing i worked on my spare time was figuring out a way to prove like where your tax dollars is going and like how can you figure it out no no nobody ever will all right the in the one story in particular that we talked about in this podcast uh a couple weeks ago was there was an example that came out of so the the

u.s government particularly the military contracts a lot of work out to third parties and when it comes to acquiring face cream moisturizer for uh people risking their lives overseas for the u.s government uh not the u.s government the american people the u.s government was spending $14,000 on $30 tubes of face cream and they spent I think they racked up 65 but sunscreen now even so they're paying 450 X like the price and it's something there's no there's no accountability the Texas visitors tax accountability yeah to come back to your regulation right so you can regulate everything and say okay this is what's good this was bad and then the argument what's good what's bad

right so instead of saying okay let's do the bare minimum right so you know you start obviously with you can't really commit fraud right so that's bad and it's pretty sort of relatively easy to identify what fraud is but do you need to regulate like one of the things that's regulated equity markets is things like you know best bid and offers and you gotta actually the best price you gotta get the retail guy the best price possible in crypto that's not possible directly because these exchanges or marketplace are not real exchanges from a regulatory perspective. They're not connected so you know you

trade in Kraken you'll get a different price than trading at the same millisecond at Coinbase. Where as an equity market doesn't happen. Let's talk about that. That's one thing that Jack Mallers and I talked a lot about. Jack Mallers sends his app wallet. Bright young kid out of Chicago. Shout out Jack. But he comes from a family of CBOT royalty in particular. So he knows the Chicago Board of Trade and futures markets very innately and the trading infrastructure

that goes into linking up CME, CBOT with traders in New York and across the world. And that was one thing he pointed out is like it's atrocious like how Bitcoin exchanges are run and interconnected at this point. And so like what are the biggest... Or not connected, you mean?

Yes. Yes. Fragmented. Yes, fragmented. Yeah, is that a bad thing? I mean, what's the alternative? What needs to happen? What is the problem and what needs to happen? All right, so let's get all the governments together in the world that work crypto trades, like including Russia, China, wherever it is, and Korea, and let's all get into a room and come up with some uniform regulations. What are the chances of that, right?

Zero. Zero, right? We can't even agree on if there's global warming or not with all of us, right, to figure that out. All right, let's jump into that one. I mean, there's no way they're going to agree. So why just don't immediately say, look, we're not going to agree on this. So just not do anything. Why just say, okay, fine. There will be multiple prices of Bitcoin at any given time, and that's okay.

That probably is okay. And how will it solve? How do you, how is Bitcoin not 5,000 on Coinbase and at the same time, 3,500 on Gemini? Well, that's because you got people that say, hey, there's an arbitrage. Let me fix that. going to sell at that $5,000 at Cracker and then buy the $3,500 at Gemini and the prices will get closer and that clearly what's happening or something like that is happening because the prices are pretty close. And that's a

good point so in order to do that some of these venues and especially if you want to access them quickly you need Bitcoin and so one of the bigger use case that we've seen for us lending Bitcoin so far versus using it to short is using it because you're you're providing that service to the market that Renee just described. For the arbors. And you need Bitcoin to do it. Yeah. And you've got a CFO at your proprietary trading firm who goes oh yeah it looks like a great opportunity it's selling for 5,000 over here and 3,500 over there we should take advantage of that. How much money do we need to do that? And it's like the

traders are like we need a hundred million and then and then he's like great approved and then they're like we need 100 million in bitcoin and he's like what and they're like uh yeah because if we do it in dollars like we can't even trade on this one and we well and so then the cfo goes well can we just like borrow some bitcoin and lock in a fixed cost of you know what that's gonna what that expense is gonna be rather than start our market making activities with a net long exposure to bitcoin because uh you know i'm 60 years old and i don't believe in this stuff i don't even know what you're talking about no idea what this is and they go yeah sure we could borrow it and then block flies on the other side lending it to them

that's how for example the price of etf stays in line with the underlying right yes simply because people are arbitraging that and creating them and deeming them at deciding the right price No, it's just something that has interested me for a while, because I've heard second, third hand of people creating accounts in multiple countries. And they make money on that. Yeah. Don't get me wrong. And that's probably okay. They get paid for the service.

