The Pomp Podcast - #742 Bringing Decentralized Technology To Public Markets w/ Russell Starr

Episode Date: December 6, 2021

Russell Starr is the Executive Chairman and CEO at DeFi Technologies Inc, a digital asset investment firm bridging the gap between traditional capital markets and decentralized finance. The company trades under the ticker symbol DEFTF. In the conversation, we discuss bitcoin, decentralized finance, public markets, regulation, equity and debt markets, managing the balance sheet, and where innovation is happening.    ======================= Choice is a new self-directed IRA product that I'm really excited about. If you are listening to this, you are likely part of the 7.1 million bitcoin owners who have retirement accounts with dollars in them, but not bitcoin. I was in that situation too. Now you can actually buy real Bitcoin in your retirement account. I'm talking about owning your private keys and using tax-advantaged dollars to do it too. Absolute game changer. https://www.retirewithchoice.com/pomp ======================= Circle is a global financial technology firm that enables businesses of all sizes to harness the power of stablecoins and public blockchains for payments, commerce and financial applications worldwide. Circle is also a principal developer of USD Coin (USDC), the fastest growing, fully reserved and regulated dollar stablecoin in the world. The free Circle Account and suite of platform API services bridge the gap between traditional payments and crypto for trading, DeFi, and NFT marketplaces. Create seamless, user-friendly, mainstream customer experiences with crypto-native infrastructure under the hood with Circle. Learn more at circle.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. Now let's kick this thing off. Russell Starr is the Executive Chairman and CEO at DeFi Technologies Incorporated, a digital asset investment firm bridging the gap between traditional capital markets and decentralized finance. The company trades under the ticker symbol DEFTF. In this conversation, we discuss Bitcoin, decentralized finance, public markets, regulation, equity and debt markets, managing the balance sheet, and where innovation is happening today. I really enjoyed this conversation with Russell, and I hope you do as well. Before we get into this episode, though,

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views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion this podcast is for informational purposes only russell what's going on man how are you good to good to chat anthony thanks for having me on absolutely i appreciate you taking the time to do this uh i've got a ton of different questions uh first of all i should say as a uh with disclaimer or whatever is that this is the only other stock that i own outside of uh gbtc and it's because i've been working with you guys on a whole bunch of

different things that you guys are working on kind of like in an advisory role. So let's get that out of the way. But what I want to understand is when you look at one being a public company and playing in these markets, you're obviously on the Canadian stock exchange. Talk to me about what advantages you get from being a public company versus being a private company. And then we'll get into some of the stuff that you're actually doing. Yeah. Well, look, Anthony, As everybody knows, regulatory changes and frameworks in this ecosystem, this really fast growing ecosystem, it's kind of one of the big dominant themes. And so actually having us being able to list these DeFi protocols as ETPs right now in Europe, you know, sort of ticks that regulatory box that a lot of the nascent protocols don't have. And it's what some of the SEC and the U.S. regulators are looking at.

So, A, having ourselves listed, it gives people exposure basically in a sort of a broad based sense to the to the entire crypto space. But then also having our underlying products listed also gives, I suspect, a lot of comfort to the regulators because it's, you know, we are on a on a traditional listed regulated exchange. And so that's that would be the best way to answer that question. Yeah. And then walk me through how you think about your business in terms of the various activities, because you guys are doing all kinds of things from launching ETPs all the way down to making private investments, except like, how do you think about, you know, what is the product suite look like today? Yeah. So, so, I mean, our three business lines, as we sort of explain them are obviously the ETPs and our AUM has just skyrocketed since we started

about nine months ago. Then of course it's infrastructure and governance, which is our node management business. And as I'm sure all your listeners are aware, you know, as you accumulate more and more and more AUM in specific protocols, you can actually petition to manage one of their nodes. And that's what we're doing across the board for all of our products. But then the other really cool space, and obviously, thanks to you and your network, and as well, our team's network, We do invest, not a lot, but into really nascent, interesting sort of VC opportunity type DeFi protocols. So we were a co-investor on the Sovereign Play, you know, lots of stuff like that. And really, you know, when it gets down to it, the way I pitch DeFi to potential investors, I just say, look, if you want a broad based exposure, like not a minor, if you want broad based exposure.

