The Wolf Of All Streets - Wall Street Will Fail | Mike Belshe On Bitcoin, Institutional Investors, Regulation & US Dollar

Episode Date: July 12, 2022

Digital assets will soon drive the global economy. Mike Belshe is playing a big role in that future as CEO of BitGo, the first ever US regulated trust bank, where he’s working hard to ensure a safe future for digital assets. He joins us on the show to discuss his personal journey from money to technology, why digital dollars may rise above Bitcoin, the biggest questions institutions are currently asking, and why Wall Street will ultimately fail. JOIN THE FREE WOLF DEN NEWSLETTER 📩 https://www.getrevue.co/profile/TheWolfDen THANK YOU TO OUR SPONSOR ►► 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://bullish.com/melker Bullish is licensed by the Gibraltar Financial Services Commission. Virtual assets and related products are high risk. Consult your investment advisor and trade responsibly. Bullish is available in select locations only and not to U.S persons. Visit bullish.com/legal for important information and risk warnings. EPISODE LINKS Mike Belshe: https://twitter.com/mikebelshe 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

We want to be able to make payments to suppliers in China on weekends and all kinds of things, but we just haven't had the technology that allows us to send money across these borders so quickly, right? Well, the demand is there. We definitely have the global economy. We need a global financial system to go with it. This is a problem they just hadn't solved. So whether it's with digital assets or some other mechanism, the citizens of the world

are going to demand that we have a modern financial system that works 24-7, just like the internet does. And this is the first inroad into it. Now, once the cat's out of the bag, the cat's out of the bag. You can't put it back. This episode is sponsored by my good friends at Bullish. Stay tuned for more information on this amazing company later in the episode. Institutional adoption requires a robust framework and security solutions that did not exist over the past few years. Luckily, we had innovators like Mike Belshi, the CEO of Bitco, who was one of the fundamental people building Netscape and Google

and some of the biggest technology companies in the world. Well, now he's in crypto and he built the most robust custody and the earliest custody solution for institutions to secure their crypto assets. And now he's competing with the likes of State Street and BNY Mellon, the biggest custodians in the world. We're going to talk about all the solutions to the problems that they're still solving now. Actually, I think it makes for a great story is how you ended up Netscape, Google, technologist and ended up having to deal with bankers now.

Sure. How'd you get into money from technology? Or is it because this is technological money? That's exactly right. Yes. Are we talking? We're always, we're just going. We're going already.

All right. Well, let's see. We thought we were going to be a technology company first. And in fact, that's what we built. We said, you know what? This stuff is too hard to secure. We were big fans of what was going on with Bitcoin. Obviously trying to

help the space grow. And so we pioneered this multi-sig technology. And our original vision was that other businesses and companies, eventually institutions and banks, would use that technology and deploy it underneath their own regulatory cover. But it's money. So, you know, startups, I've been doing this for 25 years, you know, you got to be able to move forward and having having dependencies upon others to make your business work. You can't do that. Right. So we can't just sit around and wait for institutions to come to the table. And so in 2017, we really got serious about becoming a regulated custodian ourselves, taking on that fiduciary role. And this was to help anybody that had a real fiduciary role come into the space, whether you're an RIA, whether you're an investment advisor, or if you're running a small fund, you can't hold the keys yourself. Even if you technically know how to do it, it's irresponsible

to even try because you have a duty to your clients. And if anything does go wrong and security is subtly hard, if anything goes wrong, you're going to be on the hook for it. So at that point, we made the full court press to become the first digital asset custodian. And so we did that. And that was a real shift where we now had to kind of repaint the picture of the company, not just a technology company, but we're actually a financial services firm and you can count on us and we're going to go and get the right regulatory backdrop for it. And we're going to go get insurance behind it. And we're going to have a credible management team and all the things that you would expect from a bank. Although, yes, being a banker was never on my bucket list of things to do.

