The Pomp Podcast - 341: Chris Slaughter On A Better Crypto Exchange Business Model

Episode Date: July 21, 2020

Chris Slaughter is co-founder and CEO of LVL, a new full-fledged banking account that I invested in that is focused on providing all of the fiat and Bitcoin financial services you would expect for only $9/month. This disruptive business model is already growing in popularity with users, so I wanted to bring Chris on to explain it in more detail. In this conversation, we discuss demand deposit accounts, custodial accounts, importance of FDIC insurance, why monthly subscriptions make more financial sense for everyone involved, and how they built a product to service US dollars and Bitcoin simultaneously.  =============================== The Trends premium weekly report helps you understand market trends poised to skyrocket and how you can pounce. Join the private network of 5k+ builders, founders, and investors spotting tomorrow’s trends. Expand your network, and discover the next big business idea before it explodes: https://trends.co/pomp/ =============================== The Helium Hotspot is a new product that enables the people, not the telcos, to own and operate a wireless network in their city for Internet of Things devices. You can literally earn crypto for helping to build the network and providing connectivity to Internet of Things devices sending small bits of data. Join the movement and get your Helium Hotspot today with $50 off using the code POMP at helium.com.  =============================== Pomp writes a daily letter to over 50,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at https://www.pompletter.com.

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Chris Slaughter is the co-founder and CEO of Level, a new full-fledged banking account that I invested in that is focused on providing all of the fiat and Bitcoin financial services you would expect for only $9 a month. This disruptive business model is already growing in popularity with users, so I wanted to bring Chris on to explain it in more detail. In this conversation, we discussed demand deposit accounts, custodial accounts, importance of FDIC insurance, why monthly subscriptions make more financial sense for

everyone involved, and how they built a product to service both US dollars and Bitcoin simultaneously. I really enjoyed this conversation with Chris, and I hope you do as well. Before we get into the episode, though, I want to quickly talk about our sponsors. First up is Trends by The Hustle. It's a premium weekly report that helps you understand market trends poised to skyrocket and how you can pounce. They've got a private network of over 5,000 people

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a new product that enables the people, not the telcos, to own and operate a wireless network in their city for Internet of Things devices. You can literally earn crypto for helping to build the network and providing connectivity to all sorts of different devices. Remember, the telcos traditionally have owned the wireless networks, but the Helium Hotspot is helping us take back our power and control from the telcos. It's democratizing ownership

of wireless networks. So join the movement today and help take down the telcos by getting your Helium Hotspot. You can get $50 off using the code POMP, P-O-M-P, POMP, at Helium.com. to telcos don't need any more money we can democratize access and ownership to wireless networks go get a helium hotspot today helium.com use code pomp lastly don't forget that i write a daily letter to over 50 000 investors about business technology and finance i break down complex topics into easy to understand language while sharing my personal opinion on various aspects of each industry you can subscribe at pompletter.com again pompletter.com all right That's it on the ads. Let's get into this episode with Chris. I hope you guys enjoy this one.

Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys. Bang, bang. Super pumped about this episode. I have Chris here with me. We are proud investors in Levels. So thanks so much for doing this, man. Yeah, really appreciate you having me on, Pom.

Awesome. Let's get started. For those that don't know you, your background and what you did before you got into Bitcoin and crypto? Yeah, sure. So I was originally an applied mathematician and I studied mathematics at the University of Texas. And while I was there, I developed some computer vision technology for tracking augmented reality headsets. So the basic idea was that you could take these virtual reality headsets like the HTC Vive and by putting cameras inside of them that pointed out at the world that you could track their position without having to set up any cables or, or base stations. Um, and that was my first foray into entrepreneurship. Um, we sold that business in 2015 and then we sold the business unit again. Um, and from there, I really just

wanted to take like a sabbatical and, and think about, you know, like what would I like to prioritize with my career and that was uh that was 2017 early 2017 obviously at the time crypto was getting a lot of attention um the price was going up you know really from the second quarter consistently um but what attracted me to that area more than anything was this idea that um that consumers could have better financial outcomes by sort of decentralizing power within finance, that decentralizing through these protocols, sort of who has leverage over money, having these transactions be verifiable, that ultimately could be like sort of a boon for consumers. And, you know, when I was in my early 20s, when I was in my early 20s, I was a victim

of the, you know, the Wells Fargo overdraft scandal, they opened a fake account in my name. So I've always been really passionate about, I mean, I would say first I was really mad. I was really mad that that was happening to me. And then over time, you know, I got passionate that working in the crypto space is something where, you know, you really have an opportunity to tackle those challenges. And so we started with an indexing platform. That was our first product that we introduced in crypto. And that attracted some team members that we still work with today, like Willie Woo, Jimmy Song. And, you know, as we develop the product, we really just said from first principles, like, how can we make the experience of being involved in crypto just easier to use?

Some products are doing a better job of that than others. But the two things that we identified was that it's really expensive to trade on crypto exchanges, and it's not the easiest thing to do. It's a fairly technical experience. And that's really what got us down the road to developing Level, which is the platform that we've just introduced. Got it. And so what was the original impetus for Level, right, in terms of you go down the indexing path and then you realize, wait a second, there's this other path that we want to go down. We think we can build a really compelling product that not only is sustainable and kind of can be profitable, but also, and more importantly, it can solve a number of problems for users. What were those pain points that you identified or what was kind of the opportunity? Yeah, so I think pain points is a good way to do it.