They get paid for the service, right? You can also say, all right, let's get some regulators in the room, and they're going to make sure that it's all correct, and we're going to pay those guys. So my money is rather on the, you know, people that are motivated by economics to do this stuff than the ones that are pencil pushers. And that's actually another fascinating thing about Bitcoin, though. It has found very smart people have found out ways to exploit these arbitrage opportunities and stuff like that. That's perfect.

You and I want that. I mean, I want one price of Bitcoin or at least, you know, it's close enough, right? So, what do you think about things like the TradeBlock index or Coverland's kind of indexes? It's great, no? Yeah. Awesome. Yeah. Phenomenal.

It's great. So, and you guys are using Gemini. So, is all of your price index off Gemini's price at any given time? No, we use an index. Which one? I can't say. Can't say. Okay.

Couldn't say, but would rather not. Not because people could look at that index and try to manipulate it. It's less about that. It's more just like, I think there's a handful of good index providers, and I don't want to say which one we used first and have that influence anything or whatever. Ooh. Cloud flexing on the pods.

Here we go. Okay, now. We're an hour and 20 minutes. outside of BlockFi like in Bitcoin what's

exciting you the most in Bitcoin in particular like you said you're as bullish as ever

I'm as well I think me personally I think fundamentals are fucking incredible

from a technical technology perspective and then from a macro perspective

let's talk macro macro is scaring the hell out of me right now the themes

around the world so talking macro so in my mind there's a

couple things that drive macro. There's basically demographics and then how well is your currency measured. Demographics, I'm bullish on China, despite how authoritarian their regime is. How is your currency measured? I'm bullish on the dollar. Combine those. I'm in general bullish on currency consolidation as a theme that happens. I think that one of the things that the internet did was, you know, you could say that it had a large level of influence in toppling a few dictators because there were people who could message each other on Facebook and gather up at the same place at the same time and, you know, tell the dictator to go fuck himself.

I think cryptocurrency will enable that same type of revolution in certain places in the next, you know, two to ten years. And I think that currency consolidation will be a theme. I don't think that we need to have, however many currencies we have, I think it's way too many. I think there could be 5 or 10 or maybe 20 at the most, but we just don't need that many. We're interconnected now. Let's just find, let's consolidate, and I hope that Bitcoin is one of those that gets consolidated into. I do as well.

And one thing, Deutsche Bank, I believe, they presented this a couple weeks ago, a few weeks ago at most. I found fascinating was there's more $100 bills in circulation now than $1 bills and mostly being bought by foreigners. So the demand for the dollar is higher. When I saw that stat that there's more $100 bills than $1 bills in circulation, I was like, what the fuck? I would have never guessed that. so that shows and then I know

we discussed this the first time we were on I don't know it's it's getting precarious though still like we're

we're a few years away from our tax receipts being less than the interest owed on the debt that we've accrued you know it doesn't matter you're just

it doesn't matter what do you mean I hate that argument yeah people say that people say never like never say never like magic money theory

stuff stuff does come to fruition and the roosters do come or the hens do come home to roost this stuff cannot happen forever I don't know can it keep happening for the next 100 years? 200 years?

I don't know 100, 200 years? I don't know here's what I struggle with I'll tell you what I struggle with with the demise of the dollar thought what takes its place? Bitcoin and I'm not saying

right now I don't think it's 100 or 200 years like an EMP attack then we got bigger problems no we had a power outage in New York City too it was not that long ago

I mean I don't remember I'm not sure when it was but it was like well hopefully hopefully Sandy right I was sleeping I was sleeping

in my winter coat or something yeah well hopefully by the time Again, I don't think Bitcoin is going to take over the dollar in the next decade or two decades, maybe three decades. But hopefully, by the time that has come, mesh networks and satellite networks and radio, short-term radio wave networks have been worked out. And you don't need electricity.

You can send it via radio wave. I'll tell you what we can do, Arne. Okay. Print paper Bitcoins. You can do that as well. Somebody's got to do that, right? I've got an open dime right here. Things come full circle.

yeah things come full circle I mean Amazon's got physical stores yeah so Rene Rene how do you see

Bitcoin like do you ever see it becoming a reserve currency or do you see it playing a niche like gold in the future um

no no no I really like the payment whales that's fucking awesome right but um you know

you know could I see like you know I actually think that currency could be like a lot more local too right

so you can say something like I like decentralization a lot, I guess. You know, when you go get a beer at the bar, you know, you can pay in a couple of dollars. You don't really need Bitcoin for that kind of stuff, right? But, you know, I can imagine also that if you're, you know, the Chinese or Russian government, you just must hate the fact that oil is denominated in dollars and not in something else, right? So some of these things will probably start a bit outside of the U.S.

