The Pomp Podcast - Mike Belshe, Founder of BitGo: Inside The Collision of Crypto and Wall Street

Episode Date: April 10, 2019

Mike Belshe is the founder of BitGo. In this conversation, Mike and Anthony Pompliano discuss working at Netscape, having $25,000,000 of Bitcoin under his couch, building a leading custody provider, and why insurance is so important for this industry. ---- Totle is a rare blockchain investment opportunity, one that offers a live product, active customers, an established revenue model. Totle solves three significant problems with blockchain asset exchange: 1) Security 2) Complexity and 3) Pricing. Over $4 trillion of blockchain assets were exchanged in 2018 and growth is forecast for at least the next 10 years. Totle’s sophisticated platform powers the blockchain economy with safe, simple decentralized asset exchanges at the best price for traders, wallets, businesses and other financial apps. Totle’s B2C Web App and B2B API are live and serving customers today. Visit totle.com/pomp for more info. ----- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by BlockWorks Group. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworksgroup.io

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Mike Belshi is the founder of BitGo. In this conversation, we talk working at Netscape, having $25 million of Bitcoin under his couch, building a leading custody provider, and why insurance is so important for this industry. I really enjoyed this conversation and found it educational. I hope you enjoy it as well. I'm sure a lot of you have used Kayak to find the best flight. Total is kind of like Kayak, but it don't find you no flights. It helps you find liquidity on decentralized exchanges and it optimally routes your trades for execution.

So Kayak, you find flights. Total, they help you find liquidity. We should get Kayak on it for this spot that I'm providing them, but Total instead is our advertiser and you should go visit total.com slash Pomp. Again, that's Total.com slash Pomp. And let them know that I sent you. Tell them you love their product. Take a screenshot. Tweet it at me. I'll drop you some fire emojis and then we'll all be happy. So Total.com slash Pomp. 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. Super excited to have Mike on. Mike, as I was telling you before we started, I've been a huge fan from afar. So thank you for coming on and spending some time with us today. Hey, thank you very much for having me. For sure. Let's start with your background, kind of pre-crypto. Everyone had a life before they went down the rabbit hole. Maybe just give us a little overview of what you were doing before and then how you found crypto. Sure. Well, I am a technologist, I guess, and by career, I've been in startups here

in Silicon Valley for about 25 years now. My first startup was actually Netscape. You remember Netscape? How could somebody forget at this point? Well, there's a lot of the younger generation doesn't exactly know. It's fun to run into people that worked at Netscape. But actually, Ben Horowitz was my product manager over there and worked a little bit with Mark Andreessen. So it was quite a while ago, but it got me getting a taste for startups, which hasn't left me. And I like building things from nothing. So I think that's what's attracted me there. So, and again, over the last 20 years, I guess I've continued doing that.

I founded an email search company before email search. Microsoft bought that back in 2004. And then I ended up being at Microsoft for a little while. i went over to google and i was fortunate enough to join just as the uh the chrome team was there so i was one of the first 10 guys on that team and that was a very exciting time because we were really trying to change you know both the security and performance you know underpinnings of browsers um and i think it it exceeded limitations by pretty much all measures but that was a great experience and then after we launched kind of the first phase of that

I was tasked with some web performance work and in particular just you know how web pages load off of the network and that got me excited about networking again which is actually kind of what I had studied and researched in school with before and it led me to create this protocol called speedy spdy which we ultimately submitted to the IETF for standardization and if you used your browser today, whether it's Microsoft Internet Explorer or Chrome or whatever, we probably used HTTP 2.0, which I was the lead author of. So that's kind of where I was before. A lot of technology products, I like to think that it had some impact. And my interest in Bitcoin is kind of along the same vein. Unfortunately, the first time I read about Bitcoin, I thought it was

probably a scam. And I had to read it probably two or three more times before I started getting interesting interested but you know once you do get interested um it it sucks you in um especially from a computer science perspective uh there's so many fascinating problems it's like well wait does this crypto work this actually could work and wait does this way of creating coins work wait so uh soon i found myself buying some uh for myself and then also for friends uh And since I was the technology guy, I was doing actually cold storage on an AirGaps laptop. I had that securely stored underneath my couch. And, you know, it started to amass money.

And when it got to be up $25-plus million, most of which was not my money, then I got a little concerned. I was afraid my kids would spill Coke on it or, you know, ruin that laptop. And I said, there's got to be a better way. And so actually, that was when I found P2SH, which is a pay-to-script hash. And at that time, it was an informant inside of the Bitcoin, which was really using it. And so that caused me to dig and say, could we build a multi-sig wallet out of this? And that's how BitGo was born. Man, this is an epic story.