And this was really an incremental process. So from the moment we introduced our indexing platform, we had a lot of smart people around the table that had been involved in crypto for a long time, really understood what it's like to use the products today. These are people like Jimmy Song, Willy Woo, I think I mentioned. and it was really a clear sequence of events of solving like what we thought were major customer problems so first we released this indexing platform and the biggest barrier to using this indexing platform was you had to first go and set up an exchange account on something like gdax is what it was at the time now coinbase pro um or on binance then you would have to get the api tokens that would allow our platform to talk to binance and place trades and you had to

put them into our platform um and since we were building something that we really wanted like sort of like dad and mom to be able to use that was really not a great customer experience right um and so what we tried to do was go talk to the exchanges and say you know can we onboard customers and then you know basically bring the kysk information that we get to you and then you approve the accounts and like we're going to be able to offer a much more seamless experience than having to go set up two different products right and the long and short of the answer we got from the exchanges was like we can like we're basically multiple exchanges just said we'll we're happy to buy you um and integrate what you're building into our product um but we won't

support it as a third-party product um and so um so we what we decided to do was say like let's build our own spot market um that's the most fundamental thing that these customers are providing for or these exchanges would be providing for us let's build a spot market and so we built that spot market and we launched it and that was our alpha product the ability to place market and limit orders on our own exchange and all of that was crypto only um and that so first of all that that got us a little down the path of making a better experience overall But it also attracted more users to the platform. So now we had hundreds of people that we could talk to, to understand, you know, like, what is it they like, what's missing now. And so the next thing that we identified was that people, if you're really trying to get mom and dad to get into crypto, they're not going to open a Coinbase account, buy USDC, transfer USDC over to our platform. And so we very essentially had to basically offer cash services on level.

We needed to have the ability for people to start with just cash and then get into Bitcoin and have a very easy user experience. um and so i think i think having to have our own spot market um and um and basically supporting cash those are the two main sort of observations that took us in the direction of directly competing with with coinbase and wells fargo along the way there were secondary things that would come up um so uh how do we get liquidity on the platform and we've decided to address that through the autopilot feature um which i'm happy to discuss uh that was a problem that came up for example um but it's been a very i think as much as possible we've tried to make it a natural evolution of of delivering the the uh the product that our small but growing community was was

looking for and so it's very unique i think in this space to offer uh a cash product right u.s dollar cash product that's FDIC insured, and also a crypto spot type product. And so maybe talk through just a little bit about, you know, one, why is that so rare? Like, why do so few other people go after that? And then two, what are the steps it takes to kind of run that dual process and get the regulatory approvals to be able to even offer this? Yeah, so, you know, I want to draw an analogy to a couple other platforms that are a little bit like this um and uh and and for that reason you know have attracted a lot of users because there's some clear benefits of this model um so cash app for example uh you can buy bitcoin they just support bitcoin you can buy bitcoin on

cash app and you can store cash on cash app um another example would be robin hood like you can you can buy Bitcoin on Robinhood. You can't withdraw or deposit though. It looks like any other stock. Now, the way that we've built our platform under the hood is very different from those platforms in a couple of different ways. So first of all, the cash that you're holding in your level account is in an FDIC insured demand deposit account. And what a demand deposit account is, it's a bank account that is open directly in your name. So when you sign up on the platform pump, you're going to get a cash account. And that cash account is a full FDIC insured checking account. And that means that, you know, if something was to go wrong in the

general financial system, or something was to go wrong with our business, the FDIC will just cut you a check directly. Now, Robinhood, Cash App, Coinbase, they don't build around demand deposit accounts. What they use is a type of account called a custodial account. And the idea of a custodial account is all the customer's deposits get pulled together in one corporate account. And then the company keeps track of basically how much money each customer is good for or should be credited based on the current status of their account. And so what we want to basically make it so that your cash is either in your name and directly FTS insured, just like you would have it Wells Fargo, or it's been sent to someone else's account because he bought their coin. Those are

the two acceptable states for cash on our platform. So that's one big difference. The second big difference is our business model. So I'm sure we'll have an opportunity to talk about our business model in comparison to something like Coinbase. We charge $9 a month. They charge transaction fees. But I want to stay focused specifically on the sort of cash apps or the Robin Hoods of the world. um so uh cash app and robin hood they don't operate spot markets what they do is if you buy bitcoin they match that bitcoin to a market maker that they have a relationship with um and what a market maker does is let's say the price of bitcoin is ten thousand dollars they're willing to sell you bitcoin for ten thousand twenty five dollars they're willing to buy bitcoin from you

for $9,975 and that's called a spread that's basically a profit margin that the market maker is charging for their services and then they pass that profit to to to robin hood or to cash out that's how those platforms are built now our spot market is different we do not market make on our own platform and so that that makes us different from coinbase consumer robin hood and cash up. Level never directly sells you Bitcoin. What we do is we have a product on Level called Autopilot. And when users fund their Autopilot account, it automatically market makes that process that I just described. It automatically market makes for other users. So what you're doing is you're taking your Bitcoin and your cash, you're putting it to work. And that allows

other users to buy on demand. So it provides liquidity for them. And in return, you earn an income on the profit margin that you set yourself uh and so um i think you could safely say that you know taking kickbacks from market makers like like robin hood and and cash app do i think you could safely call that a hidden hidden fee um and on our platform there is no hidden fee that the platform charges there's just a profit making opportunity for other users so this is really important right what you're getting into is kind of all the different business models around financial services and exchanges for these kind of consumer retail focused applications so you started out with first um just a transaction fee basically if i buy or i sell i'm getting hit

with a stated percentage right could be 25 basis points could be 10 basis points whatever it is but there is a stated fee that i am going to pay in order to uh cons uh finalize this transaction so that's one uh coinbase most crypto exchanges that's how they're making money there's a second one, which is this spread that you're talking about. So when you go in, it says you're buying Bitcoin at $10,025. There is a $0 transaction fee, right? So you're paying $0 in transaction fees, but actually what's happened is there's a margin that's baked into the price at which you're buying the asset itself. Now, you guys are basically going ahead and you are pioneering a third business model, which is very interesting. What got us excited is you are saying, wait a