Our systems here in Western Europe in general, sorry, in the Western countries in general, it works pretty well like you know you can buy things the credit systems work you can borrow stuff other places

it won't work and then probably there at first you say look you know Bitcoin is a very good alternative

to many other currencies maybe not towards the dollar yet but you know could it could it like take over the dollar

sure you know at some point I like when the anarchist comes out over there I know it's in there I know it's in there

it's i can see the aversion for authority i have i can i can see even somebody's face as somebody who has it themselves you know yeah i do have a hard time we're fresh in an hour and a half here it's been fun guys felt like 20 minutes right yeah um that's what i'm trying to think where we get so are you guys going to steal all the bitcoin i guess that's the the one question are you guys going to steal all the bitcoin that's the one question i have to ask no i mean i'll say i'll say it right now so there's i don't think we've said even one of these things before um the money in the interest accounts is the most senior part

of our capital stack and you probably know what that means um we will and also any money from block time employees and i think i was a cat well i know i was account number one and i think renee have his account number like four maybe or something in the in the interest account anybody else's money is also senior to any BlockFi employee money that's in the accounts I view BlockFi's worst case scenario as being we don't raise the next round of venture capital we go bankrupt and everybody gets their money back and that sucks for us because we're heavily invested in block high equity with our time and salary reductions

it's impossible for me to see a scenario where we have lost people's money in the interest account I I that's what I said on Rap Hole Recap last week I find it hard like you guys are

very well capitalized and you freeze out there I've sat down with Zach many times I trust you as a businessman I think, no, I think, but it is interesting to see once you announce these products like crypto, Twitter, especially the hardcore Bitcoiners react. But again, these products, if you don't want to use them, don't use them.

And if you, like, there are. It's not the beauty of the choice. Right? I'm sorry. The market wants more choices. It's there. I put out a tweet the other day and it said, it was like prediction. in 2019

I think Bitcoin in 2019 is going to be up for the year somewhere between 25% and 200% awesome that's it I thought I actually believe that we're in a different era now

where because there's so many instruments available you're not going to see a we're up 10x this year I just think those days might be behind us and that's okay I still think it's a phenomenal investment. I think it's going to be up a lot. I think the risk-adjusted return beats, you know, most of anything else that's in my portfolio. So we're going to be in, you know, January 2nd, January 3rd, January 4th

2020 and all the financial publications are going to be writing about the performance of assets in 2019 and Bitcoin is going to look really great. And then new people are going to come in and buy Bitcoin because of that. Some of them for the first time and what do we want and maybe they follow some uh bitcoin people on crypto twitter and what do we want those like brand new users who have never owned it before to arrive to and we want them and the question i did a little poll i was like what do we want those new users to arrive to and there are three options and the first one was the diversity of good options the second one was ico shields and the third one was not your keys not your bitcoin only

right and the results were like 68 or 70 a diversity of good options uh seven percent of people voted ico shills and like 30 was not your keys only um i just don't think it has to be an either or right like it doesn't you don't have to pick one or the other clearly it's better yeah i mean if you know someone who's 60 years old uh send it bruh i mean can you imagine explaining to your parents how to use a trezor then maybe you could i can't do you think it might work in 10 years by the way thought about that oh that's an interesting my computer my computer from 10 years ago i can't get it to run anymore i still got shit on it that

i never took off because it was too lazy i mean the hardware while i'm not going to pick on Tresor in particular Hardware Hardware I mean they are Very specific I'm not sure But obviously

The paper wallet will work Paper wallet will work I mean ideally Just make sure it doesn't Burn somewhere Or whatever Yeah ideally you have like You have it like

Embedded into Like A piece of Gold or something That's in Like a A gun lock box As Pierre Richard

Would say Did you see Lop in the New York Times Yeah Shout out Jameson Did you see that Getting into the mainstream I didn't see

The American Inspector's anymore Sorry neither do I that's not me just just just coin desk

and the blog and go to Twitter that's it yeah Jameson once a week an overview of something

from the columnist that's enough yeah Jameson I think you're just changing every day man

I haven't read the article I only saw tweets about it so apparently Jameson got interviewed

by the New York Times saying how he went completely off the grid after being swatted yeah it's a real threat um

it's talk about paper you know and Sandy you know where Boney kept their

certificates where Water Street in New York you know why it's called Water Street probably too

because the water probably yeah so they got it back our documents pretty water damaged and had to go to the issuers

and get it new ones well that's actually I hope yeah but I hope there's but there's unique ways So I actually thought of a, or I didn't think of, I was introduced to an analog, or excuse me, a manual way to store your private keys where you basically have an off-network multi-sig setup.

