The Wolf Of All Streets - Trillion-Dollar Wallets & The Future of Crypto Custody | Mike Belshe

Starting point is 00:00:00 This special coverage of Token 2049 is proudly brought to you by the Aptos Foundation. You're officially incriminated by anything you say. I won't tell you that we already got you on tape. 95% of our clients in 2028 don't even have crypto yet. North Korean hackers are targeting the ETF issuers. The SEC and the FTC and the FDIC and the OCC. CBBTC sounds a lot like CBDC. Obviously, Coinbase and Central Bank have the same initials. The institutionalization of crypto comes at a cost,

Starting point is 00:00:34 and that's having to have a trusted custodian for an institution's assets. Luckily, we have the CEO of BitGo, Mike Belshi, and others like him who are working on these problems and envisioning the problems of the future to make sure that all of our assets are safe. We also had a conversation about their brand new stablecoin and what that means for the market. So you and I have sat down and done these now for a few years. Indeed.

Starting point is 00:01:14 I would generally always talk about the state of custody. All right. Where would you say we are now? Have we evolved over the past few years? Is institutional custody improving? Well, I guess to some degree it is, right? So we have ETFs now. I'm not sure today's counts of how many billions are in the ETFs. BitGo's handling it for four of those guys at this point.

Starting point is 00:01:37 So hey, institutions are participating at that level for sure. Outside of the US, ETC is very similar to an ETF type of product. They've been using BitGoCusty for like forever, since their inception actually. They recently got bought by Bitwise, I think it was. So look, I don't know. I think on the institutional side, there's that access now for like use the traditional rails and be able to touch bitcoin obviously that's going to replicate for ether and then for solana at some point although that might be a little farther down the line but most of what we do is still you know all crypto native stuff so i think you got to marry you know how do you have custody and also self-custody i think you

Starting point is 00:02:20 know why are we here we're here to have a different type of banking relationship for people and we want to have a decentralized world where people can have that same level playing field with the bank, right? So self-custody is a huge part of the future. I think because the only custodian that has the full lineup of self-custody platform, everything we do is just two out of three multi-sig or MPC technology. But we also have the custody part. So businesses can use a combination of custody plus self-custody wallets. Individuals can hit either side of that as necessary, et cetera. Crypto investors in the United States face some major challenges. One of them is that there's almost no way to get exposure to the asset class inside of your traditional investment vehicles. The other thing is the taxes.

Starting point is 00:03:06 They are absolutely atrocious. What if I told you there was a way to solve both of these problems? Well, there is. And it's with a self-directed IRA from I Trust Capital. Guys, not only can you open a new self-directed IRA and fund it with the limits each year, but you can actually convert over from your 401k, your Roth IRA, any other IRA that you already have, and you can do that tax-free, just transferring over the balance. And then you can

Starting point is 00:03:31 go to cash, buy as much Bitcoin as you want, and not pay taxes when you sell it. You absolutely have to try this if you are in the United States. Use the link down below. It's bit.ly slash itrust-scott. That's B-I-T dot L-Y slash I-T-R-U-S-T dash S-C-O-T-T. You have to try this now. One of the biggest recent stories I actually saw was that North Korean hackers are targeting the ETF issuers. How do you stay ahead of something like that when you're custodying billions for the Fidelity's and BlackRock's and Bitwise's of the world? This is main stage now.

Starting point is 00:04:12 This isn't a small DeFi hack if something like that were to happen in the future. Yeah, that's right. I mean, there's 60 billion of assets in Bitcoin. It's a big number. And I don't know if there's any trust company that ever went from zero to the size that we're at in a shorter period of time. And obviously, that's because we're in this big growth sector. But the level of security depth that you go through is extreme.

Starting point is 00:04:34 So on the institutional side, the due diligence that comes in, like what are banks expecting? You hear all these incredible IT questionnaires that will come in when you start working with a bank on any kind of technology product. And it's deep. But it's not just the technology. It's actually also the financial service. The operational controls are behind it. What are the backstops? What happens if something does get penetrated to this level?