Let's go back first to Netscape. And what was that experience like? Right. I mean, I think that there's plenty of folks who who don't know how important that company was to a lot of the technology and kind of benefits that we enjoy today. But maybe just talk a little bit about the culture and kind of the mindset of those entrepreneurs at the time, given that many of them now have gone on to do great, very public things. yeah i mean actually right in the crypto space we've got brendan ike uh we're brave um you know and uh i guess you could say maybe that's not a crypto company but he's trying to make you know crypto payments happen from with the browser and reinvent the monetization model for web pages right so uh and he's also the creator of javascript i'm not sure if you know that uh well

let's see netscape um well i was lucky enough to get there at a very exciting time um i was just a couple of years out of school at that point. So it was pretty young. I remember my parents were really concerned. They're like, why are you going to this no-name company? I had been working at Hewlett Packard, which I didn't enjoy very much. Nothing against HP. But why are you going to this no-name company? And then a few months later, it was a public company. It was all over the news, but it was a blast. It was going from a very structured environment at Hewlett packard um where kind of what you're working on was was defined and you had a role and it wasn't very exciting uh it was bug fixing it was i suppose somewhat challenging at a technical

level but um you didn't have a lot of free reign and then inside of netscape it was the polar opposite um the age of the the crew was you know much much closer to my age uh but it was very much engineers doing engineering stuff. The offices were crazy cool. The people had all kinds of personalities. There are all kinds of projects going on. There was no limits in terms of what you could do. I was not on the browser side over there. I was at the server side. So I was working with Rob McCool and some of the server folks and was the product manager at that time. And it was just a blast. I mean, there was so much excitement about what we were doing and this idea of you know taking the web to just a whole new level um by the time i got there you

know kind of the first couple pushes out of netscape had already started and uh you know prior to that those couple of years idea of a url was new to the world right i mean it's kind of like a bitcoin address um today you know it looks pretty foreign to people um and at that time urls looked pretty foreign to people nowadays you see them on billboards and pretty much every every business card right um so anyway this is a very exciting time to be in that transformative period yeah it is uh it's really funny because the more that i talk to people who were actually building uh and spent a good part of their career um during numerous aspects of the internet boom uh you know from the early days all the way through the actual boom and bust uh

the similarities are scary, right? So what's going on in crypto now, everything from the technology, uh, the user adoption, kind of the hype and mania, um, it just feels very, very analogous in many ways. Yeah, I think it's true. And, you know, at the technology level, um, you know, I think one of the things that the Netscape is pretty famous for is having failed, right? Um, they were certainly the first mover, um, but ultimately internet explorer came and ate their lunch. Right. Um,

And why was that? And inside of Netscape, you could see it happening. We did not have software development skills like we have today. The idea of continuous improvement, we didn't have that. Continuous integration, sorry. We didn't have that. Just the vast test infrastructure that we depend on when we build software today didn't have, in fact, some of the early continuous integration systems, I think, were invented out of need at Netscape. We had this thing called Tinderbox, which was a very continuous integration system. Literally, all it did was compile the code. There were so many engineers working so chaotically. And we were using, I think we were using CVS, not even Subversion at the time. Like the tools that you use for release management were really primitive compared to what you have today. And ultimately, Netscape just failed to scale.

and Internet Explorer and custom. For sure. And so let's skip ahead to kind of pre-BitGo when you've got a laptop underneath your couch with $25 million of Bitcoin in it. Just explain kind of, you know, how do you get to that point, right? Obviously you start buying

and it sounds like maybe some friends said, hey, can you help me as well? Was it just that you had to self-custody because there was no other options? you thought that was the the most secure kind of just walk me through how do you actually get to that point with uh so much money on that computer uh under the couch um well uh at least the the friends that i had that were interested in they were fascinated with bitcoin from a concept and how could it change you know finance um where it would go you know we we really had no idea it was

hard to buy um i don't know if if you remember an exchange called trade hill do you remember trade do i do not know okay um uh well they were only around for a brief period i think it was 2013 or so i remember doing a number of purchases there actually it must have been before that because bitco was created in 2013 um 2012 2013 somewhere there um but it was hard to buy so you had to go and sign up with this small company you had to wire them money and then they were going to give you Bitcoin. And for my friends that I was telling the greatness of Bitcoin to, they didn't know how to do that. They didn't want to do that. They're just like, give me some, I'll invest, I'll invest. So I just helped them get it. And then I did cold storage. I did my own cold storage, actually.

