The Pomp Podcast - #475 Robert Materazzi on Standardizing Crypto

Starting point is 00:00:00 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. Robert Matarazzi is the CEO of LUCA, which bridges the gap between the complexities of blockchain data and traditional business needs. Formerly, he was the director at PwC, specializing in large-risk regulatory and cybersecurity-driven technology implementations for traditional financial institutions, and foreign banking organizations. In this conversation, we discuss the importance of creating industry standards, how crypto is transitioning from innovation labs to business units, and why LUCA is winning so many customers. I really enjoyed this conversation

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Starting point is 00:05:47 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. I've got Robert here with me. Thank you so much for doing this, sir. Yeah. Thank you for having me. Happy New Year. Yeah. Happy New Year to you as well. Let's just jump right into your background. You spent some time in the military, then worked

Starting point is 00:06:33 at PwC, but where'd you grow up? How did you get to the military? And then why go to PwC afterwards? Sure. Great, great question. I grew up moving around a lot. My dad was in the hotel industry, so lived in Europe. So not a military brat, but pretty comparable. I joined the military very uh not randomly but um spontaneously uh following 9-11 so i was in college during 9-11 so that that caused me to go into the marine corps um they needed pilots so so i was a helicopter pilot there for nine years and then uh and then left joined pwc um they were kicking off a big military hiring initiative and uh and that was really uh what exposed me to to a lot of the more traditional financial services side of things. So I worked in their banking capital markets group

Starting point is 00:07:22 and a lot of the post-financial crisis regulations, a big focus on large scale technology implementations and risk management or other regulatory compliance initiatives. And then was introduced to Luca through a mutual friend and hadn't worked heavily in crypto. I was familiar. I'd read the Bitcoin white paper, you know, bought a tiny amount, wish I'd bought more. And, uh, and then, uh, um, started off at, at Luca a little over two years ago now, um, formerly called, called Libra. We changed the name, um, a few months into, to me joining and they were creating institutional grade software and building data products that made, that helps to make the software

Starting point is 00:08:10 function. And, and that was very, very appealing to me in a rapidly growing industry. It was something that I knew the industry or I thought would get to eventually. which is one of the things I think we're going to talk about today is as mainstream is adopting all of this. So at Luca, we build institutional grade software and data products to support middle and back office operations. Got it. And so I know you're not the founder of the business, but you lead it today. Help us understand kind of the impetus for the company's creation and what the original idea was and then how it uh if at all it's evolved to where you are today

Starting point is 00:08:50 sure so so jake benson was my my predecessor and and founder um he's still um involved uh with luca um and uh he created the first bitcoin tax calculator back in 2014. um we kind of joked around that he was the only person trying to pay his capital gains on his bitcoin investments back then um and uh and really you know he discovered very very quickly through a lot of conversations that the right use case there wasn't just a bitcoin tax calculator but it was a cryptocurrency tax calculator because there was a lot of innovation going on um and uh and new assets being created on blockchains and then uh around 2017 company pivoted towards institutions it was a lot of the funds had now been created by that time and fund admins some of the smaller

Starting point is 00:09:39 our fund admins were starting to take on crypto fund clients. And so we built the first version of our software. We're now on the third generation, built the first version of the institutional grade software with standards like AICPA SOC controls in mind as we were building it so that we could support the businesses that were forming around the crypto ecosystem. Got it. And as you started to kind of get into these institutions, what are some of the major themes that you're seeing? Right. So the idea of building software at an institutional grade for kind of middle and back office to many people would seem unsexy. And frankly, they don't understand it. So kind of when you go into a corporation or an organization like what is the conversation like? What are the themes you're seeing and kind of maybe how does that sentiment shift even over the last year or so as you've been CEO?

Starting point is 00:10:37 So it's all about the data to start. So if we're working for a customer and we're trying to figure out whether it's, you know, creating whatever type of report they need. So if it's a fund, they're trying to strike NAV or their fund admin is trying to strike net asset value reports. We'll come in first and collect that customer's data from the ecosystem. People that know the ecosystem know that it comes from a lot more places than than traditional funds. And so and that's that's one of the great things about crypto and the innovation that's going on. And they're trading and exchanging these assets in new ways. But that creates a lot of downstream challenges for the middle and back office operations.