second. We don't need the transaction fee. And we also are not going to include spreads. All you do is you pay us a $9 a month flat subscription fee. It doesn't matter how much you trade, how much you buy or sell. You pay us $9 a month and you can use the service unlimited amount of times. And that's your revenue sources, that $9 a month per user compared to the transaction fees or the spread. So maybe explain a little bit as to like why the subscription fee and then how that math works to make it attractive for you to go after. Yeah. If you don't mind me looping back, I thought what you said about transaction fees versus hidden spreads was like very spot on. And I think one thing that's worth noting, they're different models, right? When you charge a fee specifically

on trading, that's called a trading commission. And then charging a spread, that's like a markup basically. But in some sense, you could kind of view both of them as transaction fees. It's just how transparent are you being with the customer? On Coinbase Pro, we tell you exactly the percentage we're charging. On Coinbase Consumer, they have a spread just like Robinhood does. And they disclose their commission, but they don't disclose their spread on Coinbase Consumer. Then on Robinhood, they don't disclose the spread at all. But really, I mean, both of them are sort of like you're making a percent of the customer's order um and uh and so you know i'm only bringing that up because like if we can call both of those transaction fees i think it sort of illuminates

like besides the issue of like you know let's be as transparent as possible when we're charging our customers it seems like the least we can do um when you group them together as as transaction fees i think you can really start to sort of to say like are these transaction fees like necessary just from an engineering perspective are they good for the customer um and you know the uh whether you're charging a hidden spread or you're charging a commission and these can be quite high so you know if you place nine trades on coinbase consumer a month of fifty dollars or less that's nine dollars you're spending you spent it's fifty one dollars you know that would be eighteen dollars you're spending so these are quite high fees now the first question and the spreads are high too

you know one percent on on something like robin hood um so the first question is like are those costs justifiable like just like i think it's such a fair question it's just like like are these companies going to go out of business like if they don't charge those transaction fees and you know the answer to that is like they're actually totally not justifiable because from an engineering perspective uh when i buy bitcoin for new pump all that's happening is your database entry of how much Bitcoin you have goes down, my database entry goes up, that's milliwatts. And it's objectively less complex than something like World of Warcraft, for example, which also operates on a subscription model and does many more calculations in the administration of that service. So that's

one reason where you can say, hey, these transaction fees might not make sense, right? And then the other reason you can say that they might not make sense is, you know, if these exchanges were just barely skating by they wouldn't be booking a billion dollars of net income a year right um that net income directly comes from overpaying for services so um so in a nutshell we can afford to and we think it's more reasonable to charge a nine dollar subscription fee um and you know other than just the value savings which which can be apparent quickly it's one trade on coinbase pro of eighteen hundred dollars it pays for itself um the uh if you do five trades on coinbase consumer in a month uh it pays for itself so other than it just being a pretty fast

recuperation of value we also with the membership fee we want to align we want to align ourselves to not be a transaction-based business but to be a services-based business so in a transaction-based business i'm going to make my money when you log on if you're not logged on i don't care about your account. There's no reason not to automate things. If you have a problem, unless that problem is about a transaction, I don't have a vested interest in resolving it because I'm not going to make money off helping you recover your account, for example. With us, we assign a personal banker to every level member and you can talk to them right in the app. So most people right now are just talking to Clifford and 40% of our users that sign up have a conversation with Clifford

within the first week. I don't understand how this feature works or I want to make sure that I'm doing this correctly. And so we're really there to provide a service to the customer that you can tap at all times instead of just showing up in time to make money. And so I guess part of this is you said you can afford to do it, but is it more profitable or less profitable to go with subscription-based model versus the transaction fee model um you know i think that i think that remains to be seen um it depends on it depends on the distribution of customers the customer makeup and how much money they're spending today now as i i just mentioned a couple thresholds like five trades a month it pays for itself or one eighteen hundred dollar trade on coinbase pro

um those are very low thresholds um like like just pretty much anyone that's active trade actively trading right now uh we are going to make less profit on those guys right um and so and so clearly that profit is going directly back to the customer we're not making it we will make less money than coinbase in that category now as we look into the future we're not just building a low-cost crypto exchange we have full fdic insured accounts we have free money transfers we have free wire transfers uh we have automation technology that's completely automated and included in your account um over time we hope that this product becomes something that anybody can use right it's way less technical than coinbase you could refer it to mom and dad now they have a product

they can actually use and i think that expansion in the addressable market you know just that these people that maybe were annoyed by Coinbase are finally willing to come use it. It could be more profitable in that regard just because we can help more people. Got it. And so as you're kind of building this out, talk a little bit about the FDIC insurance and then the security on the crypto side, right? Because I think one of the things that people see is, okay, so you're telling me I have a cash product and I've got a crypto product. Those are two different types of assets. I'm very worried about security in general, just in the industry. And so how do you guys think about the advantages of having FDIC insurance on the cash?

And then also, how do you think about the security of the crypto? Yeah, so I'll preface this by saying that, you know, when people entrust us with their money, that is an extremely high sort of bar of responsibility. It's people's vacation budgets. It's their kids' college funds. And we take that very seriously. And especially as an emerging brand, we want to make sure that we're doing as good or better of a job than the incumbents so you can feel completely secure about putting your cryptocurrency on the platform. And let me just compare it to a traditional exchange. I think that would be sort of the best thing to just draw a direct comparison to. So on it, and I'm going to answer both elements of your question, the cash side and the crypto side. So on your traditional exchange, they manage, I'll start with crypto.