Starting point is 00:04:58 What's the backstop to that? How do you have personnel at BitGo that can't steal the money, insider thefts, things like that? Number one, they say it's the number one type of breach. I'm not sure if that's actually true or not, but of course you need to prevent that. And then of course the other side of it is how do you protect keys over the long term of time? Right? Like I'm CEO of BitGo today. You know, maybe you feel like, oh, that Mike guy, he's been around for 10 years. He's got like the right ethos for crypto, whatever. Well, what happens when I'm no longer the CEO

Starting point is 00:05:26 for whatever reason? Not that I'm going anywhere. Yeah, not an official announcement. But you know, you do have to be thinking about that. The same thing was true, like with Google. We used to have Larry and Sergey. And when Larry and Sergey were there, they had this motto, it was do no evil.

Starting point is 00:05:39 And people got comfortable with that. Now they're not in charge anymore. And of course they don't use that motto anymore. but can you still trust the management? Anyway, longevity of keys. How do you make it so that you can get to all of the backups without having anyone else being able to follow the breadcrumb of how do you restore and how do you keep that out of the hands of the North Koreans? There's a lot of work. And how does that evolve with time? Because the technology evolves and then your systems are no longer up to date.

Starting point is 00:06:10 And you've got to imagine that they're also trying to get ahead of those things. It just seems like a never ending process of trying to be one step ahead of any possibility. Of course, this security is not a feature that you finish. You literally are never done. You have to keep raising the bar, you know, and Of course it is. Security is not a feature that you finish. You literally are never done. You have to keep raising the bar. And Bitcoin has been through this evolution.

Starting point is 00:06:29 In the early days when we started in 2013, a $10 million wallet was a big wallet. By 2015, it was a $100 million wallet. By 2017, we started to get into exchanges and have billions of dollars of assets. And then what are we designing for now? So I gave a talk at Stanford, it's a little bit dated, but it was called Designing for the Trillion Dollar Wallet. Now it's not like you're gonna have a wallet that you want to put trillion dollars in a single wallet,

Starting point is 00:06:53 but it's a conceptual piece of like, are we gonna have companies that are holding a trillion dollars of assets? And how are we gonna secure those digitally? Yes, we're gonna have them. Yes, you have to design for it now. The industry is only 2 trillion in total size today. But as we bring more real world assets in, as the price of Bitcoin goes up, as the ecosystem grows, of course we have to be designing for

Starting point is 00:07:12 that now. So yes, you keep raising the bar. You know, you can split any single point of failure across more parties. Right. And then of course, you take a risk based approach as the other side of it. We don't worry too much about small withdrawals of less than $100,000. It's kind of like, okay, we can manage that. We got lots of buffers and things can go wrong. On the other hand, for the full cold storage assets, that's where you're going to put like deep protections. And sooner or later, we have to start thinking about not just the virtual nation state actors

Starting point is 00:07:41 like North Korea. Sooner or later, we actually do have to think about physical armies also. That is going to come. Fort Knox. Fort Knox. Yeah, yeah, yeah. I'm saying we're going to have to physically secure our assets with the military. Yes. And you're going to distribute those keys across multiple countries, across multiple jurisdictions. So it's break into one vault not good enough, right? Right. More like break into 10 vault not good enough, right? More like break into 10 vaults. How do you do that? It's going to make a great movie one day when we start talking about it. We're still in a, let's say, questionable regulatory environment.

Starting point is 00:08:14 I think there's a lack of clarity in general. We had the SAB 121 veto where we actually had the state streets and the BNY melons and the largest custodians of every other asset effectively trying to get into this space. Has that been a bit of a boon for BitGo that they really don't have clarity on what they can do? Or in your mind, do you want more institutions coming into the space, custodying assets and I guess bringing a bit more legitimacy I think Wall Street thinks about products differently than Silicon Valley does so I certainly come more from the Silicon Valley side you know when you're

Starting point is 00:08:52 building products from a technology perspective you're usually thinking about open seas of like lots of new customers so when we think about the future 95% of our clients in 2028 don't even have crypto yet. Right. Right. So it's a future. It's a growth thing in Wall Street. You know, the products are already known. If you're going to launch a new product like it's how do you steal it from this guy in order to grow your business at his expense? It's a zero sum game. But in technology, it's not that way.