Starting point is 00:11:19 First, just collecting all the data. Second, trying to make sure Bitcoin is Bitcoin. You look at Kraken calls Bitcoin XBT and Coinbase BTC, two of the largest exchanges in the U.S. for the most commonly traded assets. So when you get to, you know, the other 7000 plus assets that that funds are trading on today, it gets much more complex. And then we fill in things like cost basis proceeds. So anything that requires fair market value with the pricing data source that our customers want, we let them choose from a number of them, including our fair market value or proprietary fair market value pricing product called Luca Prime. And then ultimately, we apply a bunch of reconciliation steps and techniques to make sure their data is accurate and complete so we can create a crypto sub ledger effectively. And then

Starting point is 00:12:08 from there, we can do the things that usually the customers are calling us up to do, which is any of the reporting processes, helping them pass an audit, tax reporting, financial statements, ledger entries, all the traditional financial requirements that usually people take for granted when they start putting crypto assets into their businesses. Got it. One of the things that's been really interesting to me is you just highlighted this kind of very elementary problem of just, hey, if two different exchanges call the same asset, two different names, then that can cause confusion. But also, there's some much more nuanced challenges. So one, for example, is an expanding balance sheet potential, right? So if I hold Bitcoin on my balance sheet, and all of a

Starting point is 00:12:53 sudden, it's expanding in kind of US dollar value, and I report in US dollar terms, where does that go in my financial statements or my financial reporting? Another is actually denominating revenue when it comes to crypto. So rather than denominating the revenue in dollars and saying, hey, I made $10,000. I may say I made a third of a Bitcoin. And so how does that kind of affect a lot of these accounting standards? How much of that today across all of those different issues are still complex obstacles that people need to navigate versus, no, we're getting to the point where there's some pretty good standards here and you feel pretty comfortable that corporations moving forward, whether in the public or private markets, are going to have a nice foundation to

Starting point is 00:13:38 stand on and everyone kind of agrees on what that treatment and rules are. So absolutely, like you pointed out, we have to apply some new techniques to some of those situations to do some of the very common things like establish ordinary short-term income versus capital gains or whatnot. I think that, you know, I'd say roughly 90% of that was figured out before DeFi. You know, once we get into that, and that's one of the exciting things is it's the next thing for everybody to figure out, and it's causing a lot of innovation. But when it comes to the very basic things, which are what the majority of the portfolios make up today, so these are your mining applications, your staking applications, so all that short-term income, all the airdrops

Starting point is 00:14:20 that people experience on a recurring basis, all the net capital gains that they get, or receiving an income and applying something at fair market value, I think all of that is fairly straightforward. board, we might be missing very formal guidance, but it doesn't mean that the standards aren't there. We do have, you know, draft guidance. I know the AICPA has a ton of, you know, leadership groups and has put out a ton of perspectives. Even a lot of our regulators or government agencies in the US, like the IRS with its FAQs, have matured a lot since, for example, two years ago that define a lot of these things. So I'd say there's a lot of work to go, but the basics, and I think the basic foundation is there. However, with that said, it's still something that we explain even

Starting point is 00:15:09 as part of our very basic sales pitch almost every single time. So I think there's a lot more education to go, but the good news is, is yeah, a lot of those basic functions, most of the standard setters agree on how we should address them. So one of the things that's interesting to me is that we're going to digitize the assets. Then there's this element of decentralization, and then ultimately we'll get automation out of it, right? Where people can interact with protocols, machines can transact with other machines and there ends up being

Starting point is 00:15:39 just a more efficient automated system. Is there a world where we eventually get to the software, whether you guys are building or other people's software that can essentially do a lot of the accounting functions and kind of what I'll consider operations or middle or back office in that same automated way so that you're not settling the books at the end of the month,

Starting point is 00:15:59 you're actually doing it in a minute by minute or hour by hour basis. And there's kind of a more real time aspect to a lot of the flow of funds and the financial metrics. Absolutely. We do same day NAV. We announced that in the press over a year ago with hashtags. So they currently have one of their funds that strikes NAV every single day. And that's because we worked with them maybe a little over a month to sort out some of the processes to make sure that their data flowed in and that we could accommodate that. It gets much more complex, the larger the portfolio and really where your trading activity gets into, you know, mixed derivatives into it, mixed DeFi and Uniswaps and all these new things that are coming out,

