Unchained - BitGo on Why the Travel Rule Should Not Apply to Digital Assets - Ep.266

Episode Date: August 24, 2021

BitGo CEO Mike Belshe and COO Jeff Horowitz talk about one of the hottest topics facing the crypto industry today: regulation. They discuss... what BitGo does why Jeff left his successful TradFi career to go crypto how crypto compliance and custody differs from the traditional finance world the state of crypto education amongst regulators why Jeff and Mike think the infrastructure bill is a win for the crypto industry what FinCEN is doing to regulate crypto why they think the infrastructure bill’s goal of raising billions in crypto taxes could only bring in millions what FATF guidance regarding VASPs requires of crypto companies why the travel rule could lead to US customer data being shared overseas how digital assets change the implications of the travel rule how regulators are attempting to deal with DeFi what the FATF guidance means for FATF countries, like the US why DeFi is not ready for strict regulations Jeff’s views on Brian Brooks’s departure from BinanceUS the Galaxy Digital acquisition of BitGo what security issues a trillion-dollar wallet presents why BitGo refused to put a “freeze” function in its WBTC contract why Tesla and MicroStrategy purchased BTC and why other companies have been slow to follow suit whether BitGo will offer NFT solutions going forward   Thank you to our sponsors!   Crypto.com: https://crypto.onelink.me/J9Lg/unchainedcardearnfeb2    Polymarket: https://polymarket.com/    Episode links   Mike Belshe -- CEO BitGo LinkedIn: https://www.linkedin.com/in/mikebelshe/  Twitter: https://twitter.com/mikebelshe  Previous Unchained appearance: https://unchainedpodcast.com/mike-belshe-on-what-bitgos-kingdom-trust-acquisition-means-for-crypto-and-how-security-will-develop-in-the-future/  Jeff Horowitz -- CCO BitGo LinkedIn: https://www.linkedin.com/in/jeff-horowitz-3381977   BitGo Website: https://www.bitgo.com/ Twitter: https://twitter.com/BitGo Blog: https://blog.bitgo.com/  Galaxy Digital purchase: https://www.coindesk.com/galaxy-digital-to-buy-bitgo-for-about-1-2-billion-in-stock-cash  FATF solution: https://www.coindesk.com/us-crypto-giants-build-first-version-of-fatf-compliant-travel-rule-tool New York Trust Charter: https://decrypt.co/60110/bitgo-new-york-trust-charter-crypto-wall-street    Infrastructure bill and its implications for crypto https://twitter.com/mikebelshe/status/1424163820726009861  https://www.wsj.com/articles/bitcoin-fans-are-suddenly-a-political-force-11629115380 https://www.coindesk.com/infrastructure-bill-house-politics https://www.cnbc.com/2021/08/16/tax-foundation-infrastructure-bill-crypto-tax-provision-is-unworkable.html https://decrypt.co/78198/senate-passes-infrastructure-bill-crypto-tax-house https://www.taxnotes.com/featured-analysis/proposal-regulate-digital-asset-transactions-should-be-struck/2021/08/13/775gf#.YRfX9GEX2GI.twitter https://twitter.com/vtg2/status/1426264859071627266 https://twitter.com/BlockchainAssn/status/1427276559052910599  Unchained coverage:  https://unchainedpodcast.com/how-congress-might-pass-laws-bad-for-proof-of-stake-and-defi/ https://unchainedpodcast.com/crypto-got-screwed-what-happens-next-in-the-senate/ https://unchainedpodcast.com/this-bill-looks-very-bad-for-crypto/   FATF and the travel rule https://sumsub.com/blog/what-is-the-fatf-travel-rule/ Unchained coverage: https://unchainedpodcast.com/why-the-travel-rule-is-one-of-the-most-significant-regulations-in-crypto/ https://unchainedpodcast.com/why-proposed-fatf-rules-could-be-a-shock-for-defi/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. Welcome to Unchained, your no-hype resource for all things Crypto. I'm your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto six years ago, and as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time. This is the August 23rd, 2021 episode of Unchained. My book, The Cryptopians, Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Cray is available for pre-order on Amazon, Barnes & Noble, Bookshop.org, or any of your other favorite bookstores. Go to Bitley slash Cryptopians. That's B-I-T-L-Y-S-C-R-Y-P-T-O-P-I-N-S and pre-order today. The Crypto.com app lets you buy, earn, and spend crypto, all in one place. Earn up to 8.5% interest on your Bitcoin and 14% interest on your stablecoins, paid weekly. Download the Crypto.com app and get $25 with the code, Laura. The link is in the description. Polymarket is the leading information markets platform where you can trade on the most hotly debated topics, whether it's politics, coronavirus, current events, and more, all on the blockchain.

