The Breakdown - Sam Abbassi on Why Proof of Reserves Matters Now

Episode Date: December 29, 2022

This episode is sponsored by Nexo.io, Circle and Kraken.   Today’s guest is Sam Abbassi, founder and CEO of Hoseki.   Find our guest on Twitter: @samabbassi - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company ensures the safety of your funds and keeps innovating with products like the Nexo Wallet - a non-custodial smart wallet that allows you to create your Web3 identity. Get early access at nexo.io/wallet. - Circle, the sole issuer of the trusted and reliable stablecoin USDC, is our sponsor for today’s show. USDC is a fast, cost-effective solution for global payments at internet speeds. Learn how businesses are taking advantage of these opportunities at Circle’s USDC Hub for Businesses. - Kraken, the secure, trusted digital asset exchange, is our sponsor for today's show. Kraken makes it easy to instantly buy 185+ cryptocurrencies with fast, flexible funding options. Your account is covered by regular Proof of Reserves audits, industry-leading security and award-winning Client Engagement, available 24/7. Sign up and trade today at kraken.com/breakdown. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our holiday theme music is "Spike The Eggnog" by Two Dudes. Music behind our sponsors today is “Glasgow” by Falls. Image credit: Velishchuk/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

It was weird when we first started because I kept saying that we're a proof of reserves company, but people didn't think that was very useful because, well, there aren't that many exchanges out there. So what is your total addressable market? But the thing I kept trying to communicate was that you as an individual are in the same category as a custodian, as an exchange, as an institution, and you have a lot of the same needs as a bank. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. The breakdown is sponsored by nexo.io, circle and crackin, and produced and distributed by CoinDesk.

What's going on, guys? It is Wednesday, December 28th, and today I am speaking with Sam Abasi, the CEO of Hoseki. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the breakers discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friend,os, well, this is an interview. I'm really excited. excited to share. One of the things I've been finding and talking with folks in the wake of FTX is that a big part of where continued inspiration is coming from is from the entrepreneurs that remain here working on really important problems. And Sam and Hoseki are a really great example of that. Hoseki is a proof of reserves platform that helps people demonstrate that

they have the Bitcoin they say they do. This is obviously a problem space that has much more discussion because we're all understanding it to be even more important than it might have once seemed. In this conversation, Sam and I get into all of that and so much more, so let's dive in. All right, Sam, welcome to the breakdown. How are you doing, sir? Doing well. Thanks for having me. Yeah, I'm really excited for this conversation. I think it's particularly relevant right now, and I'm sure you're living inside that. But for those of you who aren't familiar with you, I'd love to hear just a little bit about who you are, how you got into the Bitcoin space, and what you're building right now. Yeah, so I've been,

been in the space for about five years or so working on a plethora of different projects from sort of like crypto-based projects to enterprise blockchain related things to Bitcoin only, which is what I've been focusing the last two years or so on. Most recently came over from Fidelity doing some open source work and some work with partnered institutions mainly on proof of reserves. And then I found myself starting a company focused on that shortly after. So this is, I think we were just discussing a little bit before we fired this up. obviously kind of a poignant moment to be discussing proof of reserves. But maybe let's start with with how you started to get interested in this, right? Entrepreneurs have a million different

things that they could spend their time on. What was it about the specifics of this sort of area that attracted you to kind of focus here? Yeah, I was honestly just sort of captivated by the simplicity of proving ownership of assets. Bitcoin does a lot of different things. I think one of the most important things it does is making itself auditable. It's incredibly auditable. It provides assurances that just don't exist in any other asset class. And when I realize that that's a really under sort of utilized part of the system that just screamed to me that there is an opportunity here, but I think it's also a natural progression of how this space and how this asset can evolve. Like proving ownership of an asset is a basic characteristic of any asset class. So that's one of

the best things about building this is I can communicate that to anyone, know, no-coiner, pre-coiner, and people deep in the space, and they can understand what the purpose of the software is, what the purpose of the company is. So I just saw something that I thought was incredibly important that exists in any other part of the financial industry. That didn't exist in Bitcoin, and I thought it was incredibly necessary. Were you starting this around the same time that there was a growing discussion of sort of Bitcoin as a reserve asset, and you had sort of, you know, you said a couple years ago,