Starting point is 00:09:20 So we would love for Wall Street to be able to participate because we'll all grow together and we're not worried about it at all. So with SAB 121 look, I don't think there's any lack of clarity What's going on is we have you know an administration and starts with the president that has decided that they're not favorable on digital assets And they have installed regulators across the SEC and the FC FTC and the FDIC and the OCC and the IRS. If it's got three or four letters, they don't like us too much. You know, and they're negative. And look, it's no surprise that it's going to take time for regulators to work through it. Like this is a very different asset class. You know, it doesn't

Starting point is 00:10:00 abide by market structure they're familiar with. There's no case precedent on it. There's a lot of myths going around about how actors participate. But probably the biggest problem is that with digital assets, we suddenly cracked open global financial systems that they never had to solve for before. So every regulator on the planet has always kind of drawn a circle around their people and created a banking system that is the guardian of finance. And with digital assets, that doesn't work. So we've needed this for decades because we've certainly outsourced tremendous amounts of manufacturing to China. We've got a lot of IT labor out in India. It is a global economy. So we need a global financial system that accompanies it in order to be able to just do all the transactions we want to do.

Starting point is 00:10:47 The governments and regulators haven't been there yet. And all of a sudden they're having to figure that out on the double. All right. So I don't think we should be too surprised that it's going through a process. We'll get through it. SAB 121 is like the smallest of little tiny things. It's really that regulatory, like green light, we're going to work with you, we're going to make it happen.

Starting point is 00:11:08 You know, obviously we want the big traditional guardians of safety to be participating in the appropriate ways. It's kind of silly that regulators are blocking that at all. How much would regime or party change in the United States change the immediate future for the industry, but for you as well? Obviously, I think we all have ideas, but we know exactly what we're dealing with right now. There's conjecture that that could change even if the party does not. I think we're all doubtful.

Starting point is 00:11:37 Yeah, yeah. You know. I mean, look, right now we're about 30 days away from a decision. And it's either going to be, you know, we take Donald Trump and he's pro-crypto or we take Kamala Harris and she's anti-crypto. I know that both sides are trying to win votes and they'll say a lot of things in order to win those votes. But it is a decision right now. And of course, you know, as much fun as it is to be here at Token 2049, talking about crypto as though it's the world's most pressing issue, those candidates have a lot of issues that they have to deal with. I think foreign policy and otherwise probably

Starting point is 00:12:12 more important to be sorted out than crypto. Our echo chamber thinks that it's the most important thing, and I think Trump sparked that when he came out pro crypto. My assumption was always that we would just hear nothing from the Harris campaign because they have bigger issues. And why even poke the hornet's nest if they've already lost that small constituency or voter base that they assume is gone? Why even go there?

Starting point is 00:12:35 Right. So I think it becomes a diminishing issue into the election, personally. You know, but I do think there's other related issues between foreign policy and crypto where crypto can really help. I mean, imagine if the US State Department, which is responsible for allocating billions of dollars in foreign aid all over the planet. Imagine if that were tokenized in some way. Imagine that we're open and transparent. Right. So look, the State Department claims and I think the people that work there probably genuinely want to make sure that the actual monies are delivered to the appropriate places.

Starting point is 00:13:06 But how do we actually know? I mean, we know there's all kinds of corruption that happens all over the planet. And it's a very difficult thing. There's all kinds of conjecture about how well is it working? How efficiently is it being distributed? If you were a CEO that were distributing money, you'd be very concerned about making sure that the money lands in the right place. So having some transparency around it could be a really useful thing. Like, I don't know of any programs that use crypto to do this that the State Department could really rely on today. But if we get past level one, which is enabling crypto, accepting it, figuring out how to

Starting point is 00:13:36 have the traditional financial folks participate, then we can start talking about layer two. I only laugh because it assumes that they actually want transparency and for anybody to know where the money's going. You look at the Defense Department's audits, I think they've never passed one. 30-ish percent of the money that they spend is accounted for. I think there's some purposeful obfuscation on where money goes from the United States government into foreign countries, but with the right president who actually cares, whoever that may be, or with the right person under them, this solves endless issues, as you said. Well, I share some of your skepticism. Let's try to avoid the politics, get back to crypto.