Starting point is 00:16:41 makes it more complex. So we still have to figure those out. But there's absolutely a path forward to automate the majority of those processes or at a minimum highlight where there isn't automation and potentially replace them for the interim until we build more advanced features on a case-by-case. But there's a lot of that. I will say a ton of this data is, I'd say, probably over 95% of the data that we intake for our customers. And we have over 160 funds that are managed in our software today, pure crypto funds. Most of that data is not off-chain. So it is from privately held centralized databases, so like that you would get over a Coinbase API or a Kraken API or whatnot.

Starting point is 00:17:27 So a big portion of it is not on-chain data, for sure. Yeah. Walk through some of the challenges with DeFi. You mentioned that there are challenges, but maybe just elaborate on one or two of those that you guys are actively dealing with. It's really the same thing that I just mentioned. is traditionally when someone chooses a liquidity provider and that liquidity provider has their data that a customer can get over an API, in DeFi, that doesn't always exist.

Starting point is 00:17:52 There isn't always a business that they're interacting with or if there is, they're not necessarily recording the data set centralized, they're facilitating the exchange of it. And this depends on the product and what specific process. So I'd say with DeFi, we are dealing with a lot more on-chain data. And whenever you're dealing with on-chain data,

Starting point is 00:18:11 you're missing elements that people take for granted. You know, there's not going to be a U.S. dollar value associated with it usually. And so some of those very simple things we have to fill in using some other techniques, all definitely solvable. But some of the data isn't as readily available and it's often much more incomplete than we need in order to satisfy some of those reporting requirements. Got it. And then maybe we could talk a little bit just about this idea that you've previously said a lot of what we're talking about today was in the innovation labs inside these organizations, especially the large corporations. But now it's actually moving and starting to hit the business unit. So we're moving from more of an R&D type thing, more to an

Starting point is 00:18:52 application on a day-to-day basis. What are you seeing there and how do you think about that transition? Sure. I think that's the natural evolution of the traditional financial institutions adopting adopting something that's that's this material right for their for their businesses i mean a lot of the things that's going on in the crypto industry that the crypto native ecosystem has been doing for you know you could argue a decade probably materially maybe the last five years and and as these traditional financial services companies are coming in they're reading a lot of the technical white papers they've got innovation labs that are exploring a lot of things i think the biggest thing and this is advice that i gave to any of the larger financial institutions

Starting point is 00:19:33 that I speak to is to don't look as much at the underlying technology, look at the ecosystem, because that's really where we're seeing a lot of innovation as well. And that's what I think affects the overall markets and how people exchange these assets today that's different from what they're used to seeing in the securities or FX markets or whatever market you want to compare it to. Yeah. It's fascinating to me how kind of quickly this is all evolving and how quickly we're going from, oh, there's this cute thing in the crypto blockchain space to now, wait, we actually may be able to implement this in our everyday business. And it actually in some weird way feels like that's accelerating. Is that fair from your perspective? Absolutely. We've been

Starting point is 00:20:23 waiting for what is happening right now before our eyes for several years. We've been preparing for it. We didn't know when it was going to happen specifically. We were all hoping it was going to happen soon. But it is kind of a domino effect. I mean, even by Luca's partnerships that we've announced with State Street leading our Series C this past winter and partnerships with companies like S&P, IHS Market. We have partnership with CPA.com. I mean, those are all your traditional logos that play a big, very big roles in the traditional financial services ecosystem. And now some of the traditional funds, for example, get to use the name brands that they're used to seeing already to provide them services as they're adding crypto to their portfolios. And as I don't have to tell you in the press, it seems like multiple times a day we see someone is buying hundreds of millions of Bitcoin or some other crypto asset.