I think one of the challenges throughout the history is one that you've solved, obviously, is that institutions likely wanted exposure to the asset class, but did not have a way that the risk managers could even start to think about gaining access. Right. So now you've built these custody services. We don't have that excuse anymore, right? So at this point, do you think that what you've built, what's been built in this industry is sufficient that the biggest wall of money in the world could come? Could we see pensions? And, you know, we're seeing insurance companies, MassMutual has Bitcoin on their balance sheet. I mean, we are seeing things like that. But do you think that there's any more excuses from an infrastructural standpoint for institutions not to be pouring money in? So it's a yes and no. Look, risk is still very present in our industry. Have we solved the custody problem?

Yeah, we have. So for those that want to take asset long and hold it in deep cold storage under a regulated, qualified custodian and feel safe about that, we got that down pat. The industry is still lacking market structure, and it still shocks people that come from traditional finance that look at crypto. They kind of look under the carpet and they're like, wait a minute, what's going on here? Because you don't see the typical participants. And the typical participants are a little bit befuddled. That is, if you're in this industry on Wall Street, you don't think about why is the market structure the way it is. You don't think about could it be done better

because you know you can't change it. So you're not the innovator of it. You're just the guy that inherited it. So it's kind of like how do startup companies tackle bigger companies. I sometimes talk about the innovator's dilemma where small companies do. That's going on right now with market structure in crypto. The incumbents don't know quite how to participate because they don't see the market structure they're familiar with.

They're not really good at innovating and changing that. And yet it's got to change in order to reduce the risk so that everybody can come in and actually have it be safe. All right. So I'm a little all over the map, but you see lots of elements of this. We saw Coinbase just a few weeks ago had to disclose through their, I think their quarterly, saying that, oh, by the way, if we go bankrupt, it's going to be Mt. Gox all over again. Mt. Gox, if you're not familiar,

is eight years in the bankruptcy process, right? And yeah, that's right. Every single U.S. exchange, and Coinbase is a credible player. I'm not trying to diss them. FTX is a credible player. But all these guys, when you deposit there, you're taking an IOU. And technically, if they make any mistakes and they go bankrupt, you're going to be just one of the creditors to the bankruptcy court. All right. So that's a problem. We can fix that. Traditional market structure knows how to fix it. But for crypto, we haven't quite set the stage for this is the market structure we're going to demand from exchanges and traders, which, you know, at the end of the day comes down to some amount of, you know, security or eliminate single points of failure. Regulators do get confused. They think that, I mean, I shouldn't blame regulators. Everybody gets confused coming into the space. They look at crypto. They say, this is totally different. I've never seen anything like this. And it's hard to get your head around it. But if you just kind of take it down to first principles, investor protections and security are highly

aligned, right? Investors want to know they're not going to lose the asset. They want to know there's not going to be some stupid security failure at the bottom layer.ors want to know they're not going to lose the asset. They want to know there's not going to be some stupid security failure at the bottom layer. They want to know they're not going to get rug pulled. So if regulators just took an approach of, we're going to help the industry mandate security, it's not a bad place to start. It's not going to be the be all and end all. It's not going to necessarily help for more advanced things around front running and best

execution, but it will at least take away some of the rudimentary problems that we've been running into so far. All right, so back to rewind to your question. Look, yeah, the custody element is there. There's some confusion at the regulatory level of like, well, what type of custody? And can state chartered trusts hold custody of things that might be securities for federally regulated? The answer is yes. It's funny. The regulators have a hard time understanding what the laws are. They haven't really looked critically at this element in the past. They never had to. That's right. They haven't had to. The big institutions got big and they've been allowed

to do these activities for a long time. And the market structure is there. So they're just kind of like, yeah, yeah, yeah. Now crypto comes along. So they're like, wait a minute. Can we do that? Yes, you can. Okay. All right. Anyway, custody is solved, but I think there's another wave coming, which is just the next set of changes to make market structure come to life, which will reduce risk. And the smart investors are thinking about that. Now, just to make it not too pessimistic, you mentioned pension funds. You mentioned, I don't know, did you mention endowments? I should have, but I said insurance companies and pensions.