Starting point is 00:14:15 Yeah, but it can be done with a stablecoin and you've got one coming. That's right. Yes. So we've just announced today that BitGo is getting into the USD stablecoin arena. It's called USD Standard. And look, we think there's a real opportunity to change the way stablecoins work that actually opens up availability to everybody and then participates and rewards the network. So what makes a stablecoin valuable is not the issuer. It's the network of everybody using it. It's the liquidity on the exchanges. So what makes a stablecoin valuable is not the issuer. It's the network of everybody using it. It's the liquidity on the exchanges. It's the market makers. It's the payment processors that make it all happen. And today what we've got is we've got an evolution where

Starting point is 00:14:55 those rewards tend to go back and accrue only to the issuer. And this creates a problem. There's a few folks that are working on getting it all the way back to the end holder. So BlackRock has a product. That's a good product challenge there. It's definitely a security, right? So in the US, you have to register, which means you can't really use it outside the US. Crypto can't use it because they're not broker dealers, things like that.

Starting point is 00:15:15 So this is a system that's different. It's designed where the rewards go to institutions, and then those institutions can use the rewards however they see fit. And we're going to get back almost all of the rewards. The goal is to like very minimal management fee, about 10 basis points. It goes to BitGo, that's it. And everything else goes back to the ecosystem. So in layman's terms, with current stablecoins,

Starting point is 00:15:37 a company buys a whole bunch of treasuries and makes a bucket load of money and doesn't generally pass that on. Yeah. And you're saying that there will be an incentive for anybody who's utilizing your stablecoin versus potentially some of the others to actually collect that yield themselves. Yeah. And by the way, this is as much about innovation as anything else. So, I mean, just play it forward. Let's say you're trying to start a business in the crypto segment.

Starting point is 00:16:00 Of course, you're touching US dollars in some way, whether you're a payment processor, whether you're a remittance processor, whatever. You can't have as part of your business model, revenue coming from the stablecoins that you're using and adding value to the network for in the current world. So you've got to figure out how to get that revenue elsewhere and charge fees, whatever. This is going to make it so that you can actually count on that as part of

Starting point is 00:16:24 your revenue model, provide lower fees to end users on other things, and really make sure that innovation can continue to happen over the long term. Not to circle back to regulation, but stablecoin regulation is some of the lowest hanging fruit that we have, and it has actually been on the docket. I mean, both Lummis, Gillibrand has it from the Senate, Patrick McHenry and others have been championing it in the House. Is that something that you see getting done? And as you're launching a token, do you have to consider what those bills might look like? Because we've seen even conjecture that to have a stable coin in the United States, you'd

Starting point is 00:16:57 have to be issued by a bank, right? Literally just, you know, which. Well, look, we are a New York trust company regulated under dfs is gonna be coming through that new york trust company um we are well aware of what the regulators are doing and we're completely engaged with them so there's no way we're doing this without you know the regulatory support we have that coming in um in terms of uh regulators i think they're anxious to solve this problem i mean when it comes to stable coins, they actually have more real value to add. They really understand the space pretty well.

Starting point is 00:17:30 And so they can help us de-risk it. So you've got the U.S. approach in Europe. You know, you need to have a have a license there. They want to see some of the reserve assets stored there. I think that same model is going to get replicated with other countries. I think it's actually reasonably sound. It makes sense, right? Which is that they want to make sure that their residents, the constituents that they protect, are able to get the backing should anything else kind of go

Starting point is 00:17:56 wrong. So BitGo has been building a global infrastructure of custodians for quite some time. We have seven custodians around the planet, everywhere from the US to Europe under BaFin, to the Middle East under Bar license, to Singapore here under MAS. So we're able to use those and we're putting them together to make it so you can do settlement services, dollar services, get in and out, hold your crypto, all through BitGo, completely regulated and safe.