So on your traditional exchange, they manage their own cold wallets and hot wallets that basically pulls all of the customers' crypto together. And that crypto is considered to be in the custody of that exchange. So they're responsible for making sure that they have enough crypto at all times, that they don't get hacked. They're the single point of authority on approving transfers. That is the traditional way to handle crypto. Now, what we've done in our financial institution as we've built Level, we want to decentralize that security and make it less likely that we would be a point of failure. And so what we do is we work with a company called BitGo. and our wallets are multi-signature wallets that require two of three approvals um level holds one

uh key so we can't send your money by ourselves uh we only hold one and it requires two keys to send another one is in storage somewhere safe um in case either i us or bitco lose a key and then the third key is in BitGo's possession. And with BitGo, we implement these institutional policy controls. So only so many withdrawals per hour of a certain value per hour, like a net combines value. So BitGo is required and it is in a second sign off. But before we even get there, we also perform our own internal reviews um and uh and our internal reviews what we're looking for is um we want to make sure that you have sufficient account balance obviously uh we look for patterns of suspicious activity that might indicate identity theft we don't want people going on

buying crypto in somebody else's name that whether they're a customer or not we just want to prevent that um and so we're able to go through these two layers of security the internal review to prevent fraud and identity theft. And then the BitGo review to prevent unauthorized sends. And we currently, the turnaround time on that is less than 15 minutes. And we confirm at one block, whereas Coinbase confirms at three. So what you're looking at is a procedure that is a security system that is more decentralized, that has more layers of approval, but is in fact faster than coinbase um and so that's the that's the answer on the crypto side the now let's talk about cash the traditional way to store cash on a crypto exchange is in a type of custodial account called

a for benefit of account and that is an account that's in the company's name that holds the cash of all the different users and then what the company does is keep a record of how much funds are for the benefit of each customer and what you'll typically see you'll typically see something in the contract that i think is pretty scary that says like we'll never voluntarily give up your funds in an insolvency event right so if we get sued if we get if we go bankrupt and we get in a you know a bankruptcy proceeding we're not going to voluntarily give up your money um but you know you do lots of stuff in bankruptcy that's not voluntary so we wanted to um we wanted to really make sure that the cash is as safe as possible and the gold standard for storing cash in the

united states is an fdic insured checking account in your own name because uh because it's the best experience if we fail you can log into that account you can pull the cash we're not allowed to touch it um first of all we're not allowed to direct funds unless it's directly authorized by a customer so the customer has to tell us every time we direct funds second if something happens to level, you just log in and you can pull the cash off. And then third, it's directly FDIC insured. So if there's a big macro financial event, then the FDIC under the law will mail you a check for the cash. And I think that that really is sort of the highest degree of confidence I think you could have in cash under current North American law. Got it. And it feels to me like

uh the security component is getting figured out by a lot of people and obviously there's been less hacks which is a good thing overall for the industry fdic insurance is an absolute game changer on the cash side going to this model of having kind of the the true deposits rather than the custodial deposits is another kind of game changer um one of the other issues that's come up on the crypto exchange side is the treatment of private information of the users. So there's been reports that some exchanges have sold information, some are using it for other purposes. Maybe just talk a little bit about kind of what you guys see on the industry perspective, and then how you're looking at treating individual private information.

Yeah, so I want to preface this by saying that like what I've seen on Twitter is a lot of speculation and it's very interesting to me like i would love to like sit down with someone at coinbase and just ask how they actually handle some of these things but i don't know for all i know um uh for all i like i just cannot say that i know coinbase's policies um what i can do is talk about the types of things that come up that affect customer privacy in an exchange and how we've chosen to handle those. So, you know, the first thing that we do with our, the first thing when you create an account that we ask the customer to do is to apply for their level account. So you've signed into the app, but you can't access banking services until we've verified your

identity. And this is, again, to prevent fraud and identity theft. It takes about two minutes. We take a picture of your photo ID, the front and back. We automatically fill out all the fields like your name and your address um we have you do a selfie video um that authorizes the opening of the account which which which we also use to if you ever get locked out we can look at that video and make sure that it's you um and then we get a record of your social security number um at that time that is that is uh that is all exchanges ask for this stuff um uh a lot of them um a lot of them might like like a breadcrumb it you know ask for it one step at a time like maybe you can buy 100 bitcoin but now we need a picture of you now you can buy a thousand but now we need your social

right um we do that's because they they don't want to they don't want to get hacked right the the less sensitive information they get hacked for the better for us we collect all that because you're opening an fdic insured bank account and the law requires that you collect that but what we do is we custody that with our banking partner that has decades of experience with no vulnerabilities, right? Like, and then we pull information only when we need it. So like, for example, if you buy a debit card, we're going to send a request to the bank, get a copy of your address, and then confirm that with you and then ship the debit card there. So in that sense, you know, the first line of defense about protecting information is just to not have it.

And, you know, we're just designing to not have that information. Now, it is true. I think it is very true that there are laws that have to be followed when you're running a financial institution. um you know we're we we are we are an exchange we're a financial institution we offer fdic insured bank accounts um and i live in los angeles not hong kong so i have to follow these laws um now what we are going to try to do as a business is to be as transparent as possible about what it is that we're doing um and i'm happy to talk about a couple elements of that here today um Um, so, uh, so first of all, some exchanges have a, uh, uh, some exchanges have a blockchain analytics unit. Um, and what those analytics do is they look at transactions that are incoming to the exchange

or that are leaving the exchange. And they, they monitor, for example, to, to make sure that you're not withdrawing, uh, Bitcoin to one of the addresses associated with that, that hack that happened two days ago. um that's a totally different that's a totally reasonable thing to do right um but some exchanges also take that those tools that they've developed to make sure that you know funds aren't being sent to like kiddie porn operations for example um which i think everyone would agree is a good thing to stop they take those tools that they've made available or that they've developed internally

and they make them available to law enforcement so law enforcement can now use these blockchain analytics tools that were developed by an exchange uh in order to sort of in order to sort of de-anonymize people on the blockchain right now you can also go a step further and you could say uh exchanges you can't track individual users and exchanges just it's just an idiosyncrasy of the way that exchange wallets work but an exchange that chooses to sell that type of software to the government could choose to um to basically split out all their users and their deposit addresses and their withdrawal addresses to add more detail to that map on an anonymized basis and they could even choose to put the username and the you know the username the date