that's sort of right around when Saylor was first making his buys with micro strategy and people were talking about Bitcoin on the balance sheet. Was that sort of around that time that you were thinking about this? Yeah, that's exactly it. That's actually a great different to frame it too. This was, so I was working at Fidelity right when COVID hit. And so that was when Sailor got involved. That's when this whole, that's when Bitcoin seemed like it was kind of becoming more mature. When I was working on it, it was still more of like this. I mean, it still is, but it was, it really was more of like a fringe cypherpunk thing or maybe the cypherpunk aspect was. was being diluted a bit, but it was still quite French. And so here I was working on Wall Street

in a climate that was trying to sort of make this asset more mainstream, quote-unquote, maybe legitimate. And so I don't have any background in traditional finance at all. This is my whole experience on Wall Street. And so I needed to understand it from a very sort of first principle, simplistic perspective, which was reserved, just proving ownership, which again is just such a critical thing. Like, this is something that people in developing markets lack as well. Bitcoin does an amazing thing where it gives you, it gives us property rights without that monopoly on violence, which is incredibly novel. And so people in the global South own property, they own assets, but they don't have a way to actually express ownership of it. And so it was a combination of seeing the asset mature.

My perspective on Bitcoin, which is like this weird thing that I'm trying to sort of still communicate, which is that we are sort of this like third world global South digital citizens. and what are the steps required and what did to make this more useful over time? Interesting. So is it fair to say that the perspective that you have on this is like this is an intrinsic aspect of Bitcoin, this auditability. However, it still requires infrastructure to have that auditability be useful in practice as Bitcoin sort of interacts with the world. Yeah. And infrastructure is a great word. I keep using like wrappers. experiences. I relate this most closely with like multi-signature custody regimes. So companies that help people hold their funds and more secure multi-sig, that's something Bitcoin natively does. You don't need a company to do that. But there are these brilliant companies that have built

incredible experiences and services around that. And so you've now packaged this native functionality of the protocol and you're distributing it in a very efficient and effective way. And so again, I just, I still see that missing when it comes to proving that you own these assets. Yeah, yeah. I mean, this is one of these central pillars of this sort of entire space is verification over trust, and it's sort of, you know, a necessary prerequisite. I think, as we've seen this year, having systems that sort of can verify clearly, I mean, there's so much debate surging right now, which maybe we'll pause it before we fully get into the moment that we had right now. But, you know, so you started this. So the app is called Hoseki, the platform is called Hoseki. What were kind of the initial steps? You know, what was the initial build process like? When exactly did you start and kind of, you know, where have you been, you know, to date? Yeah, we started about a year and a half ago.

And so we've just been building the platform. There's a lot of infrastructure that's involved. We want to build most of the stuff that we do in house, if not all. So that takes some time and then building the team as well. And then finding out sort of use cases beyond our initial go-to-market, which was mortgages. The mortgage use case is pretty straightforward. you go to a broker or you go to a bank and you want credit, but you happen to have the majority of your net worth in Bitcoin, and they just don't know how to assess that or verify that.

So even with the verification, it's tricky because that's like bordering on the nefarious part of the space where we need to maybe scrub and clean the record of these assets and prove that you are the owner's, the entire historical record. For us, it's not that at all. For us, it's sort of communicating and extending the basic freedom and rights that Bitcoin gives us. So brokers are a brilliant use case and have been for me because typically when you approach them, someone else holds your assets. So you may have some income, you may have some stocks and you show them a fidelity statement, for example, and they're inclined and they're going to trust that statement because it's fidelity, it has a letterhead. It's a big faceless institution that has that trusted brand name. But now the narrative is flipped.

As someone who holds your own keys, you are effectively an institution, but they don't know how to handle that. And so for us, it was sort of exploring that a little bit more deeply. Okay, we know it's a problem in mortgages. Where else is this a problem? And it turns out that it's a problem for people that want to get visas and residency applications. Even in the judicial space, we were helping someone get custody of their children. Moses net worth wasn't, it was in Bitcoin. He had no way to prove that and had that assessed.