Starting point is 00:18:21 Of all the things that this industry has thrown at the wall, we have two killer apps, Bitcoin and stablecoins. Yeah, I agree. I mean, it is the killer app. And to your point, governments should love stablecoins. Well, certainly the United States government, because I mean, it's hyper-dollarization, right? Buying treasuries,

Starting point is 00:18:36 spreading the United States dollar around the world. It's actually almost antithetical to the ethos of Bitcoiners to some degree. Look digital assets, I mean, some Bitcoiners are like, hey, the only digital asset that makes sense is Bitcoin. There's never going to be another one. I don't subscribe to that. I think innovation comes and the idea that I'm going to be able to declare that nobody

Starting point is 00:18:58 else is ever going to have a great idea around digital assets is crazy. It's insanely arrogant. So yes, stablecoins are clearly a fantastic innovation, completely lowers the barrier from being able to move money globally, locally, whatever it may be, provides a lot of programmability about how you can use that in terms of apps and services and products. So yeah, we're seeing it take off already and it's only going to get stronger. You know, probably it's the credit cards that need to think about like what is their role kind of on a go forward basis.

Starting point is 00:19:25 By the way, the stable coin usage also can learn from some of that credit card network. Remember, one thing that we get out of the credit card network is basically an insurance policy for consumers. Right. You see some charge you didn't like. Call them up. Tell them it's not me. Right. And they they're required in the United States by law to to back it out and then go investigate. Now, they still may charge you if they decide it's your charge. But there's a lot of consumer protection kind of at that layer. That's where the money allegedly goes to for your five percent fees to Visa MasterCard. I think we can come up with a happy medium where you're going to get the protections that consumers want. But you're also going to have the low cost that you might see more associated with stable coins

Starting point is 00:20:05 as opposed to credit cards. Yeah, we're seeing a number of stable coins obviously launch a lot of other institutional products. Like you said, BUIDL from BlackRock you alluded to before. Now we're getting wrapped Bitcoin from Coinbase and others that can be used on the network. So we're getting a lot of more institutional grade products, but some of them I think there's some skepticism around.

Starting point is 00:20:26 Well, sure. So shifting away from the US dollar one, let's finish that up. I think BitGo's position, we're trying to make a really neutral, open stablecoin that everybody can use. Everybody that helps make the network great gets rewarded for it. That's really the unique position and sharing everything back that we can. So that's where we're focused there. Now shifting gears over to Wrapped Bitcoin. You know, BitGo's been the custodian for Wrapped Bitcoin. The issuer of the Wrapped Bitcoin is actually the Wrapped Bitcoin DAO. It's been around for seven, eight years. There's a number of companies including Kyber and Rand and BitGo that got together many years ago

Starting point is 00:21:05 and said, hey, maybe we could create a rapid point for him to use within DeFi markets. So as of today, you know, Bitcoin is still, I don't know, 80 or 85 percent of kind of the wrapped Bitcoin market provides a tremendous amount of total value locked inside the DeFi systems. Now, some people are trying to figure out, you know, how do they get into that market? Bitcoin has been in the process of trying to decentralize. So look, we're primarily a US-based custodian when it comes to wrap Bitcoin. We keep custody of it completely within the United States. We think that DeFi wants and demands to start spreading that apart. So we're talking about security earlier. The basic principle of security is eliminate single points of failure. Of course if

Starting point is 00:21:49 you've got one key you split it across multiple keys, that's multi-sig MPC, that's what we do. If you've got one person split it across multiple people, you got one company split it across multiple companies, you got one jurisdiction for a DeFi type of product, do you want one jurisdiction to have complete oversight as to what can be done with it or not? You want to split that apart. So there's two single points of failure that we are trying to address right now with RappBitcoin, which is to start splitting the keys across multiple companies and across multiple jurisdictions. And then some people are seeing that as an opportunity to say, ah, you know, don't use that one, use ours.