Starting point is 00:21:16 We know it's Bitcoin today. I'm sure that'll work its way down to the other cryptocurrencies over the course of this next year. But yeah, very, very exciting. And then it's whether it's all the regulation, like what the OCC has been putting out lately, I mean, allowing the custody of assets, you know, comparing what we're doing in crypto to things like Fedwire and whatnot is really, really exciting. You mentioned a couple of big milestones that you've experienced lately. Let's maybe talk about the fundraise first. You raised capital, my understanding is, from State Street, CPA.com, and a couple of others that maybe aren't considered your traditional venture capitalists, but are very critical to what you're building and kind of the industry you're going after. Talk through just the partners in that fundraise, what the capital is going to be used for, and why select those to partner with. Sure. So, you know, all of we named in the press State Street, CPA.com, who we'd already been partnered with for over a year. And we go to market with them for our LucasX for Professionals product and then S&P. And all of those we were talking to in commercial relationship capacities before investments. And we were raising our Series C last year. So our, you know, those big partnerships are natural companies to speak to. And so we wanted to focus on that, particularly in our press release, because we thought it

Starting point is 00:22:41 would help the industry and help with some of the adoption. And then from there, we do have other investors that were involved in the rounds that we didn't name that aren't part of commercial relationships. But the use of the capital, honestly, is just to further improve our products. We've already built our products. We're on the third generation. We're actually just launching some of them more publicly over the course of the next couple of weeks in advance of tax season. But they're not all tax-focused products. I mean,

Starting point is 00:23:10 we do have the next generation of our institutional software that we're putting out. We plan on improving it to add all the features that our customers are asking for related to DeFi very, very quickly so that they can start using them right away and benefit from their back offices being organized as they're adopting some of these new financial products. And then continuing to um scale our scale our footprints um so it's pretty honestly the use of the capital is is pretty basic it's just the to to expand our business continue to execute and uh and support our customers with features you don't happen to want to name the people you didn't name previously right now do you um not right now but we will probably uh it's soon in the press so just so

Starting point is 00:24:01 that i don't uh prematurely you know share share some of that so we will be doing it um but we're just going to be doing it here and here in the new future that we've already uh that we're already working on a strategy around no problem i didn't expect you to but i gotta ask uh another part uh that you've done and announced publicly is this partnership with the s&p um and there's some indexes and some other work maybe talk a little bit just about uh kind of that relationship specifically and some of the stuff that you publicly announced so we are providing our luca reference data and luca prime among among other data products to s p to support them as they create their indices um for crypto uh they haven't announced specifically what what

Starting point is 00:24:45 the indices will be yet but that there will be several of them um they're gonna be coming out very soon here um which we're very very excited about and uh and we're hoping that this is just the beginning of our relationship with them. They're a great logo that we know is very, very trusted. And that's a big part of our relationship is making sure that the data quality of our products can serve the companies like S&P and all of our other customers and meet those traditional institutional standards so that they can continue doing what they're doing, but hopefully with crypto assets involved in a much more material way. Got it. And would it be fair to say that majority, if not all of the business for you,

Starting point is 00:25:26 is really B2B, whether you're going B2B and providing software to those middle and back offices, or you're providing these data feeds and kind of reference data to somebody like an S&P, and then they may go B2C. So that's more of like a B2B2C type model. Or do you actually have direct touch points with retail and any of the products? Really all of the above now. So a couple of examples. And our foundation, to be clear, is absolutely B2B, right? We cater to our institutions, a lot of the biggest logos in the crypto industry, and are now starting to see the traditional side of things enter. But additionally, so for example, with our CP.com partnership, that's more of a B2B2C. So we built a product for them to sell to or license to CPA firms who

Starting point is 00:26:11 are supporting their clients. So that's an example of our B2B2C. We have in a pre-launch mode, And we'll be announcing it very soon here in the next week, a free portfolio management tool that is a consumer product that's absolutely free, which we believe will help support the industry. And there's some very inexpensive tax add-ons. So if they need to do tax reporting on top of that, it'll be extremely cost effective for the retail. So in that example, we are going direct B2C. And we'll continue to build those out. But really, it's all with the same standards that B2B requires, which is a big part of our strategy. It's part of our culture, what we've built to our AICPA SOC controls and all the standards that the institutions rely on.

Starting point is 00:26:56 We want consumers in the retail markets to benefit from as well. Yeah, it makes a lot of sense, too. So I guess once you get the B2B relationships and you're really able to establish yourself, both from a product standpoint and accuracy, a resiliency and also kind of this validation to then move kind of downstream into the retail market as well. Is that generally how you're thinking about it? Perfectly said. That's exactly what we intend to do.