of birth the social security number in the de-anonymized version and sell that to the government um there's no law preventing that i don't know that that is what coinbase is doing um but i can tell you that first of all we do not sell analytics technology to any federal agencies and second we do not provide personal information on a customer um basically with the same policy as kraken like if you could if you subpoena us we will follow the law to the letter and otherwise like you're not going to get information from us um and so uh uh so an example of that would be like um there's a there's a thing called a 314b which is basically a report you follow because you saw something suspicious that you're just voluntarily um giving that

information to the government we don't file 13 314bs um we don't think that it adds value um and then places where we do report to the government because again we're required by law. We're going to follow the law. I don't want to go to jail. What we try to do is be as transparent as possible to the customer. So we don't want there to be any ambiguity about what we provided or why we provided it. So for example, the internal revenue service requires a report if you do more than $40,000 of payment transactions on a platform in a year. So what we do is we, of course file that, but we strip it down to the most anonymized form that we can. You can't see who the counterparties were, the type of trades, whatever. We give them the absolute bare minimum

to be in compliance with the law. And I don't think we're trying to withhold anything from them. We just want to respect customer rights as we submit that. Then what we do is we email the customer and say, hey, this is what we sent to the IRS. Here's the reason we sent it to the IRS. by the way here's the information that you need for your 1099b for your tax filings and here's your transaction summary and here's your 89 49 like cost basis summary so we're basically going to follow the law and then we're going to give the user all the information they need to be fully empowered about their rights um and if i could just give one more example just because it's unique it's specific to us being a financial institution that offers bank accounts exchanges

aren't required to let you know if they sell customer data for marketing purposes or if they sell customer data um uh for marketing purposes by their affiliates or if they do joint marketing they're not required by law to disclose that a bank is required by law to disclose that and so once a year you get let's say you bank with wells fargo once a year you're going to get a letter that says here's all the information we're selling and you know if you want to opt out you need to make 10 phone calls and send six emails right um in our app there's a privacy notice and basically we use your personal information to send transactions that you initiate and we don't market with affiliates we don't sell with affiliates we don't market to third parties

we don't sell to third parties and that is disclosed on an annual basis and right in the app you can see it um so our our model does not require us to make money from the government it does not make require us to make money by trying to sell you car loans and we just don't do any of that. Why? Like, when I hear that, that all sounds great. Why do you choose to go down this path and others don't? Um, how could I speak to the motivations of other people? I mean, obviously, it's lucrative. I think for us, we're a services business, and our customer is the our customer is the trader um is our customer is the level member um if we were selling this technology to the government our customer would be the government and then maybe our product is

customer information but the only customer that we have is the level member and if i was a level member i wouldn't want any of that information shared unnecessarily i i would want to know if information was shared, I would want to be notified. And I think it's really just the bottom line is the people we serve are our customers and we don't have conflicting financial interests that I think would compromise us in this area. Yeah, that's not a bad way to look at it. Talk through a little bit about how you're seeing users use the product so far, right? So you kind of have two different products in terms of a cash product and a crypto product, you take a very kind of customer centric or customer first approach.

What are users doing when they come on? Are they putting, you know, all of their money in the deposit account? Are they putting all their money in crypto? Are they splitting it? Like, what do you see there from user behavior? Yeah, great question. So there are three central components of our product. There's our banking product, our crypto product, and our customer support product so uh the main product today that is going to save people a lot of money just right out the gate is our crypto product uh and that's because uh that's because as i mentioned with with very low trading on other platforms it pays for itself um and it's also because we have we have autopilot and so all the all that sweet market making income that coinbase

has been keeping for themselves you can put your bitcoin in there and passively earn an income that way um and all of that stuff is running today um we also are seeing a lot of engagement with the support chat and uh i i wouldn't really want to emphasize like how much that we've tried to make that a good product right so many support systems are designed to to be like how can i not have to deal with these people right like first i'm going to give you a robot if you negotiate with the robot or like match zero over and over and over again then like maybe i'll let you talk to a human but it's not gonna be the human you wanted to talk to and then like we're just gonna disconnect if we get frustrated with you right um our support product isn't like that at all it's a chat you

have with an assigned banker and that banker is there to help you navigate the product and that's provided free of charge so we're seeing a lot of people go engage with those bankers and sometimes it's i initiated a withdrawal what's the typical time that it takes for that to to settle um sometimes it's like hey i really like it but you know did you know about this bug on the buy screen um but we're seeing about two out of five people are going and engaging with support and that's exactly what we want like you're not we're not going to give you a canned response that says like hey have you seen this support article we're going to talk to you because that's the expectation you that is what you expect when someone is banking for you right we're not

exchange we are banking for you um and then the banking side uh we are seeing people deposit a lot of money the main reason you would do that today is to facilitate um purchasing crypto or liquidating crypto um by the end of this year we'll have a debit card uh and you can receive paychecks deposit checks and send checks from level uh so there's there's no reason that you wouldn't use this to replace both Wells Fargo and Coinbase. And like, in addition to the benefit of it just being a good experience and being affordable, you wouldn't have to move money between them anymore. But what we're seeing people do today is save a lot of money on crypto trading and talk to our support team. So already, it's pretty compelling. Obviously, we invested in,

you know, my personal fascination is just this idea of, can you completely disrupt an industry that is highly, highly profitable by simply changing the way that you get paid, right? And so rather than the transaction fees, if you go to the subscription model, I ran the math and it's, look, Coinbase would have made more money in 2017 by having everyone pay $9 a month that was part of their user base rather than have them just make the billion plus dollars they made on transaction fees, right? So the subscription model works in that sense. Now, in terms of where you guys go from here, what are kind of other products you're thinking about, other areas that are interesting, and kind of maybe other bodies of work that you guys may or may not end up working on?