I can't remember the details of why, but I had my own cold keys that I generated on my own, somewhat out of just curiosity and having fun. I had my own process for it. There wasn't a lot to lean on at the time. And I just had, I signed them all up to use it as well. And then I got these little USB sticks that were shaped like gold bars, which I thought was kind of appropriate. Um, and I, I put the part there in an encrypted form and handed them back to, um, to others eventually. So, um, I don't know. It's just what I did. It's what you did at the time. The tooling was not like it is now. For sure. And so when you're setting up your own cold storage, how much of that, you know, could you just go read like a tutorial online and learn from others

versus was it very experimental and you kind of had to really understand the technology and figure it out for yourself? Well, what I was afraid of was malware actually on, on computers. So, you know, which is where I had been kind of just before this. We spent a ton of time on the security layers there. Most people today still aren't really aware of like what the differences in Chrome are, but it's part of the business case impetus to that. We were monitoring, you know, by way of the Google crawler incidents of malware on the internet. And back then it was just exponential growth. It's probably still exponential growth. Um, there's just so much, so much out there. So I was afraid that if I stored these keys anywhere near an online computer, that if I had

already been breached in any way i'd be i'd be hosed there's nothing else that was really particularly interesting but that would be um so i got a brand new laptop and i figured out how to just disable all the networking in it um and to be honest you do a lot more i could have gone down to the hardware level which i didn't do i just knew i i wanted to have it be offline and then i I carried my software to it, compiled it on, took basic steps. I mean, it's nowhere near what we would do for cold storage today. It's nowhere near what BitGo does for cold storage. But in those days, it was about right.

Got it. And so when you're sitting there and you've got a decent amount of money, a laptop under a couch, and you decide to start BitGo, what was kind of the original idea? Was it just to commercialize what you were doing for yourself or was there kind of a grander plan? It's a lot of exploration. Actually, I think startups are this way. You always have an inkling about what the problem space is. And you can get that from either experience or personal need. In this case, it was more of a need, but you know,

I was in the space brainstorming and trying to figure it out. The first version of BitGo that I put together looked kind of consumery. And, uh, it was cause I didn't know exactly which direction it was going to go. Um, I had ideas about how to keep it secure. I knew the technical details of what we were trying to do. So that part worked. Um, but you know, there's a big push to just kind of get the product together. Um, I remember summer of 2013 was actually, uh, it was a very, um, lengthy slog cause

I was just coding the front end, the back end, everything all by myself. Um, and, uh, it took some time. um but you get through it you have kind of a terrible product on the other side of it the underpinnings were good but it wasn't refined in terms of which direction you take the business but once you have that now you can start showing that to other people and they can start getting it just to use another example like when i did email search uh in 2004 with my good friend eric han uh you know we said we were doing the search product for email and people looked at it so why would he want that and we would say it's like google for your email and they'd say why would i

want that but when you demoed it their lights their eyes would go wide and the lights go on um so once you can show show people something then they see a different story and the same thing was true with the bitco product that i made they could start to see how it could be used and quickly of course you realize well who's interested in security the most that have large amounts of of, uh, Bitcoin to, to secure. So, uh, quickly sort of gravitated towards high net worth individuals or businesses that wanted a security option. And so then it just started to go down that path. Got it. That, uh, that makes a ton of sense. And what was the general, uh, feeling or reception from let's not go to customers yet, but just more so, um, the entrepreneurship and kind

of venture capital community. Was this something where a lot of people were excited and kind of tinkering around investing in and looking at crypto? Or did you really feel like, hey, I'm working on something that's kind of outside of, you know, maybe where a lot of people's focus are. And so I'm going to have to kind of build this myself and make it overly compelling to get other people excited about it. Well, Bitcoin was, it's niche now and it was niche then too, right? So, So, but there are a number of VC firms that were starting to do different things in Bitcoin. We had the run up of price just before the Gox collapse in late 2013. And that brought a lot of excitement.

So I had built the first version of BitGo in that 2013 summer, brought a couple of other people on with me kind of in by the end of the year. And then we went to raise money in mid 2014. So at that time, you know, there were numbers that were interested in having something in their portfolio related to Bitcoin. They wanted some exposure. They liked what they saw with BitGo. I think we had a pretty reasonable management team around it. And the idea of going after institutional Bitcoin space was initiated. Got it. That makes sense.