so we have a BTC ETP, we have an Ethereum ETP, Solana, Cardano, Polkadot, and we're about to launch metaverse and gaming ETPs. You can get that holistic diversified exposure through our three different business lines, which, and just being blunt, I love the miners. One of our founders created Hive Blockchain. One of the other guys that's involved, Johan Wattenstrom, created coin shares. So these are deep legacy smart people. But being able to get sort of that generic diversified approach where you're not just long hive or hut or whatnot, I think is a real benefit to potential investors. Got it. And so I've got a couple of questions about this. One is you mentioned Sovereign, right? As everyone knows, I had invested in that and they were

trying to bring a lot of the decentralized financial type applications and have them built on top of Bitcoin and kind of interface with Bitcoin. How much of a thesis do you guys have on the underlying infrastructure of where these types of decentralized financial applications will get built versus you just look at the applications and you're like, hey, they're going to end up being kind of chain agnostic. And really the comparison to the historical way that technology unfolded is right now everyone is looking at YouTube. 99.9% of people couldn't tell you what the underlying technology of YouTube is. Go to Google. Nobody knows what the tech stack of Google is. They just know they go to an interface, they type in something and

Google spits out an answer and they like it and they keep using it. Like, how do you think about that? Look, we are basically, to your point, relatively agnostic. I mean, you're looking at the equivalent of being able to invest in 1994 into Yahoo, Amazon, right? And this space is growing two times faster than the internet, which a lot of people don't understand. And then on top of that, a lot of people are really challenged to get into the space just because, you know, a lot of people are uncomfortable opening a Coinbase account or a Kraken or a Frax or whatever. So, so what we do is, is we sort of say to ourselves, look, here's your top 75,

top a hundred protocols in terms of market cap, in terms of growth. You know, you're seeing a lot of these gaming and metaverse protocols enter into that top 75 or top a hundred. And we try to just be sensible and smart about, about launching ETPs in products that people actually really, really have interest. But then on the other arm, it's that VC sort of style of investment. And to your point, you know, why wouldn't you want to take a look at an opportunity for sort of the first ever DeFi protocol based on the Bitcoin chain? You know, will it be the dominant

player? I don't know where 10 years is going to take us. And I don't know what this ecosystem is going to look like. All I know is that it's going to be one heck of a lot larger than where we are today. And so, um, maybe I'm, I'm being a little bit political in the way I answer your question, but, but agnostic, you know, Solana, we love Ethereum. We love Bitcoin. We love sovereign. We love eventually we don't know who the winners and losers are ultimately going to be here. It's just making sure that you're exposed to the space in general. Um, and so hopefully that answers, uh, the question you had in the way we're thinking about it. Yeah. What's fascinating to me is you're, you guys are obviously a publicly traded company that have regulatory bodies that oversee you and

your activities so that there's an element of like what you do you have to put incredible care into uh and make sure you don't overstep any of those uh those rules talk to me about this node business right so obviously things like cloud computing uh mining we pretty much know that those are great businesses they're great from a cash flow perspective we literally had the ceo of compass mining a bitcoin mining business on the show yesterday uh we haven't talked as much about nodes. What are you guys doing there? What does the economics look like? How do you decide where to do it? When do you refrain from doing it? Just talk to me about that business. Well, you know, some of the products you wouldn't ever do it for, you know, ultimately,

if we launch something like an equity wrapper on Aave, and just to be clear, we're not looking at that right now. That's not something where you're necessarily going to, you know, petition to run one of the nodes. But the way we look at it is, look, our AUM is taking off. It's growing 1,000% month-over-month type growth since the beginning of the year. So that's our core business. And as our AUM grows for the underlying protocol that we launched, so for example, Polkadot, our DOT product went from zero to kind of 58, 60 million now. Once you get to a specific level of underlying dot that you have on your balance sheet, you can run one of their notes. And so, you know, our business model is really, really simple. You know, the miners have a real

cost center just in terms of infrastructure and what they have to put in place to actually mine the underlying Ethereum or Bitcoin. We basically have a revenue model that's basically just us and our fixed costs. So our margins are effectively 80, 90%. And so you have that AUM business that really drives our revenues and the valuation of our company. But then you can layer in these VC returns and these governance returns, which, you know, historically, people have made millions of dollars running these nodes, right? Like you have guys who have just sort of accumulated node management businesses and are turning that into, you know, retirement funds many times over. And so we just as our AUM grows in Solana, you know, and once we get into the metaverse, once we get into gaming, once we we launch some of these other products like Uniswap, you know, we'll we'll look to run nodes on all of them.

And you can generate anywhere from one to two million bucks a year in terms of sort of sort of yield driven, token driven revenues. And if you're doing like the math that I tell the people is, if we get to a billion in AUM, we'll do about 90 to 100 million in revenue. But then you layer in the node management business, you bring in another 10 to 20 million. Then you bring in the VC returns, you bring in another 10 to 20 million. And that makes for a very, very profitable and handsome return for investors. Got it. And talk to me about your balance sheet, right? So we've seen, obviously, a number of other publicly traded companies. Let's start with kind of the big one.