So our mission is to build the best financial institution in the world. And a financial institution is a bank, first of all. It's a place where you can collect your paycheck and deposit checks and basically be the place you keep your money. but we think that we think the ecosystem is rapidly evolving and so you know for us to offer a bank if we want to launch the best financial institution and we didn't support crypto that would be like launching a new laptop in 2002 that doesn't support wi-fi right you know or you launch the iMac without connecting to the internet so it's it's like we fundamentally have to be part this this this change that's going on from sort of government issued funny money to to money that

we can all really trust like like we want to bank your money and bitcoin is better money than cash so like we're going to bank that right as we look beyond that and of course we have the customer support features as we look beyond that uh we are planning to add more states so we support 60 percent of the population today. We expect to support everywhere but New York by early 2021. That is an incremental change. And if you sign up now, you'll receive a notification email once your state is open. The other thing we're doing is we're offering, we're adding by the end of this year, a debit card and the ability to do direct deposit and deposit checks. So at that point, what you have is a bank that's completely at parity with something like chime or wells fargo

mobile but is built for you has great customer support and and that's where we see people going basically being able to live off this product right um i mean you could you could never deposit cash once onto this platform just use it to store bitcoin and pay your bills with your debit card It's just a radically new approach to banking. And we're in early access now. During early access at the end of the year, those features will be deployed, and then we will be a full production product. Beyond that, I'd say the major initiatives that we're looking at is we would love to support the Eurozone, the United Kingdom, Canada, New Zealand, and Australia as a start. because it is our goal to be the best financial institution in the world.

And the most reasonable place to start is in financial systems that are a lot like ours and with customers that have a lot of those same similar expectations. And the other thing that we'll look at is adding stocks. I think there's a big opportunity to make stock investing better. Part of it is if you want to invest in stocks, You need to move cash from your bank account into a brokerage account. And just like we want you to be able to buy Bitcoin right out of your checking account, you ought to be able to buy stocks right out of your checking account. And then, you know, that's part of the motivation.

Another part of the motivation is we want to get rid of these hidden spreads that Robinhood charges. We want to educate the market on that and have our customers feel confident that their subscription is the only fee that they're paying. And then the final part of that would be taking autopilot, which is our technology for automated trading today, and evolving into something that can manage your whole portfolio. How much Bitcoin are you hodling? How much are you market making with the autopilot? Do you have a diversified portfolio of ETFs? you should be able to invest from your checking account and liquidate back into your checking account without leaving the app and have that investing experience,

be able to meet all of the needs as you invest your cash or Bitcoin money for the future. Explain a little bit more about what Autopilot does right now. Yeah, so at a high level, what Autopilot does is it allows you to take Bitcoin that you would otherwise be hodling and move it into the autopilot account, and it will automatically invest those assets on your

behalf. So how does it invest it? Is it like crazy voodoo machine learning? It's not. It's doing a process called market making. And market making is one of the oldest, most proven, and consistently profitable ways to make money in all of investing. And it follows the simple rule of buy low, sell high. So a market maker, let's say you've got $10,000 of Bitcoin on your account, you've got $10,000 of cash on your account, and Bitcoin's trading at $10,000. So what I'm going to do is I'm going to take my cash I'm going to offer to buy at a discount. So I'm going to offer to buy at $99,950. That means anyone that trades with you is paying you a $50 profit for each Bitcoin that they buy. Then I'm going to take all my cash. Sorry, that's with cash. Then I'm

to take my Bitcoin and I'm offered to sell that at a 0.5% premium. So $10,000, $50. And so anybody that buys that, you're making $50 profit for the Bitcoin. And so what Autopilot does is it runs that strategy based on the current price estimate from our partners over at Nomics. And it runs that strategy 24 hours a day and it reprices your orders every 15 seconds so this is like a high frequency um trading tool that is running like a a proven strategy for consistently earning income and the way it earns that income is when people go on our platform and they just buy or sell using the standard interface that's a market order and it's going to consume some of these uh amms liquidity uh and so um during alpha uh we were we're gonna have to see what happens during prod

like we are we gonna have a big birth like a big growth of supply uh and then while demand is ramping up it will be a lot more demand than supply as the as the marketplace balances out but you know during alpha we were seeing we're seeing people get about a six percent monthly return on their autopilot funds as the while the markets were active um the final thing i want to touch on is it was really important for us to, uh, to introduce a, a strategy, an automated strategy that lets you participate in the crypto market, but passively. Um, and we didn't want it to be voodoo. Um, so the specific implementation that we've made is, uh, it's based on state of the art research, um, uh, on stochastic optimal control, and it's proven to be the optimal

strategy for market-making. It's what the wall street guys are doing. It's what the Chicago guys are doing modern market makers run this algorithm and we're making it available to to everyone you can learn more about this strategy uh uh by clicking the more info button on your automated market maker and that includes a link to the research paper where we developed it yeah it's really cool i think how what you're basically saying is you're giving the market making profit to the user and also making sure there's liquidity on the platform right is that generally correct Yes, that is both those things. And then also what we're doing is we're taking another one of these hidden fee business models, and we're getting rid of it. Because if you go on Coinbase Consumer today, you're going to have a commission fee, which is 1.5%. And then that is subject to a minimum, right? Zero to $50 is $1, beyond that is $2, it goes up to $3.

So that's their commission. What they're not telling you is that they also increased the price by 0.5%. So Coinbase is market-making directly to their consumer clients. We are also eliminating that. Now, there's still a fundamental need to market-make, and we're going to let our customers earn the profit by delivering value market-making, but we are removing ourselves as a market-making participant and intermediary. such as Coinbase would. Got it. What do you think the biggest obstacle for growth for you is moving

forward? So we're really proud of our product and we're not going to stop improving it until like really every customer is happy. And I can't stress that enough. I mean, every day we go through our chats from the previous day, we prioritize things that we need to fix. We burn them down through the day. I mean, just today, the whole team is working on changing some aspects of the referral program. And the reason I emphasize that is, as I said, it's an enormous amount of trust to put your money on our platform. And the number one most important thing that we need to do is make it easy to use at a fair price. And so nothing is a higher priority than that. We want to earn trust in the business model and the quality of the product.