So it's more like practical everyday things. But, yeah, it's been an incredible journey. It was a weird when we first started because I kept saying that we're a proof of reserves company, but people didn't think that was very sort of useful. because, well, there aren't that many exchanges out there. So what is your total addressable market? But the thing I kept trying to communicate was that you as an individual are in the same category as a custodian, as an exchange, as an institution, and you have a lot of the same needs as a bank. We keep saying that you are your own bank if you hold your keys, but I didn't have any banking

services. I still don't really have any banking services as a bank. And so it's been about sort of exploring the true need for this basic financial plumbing that we've been trying to build. Super interesting. So, I mean, it sounds like your experience was a lot of people, their starting assumption was that the market for this was institutions or enterprises that needed to prove reserves in some way. But in fact, in the Bitcoin ecosystem, by definition, individuals are sort of functioning like those institutions. And a lot of those sort of primary use cases are more on the individual level. That's exactly right. Yeah. I mean, the exchanges in the institutions, they have a need for this.

You know, a lot of this comes from, I did my small part writing a paper with Deloitte, KPMG, Nick Carter, and a few other folks with the Chamber of Digital Commerce on Group of Reserves. And the conclusion of that paper was that, well, it hasn't become an industry standard because customers haven't been demanding transparency from their institutions. And so it's, I think, a bit of an uphill battle. It's also an obvious thing for them to use. But I think in terms of like growing the industry and really realizing Bitcoin's utility for human freedom and for true financial sovereignty,

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with other institutions, how have they changed the narratives, the discussions around proof of reserves, sort of in your mind, broadly speaking, but also specifically as it relates to what you're building? It's been night and day. I think as someone who's a bit more skeptical, typically, that's that sort of informs how I do things in the world. But it's been night and day. It's gone from sort of this being something that we might have on our roadmap in two to three years to something that we need to address yesterday. So that's been good. Proof of reserves has been around since, you know, I think 2013 or 12, like since the early days.

But now it's, I mean, CNBC had, they have headlines that have the reproof of reserves in there. So it has been incredible. So it's been good on that end where there's more awareness around the fact that this thing exists and the fact that institutions can and should be transparent because it's trivial to be transparent using Bitcoin. So that's the positive. The negative, I think, is that the messaging has been a little bit sort of diluted. I think people are using the wrong terms when they mean something different entirely. And of course, I think some institutions are being a bit opportunistic and doing things that they're calling proof of reserves when they're not actually proof of reserves. So this was my fear as it sort of started.

And I'm more optimistic than pessimistic in general. But there definitely feels like there could be a let's call it an Enigo Montoya moment. You keep using that word. I do not think it means what you think it means with proof of reserves and almost like a proof of reserves washing sort of moment. And certainly you see, you know, that happening with exchanges. I mean, how much is that, let's try to parse out, I guess, and for you, how much of that is opportunistic marketing, purposeful obfuscation versus messy complexity applying one proof reserves across multiple crypto assets plus sort of what the demand is becoming for consumers, which is really sort of extensive audits that include proof of reserves, but also include other things. in terms of customer balance segregation, all these sort of things? You know, what are all the, what's the full panopy of problems, I guess, right now with sort

of the way that we're discussing this? I think the place to start is incentives. I mean, these things are incentive-based exchanges are not really incentivized to prove the reserves. That's why they haven't done historically. Like I said, customers haven't demanded that they do so. We sort of concluded with two approaches on how transparency can or maybe should be achieved. One is consumer demand, which doesn't exist.

The other, which is the less preferable option is regulatory regimes, so being forced to be compliant, which we don't really want to see a future where that happens. And the frustrating part is that we can be self-regulatory here. Again, it's a very simple thing. The standards are out there. I mean, there isn't, you know, the calm standards is even a bit too heavy-handed, I think. It's a very natural part of what Bitcoin does. And if I can explain, like, why really quickly, because this mental model has helped other people, too. A Bitcoin transaction is like a physical check in the sense that it's a true.

