The Wolf Of All Streets - Bitcoin, Regulation & Finance 2.0 | Jeff Horowitz, BitGo

Episode Date: June 2, 2022

Chief Compliance Officer at BitGo and formerly CCO at Coinbase, Jeff Horowitz is no stranger to regulation. Navigating state, federal, and international policies and regulations, Jeff is playing a crucial role in the future of Crypto. He joined us to discuss The Executive Order, regulatory road-blockers, promising growth at BitGo, and what he’s most excited about for the near future. JOIN THE FREE WOLF DEN NEWSLETTER 📩 https://www.getrevue.co/profile/TheWolfDen THANK YOU TO OUR SPONSORS ►► Have you ever had your exchange go completely offline during days of high volatility? Of course you have. We've all been through it. Those days are no longer with Bullish. Bullish is a new breed of digital asset exchange that empowers users to trade with deep and predictable liquidity across highly variable market conditions. They also have incredible automated market-making and industry-leading security. I can't get enough of this platform and it's fully regulated. Sign up here: https://thewolfofallstreets.info/bullish/youtube EPISODE LINKS Production & Marketing Team: https://penname.co/ FOLLOW SCOTT MELKER • Twitter: https://twitter.com/scottmelker • Facebook: https://www.facebook.com/wolfofallstreets • Web: https://www.thewolfofallstreets.io • Spotify: https://spoti.fi/30N5FDe • Apple Podcasts: https://apple.co/3FASB2c

I think the executive order is a good start of a conversation. I think the U.S. has woken up that outside the U.S. they're leading in innovation. And as a country, if we don't figure this out, it will go all offshore. And we're not going to mitigate the risks that they're trying to mitigate with regulation. So, interesting for the White House to get involved and say, hey guys, stop fighting and let's figure this out. And you've got 180 days because we're losing the battle here. This episode is sponsored by my good friends at Bullish. Stay tuned for more information on this amazing company later in the episode.

One of the biggest challenges for the cryptocurrency and Bitcoin industry is knowing how to custody your assets. And that goes from the individual all the way up to the biggest institutions in the world. We have companies like BitGo that are custodying tens of billions of dollars worth of crypto assets for the biggest institutions in the world. But that requires a hell of a lot of regulatory clarity and thinking about what's likely to come in regulation. I sat down with Jeff Horowitz from BitGo and he broke it down for me. So you've been around the compliance game for a while? Yeah. Yes. So I'm happy to talk about whatever you want to talk about.

I give you about BitGo, my background, regulation, wherever you want to go. We're talking about it all now. All right, we're ready. He's already on and I just like to just start talking. Awesome. Yeah, but like you've been doing compliance for a very long time, but not obviously only in crypto. Yep. Is this the absolute Wild West versus what you were doing before?

It is the fastest I've ever had to move in my career. So I've been doing compliance for almost 30 years. Goldman Sachs, Citigroup, Pershing, which was the largest clearing broker dealer in the United States, owned by a bank in New York, Mellon, and then got an opportunity to go to Coinbase and looked at the risks and the reward. And the risk was, well, if crypto fizzles, I go back to Wall Street, but if it doesn't, I get to help shape regulation, work at a great company, and really dive into what can crypto bring to the world

and how do we do that in a sensible and controlled way because there are regulations that we need to follow. I've been catching bad guys for years and so I'm like, I got to do this and everybody has to work at a startup at least once in their career. So what I could get out of that was, you know, a hundred X in knowledge.

And so, yes, it's been crazy. It's so funny to think of Coinbase as a startup. And in 2022, it's hard to think of that. Correct. And then, you know, I'm at BitGo now, which is the largest institutional custodian. And it's just been explosive growth of how the institutions are now getting into crypto,

wanting to understand what it is. And so we started with hedge funds and treasuries. And the more regulatory clarity we get, the more the traditional institutions are going to continue to come into the space. But isn't that sort of the elephant in the room, clarity? Yes. Because we certainly don't have it now.

No, but- Maybe you do and we don't know about it, but we certainly don't feel like we have it. No, and I think the executive order is a good start of a conversation. I think the US has woken up that outside the US, they're leading in innovation. And as a country, if we don't figure this out,

it will go all offshore. And we're not going to mitigate the risks that they're trying to mitigate with regulations. So, interesting for White House to get involved and say, hey, guys, stop fighting and let's figure this out. You got 180 days because we're losing the battle here. But it's incredible that you read the executive order and it's not even saying this is what we need to do. It's saying, guys, go figure out what we need to do and who's going to do it. It seems like such a very initial first step. Yeah. And it should have happened three years ago. I think they really thought this was

not going to get to where we are and they wouldn't have to deal with it. And the reality is now they need to. It feels like it's the same actually with politics, right? If you asked a question about crypto to a politician three years ago, they would just walk past you and ignore it. And now they have to have an opinion. And regulators, it's probably the same way. I mean, you're just at risk now that your constituents, the people in the country who have money now, legitimately care about this, and you need to give us some direction.