And so let's maybe talk about how the company and product have evolved over time, right? Because you guys went from, you know, that tinkering to now you've got a pretty compelling business, lots of brand name investors behind you. You recently announced an insurance product. How do you go from those early days to now? Well, you keep solving problems. And I wouldn't say it's necessarily your customers. It's certainly not ignoring them, but trying to understand what they're trying to do and

get stronger. So that first version that we made, it was a security product to help you secure your bank. At the root of it, what we liked was with multi-sig, we could create the first non-custodial wallet where we can have one key in a wallet, you can have two keys, you still have full control of your coins, we can never transact without you. but we can now start to implement security policies and take care of issues that you might not be able to take care of on your own with editing and things like that, because we have a key in the wallet enough to participate, but not enough to hold the funds. And that worked for a good long time. In those early days, we were selling to crypto companies. These are companies that had tech teams. They were aggressive in their risk-taking in that they

wanted to get into this crazy space of, of, of digital assets. Um, and so we were selling them a technical product and they wanted to hold the keys, but it's gotten bigger. Well, the types of participants in the market have, have changed as well. And as more traditional financial people came and looked at Bitcoin, they wanted to get in. Um, but much like my, my friends that held Bitcoin for in the beginning, you know, if you don't have a bank to hold this stuff, if you don't have a custodian, then how are we involved with the space? And anyone that's got a fiduciary responsibility for their clients is looking for somebody that is a stand-up type of custodial bank or trust that they can rely on to store the asset. They're not going to take custody directly

because if anything ever happened to it, they would be fiduciarily liable for whatever that loss was. So they have to be able to explain to their clients that they're doing the right things. And that led us to want to go down the custody path. Now, Bitco's been, you know, I guess you could say we're probably a little too hesitant to go down that path. We didn't really want to take custody because it's a big responsibility. And we think there's a lot you have to do in order to do it right. So other companies went in very fast. You know, exchanges all take custody to this day. A lot of them have failed. They took high risks and they didn't do it very well. didn't even implement multi-sig. So, you know, we took a very, I think, I hate to use the word,

but we used a reasonable path and we said, look, we're going to do a really, really solid job on this. And for us, that meant becoming a trust company. So we're now regulated out of the division of banking in South Dakota. This is a transition point for the company where we went from pure software company to now a financial services company. So it's a long haul, but it's really, you know, paying attention to what your clients need and skating to where the puck will be, I guess you would say. For sure. And one of the things that I think a lot of people don't realize is how important the regulatory licensing is when you want to go work with kind of the large players in the industry, whether they're financial services or even just institutional investors in

the sense of endowments, pension funds, et cetera. Maybe talk a little bit from a landscape perspective, how you see the different custody providers in the market and why you guys chose to go the route of getting that licensing versus maybe some of the other routes that you could have taken. Right. Well, you know, crypto has been a bit of an enigma to regulators around because it happens to fall kind of into no man's land. It's not under the jurisdiction of the SEC. They regulate equities and Bitcoin has been squarely placed in the not an equity camp. IRS taxes it like a property and it's treated like a property by everybody else. Sometimes people think, well, maybe CFTC, which is, you know, the C in CFTC stands for commodities.

Some people think that they might have jurisdiction, but no, CFTC is actually about futures and derivatives. They don't have jurisdiction either. So actually to be a custodian of the licensing, there is none. You don't actually have to have licensing. But if your client has a fiduciary responsibility to their clients, they're looking for who's gone the farthest miles down the road of securing the funds. And that means having a strong company with a known management brand, with a great technology product, with a big company with insurance. You just got to keep lining up all these things. So the big difference between us and the competitors is that we are an independent trust company. It's like a bank. You put it with

us. We can take custody, license away. We've gone through the processes to go through financial review, through technology review, through procedural review. We do SOC 2 audits. That's allowed us to get insurance and things like that. We've really tried to demonstrate that, yes, we have the security that we claim to have. So I think that's the big difference between a financial services company and a technology company. In any other class, any other asset class, you wouldn't even consider using just a technology non-trust company type of custodian. it just doesn't happen. Those markets have all matured in ways that fiduciaries have a place to go. Those custodial partners have undergone a number of checks to verify that they are worthy

of being custodian of other people's assets. It's just Bitcoin that's new that hasn't done this yet. So you need more than technology, frankly, is the answer. Absolutely. And then the big news lately was you guys went and got insurance, right? And so maybe talk a little bit about what that process was like, why you did it, and ultimately how you got the solution across the finish line. Sure. Yeah, insurance has been a long, long process. We all think we know what the word insurance means, and we roughly do. But any two parties saying they have insurance in crypto, you have to ask, what does that mean? Because insurance is not descriptive enough. I've seen companies that are saying they're insured when really they just carry