two-step process. One is, you know, you signed a check, you put a signature on the check, and the second is that you take that check to the bank for funds to move. Doing any one of those things doesn't move funds. So if you take a check to the bank that doesn't have a signature, it's not valid. Funds aren't going to move. The signature is what verifies that this is a valid thing. It's the person who owns these funds is authorized for them to move. But similarly, if you have a signed check on your desk that's valid and you never take it to the bank, then the funds don't move either. A Bitcoin works in the exact, same way, you generate a signature on the transaction, and then you broadcast that to the network,

which is tantamount to taking that to the bank. That signature is what verifies that you have the authority to spend these UTXOs or to destroy them and create new UTXOs. So every time we spend Bitcoin, we're kind of taking part in this process. It's really just a matter of dissecting that small bit outside of the transaction flow and then just verifying that this is accurate. The self-regulatory part is frustrating because it can be done easily. I think it's more opportunistic. I think exchanges, I mean, some of the steps competitive advantage as well. If your competitor isn't being transparent about the reserves, it seems like you're losing a lot by doing so. So I go down to basic, you know, capitalist incentives here.

If they're not being forced to, if they don't have a real benefit to doing so, they're probably not going to do it. And the benefits aren't that clear right now. I think the terminology isn't doing anyone any favors either. I think using the term proofs is difficult. I think for Bitcoiners, it's a little bit precarious because the, only other time they hear proof of is usually proof of steak or proof of something else, which to them is scams. So this being called proof of reserves and a proof of solvency and a proof of liability is just kind of muddies it even further. So unfortunately, it's a hodgepot of different

things. Super interesting. How much do you think that the answer to that is one sort of consumer education or sort of community learning in terms of discussing things, having this sort of normalized and kind of consumer demand based, i.e. customers saying we're not willing to work with a centralized exchange or a centralized custodian that doesn't have sort of something like this in place versus is this a spot where there's actually a common sense regulatory regime? Because presumably going into 2023, one of the big things that is going to be debated even more now is what the regulatory regime across, you know, sort of different crypto assets and particular centralized custodians looks like. And I think that one of the things that I find often

is that there's actually kind of more consensus among people in the Bitcoin space and among the crypto industry around what common sense rules look like around those centralized sort of custodians. Is this one that you think fits in that regulatory regime or should it be entirely kind of market pressure? Yeah. I mean, I'm really cautious with this because I, it is scary when legislators come in and just start drafting different things. Granted, I, you know, we have like the Lummus Bill, for example. I mean, we, we do have innovative and forward-thinking and friendly people in government. And I've been having conversations with, with offices of senators in the last couple weeks, and I've been pleasantly surprised. There are people that are, you know,

quote-unquote, allies. Again, I do want to be cautious about sort of granting more power or advocating for more power on their end, if we can help it. I think it's probably going to come down to hopefully some sensible legislation and or more pain. I personally would prefer more pain because, again, I just don't want legislation to exist. And I think pain is good. It makes the body stronger. You know, like one of the worst things that happened in this last year was that millions lost billions. But one of the best things that happened was that millions lost billions. I think a lot of this, unfortunately, is a learning experience. I hate to see people sort of suffer. But a lot of the time, it's just a necessary component of or necessary part of maturation.

I think it's super interesting, totally reasonable answer. Let's actually use that as a kind of moment to zoom out. How would you summarize Bitcoin's year in 2022? I think it's more crypto, frankly. I think Bitcoin's been fine. I think it's, I mean, Bitcoin itself, like truly like the network and the asset, I think is unaffected. I think it's more about the crypto industry.

And I think that has been separate from Bitcoin. I think we've seen that the last couple of, months. So I would say Bitcoin hasn't really changed. I'd say I think we're at an inflection point with the industry overall, which encompasses much more than Bitcoin and sort of why are we here and what are we trying to accomplish. I think we're at sort of like a, and maybe a point of an identity crisis. Kind of building off that then, everyone right now is sort of heading into 2023 after what was sort of a blistering, you know, head spinning year. What do you think a successful 2023 looks like for Bitcoin specifically? And what does it take to get there?

I think stuff that we're already doing, I mean, I think privacy tech building on that, maybe what we're realizing is that we're actually, and this might be sort of a cliche, but maybe we're actually quite early and, I mean, like uncomfortably early. If we're still going through these cycles of scams and we still have this crazy price fluctuation as a result of it, then, you know, maybe this isn't a three to five year play. Maybe this really is a 10 to 20 year play, which wouldn't be great for a lot of people and a lot of companies, but that may just be where we're at as an industry. I think in terms of Bitcoin development, though, yeah,

I mean, privacy and scaling tech is working nicely. It's working slowly, but I mean, that's sort of how Bitcoin development sort of happened. So I think as long as we keep building what we think is useful for a longer term perspective and a longer term sort of outlook on the industry, then I think will be fine, mainly privacy and scaling. What makes you most nervous or pessimistic for next year? A crazy bull run and an outcome where we just didn't really learn from our mistakes.