They had sound bites. Well, why do we need it? We have Venmo, it works. It's only used for money laundering and illicit finance, and now we're doing the education. So we meet with congressmen and senators on what are the risks and what are the rewards, and how should're doing the education. So we meet with congressmen and senators on what are the risks and what are the rewards, and how should their constituents view it, and what do we need

them to lobby for or have conversations about. And to your point, they weren't having that three years ago, but now they are. But are they listening? Yes. They care. They legitimately care now. Yes. We have them coming through our offices on a much more frequent basis to explain to them what do we want regulation to do? And where does regulation fit in with growth and expansion of crypto? And how do we get to the unbanked? And how do we take away some of the fees

of all the intermediaries and make it a more efficient system? And so, they're starting to listen. It's a surprise to hear that they would be asking that when they're sort of part of that system. They are, and there's Democrats and Republicans, and it's, you know, it's like what? You're talking to both sides of the aisle, right?

Both sides. Because I think there's this weird public perception that it's become this, you know, one-sided debate, and it's just not. No. And it's funny. Sometimes we talk to the people that are proponents, and they get it, and they want the adoption. But we also have to spend time trying to convince those that are naysayers and don't understand it why they should dig in a little more. There's nothing wrong with being a naysayer as long as you're willing to listen.

Listen. That's part of the conversation. And when I listen to the testimonies on the Hill, some of them are just coming from a perspective of non-knowledge and they haven't listened. And I think that's what this executive order is going to hopefully spearhead. Like, let's have the open and honest conversation. You obviously are operating regardless of clarity or not. Yes. This is happening. Yes. This is happening. Yes. This is happening. But are there things that you can't do still that you guys have on the roadmap

or really want to make happen immediately that you just can't until they start to become open? So there's, you know, do you ask for forgiveness? Do you ask for permission? We will always follow the law and we're always going to make sure that what we're doing meets the regulatory constraints we're under going to make sure that what we're doing meets the regulatory constraints we're under. We're a trust company. We need to follow those rules.

There's lack of clarity on borrowing and lending and what's a security and what's not. So yes, there's been business opportunities that we haven't been able to adopt because of that gray area. But as a custodian, I can custody security. I can custody anything, which is great. The challenge comes in when you want to trade, when you want to earn interest on it, and I'm for customer protection and sensible regulation, but lack of any conversation is what's hurting this. Because you don't want to live in an enforcement world, and that's kind of where the SEC is,

where they're going to legislate through enforcement, and that's not where we want to be. We want to be at the table. Gary Gensler says, just come in. Come into the office. Talk to us. Coinbase comes into the office to talk to them and gets a threat of litigation on a 4% earned product. Yep. Yes.

Why would anyone go in and talk to them if that's what you're publicly seeing when somebody legitimately tries? Yeah, it's not a good place. And Commissioner Peirce is like, yes, we want to work with you. We want to be in a sandbox. She's having the right conversation. I don't get why Gensler is from that mindset. And he understands both the risks and the opportunities. And the technology.

Yes. And look, there are some things that we need to fix, right? We don't want retail investors coming in uneducated and not understanding the risks of, whether it's wallets or, you know, the, just like buying a security, you want to research the company.

You want to know what they are going to do, what utility they bring in, what problem are they solving? Same thing with these coins, right? You need to understand what their premise is. So we do need some customer protection and some disclosures, but it's buyer beware, do your homework, and let's let the innovation that some of these new tokens and chains are bringing to make efficiencies,

let's let it prosper. Well, it's crazy, you said at the very beginning, it's the fastest moving market. Yeah. They're never going to move fast. I have this feeling that even by the time they start to regulate, the industry is going to be so beyond what they were attempting to regulate anyways that they're just going to be chasing this horse indefinitely.

Well, I think the problem is they're trying to put us back into you've got to comply with the only regulations we're comfortable with. Right? 1930s Howey test, not exactly relevant for technology from the 21st century. Not at all. I mean, you know, we have decentralization and utility that we hadn't contemplated in the 40s. And so I'm not saying let's write new rules, but let's think out of the box here. And what I think is happening is they're picking and choosing when they want to do that. So some of these unhosted travel rules, they're putting in new requirements

that the banks don't have to do, but then they want to apply the securities test of the Howey test. So you can't have both sides. So let's figure out what risk are we trying to mitigate, and then we can figure out rules for it. Do you think that we'll see a SEC or CFTC, obviously we talk about a partnership,

who should be looking at this, who should be looking at that? Do you think we just get our own agency. No, no. That would just be another agency that we need to go through in addition to the SEC and the CFTC. Right, it would actually be worse. Yeah, I think that will be much worse.