corporate liability insurance. Corporate liability insurance does not cover coin losses anywhere. So there's some companies like that. There's other companies that will have some amount of theft insurance for coins, but it has a really small cap or there's big cuts or doesn't cover hacking, things like that. So when we started looking for insurance, we naively thought it wouldn't be that hard but we realized that actually all these things are hard to navigate first off we got billions of dollars worth of asset in uh bico wallets today and it turns out that there's just no underwriting capacity for that size uh in this new market um it's estimated that the total underwriting capacity in the world for crypto assets right now is somewhere around

two billion dollars um wow and uh puts a limit on it second because it's not a very big market um the prices are pretty high right so how do they how do they move down they bring premiums down and they've got a lot of clients to draw from and kind of spread and share the risk um so given that there's not a lot of participants in insurance today uh those rates are high they could be a they can be a percent or more. So in fact, BitGo paid, BitGo bought an insurance policy a few years back. It was a smaller one by a long shot, but we're paying upwards of 3% per year in terms of the premium on that. Anyway, that was so expensive, our clients didn't want to pay for it. So we ended up ditching that until this new version. And now the premiums are down quite a

bit, but they're still up around a percentage point. Now, we absorb that fee for our clients for the first $100 million. And that's the insurance policy we have. It's a bit unique. We spent a lot of time with the syndicates from Lloyd's of London. They were very kind. They actually provided a quote in our press release announcement. And Lloyd's London usually doesn't do that. But they were willing to do it in this case, I believe, primarily because they spent so much time looking at everything that we do. And if you're not familiar, you know what SOC 2 audit is? I do. Yes. Okay. So in, in the financial world, you know, folks do SOC 2 audits. There's a number of types. In our case, what we were looking to do was to verify our operational

controls. But once you take custody of an asset, right? Like how, how does R know that Mike Belshi doesn't have all the keys, you know, on his laptop. And then if something terrible happens to him, he's going to lose it. We know this happened at Quadriga, right? The SOC 2 helps verify that what we say we have as operational controls have been looked at by a reputable external firm. In our case, we did it with Deloitte. So we have an attestation from an external party. The underwriters do a similar thing. They want to know exactly how all this stuff works. They spend a lot of time with you. And then ultimately, they're dollars behind your risk. For sure. And how does this change the conversation with customers? Is this a major

inflection point where now people feel like this starts to look more like the legacy financial system in terms of security, insurance, etc.? Or do you think that there's still a lot of kind of demystification or familiarization that needs to happen to get a lot of the institutional investors to start participating? Well, I think it's a huge step forward. I never would want to diminish how big it is. I mean, because now we've got custody providers that have technology. We've been known for that for five years. We've got custody providers that have the regulatory clearances to go and be a custodian in a way that's monitored by government agency. And then the insurance angle is now it's backed up in case something does go

wrong. Now, of course, our interests are 100% aligned with the underwriters. We don't ever want to see a loss. And we know it's imperative that that might happen. It's a huge step forward because you've kind of got all those things together. At the same time, this is not even close to being done. With what we did in our beginnings with multi-sig, moving single points of failure in the system. And this is what we do in security, you know, in crypto assets or any other type of asset. If you have one key, split it into two keys. If you have one person that's got those keys, split it across two people. If you only have one company that owns it, companies, et cetera. So we've always been doing this. And when we look at

what needs to come next in order to uh uh pave the way for for real institutional money to come in the next thing is actually to remove the single points of failure in the crypto financial itself and you know frankly it's it's the exchange um you're seeing this from a number of efforts right now but pico's been pushing on this for years now now this is where we need to separate the functions that happen in our financial markets. And if you were to look at equities markets or derivatives markets, you'll find brokers are separate from exchanges, which are separate from clearing houses, which are separate from banks and custodians. And each one plays a role. Now, on one hand, you can argue that sounds like a lot of middlemen. And it is. And we can do

better, which is like the really exciting thing about crypto as we go forward. But for here and now, having gone to these centralized exchanges that are performing the function of the broker for both the buyer and the seller and the clearing house and the custodian, we're taking on a lot of risk. What the insurance underwriting does is it allows us to start to build the independent custodian that's large enough and strong enough that institutions can count on it. And the next step that we need to do is to build the markets that goes along with it. And if we do those two things, you know, the market's going to open up. For sure. Let's switch gears a little bit and talk about it. I think you pronounce it Quadrigo, the exchange that has gone through a number of