But I think endowments and pensions are the big wall. Okay. Yeah, pensions for sure. Sovereign wealth, they're already in. It's just a matter of scale. So with COVID and the crisis that we just had, it changed the landscape outside of crypto. So what happened is all of these guys that are looking to make a return to preserve long-term wealth, they've had their portfolio plans. They had some amount of equities, had some amount of

bonds, had some amount of investments. Crypto wasn't part of it, right? Because crypto wasn't ready. And then all of a sudden, the US starts printing money at unprecedented levels. We're not the only ones. All the other countries are doing it too. And their portfolios don't look like the models that they set forth 10 years ago for how they were going to preserve wealth. Bonds are terrible. Stocks are about to pop. We all know it, right? There's a huge bubble. And they're thinking, holy cow, how am I going to keep up with my promises that I made 10 years ago? And they all invested in crypto. They're all looking at it. Now, the real question when it comes to are they investing is like,

at what size? So the pension funds, and I say the pension funds, that's an overstatement. They're not actually in yet. They're certainly looking at it. I think they have the hardest job. They've got big investment committees. It takes a long time. There's yays and nays in those committees. But the endowments, yeah, they're already coming in. And they're looking at the market and how are they going to preserve wealth. Frankly, if you don't have 3% to 5% in crypto assets right now, you've got a big exposure where you can miss and it's only 3% to 5% of what you would be investing. Now, 3% to 5% got a big exposure where you can miss and it's only three to five percent of what you would be investing now three to five percent is a big number but your downsize is but downsize extremely limited at three percent that's right the downside is super limited and given what's

going on with the u.s dollar you have to say that's not a bad bet and you've been here a long time even when you were building your custody solutions, I would imagine in 2017, if you were at an endowment or a pension fund and you were the guy who dared walk in and say, maybe we should gain exposure to Bitcoin, they would have outright fired you or probably put you into an institution. Now I think it's 180.

Now I think it's a, yeah. Now I think it's 180 degrees. I think you can't be a risk manager or a CFO or any of these sort of companies without being able to answer questions about crypto and have a plan for it, even if you're against it. That's right. Yeah. We have definitely seen, because we've been doing this 10 years now, like in those early days, you know, we build a security solution. Who pays for security solutions? Well, people that have lots of assets, right? So we've always gravitated towards businesses and institutions. We say institutions, but it was really the early crypto adopters, the early crypto businesses.

In terms of the investments and the funds, et cetera, we've seen a segregation. You've got crypto funds over here and everything else over there. And that's what we saw through the second half of the 2010s. And then with 2020 and COVID hitting, all of a sudden the economy looks very different. And yeah, people are saying like, shoot, how can I ignore this asset class that actually could emerge as the inflation hedge? Hasn't happened quite yet. And then the theories are wild, fast, and furious. So is it going to hit that inflation hedge capability or is it going to remain correlated to everything else? My personal view here is that we're going to find out.

Of course, when it's small, it's more correlated. It is a high-risk asset. And when people are in panic mode, they look to fly to safety. And so they eliminate their risk, right? And so they've taken that off the table. Especially the one that's liquid 24-7. And it's liquid 24-7. Exactly right. Good luck selling that stock that you're dying to get out of on Saturday at noon. That's exactly right.

Yeah. The inflation hedge argument is always interesting to me. I think in the United States, we obviously have the luxury of access to the global reserve currency. And we have the luxury of viewing it as just another asset in your portfolio. But I think you can make the argument that in a hyperinflationary environment, it's already proven as an inflation hedge. If you live in Venezuela, you're not having this same conversation right now. You're immediately getting out of your local currency into Bitcoin or even stable coins, frankly, as fast as humanly possible.

For sure. But I think you could also argue there that the U.S. dollar is an inflation hedge. Hence why I said stable coins as well. In that environment. But yeah, we're going to see what happens. And then here in the US, we do have the luxury of massive reserve currency. And I think it's hard to appreciate the scale of how big that is. 60% of the world reserves are still US dollars today. It's been shrinking over the last decade. But it's going to take a long time to unwind that. And when we did all this money printing, we injected that money solely into the U.S. economy. Right?