Starting point is 00:27:25 There's a ton of innovation that goes on in the crypto industry. And so you get a ton of startups, a ton of companies that are doing great things. However, when we start doing things to institutional standards, it becomes much more challenging. It's much more costly. I mean, even just our annual audit costs to maintain our AICPA SOC standards are higher than a traditional startup would be, without a doubt. But that's what's required in order to build that quality of a product. And so the standards that we support there are a big part of our value prop, a big part of our marketing campaigns and everything that we do. And it's honestly one of the challenging things, too, because people think because they're selling you something that the calculations are correct.

Starting point is 00:28:09 But I can tell you that they're not. And we want to make sure that we put products out there that people can trust and that are accurate and that they can support and that they're very comfortable using when they're filing their taxes or doing any of those other things that could potentially put them at risk if they get it wrong. Absolutely. I got to ask for somebody who was a helicopter pilot in the Marines to running this business, what are some of the similarities and also some of the biggest differences between those two jobs? Sure. That's a great question. You know, at the end of the day, both of them just come down to problem solving. And same thing I was

Starting point is 00:28:52 doing at PwC. And that, you know, consultants, the ones that you can that you can trust and that you rely on, you know, in the normal course of your business, are helping you there to solve the most challenging problems, or to improve processes. And that's exactly what we're doing at Luca is we're taking what is a very complex problem at the end of the day. And we're trying to make it as simple as possible, um, for our customers and, uh, and making sure that we focus on, on their needs first, you know, same thing as a helicopter pilot, you know, our, our customer was different in that case. It was the, you know, the ground troops or the infantry or, um, anyone on the grounds that we're supporting. Um, it's, uh, it's the same, same premise here is we're

Starting point is 00:29:33 solving problems so that they can rely on us. So we're in a, I consider our company to be in a support position to other companies, businesses. For sure. Before we move into the kind of lightning round to finish up, I just want to zoom out a little bit. You guys obviously have built a great business. There's a lot of commercial partners and customers that trust you on a day-to-day basis really to run their business and kind of fulfill that support position you just described. Where are we going, right? When we start thinking about digital assets, decentralized protocols, kind of this automated financial system. From your perspective, how does the business evolve and kind of what role can you guys eventually kind of move into and serve for the industry as it,

Starting point is 00:30:18 you know, not only brings in kind of more adoption, both in the institutional and retail space, but also different types of assets, different types of mechanisms, and kind of really moves to digitize most of the legacy financial system. So, I mean, as this, our industry is moving fast right now. And particularly in the last six months, I like to say that it's picked up a lot here, which is exciting to see. And I usually resist a little bit when people say, hey, this is a new asset class or things like that. You know, this is a new technology that can change the way that all assets are managed globally, potentially in the future. And when or if that happens, I don't know. I think that asset management and asset exchange can benefit

Starting point is 00:31:00 from this technology. And when I say technology, I don't mean just blockchain, but it's the way that the ecosystem is exchanging these assets. I mean, if we can create new ways to access assets across borders and increase the liquidity of those assets and allow people to exchange them for one another in a marketplace, that's very, very exciting. I mean, you can apply it to real estate debt. I mean, you know, anything that has a store of value associated with it and ultimately create marketplace that exchanges these assets in a new way compared to what we've seen before now that makes some of these back office operations more challenging so that's where luca comes into the picture and we plan on you know stay bleeding edge um for the middle and back office operations space

Starting point is 00:31:46 so that the innovators can keep innovating and uh and in creating a new way that ideally assets are exchanged globally and in the future um so that's that's really the future that we see we know we're We're seeing it in a very, very material way today already, but it's got a long way to go, clearly, right, in the larger ecosystem. For sure. Three questions I'd ask everyone, and then you'll get to ask me one question to finish up. The first is, what is the most important book that you've ever read? Great question. Um, so my first reaction here is, uh, Gates of Fire, which is, uh, about the, the battle

Starting point is 00:32:28 of Thermopylae in the, in the 300, which I know everyone's seen the movie, but that doesn't do justice to this book. Um, and it's just an, you know, an example of, uh, setting the right examples of leadership of standard setting, um, that really fits into the overall culture of an organization. That's a great answer. Second question is a question that's sponsored by Eight Sleep. They basically have a thermoregulation mattress that makes it super cold. I previously was not into sleep.