So you've got MicroStrategy, Square, and Tesla. They've gone ahead and they've put anywhere between kind of 2% to 90-plus percent of their balance sheet in Bitcoin. We've seen a number of the miners go ahead that are publicly listed, and they're putting Bitcoin mostly, but some Ethereum miners are also putting Ethereum on their balance sheets. We also now see public pension funds, things like the Houston Firefighters Department buying Bitcoin and ETH. How do you guys deal with this? Cause you guys are dealing with so many different, uh, communities and technologies and assets. Like, how do you think about your balance sheet and managing that? So, so the, like you, the public markets are so different than, than like the, the, the

crypto ecosystem. And then obviously the private markets, our balance sheet is, is really quite robust. We have 17 to 20 million in liquid assets right now. So, so the way you look at it from a public, public company perspective is, you know, are you, are you cashflow positive? We luckily are cash flow positive and we're on basically a trend to be extremely cash flow positive and I would argue are incredibly undervalued right now, both in Canada and the US on our public listings. So our balance sheet, we look at, you know, how much Bitcoin, how much Ethereum, how much Polkadot, how much whatnot do we have? We generate all our revenues from either management fees or staking revenues or trading flows.

and then really it's about protecting your shareholders and not diluting your shareholders and so as we generate more cash flow one one of the the I don't know I we're discussing at the board whether that cash is better off being reinvested into the underlying protocols because you know there's no yield market in the world anymore and if you can actually take 100 million in revenue 90 million in profits if our margins hold true and you can reinvest you know 90 million of that into bitcoin after you know your fixed costs and whatnot are paid and you get exposure to effectively the fastest growing ecosystem and investment opportunity in the world then then you you you really have i don't want to call it incredible leverage but

you offer investors just this this doubling down effect it's almost like being doubly exposed to that industry because we're already accumulating aum in the underlying line protocols and as they grow, obviously, our AUM will grow. And as more people buy our products, our AUM will grow. But then if you can actually, you know, hodl and buy Bitcoin, hodl it, buy Ethereum, hodl it, then maybe you even get those minor type leverage returns, which is something we are thinking about. We just haven't made a decision on it yet. Got it. Talk to me about regulation, right? Obviously, being a publicly traded company, I think that's the most fascinating part about this entire thing is all the things you're talking about, most people would be like, oh,

there's questions around regulation. You're a publicly traded company. So how do you guys think about regulation, both of yourselves and of some of these products or ecosystems? Yeah, look, I think regulation, as I was suggesting earlier, and I don't, I suspect your thoughts are probably aligned. I think it's going to be one of the most dominant themes in the crypto space moving forward. It's effectively what the SEC is embarking on. And I think it really gives investors a whole other way of looking at crypto, right? Like I'm a, I'm a trad fi guy, Like that's where I come from. And I'll be honest with you, I missed the first seven, eight years, but so did 99% of the rest of the world. If you can actually take these protocols that are currently only getting exposure to people who are trading on Coinbase or any of the other exchanges, but if you can actually put them on listed regulated exchanges, you nailed it. the regulator, that's a huge plus for the regulators. It's a huge plus for the SEC.

You know, we're basically in the midst of making a NASDAQ application, which, you know, I'm very hopeful we'll go through very, very shortly. But the SEC is paying really, really close attention as they should, because this is a brand new industry. They did the exact same thing for, you know, cannabis, psychedelics. They did the exact same thing for the internet when it was basically becoming what we see now as, you know, arguably the largest sector people have invested in ever in the history of uh of uh the capital markets so yeah no regulation is something people need to be really really aware of i think it's a major competitive advantage for us um because to your point we've already ticked off those boxes all the kyc is done you're dealing with

you know euro next or the nordic growth market or the tsx or nasdaq so you're actually you're actually already two three steps ahead of some of these other opportunities that are going to have to go through that extreme um uh revision that that you're seeing happen right now with the sec and then when you start to think about uh that listing in uh on the nasdaq right you can explain kind of where you guys are in that process but obviously we're talking about the canadian public markets and the u.s public markets how do you think about the pros and cons of both of those and why try to cross list or whatever yeah yeah well look the nasdaq is the crown jewel of sort of the tech space in general. And if you look at Hive or Hutt or Bitfarms or, you know, any of

these other companies that have managed to start in Canada and then list on the NASDAQ, there's literally a 2030, sometimes 100% lift to the actual valuation because a lot of investors focus primarily on the US market. So Canada would be, you know, that tiny little market and the NASDAQ would be that that massive, massive ocean market. You know, getting on that would be would be really, really beneficial for our company. It gives us exposure to to tons of other investors, because we've been basically stuck on the OTC markets in the US, which, which basically prohibits a lot of US investors from getting exposure to our company. But one of the really interesting data points that I don't know a lot of people have thought through, you know,