With over $130 million traded on the platform, Polymarket is the go-to place to settle the biggest debates of the day. For a limited time, sign up with referral code unchanged to get your first trade reimbursed up to $100. Today's guests are Mike Belchie, co-founder and CEO of BitGo and Jeff Horowitz, Chief Compliance Officer at Bicco. Welcome, Mike and Jeff. Thanks for having us. Great to see you again, Laura. It's been a long time in this industry. You've been through it thick and thin. I really haven't. It's been so fun. It's honestly been the ride of my life and I just loved every minute. All right, why don't we, before we get into the discussion, why we just start with a basic description of BITCO? BICO's also been around forever, but just for people who may be new to the space.

Mike? Sure. Well, let's see. Bitco got started in one of the early generations back in 2013, started out a technology company, pioneered multi-signature technology, which is used almost everywhere today for securing large amounts of digital asset. We've grown to support over 20 different blockchains, several hundred tokens, provide infrastructure to a large portion of the ecosystem, continuing to push forward on security and compliance. I guess that's why we're here today, talk about little compliance. We are a regulated trust company in two different states, both South Dakota and also New York. We also have regulated entities abroad to about half our business here in the U.S., half outside the U.S.

And I think most recently, you know, BitGo and Galaxy have agreed to merge. So that deal is still in progress, hopefully closing in not too long, but that's, that's what we're going next. And that's, it's all about institutional adoption, digital assets, right? And so it's a little about a little about Bicco. And so speaking of institutional adoption, Jeff, you spent many years in traditional finance before making the jump to crypto. Some of those years were at Pershing, a city, Lehman Brothers, Goldman. And then you did spend time at Coinbase before joining Bicco. Why did you decide to leave traditional finance for crypto? Great question. After being 25 years doing some of the same things every day,

sometimes you'll look for something entrepreneurial or a little more innovative. And when I received a call to join Coinbase, I hadn't really researched crypto yet. But in taking the call, I figured I had to do some homework. And I find myself getting really enthusiastic about what was the promise of crypto, what could it do, and to have a seat at the table to help shape regulation for a brand new asset class, which is too hard to turn up. And it's been exciting three years in the space and really looking forward to what the next five years will bring. And so what do you do as a chief compliance officer?

And how would you say that that, or how would you say that compliance in the crypto space differs from that of traditional finance? Sure. I think the first question it gets asked when you're talking about crypto or regulation is is it only used for bad guys? Why do we need it? You know, Venmo and PayPal and other, you know, payment processors are work fine here. And I think the answer is it's a global challenge. We don't have PayPal and Venmo around the globe. It's very expensive to do remittance. And so the first thing I do is, you know, I set up an AML program, right? How do we identify

and find the bad actors? How do we report them to law enforcement and have a risk-based, reasonably designed compliance program. And the other part of my job is working with regulators and whether that's getting new licenses, running a program which needs to have trading compliance, surveillance, AML, policies and procedures. It's very similar to traditional finance. We're overseen by the New York DFS. They don't have a different rulebook for us than they do city bank or Bank in New York Mellon who they also oversee. So it's really combining what you've done in traditional finance, but in a fast-moving and brand-new asset class where some of the technology is just different than the traditional market. And Mike, since Bicko started, you know, really as

like a crypto custody company. And, you know, obviously like you were really a big pioneer in that. How would you say crypto custody differs from being a traditional financial custodian? Well, as Jeff said, you know, in a lot of ways, it shouldn't. But a big part of what we do is help regulators kind of through the process, right? So look, we got into this space because we do see the opportunity to make a financial system that is far superior to what we've seen in the past in terms of transparency, in terms of fairness and equality, and also being global. as Jeff said, this is the first time we've really had the pipes connected around the planet. So this creates a lot of confusion. People look at digital assets and they're like, this is just different.

I remember the first time I was one of my early pitches to traditional finance was out at JPMorgan. It was really kind of an exploratory. They were learning what crypto was probably, I don't know, 2015 or 16 or something like that. And just describing how digital assets work, what is multi-sig, how do the private keys work, all this. you start to see the light bulbs go off where they get it. And when I started to segue that with, like, well, here's how traditional markets work and here's how they should think about it. You know, they could start to relate to it. I remember asking them afterwards, like, why am I teaching you guys about like how market structure in digital assets should work? And they just said they've been so confused because it's such a different asset class. The technology is so foreign compared to what they'd looked at before. So look, it's no surprise. I think we've gone through this curve as we get into it. And it's, it's a fascinating space because there's so many different angles of digital assets from, you know, decentralization to, you know, what is the private key storage, to how to distributions work and whatnot, that it's going to take

a lot of education. And we're definitely seeing that now from regulators. So, you know, kind of back to the chief compliance officer role, I would say actually, on one hand, the compliance officer role is probably supposed to be similar to what you'd see anywhere else, but actually, in digital assets right now, it's different. And the thing that's different is it's problem solving. It's helping regulators understand, you know, what's the metaphor between a particular activity in digital asset space compared to traditional markets and then helping them get over the curve of like accepting like, yes, even though the technology is, you know, kind of upside down, frankly, compared to how the banking system works, that we can actually manage these and we can have safe

access and we can, you know, fulfill what we're trying to do as, you know, keep regulators and keeping money transmission safe. Yeah, and you know, and what you said, like it sounds like a huge piece of that is education. But obviously what we've seen in recent weeks with this huge storyline around regulation and this whole fight that went down over the crypto provision of the infrastructure bill, I wondered how you felt that education piece has been going. Because the industry, even though it's still fair. nearly new. You know, it has been around for a while. Companies like yours have existed for a while.