issues. And there's reports that have surfaced that about $190 million or so of crypto have disappeared after the death of the operator of the exchange. Maybe just talk through, that kind of seems like the nightmare scenario. And we've definitely heard from institutional investors, how can I invest in an asset when $190 million can just disappear? Let's just talk through what are they not doing in that scenario that they should be doing? Um, and kind of how do you answer that question for those institutional type investors, uh, when they bring it up? Right. Well, I mean, you can go outside of crypto. We've seen the same exact problem. Uh, you probably heard of a guy named Bernie Madoff, right? Uh, so Bernie said he had,

he said he had a boatload of assets and he said he was trading and generating all these returns. Of course he was operating a Ponzi scheme. Um, and to facilitate this, he was using his own custodian. Now, Bernie has publicly said, you can go look it up, look up Bernie Madoff, qualified custodian. You'll see lines. He said if his clients had required him to be an independent custodian, he never would have been able to pull that thing off. So we've known outside of the crypto space that the right answer is the guys that are doing the trading can't be the same guys responsible for holding the money. When you put those under one house, you lose all your checks and balances. And now one guy can either deliberately defraud you, like in the case

of Bernie Madoff, huge mistakes in terms of not securing it, like in the case of Quadriga, he can get hacked and go into a fractional reserve capacity, like in the case of Mt. Gox, et cetera, et cetera. So from my view, the next step, if you want institutional money to come in, you have to separate these functions. So any exchange that's saying they're going to bring in institutional investors while they're providing both custody and trading, it's not going to work. We hear this from all our clients. They're choosing BitGo because they like the fact that we are not the exchange. They like the fact that they get that separation and that buffer. Yeah. And it's really the institutional investors, in my experience, it's interesting

to hear you say this because they just have a higher degree of criteria. It's not so much that they are optimizing for ease of use like a retail investor may. They're not optimizing for speed to access their money. They really are optimizing for security and the ability to ensure they're not going to lose money. That is their job as fiduciaries. Absolutely. And again, it's the way do it in all asset classes now you know one of the great things about bitcoin is it it levels the playing field like you can hold your own bitcoin and you don't need to use anybody else and if you want to go that route you know all the power to you uh you can do it you know um jameson lopp is is well known in the industry great guy he secures his own bitcoin he moves to a secure location far

away and doesn't tell anyone where it is and he has lots of guns right um that's one way to secure your money another way is to use a custodian or um which is what most of us want to do so unfortunately once you start talking about large amounts of money you're wanting to give it to somebody else whether that's an investment vehicle going through an ria or through a hedge fund or whether it's just you want to have custody of it somewhere those guys have responsibilities to keep your money safe and in every asset class as soon as you're talking about protecting someone else's money as opposed to just protecting your own money bar goes way up now you want to know that this guy is not lying to you you want to know that he's solvent you want to know that he's got

protections in case something goes wrong like if he dies or there's a fire so yeah if you're an institutional investor you have legal responsibility your clients have to find a good reliable partner You can't take custody of this. Even though, in theory, you technically could, it would be an impossible decision to make from a business perspective. For sure. And one of the things that cracks me up when we've gone through diligence is, you know, the question that you have to ask in crypto of fund managers is, do you have a bunch of kind of, you know, ledgers floating around the office? right who has who has the ability to access the phones um what are those security measures you know all of those things uh and so there's a little bit of an aspect of like cover your ass hey we give it to a somebody who's got licensing who's third party um who's trusted etc uh really i think um makes that answer clear concise and puts everyone at ease well i think that's right

and and you started to hit on it like you know you can take a ledger or a perfectly good piece of technology. And there's a number of startups in the custodian space that have, you know, very interesting, sometimes easy to use, you know, promising technology. But when you just take the technology and you have to deploy it within your organization, where you're now giving people parts of keys or whatever it is, now you have to figure out, okay, well, how are you going to avoid insider theft? How are you going to avoid insider theft by key executives? How are you going to deal with you know three guys on a plane that just happens to go down when it shouldn't have gone down um you know all these considerations come into play and this is where that operational

audit even though it's boring it's not nearly as sexy as technology like it turns out to be just hard if not harder than the technology problem you gotta have multiple teams you gotta have business continuity you gotta have disaster recovery you gotta document it you gotta audit it You got to prove it to your client. It's a lot of work. For sure. Where, where do you see the, the custody space going in the future? What are kind of the big milestones that you're looking forward to over the next couple of years? Well, the first, the first thing I hope to see in the, in the industry is that we fix kind of the market structure. Like I said, you know, right now we've got too much dependence on these kinds of centralized exchanges.