Galaxy is listed in Canada. Voyager Digital, which is a market darling, is listed in Canada. Hive, Hutt, all these other companies, a lot of them started off in Canada. And yeah, that might be a little bit of a detriment just in terms of valuation and moving your company forward. And then getting on the NASDAQ clearly is the crown jewel of global equity listings. And literally, you just have to look to Hutt, who I know you're really familiar with. The Hutt went you know, basically from five, six bucks to 20 bucks. Once they listed on the NASDAQ, it was crazy. Joe, John, what questions do you guys have for Russell? Hey, Russell. Uh, thanks for coming on. Nice to meet you. Yeah. So, yeah. So my question would just be around growth. You guys

have obviously grown a lot over, uh, you know, the, the, the past few months, uh, if not year, I know revenue is up a few hundred percent. AUM is obviously up a lot. Also just talk to me about like the biggest challenges you guys have faced or are faced while going through that growth period. Yeah, so really good question. Lots of sort of different aspects to it. But like this company didn't exist in December of last year. So we became DeFi in call it January, end of January, beginning of February. And a lot of people wondered why we started on the Nordic growth market with all of our products. That's the NGM, basically this tiny, tiny market in Scandinavia. And the reason why is, and a lot of people aren't aware of this, but CoinShares actually started on the Nordic growth market. That's literally, they basically created that company in Scandinavia. Our COO, Johan Wattenstrom, who, by the way, would be an amazing interview for you guys. I think for a few years, he was the largest crypto trader in the world. He started XBT Provider, which is now CoinShares. And so we kind of mimicked that process.

And for whatever reason, the view in Europe for crypto is completely different than the view in the US for crypto, at least from a regulatory environment. So the long-winded answer to your question is Europe is incredibly pro-crypto. Germany has all sorts of tax incentives put in place for crypto. So I don't know why that divergence of thinking is occurring between the SEC and Europe, but it is what it is. And so we're looking to build and grow basically most of our AUM there to start. We're looking to Canada, we're looking to the Middle East. But if the past nine months took us from zero to 400 million in AUM in Sweden alone, we're now listing in Frankfurt, we're going to list in Stuttgart, we're about to list on the Euronext,

which for all of your viewers is literally the fourth biggest market in the world. You get those products onto those exchanges. If you've gone from zero to 400, just basically in a, in a small Scandinavian country, I really see, see a world where at one to maybe even 3 billion in the next couple of years. And if you use my sort of 1 billion equals a hundred million in revenue, you can just see how quickly that growth would translate into returns for, for like a publicly listed equity.

What's up Russell? It's John. Nice to meet you. How are you? I'm doing well. Yeah, likewise, likewise. You're doing well. So can you just talk about what are you most excited about for your company and the industry in general? Oh, that's an awesome question. Look, like I mentioned, I'm a TradFi guy.

I was literally a gold CEO. And my view was, look, gold is going to the moon. I have a master's in economics, started my PhD in economics. you know, what the U.S. is doing in terms of fiat money printing and basically the destruction of the value of the U.S. dollar is just bonkers to me. But, you know, it is what it is. It's not going to change. And so now you have this sector. And this is where I'm getting directly to your question. This is maybe the most exciting investment opportunity our generation, your generation you know many generations will see it it's it's the chance to go back to 1994 and buy

you know 10 20 100 grand of of amazon at pennies to where it's trading at now so that the most exciting thing for me is is is just going from this sort of staid relatively boring sector called gold um into you know an industry where i get to talk to the likes of you guys i mean like it's an honor being on this podcast and having the background I have and yet getting to see people who have just so much interest in making things better and sort of disintermediating this global banking system that has just made gazillions. And so to be a part of changing the entire financial ecosystem is beyond exciting. So it's just every day picking up the phone, talking to people like you talking to investors looking at new protocols looking at what like