So we all receive it. Stimmy is great. You know, we don't feel it directly. Now, imagine you're El Salvador and you got rid of your own currency, you know, back in 2000 or whatever it was that they switched over to the dollar. They're completely dependent on the value of the dollar and they don't get stimmy checks. Right. They feel it very acutely when the US makes monetary changes that they aren't expecting and they have no control over it.

So one of the big debates that governments have is like, well, gee, if I eliminate my own currency, what am I going to do in times of recession, in times of bounty? Controlling that monetary policy and being able to tweak it a little bit. Do you want to give that up completely? They don't. They're reluctant to do so. Of course, oftentimes, like in Venezuela, they then make mistakes and they decide they want to buy more planes and tanks for the leaders and the citizens suffer. Yeah, that makes perfect sense.

It really is interesting to talk about sort of the adoption of stablecoins in that regard, because we love as Bitcoiners, obviously, to say that everybody in the world should buy Bitcoin and opt out from the system. But most people in the world, if you're an average citizen, you're unbanked or underbanked, you're starving for dollars, really. Dollars are a lot less risky than this asset that you don't quite understand yet. So yeah, digital dollars could end up being much bigger than Bitcoin for the short term. Everybody knows that there are advantages to trading on both centralized and decentralized exchanges. But why not choose an exchange like Bullish that offers the best of both worlds? Bullish's total trading volume recently exceeded $25 billion in just seven months since they launched, and they have the best liquidity in the game when it comes to Bitcoin USD. Now, Bullish has released the first major upgrade to its liquidity pool technology with the

introduction of a concentrated range-bound liquidity pool for the Bitcoin USD trading pair. This upgrade triples the order book depth within a range of 2%, making it one of the world's deepest Bitcoin USD trading pairs. This industry-leading order depth means you can trade confidently at scale with clearly understood price impact. You should check them out immediately at bullish.com slash melker. How much risk is there that those end up being a central bank digital currency that eliminates privacy? Well, I mean, right now, I mean, I guess it's 100% risk. Central bank digital currency is a specific meaning, but they are centralized solutions, very much so.

Then we've got people that are confused about what is a stable coin. And we all saw that spectacularly fail last month with Terra, right? But for one-to-one backed, you know, that's probably a manageable thing. And actually, I think it's a place where regulators can come in and actually understand the space much more intrinsically for how they think about things. Let's make sure these guys have the assets that they claim to have. So that's actually a really great innovation.

Then the regulators have to worry about, okay, wait, we've had these AML-KYC restrictions. None of us want to fund terrorists. None of us want to fund money launderers, right? We're all trying to block that. But those laws that have been in place on the books have been very local, right? Every country's got its own rules and they interface only through this small controlled set of gateways of banks right um in particular the foreign foreign correspondent banks so now with digital assets all of a sudden the the barriers are gone right and the regulators are not sure what to do yeah uh it's certainly a challenging environment for them especially when the only thing they know how to do is apply it to act from the 1930s and 1940s.

Yeah, yeah, I think that's fair. To give them some credit, though, it's really a scalability problem that just they haven't gotten to yet. We need a global financial system, right? We want to be able to make payments to suppliers in China on weekends and all kinds of things. But we just haven't had the technology that allows us to send money across these borders so quickly, right? Well, the demand is there. We definitely have the global economy. We need a global financial system to go with it. This is a problem they just hadn't solved. So whether it's with digital assets or some other mechanism, you know, the citizens of the world are going to demand that we have a modern financial system

that works 24-7, just like the internet does. And this is the first inroad into it. Now, once the cat's out of the bag, the cat's out of the bag. You can't put it back. So regulators need to go figure out what they're going to do with this. And hopefully they don't come with too many draconian things and just try to lock it all down. I think we could do better. Do you think that the proposed legislation from Lummis and Gillibrand right now is a decent start? Is there anything in there that scares you? Look, I think there's a lot of great stuff in there. There's going to be multiple iterations of getting this all right.