I think the exchanges are doing a great job at the exchange part, but that's gotta be separated. So whether it happens by industry volunteering to do it, by investors demanding it from their exchanges, or whether it's regulated, I hope we don't have to rely on regulation to make this happen. But that's the number one thing. As long as we keep having news stories like what happened with Quadriga happen, we look like amateurs. We have to separate the exchanges from the custodian. Until we do that, somebody's going to keep failing. industry is going to be held back so i mean that's the number one thing to fix but on the other side of it there's some more exciting things that we can do um so in a traditional financial world

you know there's two parts there's like the trading part and then there's the clearing and settlement part um that that leads to a lot of middlemen um i am excited about being able to reduce some of those middlemen out of the equation and i think crypto is an opportunity to do that that we've never seen before. Once you digitize all the assets, whether it's Bitcoin or dollars or real estate or whatever it is, you can now do the swaps completely digitally. And then suddenly we can start to figure out how to do atomic swaps to exchange the assets. So that clearing and settlement function is going to change dramatically in a way that's going to be cheaper, faster, and way less risk. For sure. And you just hit on the idea that

One of my thesis from very early on has been every stock, bond, currency, and commodity will be digitized, tokenized, etc. And it's really just you need digitally native assets to operate in the digital world. Do you feel like most custodians will be able to service all of those assets? And it's really they'll be looking at protocol support and then the assets built on top of those protocols just fall in line? Or do you think we'll get kind of a fragmented market that certain people will focus on, hey, you know, I do real estate tokenization because there's specific kind of criteria or nuances to that. Which kind of path do you think we go down? Well, I think we're going to continue to see a lot of varied technology for a while. It's not like we have perfected the perfect blockchain to date that will handle all asset types.

One of the most exciting things, just from a research perspective, is how much study is going into this space today. I had the pleasure of speaking at Stanford with Dan Bowman's blockchain team, I think it was in November. and you go there and you just hear the excitement you know from the students there and the people participating uh about all crypto that's going into into the works and how they can do it better and how they can make things um uh more efficient and dan bonet you know he's been teaching there for 25 years he's like a kid in a candy store everybody wants to know you know for the first 20 years it was just kind of that cryptography stuff and then now it's like really exciting so the point is, is that this space is changing really fast. And I think that's going to lead

to some fragmentation in different asset classes for a little while as these things grow both technically and organically. Um, and then eventually they're going to have to come back together with some amount of standards, but it's too early to tell exactly. Yeah, for sure. And then what's the one thing that you wish everyone understood about the custody business that maybe is a misconception or, or, uh, just folks aren't aware of? I think, uh, what I would, I think most people don't realize how hard operational security is. Um, it's easy to secure from kind of a technical key level of the key. It's in this hardware device. It's in this vault. And I've got two of them that are separated by a thousand miles,

the operational controls around that to make it so that your clients can still have access to their money whenever they need it, um, is, uh, uh, is really hard. For sure. The, uh, before I finish up, I usually, uh, run through some rapid fire questions. Uh, what do you think is the most important, uh, company in crypto other than your own? Uh, I would say Binance. Why is that? You know, Binance, Binance is, uh, it's a, it's a global company. Um, they've got tremendous resources they're pushing areas uh they've demonstrated how how key they are just by their their fast and rapid growth um you know you can argue what they're doing well and what they're not doing as well um but they are absolutely for pretty much anything related to this technology yeah it is

absolutely uh so impressive just to see them execute um at the speed that they are on the global scale, what, uh, what one regulation would you change or improve if you could? Um, well, let's see, I, the money transmission one is, is an obvious one that should be better here for the United States, uh, having to go to 50 state regulators to get kind of a slightly different definition of money transmission in each of them, uh, is a little silly. I guess I'd highlight a second one, which is I think, uh, federal level, um, regulatory around any transmission, uh, would be even better. For sure. What's the most important book that you've ever read? Well, I can't read, you know, okay. I can read, uh, let's see most important book that I've

ever read. Um, I don't know if it's the most important book. I mean, there's a tremendous number of good books uh recently i read a book uh which i thought was interesting uh called sociopath next door which is kind of a odd book and why are you reading that well in building teams uh you know and uh i got this tip from one of my investors you know but building teams you know how do you evaluate good character how do you evaluate who's going to help you build a world class organization. And this particular book starts with a hypothesis that a fair number of the world's population, I think they said 25%, may actually be sociopaths, meaning that they don't feel guilty about doing bad things. And, you know, when you start to think about the world we

live in with other people that may not have a conscience, you know, it changes your look, and change your perspective on how do you hire. So that's why I found it interesting. Yeah, that's a pretty high number. That's a little scary, actually. Yeah. All right. So I usually end with letting the guest ask me one question.