I think we need to be able to think that we're in the 21st century and the innovation we have, we need to adopt our rules for it, right? And if we had over-regulated the internet in the 90s, we wouldn't have Uber and streaming television, all of these cool things that we have now if we over-regulated the internet in the 90s, we wouldn't have Uber and streaming television, all of these cool things that we have now if we over-regulated it.

So let's not over-regulate crypto, let's put some guardrails around it. Maybe their fear is that this is the money. Right, the internet was the information, I just don't think they saw it coming. And now when you have the example of the internet and the proliferation of it through the 90s and 2000s, they're probably a little bit scared of where this could go.

The US doesn't want to use, lose the dollar being the national global currency, right? So we're talking about what would a CBDC bring. But Bitcoin's not going to supplant that. It just can't. I know you can't say that here, but it is. Correct. But sensibly.

But it has a purpose. It has a store of value purpose. But we got to move with technology, right? This country hasn't invented anything, right? The only thing we invented lately was the internet, right? And we got behind that, but since the industrial revolution, we don't make anything here. So if finance could be something that we can all rally around

and bring people who are not in that marketplace into the marketplace. Let's try it. Have you ever been trading crypto and during bouts of high volatility had your exchange go completely offline or seen the order books go thin and have absolutely no liquidity for your trade? I know that you have. It's happened to every single crypto trader, but it's not an issue anymore thanks to bullish bullish is a powerful new exchange for digital assets that offers deep liquidity automated market making and industry leading security combining the innovations of defy with the regulated environment of traditional finance bullish empowers users to trade with confidence

across variable market conditions while secure in a regulated environment that's backed by multi-billion dollar liquidity contributions from the bullish treasury. Follow at Bullish on Twitter or visit bullish.com slash Melker to learn more. Talk about growth at BitGo because we all have the narratives of institutional adoption that we're sort of trying to pick and choose who we can find and says this is happening. Not you can see how much is being custody. Oh, yeah. So we have over 60 billion in crypto assets under custody. Right. And it started with hedge funds. Right. That are crypto forward. Right. They get it. They want to bring their investors into it. But we have corporations wanting to put Bitcoin

on their balance sheet. Right. So we have customers like that. We have exchanges. We have the protocols themselves. So it's gone way up in the last 15 months. That next wave is what we're really focused on. So when the BNY Mellons and the large asset management firms are going to allow their customers to start investing in this and bring in an ETF and a mutual fund, right? That's the next wave.

We've got some hurdles to get there, but they're waiting on the sidelines. If I am a fiduciary, I need to know that I'm putting my money with a qualified custodian. That's what we are as a trust company. And whether we do that at a national bank level, at a trust company level, that's where the conversation's happening.

And I think it will come. Six months, nine months from now. That's soon. The more clarity we get, they don't want to be left on the sidelines. So you hear big companies like Bank of New York, Mellon, and J.P. Morgan starting to get into this space, that's a really good sign.

Yeah, they're here. Yeah. And they've been doing this for 200 years, right? What's challenging for them is the technology, right? We have cold wallet storage, we offer hot wallet for infrastructure. We can bring everybody into this. If you want to own your own keys, we have that.

We can also hold your own keys in cold storage, right? And we're going to control that. We have that five year can also hold your own keys in cold storage, right? And we're going to control that. That, we have that five year advantage in building the technology. I think the banks are going to need to work with all of these custodians that have already been there and built. And that's what we get our customers from

because we are the safe, secure way to hold your assets. It sounds like then the conversation has evolved because probably over the last few years it was, I don't know if we want to be exposed to this, but it sounds like now it's the risk manager saying, how can I safely be exposed to this? Correct. But we want to. Yes. Yeah. And they've gotten there. Those conversations have happened. So I've had to sit in those risk management committees like, do we touch cannabis? Do we touch crypto? Right. They're there now going, well, there is a use case for it and let's get into it. And they've got, you've got teams of innovators that are working on

how do we get into that space, get in safely. They're not going to jump into the pool, but they have their toe and maybe a foot in there. Makes me laugh about, I didn't get into crypto until 2016, but in 2017 it was the institutions are here, that's what's driving price to 20,000, and none of them could do it. You just didn't have the even infrastructure in place for them to safely.

I mean, that was literally a pipe dream. Yes. Yeah. Yeah. We want it because we want us to be global. We want it to be really big. And that's where all the money is sitting is with the institutions. So I think we're like maybe at the second inning.