Now, beyond that, it's sort of evident that we need to get a certain amount of customers before this business model really works, right? Even though the per transaction cost for us is low, we have subscriptions to various pieces of software. We have employees to pay, right? And so we need to grow to a sufficiently sized user base to be sustainable and offer this free trading forever, which really needs to be a community effort. We're asking that – and I guess one way to say it is we always want to deliver more value than we're asking in return. But we are going to ask people on the platform to talk to other people about what they've seen. There's tools to share it on Twitter. There's ways to text message your friends.

We're not forcing you to do it. We want you to look around the product. We are giving, we're giving rewards in consideration of your time. So you get $10 just for signing up. The friends you invite, they get $10 for signing up. Once you have three friends that have downloaded the app, they don't even have to be a paying customer yet. Just that they've downloaded it, we're going to give you 10 bucks.

Um, and then beyond that, you know, we'll, we'll, we'll pay you 30% of the, of the, uh, the membership fee that we collect from people that you refer forever. So that's $24 a year. Um, as long as your friends are our users now, like, why are we doing that? Because to get the word out, you have to do marketing and to do marketing costs money. and the we think the ideal way to do that would be to impress our customers enough with where they don't mind sharing it and because that's value to us we're going to pay you and we'd rather pay you than google or facebook it's it's really that straightforward yeah i love that um and talk a little bit more about the uh promotion that you're running right now when somebody signs up for an account then if they get their friends to sign up um kind of how that works and kind of what the incentives are for people to join like you're talking about there so uh when you sign up through a invite code so pomp's invite code for example is lvl.co slash pomp if you follow that uh you

can download the app off the app store you sign up for the account and pomp is automatically going to get credit for having referred to you um now when you sign up uh the first thing we do is we just give you $10. Like we're not going to charge you for the first month. We just give you $10 of Bitcoin. We want it to be completely free to you to be able to poke around the platform, see if you like it. And if what you want to do with that $10 is just withdraw it off the exchange, like bummer, but you're allowed to do that too. It's your $10. We're giving it to you just to sign up. Next, if you like the product and you decide to share it with three friends by text message or by posting a link on Twitter. Once we see that three friends have downloaded the app, we credit you

with another $10. So that's $20. And so far, what you've had to do is download the app, play with it, text it to three friends and see if they want to download it, right? So you can earn $20 just by getting involved on the very first day. So then downstream of that, once, let's say that you have five friends that sign up and they all become users they really enjoy using it um we're going to be making recurring revenue off them um and so we're going to give you a recurring reward too um you'll get two dollars for each of your friends that are active in perpetuity forever uh so four referred friends are getting paid a hundred bucks a year uh and uh and and and the idea is like we want to ask you for the minimum amount to do to show that we have value right so like thank you

much for so much for signing up like we really appreciate it we knew that took time out of your day here's ten dollars because we want you to play with that money not your own money we think we can get your trust right then you know when sharing with your three friends to download like you don't need to convince them to use it we're not going to force you to do it but if you do it thank you so much for your time here's ten bucks and if they convert we're going to give you some of the RepShare. We want it to be completely voluntary, but we want to show the deep gratitude we have for people that help make this company a success by bringing it to scale. Got it. And I guess as you think about the industry kind of much larger, just outside of

you guys, where are we going, right? So it's very obvious that infrastructure has been a great business to be in in crypto and in the legacy fiat world where is this all going and kind of how do you see this developing over let's maybe the next five years or so yeah so that's a great question and i think it's possible to answer that from two different contexts like one of them is like where what's where's crypto headed right and like how does that affect the crypto platform and then the other is is uh is where financial services are um and so um i'll start with crypto if that's okay um you know i think like like let's talk about bitcoin um you know bitcoin is uh it's decentralized it's a payment method you don't have to worry about people printing more of

it um and so it is just intrinsically a uh uh it is intrinsically a hedge against the u.s dollar um and basically charges the u.s government every time they print more money that's what holding bitcoin does in addition because it's a payment mechanism if we were to take bitcoin transactions build easier to use products where it's easier to pay for things with bitcoin as we're going to try to do with level um if we're able to drive the transaction volume of people paying with bitcoin um we would see the price of bitcoin go up by a factor of 100 um it's also true that we can get transaction volumes up high enough where it's more cost competitive relative to debit cards, which costs one to 1.5% fee to process. As you know, Bitcoin has a simple flat

rate fee. And so Bitcoin makes a lot of sense to own as an investment, to help be a part of promoting its adoption as a payment mechanism. And so I think today, offering crypto as part of a financial product is absolutely essential. I would not feel responsible building a bank where users can't bank crypto, if that makes sense. So that's where I think crypto is headed. The financial services, what we're seeing right now is a lot of companies

that have started in different areas, trying to sort of complete, to be the complete financial institution of the customer. And everyone is starting from a different vantage point, and they're taking a different approach. So I'm just going to name a couple at random. Robinhood started as a stockbroker account. Now they want you to keep your cash there, but they don't have checking accounts. They don't have demand deposit accounts, FDIC-insured accounts.