I think people are hopeful. I think, you know, there's a little bit of opium with respect to there being a lot of demand for Bitcoin and they're actually not being as much Bitcoin as people expected, right? There's less supply that people expected. But there was all that demand. So theoretically, price should sort of hockey steps. afterwards, and that would be great in a lot of ways, but I think it would be terrible as well. I really think we need to learn. I think it almost feels like we're an addicts trying to get

sober, and we still haven't checked into rehab. That's a great analogy. All right, flip side of that same question. What makes you sort of optimistic? The fact that there's so many people still building, and, you know, I focus on the Bitcoin end, so I know that happens in other parts of the industry, too, but, you know, the fact that people seem relatively unperturbed, at least people that are serious about building the space. They are, they truly are a low time preference, and they're kind of be optimistic. So I'm optimistic about the people that are still here and that I know will be here because they're building things that will ultimately matter. Awesome. Well, maybe on that, just a fun one to kind of close us out is if you could fund anyone, Bitcoin company or

initiative, sort of at any price, what would it be? Oh, I'm going to have to give you more of like a vague answer, unfortunately. I would fund the community projects. I was just in El Salvador. I think it's interesting. I think there's a lot of marketing around it as well. I think some of it's justified. Some of it isn't. But, you know, I can tell you, I went there last year and this year, and in a year, the country genuinely, like the infrastructure looks significantly better. I don't know if that's Bitcoin alone. Maybe that's as a result of other policy changes. But sort of, as someone who, like, a lot of my mind is focused on the global south. And so I see Bitcoin financialized here in the West. Amazing. That's great. But this is supposed to be something

that delivers financial freedom to the world. And maybe I'm trying to run before we can crawl. but I'm always focused on places in the global south and how we can develop true community efforts there. So no one project in particular, but if there is a project that focuses on allowing people in the global south to custody Bitcoin in more efficient ways and allow them to use that within their local community, and localizing that as much as possible is something I'd be behind. Super interesting. Yeah. Just go on a little tangent on that. I think that one of the remarkable things as a new technology comes into these, parts of the world is the extent to which tiny little bits of funding can support sort of like massive upticks in infrastructure and adoption, sort of largely driven by communities. I mean, we've seen this over and over and over again.

You know, usually it's sort of left over in the social impact, social change side of the world, but, you know, people accessing new technologies, you know, small amounts of funding that goes directly into communities can have pretty remarkable impact. So it'd be interesting to see sort of Bitcoiners get behind more of that directly, I think, especially because, you know, such small amounts could go so far. That is just learning how other people sort of treat the asset. It is, it is quite different. For example, in Bitcoin Beach, I realized that some of the merchants there were actually,

they prefer to take dollars, but they were settling amongst each other in Bitcoin. And I hadn't even conceived of that happening. And granted, that may not be like a revolutionary sort of thing as it relates to the entire industry. but it's sort of a beautiful thing, I think. I mean, this is non-government money. People can use it in a way that gives them better opportunities like that. I'm totally behind it. Yeah, it's a whole different conversation,

but the relationship of how people use dollars or dollar-like assets, but also Bitcoin in different contexts in their lives, is a pretty fascinating one. But Sam, listen, this is awesome to have you on the show. Let's definitely do this again. And very excited to see what you guys, Keep building, obviously a very important type of project in an opportune moment. So I'm optimistic that the optimistic side will win if we keep building good things.

So appreciate your time and everything you do. Thanks. Thanks for having me. All right, guys, back to NLW here. I said at the top and I'll reiterate here, if you're a little bummed out and looking for inspiration, go check out the entrepreneurs building on Bitcoin and Lightning right now. There is so much energy, enthusiasm, and commitment there. of impossible not to come away at least a little stoked, and I hope that's what you're feeling right now. From my end, I want to say thanks again one more time to my sponsors next to dotio, Circle and Cracken,

and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.