Right. So is there more infrastructure that still needs to be built to service all of their needs? No. Or is it just there waiting for the regulators to say, turn it on? It's waiting there. Yeah, turn it on, right?

I think we need the ETF approved, right? Yeah, Godspeed. Right, you know. Good luck. So we're doing it in the futures, right? But it's there. We're working on what are the market manipulation challenges and the use cases there so that they can get more comfortable

for the SEC to approve this. I think they're jumping at the bit, right? I think their customers are saying, how do I get access? And I want to get access through a qualified custodian, through a broker dealer, through somebody that I know I can trust, right? And then we can all be that infrastructure behind that. Are we at risk of the regulators, legislators still going completely the wrong way on this? No, no, no.

We've seen, and it's not just the asset price improvement, right? It's what can the utility do? How can I earn interest when interest is zero, right? And can I lend and borrow and actually make my investments work for me? And they want a piece of that. I'm really excited for the use case though of crypto going around the globe, right?

Remittances cost so much. If we can do this at a fraction of the cost and while mitigating the risks of, is it used for good purposes or for bad purposes? The use case is there that we can bring so many people into the economy that just can't get a bank account. Isn't that misdirection anyways, though? Because that's, I sort of joke, it's like saying that somebody put fake news on the internet, let's ban the internet. Instead of talk to the person who's posting the fake news.

This is just technology. It is just. You can't shut down the technology because it's being used for good or bad, it's agnostic. Correct, and it exists peer to peer, whether we regulate it or not, right? It's unstoppable. It is unstoppable, and some of the regulations

is coming out going, all right, well, you want to know every transaction I ever did and report it to a government, but my $20 bill doesn't get reported, right? And we can't write rules for that to mitigate a real small potential problem of illicit finance. So we need to figure out how peer to peer

and peer and institutions can work together. But doesn't that give you pause to see what the EU regulators just did? Because we're talking about playing by different rules just because of the name of the asset, right? Absolutely. If you need to send me $1,200 because we went to the Super Bowl together, you can Venmo me that without collecting my driver's license, social security number, and then sending that to the government. That's what the EU just did. I know.

Doesn't that give you pause that that could, given those aren't elected officials, but given that that could happen here? That's what I mean by going the wrong way. Absolutely. So we had the same conversation at the end of 2020 here with the Treasury Department when they wanted to put out some rules

around unhosted wallets. And so I sat down with Treasury officials six months before that came out. We had a meeting in Washington and we discussed the pros, the cons, and the risks of them coming out with something like that. And I thought we had made progress, but then that rule came out and now you have the EU rule.

They can't have their cake and eat it too. They can't say we want this, but we're not going to make banks do it. We only want this for you. We only want this for you. And I want to hold the government responsible for, if I gave you all that data, what are you going to do with it? They don't read all of our SARs today.

They don't read all our CTRs, right? And now we're going to start reporting on $1,000 or $0 threshold transactions. They got to prove what they need that data for before we start sending it. So what are you most excited for then in the coming year? I mean, you choose your timeline because in this space, one year can be 50 years and anywhere else. But what's really getting you excited about what you guys are doing moving forward? I would love to see Finance 2.0 really come to fruition, right? We've been living in finance 1.0 for so long. The innovation that we can do where you can make money, earn money, lend and borrow with an asset that's going to do something different in the future is exciting. I think some of the chains, whether it's Avalanche or Polkadot or,

you know, that can speed transactions up beyond what Bitcoin can do and can compete with Visa and MasterCard. That's pretty exciting. I think it's endless where we're going to go. We just got to get going. And we need the regulators to help us get there. Well, I'm glad that we have people like you at least trying to make that happen. Where can everybody follow you,

what you're doing after this conversation? On LinkedIn, I think at Jeff Horowitz, but reach out to BitGo. We can custody safe, we can trade, we do prime brokerage, and we can do it out of cold storage, which is the safest way to do that. So any institutions who want to learn more about what our products and services,

reach out to us at BitGo. Yeah, it's funny, we're at a place where being your own bank as an individual is really scary. Yes. Yes. Maybe it's nice to have a trusted custodian actually to hold your assets so you don't have to worry so you can sleep at night. If I got billions, I want to trust it to somebody who's been there, done it, and helped build some of the security and multi-sig. It's one of the things we pioneered.

So we'll leave the unhosted wallets and you want to maintain it on your phone to the retail investors. Awesome, man. Thank you so much. Scott, thanks for it. Appreciate it. Thank you so much for listening to this episode. If you haven't already left a rating

or a review on Apple Podcasts or Spotify, please do that now. Spotify just added ratings. So please go ahead and click that five star. I'll see you guys next time.