Starting point is 00:22:25 Different arguments. Look, all of DeFi is a trade off of some of the benefits of complete decentralization and some of the benefits of centralization. Centralization comes in handy sometimes when things go wrong, right? Like you want to return some money to somebody that was wrongly hacked. That's where you get freeze functions and things like that. You want to take over in case something really goes wrong with the protocol, some unforeseen bug in the software.

Starting point is 00:22:50 These DAOs can come in and they can centrally just say, we're going to make a change and we see that happen a lot. A lot of the DeFi protocols actually have a relatively small group that make decisions in a fairly centralized way. Then of course, you've got things like regulation, right? So how do you be a regulated entity? You can't be a decentralized regulated entity today.

Starting point is 00:23:10 We may figure that out, but at least today you can't. And in order to have a regulated entity that provides like a legal framework that protects against like bankruptcy failures, that protects against like segregation of funds and commingled funds, has a fiduciary care over the assets. Well, that can only be done if you're kind of a centralized entity, at least in terms of being known to the regulators.

Starting point is 00:23:31 But we can split that duty across multiple regulated entities and provide those same protections. That's the type of thing we're trying to do. There's some competitors that are taking some shortcuts to try to win market share. Yeah, you mentioned before we were talking one of those incriminating things, CBBTC sounds a lot like CBDC.

Starting point is 00:23:51 It certainly does. You know, I don't know. I think they picked a funny name there. Obviously, Coinbase and Central Bank have the same initials. Yeah. But, you know, I will say if you're going to launch some sort of token to be used in DeFi, I think you actually owe it to the DeFi community to try to match the ethos of it. So one of the things you're done with RappBitcoin from day one was a proof of reserve system.

Starting point is 00:24:14 You can go to WBTC.network today. You can see exactly what addresses are holding the backing and you can verify that. You go to Chainlink's Oracle. They'll give you a proof that shows that that matches the number of tokens and you can count on it. You know, Coinbase traditionally hasn't done proof of reserves for their exchange. That's their decision. They can decide to do that or not. It looks like they're not going to do that for their wrapped Bitcoin, which is allegedly designed for DeFi. Look, I think we can do better. When it comes to DeFi, we want to see these types of on-chain proofs. We've learned a lot of hard lessons when we haven't had them. Exactly. And I know that Coinbase is a public company, their financials

Starting point is 00:24:50 are disclosed, there are tremendous, like, I don't know, 1800 pages probably come out every quarter in their tech use statements. There's no doubt. But that happened at Lehman Brothers too, in 2008. The entire reason we created this whole system from Satoshi with Bitcoin and whatnot is because guess what? While that system that we have in traditional finance, public companies and disclosures is good, we can do better. And that's what crypto is about. That's what DeFi is about. We can have transparency. Of course, you can't count on just an audit that happens offline. Every few months, we've had auditors fail. Obviously, there's some major auditors in Greece and not around anymore

Starting point is 00:25:31 because of auditing types of failures. So yes, we need on-chain groups everywhere we can get them. From a 30,000-foot view, you mentioned your speech at Stanford about trillion dollar wallets in the future and how do that grandest vision for 10 years from now of what this ecosystem looks like and what BitGo's role in that could theoretically be. Look, I think 10 years from now, we are actually going to have the global financial system where people actually can use their money across the world interoperably pretty seamlessly and I think the regulators are gonna have a much stronger ability to regulate in the ways that they want to they care about

Starting point is 00:26:13 AML KYC nobody wants to do money laundering no I mean enable money laundering nobody wants to be enabling terrorist financing so the regulators are gonna have ways to do that that won't get in the way of like regular normal people that are law-abiding citizens. And on top of that, we're going to have a way better use of our money at lower fees. So look, BitGo is building a global network on the custody and settlement layer to help make all of this possible. You're going to be able to do self-custody of your own assets. You want to go off the grid, you can go off the grid. And it's going to work with all of these regulatory constraints. Perfect. Thank you so much, Mike. Always a pleasure catching up. Likewise. Thank you, Scott.

The Wolf Of All Streets - Trillion-Dollar Wallets & The Future of Crypto Custody | Mike Belshe

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