So they call their program for holding cash, they call it cash management because that cash is being held in an SIPC account. You see the same thing with Betterment. So that's one approach, right? Then you've got, you've got Venmo. So now Venmo wants to keep some of your money. And what the way that they're doing that is basically by loading a card. So like under the hood, they have a cash account. And it's basically it's just credit on a payment network, and they'll send it back to you. um uh so you know that's not a real checking account and there's also the issue that you know if you fund that with a debit card it's a four percent fee right and so um so uh there's a clear advantage when you have a financial institution that can do all of these things uh like if you have one app where you can buy stocks and you know there's no hidden fees where you can buy crypto and you know there's no hidden fees uh where you can bank where you can spend on a debit card

if for some reason you run out of cash it just covers the overdraft with your bitcoin there are so many benefits to that not to mention just cutting down on the fees that you would have paid moving money from coinbase to wall spargo right um there's just an incredible number of benefits and so what we're seeing is a lot of companies um that are trying to collect the infinity stones they need to get the banking infinity stone they need to get the brokerage infinity stone they need to get the crypto infinity stone and if they can get all the write infinity stones they can be this trusted digital financial institution um that obviously is our goal what we're trying to do is take the most principled approach that we can on every

aspect every pillar that we add to the product so our checking account it is not cash in a pre-loaded debit card it is not an sipc account brokerage account it is an it is not a custodial account where we're looping it together with other funds and just hoping it goes well it is a bank account and it's a bank account that uh comes with all the same guarantees you would have at wells fargo including from the fdic right when we did crypto we don't want to do a stripped down version of crypto like like um like robin hood would do where you can buy crypto but you can't actually send it and when you buy it you're always going to be paying a markup to to um to coinbase or sorry to to robin hood we want to do it where it's just a spot market we don't participate in

it like you can make liquidity and make money you can buy crypto and make money it's just totally up to you and then you know as we move forward to other things that we add we're going to be just as principled um now who gets there first uh who is who you know who's the favorite platform i don't know but i can tell you that um i can tell you that our business model is transparent And we have been laser focused on doing each aspect of this financial institution in the way that our customers think, we believe that our customers would expect from us. Makes sense to me. What is the place that we want to send everyone to go and find out more about Level? yeah so um if you're i would i would recommend i'll give you a couple resources first of all it uh there's no harm in trying out the app go to lvl.co slash tone or sorry lvl.co slash pomp

sorry about that come on get me you gotta get me my credit i know i was on i was on i was i was did a video with uh tone yesterday so i'm just like like wishy-brain i'm so don't listen to that guy come on come on into lvl.co slash pump yeah lvl.co slash pump if you didn't get that lvl.co slash pump so look if you go to lvl.co slash pump you're going to be brought to the app store you're going to download it there's no commitment whatsoever you can log into the app you get your credited bitcoin you can look around you can explore every single feature it's up to you whether you want to complete the verification it's up to you whether you want to share it with other people. The entire app is open-faced. At the second you log in, you can see everything that

the app does, explore the entire thing. So I would strongly encourage you to go to lvl.co slash pump and just try it out. In addition to that, you can go to lvl.co and we have information on the platform, including the states that it's available in, 26 states and 60% of the U.S. population. we also have a twitter uh banquet level and uh we use that twitter to to basically engage with people uh and right now as the platform is really in its infancy you have a really strong voice so if you tweeted us and you're like i hate this feature like please fix it there's a really good chance it's going to get fixed that day if not that week um and so i would also just highly encourage you engage with us there because i mean basically people snapping at us on twitter is like

is like our that's our new boss as we're getting this rolled out i love that uh before i finish up i always ask the same two questions first is uh what is the most important book that you've ever read most important book that i've ever read so i got this last time and so i'm going to try to think of something different i'm gonna say i'm gonna say the great gatsby um so last time i did a non-fiction book about like vulnerability now i'm gonna say the great gatsby because it is just such a well-written book um and we could say this is second most important because i do think it's very important to like understand vulnerability and be a healthy adult um but you know if you want to read a book that's just a work of freaking art that you know you're

just really going to appreciate that there's smart people out there writing books uh totally recommend the great gatsby if you haven't read it that is a great one uh any new thoughts on aliens there's been ufo videos that have come out there's all kinds of new developments so like there have been a lot of new developments and i think the answer that i gave you last time was like of course there's aliens i think like there's so many stars there's so many planets you know but now i'm not so sure because i was reading about i was reading about i think it's called the fermi paradox which is like which is like if there's so many aliens why aren't we seeing any of them and like i just like i just like read through that wikipedia page like like

all day um i mean not all day but like i read through that and it makes a pretty compelling arguments like we should be able to see radio signatures we've like really swept the sky um also the idea that like advanced civilizations would build superstructures um and those superstructures would have certain like marks it would be easy to identify um and then that got me down the path of like well if we can't see that you know is is there some great filter thing where like civilization gets far far enough along they build some doomsday device and then wipe themselves was out um and that was depressing so i stopped thinking about it uh that's my that's my download you you went and did research though i'll take credit for you going and doing research

what uh you made me think what uh what question you got for me to finish this thing up um so the last time i asked you um i think that i think that i i think the last time i asked you how you balance um having a podcast with being an investor um and so i'm gonna ask you the easy one this time which is just like i need a download on your view on aliens yeah there's definitely aliens the the two key qualifiers of that are uh aliens being other life or other intelligent life you could categorize it either way if you just go other life for sure because you just need organisms uh they're probably on mars right there's water on mars um and then the second thing is just from a time perspective are we here on the same time scale so let's say that uh you

know there could have been other life a billion years ago but humans weren't around or yeah life could be a billion years from today and humans won't be around i don't know um but i definitely think that there's life it's just a matter of um you know kind of are we here at the same time and is it intelligent or not yeah i buy that like we're we're on a very small court of time on a cosmic scale you know we're like like 0.001 percent like we're gonna live 80 years out of 13.8 billion um so yeah i mean that i totally buy that um i just i it's just depressing if you think about the the great filter but it's totally plausible that we just we just missed these guys it's depressing man when you start thinking of that it's like hey let's go do some crazy

wild stuff while we're here because we ain't here for very long right exactly all right man i love it uh everyone go to lvl.co slash pomp we're super excited like i said we invest in the business uh i really think that this idea of a nine dollar a month flat fee uh could be quite disruptive in the market and frankly it's just better for users so you guys go check it out and uh chris will do again sometime soon yeah sounds great thanks so much for having me