Starting point is 00:33:00 I used to fly around the country a bunch and basically beat up my body. And these guys convinced me, hey, you probably should sleep eight hours. And this helps you basically sleep in a much deeper, kind of more plentiful way. What's your sleep kind of regimen or has anything changed over the years, especially going from the military, uh, to PWC and now here, uh, anything that you've kind of changed over time? Yes. I sleep less. I think, um, is this really, I thought that I would get used to sleeping less from the Marine Corps. Uh, and I think it just made me miss sleep more instead. Um, but I've gotten used to acclimating to it, but I think that the bigger takeaway,

Starting point is 00:33:43 kind of like you hit it on the debt on the head for your sponsor. Um, that should be a short term, right? Learn how to manage it, but you, you can never replace actual sleep. So I'll have to, uh, I'll have to check out this mattress because, um, I absolutely could benefit from it. How many hours do you think you sleep a night? Uh, probably I'm averaging five now. I'm usually happy if i can get six to seven so never okay never continuously but yeah and uh the one uh variable is always uh i see a trampoline in the background so i'm assuming you have young children who uh who probably are uh not making this easy for you no that that's definitely a challenge i think they they help and uh um they help keep the focus though for for sure so but they don't

Starting point is 00:34:34 necessarily help sleep i love it uh last question a little bit more fun aliens are you a believer or a non-believer i i don't see how there there could be a universe that big without them i think so i break it down to statistics when i do that which is usually the way that i that i approach answers like that so if i had to if i had to go one way or another i would say yes i believe that they are out there somewhere. So maybe the, uh, the NASA astronauts that are going to venture to Mars will, will prove us right in some capacity soon. Yeah. I, I, uh, I agree that they're somewhere. I don't know if I believe that they've come to earth and haven't revealed themselves or anything crazy like that, but definitely arms and legs or eyes, but I think there's something out

Starting point is 00:35:19 there. I love it. You could ask me one question to wrap up. What do you got for me? Sure. I'd say, um you know where uh what do you think is going to be the the biggest milestone in crypto in 2021 specifically 2021 um i think we see a fortune 50 company put uh bitcoin on their balance sheet or at least fortune 100 um you know i i don't know which one necessarily uh we're recording this kind of mid-january 2021 uh if you said to me right now what's the next big public company to do it, it's probably Tesla. But if you said to me, you know, pick one that is kind of nobody would expect, I'm not sure I could do that. But definitely somebody does it, or at least that would kind of be the big milestone. And then once you get kind of all the corporations starting to

Starting point is 00:36:10 do it in some form or fashion, I think that the next one is just like, what's the first central bank to not only do it, but to do it and kind of publicize it, right? You know, some people would argue, hey, look, somebody probably has already done it. But to really come out and say, hey, look, we're doing this. Here's our thesis behind doing it. And we're committed to this, I think would be, you know, kind of you went from retail investors to kind of now you got these institutional financial service companies. You'll then get, you know, more traditional corporations, publicly traded companies, and then eventually you'll get the central banks. So those are kind of the next two milestones. But I don't foresee a central bank making that move in 2021. Sure. I buy that.

Starting point is 00:36:50 All right, man. Well, Robert, listen, thank you so much for, for doing this. Where can we send people to find you on the internet or find out more about Luca? Sure. So Luca.tech is where you can find our website and you can find all of our social, social outlets there as well for our various products, depending on what type of customer you are. And that's L-U-K-K-A.tech. Awesome. And anywhere to send them to find you? I am actually not on social media, just, just with the company. Yeah.

Starting point is 00:37:18 I love it. That, that is a, that's an easy way to make sure everyone goes to the company website. Absolutely. That's better than going to my personal one anyway. All right, man. Listen, thank you so much for taking the time to do this, Robert. We'll have to do it again in the future. Yeah. Happy to come back anytime. Thanks for having me.

The Pomp Podcast - #475 Robert Materazzi on Standardizing Crypto

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