you know ave is doing in the lending world um you know looking at what's happening in the metaverse you know we're about to launch a metaverse and gaming basket and my you know i would have thought a year ago that our bitcoin and ethereum baskets etps would have been like like like the growth market for the company but i have a feeling that the metaverse gaming basket is is going to be our top performing, uh, ETP. So this is changing every day. You guys must see like, like people like me, uh, you know, geniuses who created some of these protocols who are now billionaires. Um, it's just, it's changing. It's so exciting. Um, it's so, uh, interesting being, being able to do this on a listed market as well. Um, yeah, so it's, it's just basically putting all of it together

and just being involved in such a transformative industry. Russell, you guys are in the process of launching a number of these ETPs. One, talk about what your ideas there are, but also to explain like why the public market structure for those types of properties are so advantageous in your opinion and who are the types of investors

that you anticipate buying that stuff versus maybe participating in the private market, you know, aspect of this industry? Yeah. So, you know, as I was remarking before, I mean, clearly Bitcoin adoption is going up. Clearly Ethereum adoption is going up. Clearly the TVL and all of these DeFi protocols is going up. But even with that in context, literally the majority of the world can't or isn't comfortable with opening up these unusual trading accounts that you have to do for a Coinbase or Kraken or whatever. So the real value proposition for us is like bringing a protocol like Solana or Polkadot or, Anthony, to answer your question, like we're going to be launching top 10 DeFi, top 10 DeFi yield. We're just finalizing basically baskets, which is going to be something new. So it's almost like a diversified ETF that people can actually invest in and get exposure to gaming and metaverse all in one. and then top 10 DeFi all in one, top 10 DeFi yield all in one.

And so it's taking Solana that I think everybody should have in their portfolio, taking Ethereum that everyone should have in their portfolio, and just simplifying it for the investor so that they can actually buy it on a listed regulated exchange through the U.S. example would be like through your Charles Schwab or your TD Ameritrade account, just that in Europe. So you're actually opening the doors even more for these nascent protocols to be adopted and understood by the general investing public, which is the biggest market in the world. And then in terms of conversations that you have with a lot of these institutional type investors or people who are interested in public market companies, what's been the general tone and how has that changed over the last year or so as you've been having those conversations?

It's literally been incredible because even institutions like I grew up as an insti sales guy, right? Institutional trading, ultimately corporate finance, then created my own broker dealer actually in Canada. That's become a really big player in the Canadian capital markets. This is so innovative, so transformative, so crazy, because the institutions, when they first create their fund prospectuses, or they're offering them randoms, they basically state where they can invest. And none of them 10 years ago thought that Coinbase was even going to exist other than a few

really, really very risk taking and opportunistic and smart people who created it. And so now what you're seeing is institutions saying, how do I get long Bitcoin without being able to open an account on Coinbase or on Kraken? How do I get long Ethereum? How do I get long Solana? And so, you know, you're seeing hedge funds that pop up that invest on all these alternative trading exchanges, but then you also have, you know, the biggest part of that investing community that can't. And so having them, them being able to see and invest into a Solana or even just DeFi, the parent company like we had an institution offshore that basically called us one day and just was like we're gonna buy 2.5 million shares because they actually see this as a way of getting

long without having to effectively go to all their shareholders or go to all of their creators of their funds or their hedge fund committees to actually rewrite their offering memorandum or their prospectus to allow them to start investing on these alternative exchanges they can now do it through us and i i think honestly that's going to be a real dominant theme you saw in vesco um i think it was you guys who actually tweeted it. Invesco is starting to launch a DeFi protocol, ETPs, ETFs. You know, the market's going to get crowded, so to speak. But if you're looking at a market that's growing two times faster than the internet, I don't care how many people get involved, you know, today, tomorrow, it's not going to be able to keep up with the demand that

you're going to see from the traditional equity investor, basically jumping on board to all these protocols. Correct. Where can we send people to find you on the internet or find out more about the company? Yeah. So the website is defi.tech, www.defi.tech. Our US symbol is D E F T F for the NASDAQ. When we get on it, it's D E F T. And in Canada, it's D E F I dot N E O. But that's the website. You got it right there. Um, if you guys like I'm a little bit of an unusual CEO, um, I actually answer almost all of the, the incoming investor relations questions myself, just cause I, I think you should be involved with your investors. Um, so you can also reach me through that as well, which is, I think I are at defy.tech. Awesome, man. Listen, thank you so much for taking

the time to do this. I think it's, uh, it's fascinating that as a publicly traded company, you you're uh kind of navigating so much of this um and obviously doing a a great job and i've enjoyed uh working with you guys and hopefully we'll continue to do more of it yeah likewise likewise and thank you guys have uh have an awesome thursday and a great weekend thanks Russell see you guys later