I really hope I can get this guy on the podcast to come explain it. but you basically have a number system that you associate with words in a dictionary and you just keep those numbers on a piece of steel or a piece of paper or whatever in many places and you know a special edition of a specific

dictionary that you go find and you match up it's fun to be your bank and you match up your own words we got a hundred random people in a room at a cocktail party how many of them do you think are capable of doing that not many but that's

that's the other thing we're willing too right yeah we're willing yeah but again it's I would argue it's worthwhile if you take full control of it

at least some of it but again going back to like I think there will be times there's a certain time you have full control exactly like if you're

fucking escaping China or North Korea or whatever it may be and you want to fucking run around the world naked so nobody like

strip searches you for your treasure or whatever if you live in New York and lost your apartment keys two months ago and feel incredible anxiety

when you have responsibility over the security of anything, you have to remember all those steps that you just described. And that's okay. It's okay. One of my favorite Neurage Bitcoin tweets was, I think it was after

Zappo came out and announced their vault services in the middle of the Alps or something like that. Yeah. he's like so he was like a meme of not Nelson

one of the other Simpsons characters Lisa the guy is Ralph it was Ralph like

I have existential fear he's like yeah this is how I feel knowing that some people have their

bitcoin in a vault in the Alps and mine's on a post-it note in my underwear drawer it's

it's something I really have to overcome that's actually why I'm excited to see more multi-sig solutions

come out too because I think that helps the problem as well and so like forcing that the UX around multi-sig in particular

is something I'm fascinated with right now as well shout out to the guys at Unchained yeah shout out to Unchained Drew

Joe Kelly to you and now it's in the vault do you guys have multi-sig in the future no we don't

custody we think custody should be free and we should not do it yeah that's uh no it's interesting that's the other thing like you said it's so early and it's so interesting seeing everybody attack a piece of the pie in different ways and

i think i only want yeah exactly and i think i'm like you said and we've been hinting not even hinting overtly saying throughout the punk is like i'm more optimistic than i ever been i mean less unless there's an emp attack solar there's a solar flare yes we could be wearing it It's starting to feel good. Yeah. But believe it or not, we're getting closer to, like, not having to worry about a solar flare,

which is actually crazy to think about. How so? What is that? So the hypothetical is, like, a solar flare EMP attack wipes out the electricity. How do you propagate Bitcoin transactions? Technically, you'd use, like,

radio waves or mesh networks. Hopefully, people are saving some stuff in Faraday cages so they can use their EMP. Well, at least someone needs to keep the blockchain somewhere, right? well or it's being backed up on this computer every 10 minutes or every block yeah okay at least you're ready so we'll go to you yeah or somebody or somebody around the world who wasn't affected

that's what uh frank or frank merkle ralph merkle um i think he said it best like bitcoin will survive like a nuclear apocalypse it's like uh like a like a cockroach that'll never die that keeps replicating itself in geographically dispersed areas and yeah it's like a nuclear apocalypse came to be like the rats the cockroaches of bitcoin that would like survive I guess it's a good place then you guys got any parting notes for the freaks

stay freaky that's what we try to do here welcome to Thunderdome dude I can't wait to bring the anarchists and you out a little bit more the next time we speak next time

next time just Renee yeah we'll make it happen gentlemen thank you for coming by the apartment thanks for having us man

thanks it's been a pleasure peace and love freaks boom it was fun it was good right yeah it flew by

I thought it was 20 minutes it said it was 2 people 2 hours is that what you're thinking I just let it go what's an instantly an hour 20 I'm like

so when's the woman coming home I don't know she might have texted me Her show probably started right now, so not for a while. Well, when are you going to put this out? I just want you to give us a heads up so we can retweet it and pump it. I'm thinking Thursday.

Oh, nice. That's awesome. Yeah, I could turn it around. I would Friday. Friday's probably the best day to do it. Yeah, Friday's the best download day or something like that. Just shoot me an email or a DM or whatever. That way I can tell you.

Oh my god, I forgot to hit record on.