I don't know what the probability, I don't know what the over-under is on whether that bill is going to pass. Extremely low. Yeah. So, look, it's good that we've got regulators thinking about this. Well, in this case, legislators thinking about this and getting familiar with the issues. Some of the things that are good that are in there, it does define custody better, kind of defines which regulator is in charge of which duties.

Hopefully the right ones. Yeah, I don't even know if it really matters if it's the right ones. A decision would be good. So right now, regulators can avoid making decisions that are needed by business because they can hide behind, well, is it your job or my job? Who's going to get the volleyball that landed in the middle of the court, so to speak? So if we get that clarified, it's going to go a long way. I think we've seen a lot of good movements generally from the legislators in the last

six to 12 months. I think it's because actually crypto companies are really starting to get vocal and also because at the retail level, people are very vocal about, we want good money. Turns out people get pretty ferocious as communities when it's about their financial health. And they see a path here that's strong for their futures, and they want our legislators to recognize it and embrace it. And perhaps the pessimistic view is that those legislators just want to get reelected. And now they're hearing from their constituents and it actually matters. It was very ignorable, right? Okay, 3% of my constituents have heard of this. They're

asking questions. Let's ignore them now. You have to have answers. It's probably very true. It's probably true that the campaign financing problem that we have in the United States makes it so that this works. And guess what? Crypto people are very ready to speak up. I think stepping away from finance for a second, if you think about what the internet has done, forget about crypto, social media and all this, I know it gets blasted a lot, but the internet has enabled us to form communities across the entire globe that we weren't able to form before we had the internet and turns out when you take communities and you apply it to money they get extremely ferocious about protecting their money and then we sometimes call this the

What the chain link Marines and the link Marines and the XRP army and the extra fear all this stuff, right? We call them millets and malicious. Well, they're not really malicious What it really is is they care a lot about their finance. And so it's just the extreme of what you get when you have a really passionate community. And now you apply that into the legal framework. And of course, legislators are seeing those armies show up. They're saying, we want you to support this because this matters to my finances in the future. And they're right. So yes, we need- Sure it doesn't hurt when you have Sam Bateman-Fried saying he's willing to throw a billion dollars

at the next election. Yes. You have to imagine they're going, how do we get a small piece of that? Absolutely, yeah. But that's happening everywhere. I meet with, I don't know, two or three senators, congresspeople every month.

I'm doing my tiny little part. But every single crypto company is making these calls. And it has an effect. I think we've seen it in the last 12 months with a change in attitude. Now, there's a few holdouts. Liz Warren is a little bit off base still. Slightly. Yeah. But she's old. She'll be gone soon. You'd think so. But we seem to reelect people until they're 130 years old in this country. I thought she was 130 years old. 147. You are interfacing, obviously, with these huge institutions all the time.

What are the biggest questions at this point that they're still asking? So on on the custody side, there's still a ton of diligence questions. Look, in order to start putting in money at scale, they look heavy at everything that you do. So they want to see your SOC audits. They want to see all your controls that you have in place. They want to see how you manage this from a regulatory perspective. They want to see legal reviews. They do their own.

So there's a lot of that work that's going on. I think we're still in the early days. We like to say the institutions are all here. Sort of, they are. But I think the institutions are by and large going to miss the industry altogether. I agree. I think we're seeing the beginnings of wholesale replacement of the existing institutions. It's the innovator's dilemmailemma, Come to Finance. You read that book? Right.

So Silicon Valley, everybody knows it. You talk to people up and down Wall Street, people are like, Innovators, I haven't read that. I want to read that. And of course, this is a Silicon Valley classic talking about how it is that small tech companies can tackle massive tech giants. And it happens over and over again. And the giants have all the resources. They see it coming.

They know they need to change. and they just can't do it. And Wall Street is seeing that exact same phenomenon right now. They know it's coming. They want to change, and they can't. They are a deer in the headlights. So the conclusions of Innovator's Dilemma comes down to a couple of things. First off, innovation, when it first comes, is too small for the big guys to pay attention to. So they're like, ah, it doesn't move the needle in my business. And they keep putting it off, putting it off. The second thing is that innovation is incremental. It comes through iterations. So when the first version of a BitGo, completely unusable by institutions. Okay, well, that was just a technology, right?