But before that, we talk about aliens. What do you think the probability that aliens are real? I think it's 100%. I mean... Really? That's what I'm talking about. well you know uh we have global warming here right yep and it's part of an alien plan to uh warm up the planet

is one of them and he figured you know how to accelerate global warming but to have a bunch miners would do nothing but burn fossil fuels in order to like do this crazy you know big stuff which would feed human greed um so they could uh heat up the planet faster listen if uh if i didn't think that there's a couple of people who might believe that i i would be laughing um you you are the first person who has come on with a uh conspiracy theory around aliens so uh so you definitely win an award for that one what uh what one question do you have for me well when you're talking with all of the folks that you talk to, what's their biggest concern about custody? I think that there's two. So we're in a unique position in that we're basically a steward of

their capital, right? And so one, they want to really understand just what our operational process is, what security measures do we have in place? Where do we think the risks are? What are we doing to mitigate that? Kind of all the things you would expect in funder manager diligence. But the more interesting and probably more applicable thing for you guys is it's really around the narrative. Most people that we talk to at the institutions, and I'm specifically talking about endowments, foundations, pensions, and sovereign wealths, they're not technical. right they're basically uh have a fairly high level understanding of what blockchain technology is digital assets why they're important why they should include this in their portfolio you know all that stuff but they're not going to sit down with you and go toe-to-toe and in a debate on you

know the technical nuances of security and so really where they uh kind of fall back on or what their crutches is the headlines they read and so we spend a lot of time uh kind of using analogies Similar to what you described with Bernie Madoff and the custody problem, things like that, I think, really help them understand, one, it's actually more similar than it is different. Two, you need to do your homework and your diligence, but by going with trusted members with the regulatory licensing, with track records of success run by reputable people, drastically decreases the likelihood that something's going to go wrong. And then three, we see somewhat of a herd mindset, right? It's kind of the belief that why is State Street so great in the legacy world? Well, because everyone uses them, right? And so I think that it's a really interesting phenomenon where they only know two or three names in the custody world, BitGo obviously being one of the leaders. And so when they hear a name that they know, they kind of have a sigh of relief, which is very interesting because it has much more to do with narrative than the technicals for the non-technical people. And I think that gets lost a lot when people are in the weeds of crypto and debating all the technologies of how this stuff's getting built. I think that's right. And that's a pattern that we see in business generally.

um you asked about books um another one is beyond the cloud by uh mark benioff right um and this this is how new markets are won so uh in the early days there's a lot of technical differentiation and people look like oh he has this feature that feature or whatnot okay but eventually you know it gets sophisticated and the differentiation is harder to see and then people start to fall back on brand um and we're already there in crypto like Does someone evaluate BitGo security versus Coinbase security? I mean, we say we've got multi-sig, we've got these bank vaults that we have offline and all this stuff. But how do they weigh that against somebody else's offering?

And it's really hard. So instead, they look at attestations from others, whether it's your SOC 2 types of audits, clients, whether it's traction, the biggest kind of becomes a name to itself. For sure. and uh obviously it's one of those things where uh the moat gets larger if you are one of the first movers and can start to build that size right so uh so you my friend are in a in a great position uh listen mike i i really appreciate you taking the time today i think um you know what you guys are doing is uh it's really compelling and uh obviously um you've been very thoughtful about building the company and and the products so we're cheering for you and

we'll have to do this together in the future. Great. Thanks so much for having me on, Anthony. Another word from our sponsors at Total. They're kind of like Kayak, which helps you find the best flights. But Total helps you find liquidity by aggregating decentralized exchanges and optimally routing trades for execution. Remember, that's Total.com slash Pomp. T-O-T-L-E.com slash Pomp. Go check it out. Let me know what you think. Tweet at me. I'll drop you some fire emojis. total.com slash pop. Hey everyone, pop here. If you'd like this episode of off the chain and want to help us take crypto to the top of the Apple, Spotify, and other podcast charts, please do us a favor and rate review and subscribe to review. Simply go to the off the chain homepage, scroll

down until you see the five blank stars, taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts. I appreciate you listening and see you next time on off the chain. Thank you.