Okay, we add on to that. We add insurance. We add more features around cold and hot and segregation of risk and all this. Then we get regulated. We add more layers of that. We get a bigger staff. You know, through each of these iterations,

more people are able to start using BitGo. The big institutions still are like sort of paying attention, but it's still kind of too small. Well, guess what? By the time they finally wake up, we're on iteration number 602. And it takes a long time for them to learn. And they're still analyzing what you were doing four years ago because their risk managers are so slow. That's exactly right. And so you see this. Let's look at Fidelity. I'm really glad Fidelity is in the space. Six years ago, they launched a Bitcoin product. Can you use Bitcoin at Fidelity yet? Try? Do you have a Fidelity's in the space. Six years ago they launched a Bitcoin product. Can you use Bitcoin

at Fidelity yet? Try? Do you have a Fidelity account? I do have a Fidelity account. Go try to find Bitcoin on it. Good luck. And beyond Bitcoin, I think they support Ether, I heard, but do they support anything beyond that? So it's a really slow pace. And they are the rapid adopter in the traditional space, right? So look, I think the same thing is going to happen with institutions generally. And they're all working on it. They've got mid-level managers that are excited about what's going to happen with crypto. And I think they're going to struggle to get launched at scale. So either get on board or get left behind.

Hey, look, it's kind of weird to be in this position. These are my potential clients. I want them in. I would love it if they were in right now because it makes our business better. If we grow this industry and we get the credibility and the strength and we plumb all the networks together across the globe so you can move digital assets everywhere, it's nothing but good. We'll adapt in our business. Is State Street a better custodian than Bicco? Of course. So I'd love to have them in. And then at the same time, you could say, well, wait, am I dissing them?

I'm not dissing them. This innovator's dilemma has happened to every major tech firm, IBM, Microsoft, down the line, and it's happening on Wall Street. So maybe they'll be able to figure that out. I think a great answer would be to come to Bicco and have us do sub custody for you or whatever. We can help you through it. We've got everything you need, but we'll see what happens. I think there's one other thing with money that does come to play here, which is, and this is back to risk. So what's the market cap of the US's biggest custodians? Oh, massive.

Not that massive. Talk about State Street and- Yeah, State Street. What's their market cap? I don't know what their market cap is. About $35, $40 billion. I thought it was actually much larger. Most people do. So whether you're talking about State Street or you're talking about Beale and Mellon, they're both in that same range. Now, JP Morgan's quite a bit bigger. They've got the whole retail arm. So they're bigger. I'm not sure what the custody business alone would be valued at. But here's my point. If any of these firms

opened full throttle business Bitcoin custody today, within three months, do you think that they could amass $10 billion of custody? I mean, BitGo's got way more than that today, right? So of course they can do that. All right. And that'd be great. And then if Bitcoin does what it does, and it goes up by a factor of 10, well, now they've got $100 billion in custody. So they've got $100 billion of Bitcoin custody on brand new technology in an area that they don't feel super comfortable with in a span of six months. And the market cap is $35 billion. What is the chance if you're a manager of either of those companies that you're going to put a $100 billion bet on the existence of your company when you're only worth $35 billion? The chances are zero. So what are they going to do?

They're going to do a smart approach, and they should. They've got a very healthy, vibrant $35 billion business not related to crypto. They're going to protect that. They're going to use a risk-mitigated approach. They will set a threshold. And maybe it's a billion bucks. Maybe it's two billion bucks. But that's all the risk that they're going to take for some period of time. They're going to tiptoe into it. Maybe it'll be a two-year plan, a five-year plan. I don't know, but they will be responsible. They'll do the right thing. But this is why they can't really get into crypto at the level that we all hoped that they would. Well, whatever happens, we're certainly going to get there with or without them. It's coming. We can't stop it. Thank you so much

for everything you've built. I look forward to having this conversation in another year and seeing how big it is. All right. Thank you. Thank you. 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.