So I just wondered what your sense was of the understanding of the technology from regulators. Well, look, I applaud the Senate for trying to understand and working toward it. I think what we saw here in this bill was a lot less to do with crypto as it was to do with politics. As you know, they were spending a trillion dollars on an infrastructure bill and they needed to have ways to show that they were they were going to bring revenue coincident with that. And they decided to go and look in the crypto sector. And I think what they thought was going to be relatively easy-peasy, they realized, wait a minute, this is more subtle and complicated than we thought. And in particular, that bill would have classified a bunch of people that are clearly not brokers as being brokers. So,

you know, making a payment in digital assets would now classify you as a broker, you know, being a minor, these other activities. It clearly doesn't match. So I think this was more of a artifact of having done that very quickly. They're in a hurry to get the infrastructure bill out. Hopefully that's for a good reason. And this kind of became a bit of a tag along. But now on the other side of it, I think there was a huge win for the digital asset space Bitcoin crypto with this. The senator saw firsthand, you know, how passionate people are about democratizing money. And And this is an area where we were able to mobilize, we the crypto digital asset community very, very quickly.

Obviously, a lot of very technically capable people, but mobilizing on Twitter, they heard our voices loud and clear. And I think, if anything, the best outcome for us in particular is that in the future they're going to be seeking out, what is my position on digital assets and crypto, and how should I be thinking about that for my country? constituents in a way that this can help them.

You know, obviously they want to get elected. I think they've recognized that like this is a force that really, really matters. Actually, I did want to ask about one point in what you said, where you said that the language would have included some people that were clearly not brokers. And I think you're right that, at least for some of those roles, the way the regulation was written, whoever wrote that did not intend to capture people such as minors. But I wonder if there is contention about whether or not or how to tax people participating in defy. And I did wonder if maybe the way the language was written was intended to capture those people

and that that is a fundamental difference in the way that some regulators view how the space should be regulated versus how the industry views, how those people should be regulated. I think there was more of a lack of education than a targeted view of defiq. A lot of the reports came out that Janet Yellen and Treasury was advising some of the senators on the language. I do think they have an alter, you know, a behind-the-scenes view that they want to regulate the space as much as possible. But the way to do it for a tax bill and to rope in either, you know, minors or stakers or validators was not the best way to do it. And, you know, I look back to March of 2020. Secretary Manusian, who was a crypto critic,

actually did convene a meeting of some of the same folks, leaders in the crypto industry, in FinTech, and some traditional financial services to discuss, you know, what were the risks in the space, how do we not stifle innovation? And it was all around, what are we going to do about unhosted wallets and the travel rule? And it was a really good dialogue.

And it was literally the week before the country shut down for COVID. But then you fast forward to December, and we had the midnight regulatory report come out about transaction reporting, and it kind of undid everything that we thought we had a good dialogue about. So I think we have fits and starts on the open dialogue and trying to educate. But this was another example of trying to rush regulation or legislation without partnering with the industry to get a better understanding of what it is they're asking. I don't think the industry is against people playing their proper tax. But those are most likely exchanges who can do 1099s.

I don't like legislation that makes it impossibly compliant with. And I also wondered, you know, as you mentioned, a lot of people were saying that that appear to be driven by Treasury. And I imagine as a chief compliance officer, maybe you interact more with kind of the rank and file regulators, presumably maybe in the IRS. And I wondered, do you have a sense of what their stance is on how this should be done? I mean, like we intersect with everybody. Multiple FinCEN directors over the last couple of years.

I mean, I sat in on the minutiae meeting, you know, representing compliance and regulatory. So it starts at the top, but it is also the policy makers in between. And some of them have moved around government. Some of them are now advisors at FinCEN come from DOJ. I think the challenge is there's always a rush to do this and it's not in a timely manner. and the industry needs to mobilize. We sent 7,000 letters the last week of December to stop regulation coming out that we just couldn't be compliant with.

That regulation is still floating around Washington, and we're waiting for it to be reissued, but hopefully with some better definitions, and something that achieves what the regulators are looking for. That's how do we manage the risk, but how do we not drive all this innovation offshore, lose jobs? And I think that's part of the conversation that's happening now in Washington. Yeah, and I was also going to ask about when you mentioned FinCEN. Obviously, the original FinCEN guidance, you know, was pretty clear in applying to companies that take custody of customers' funds. And I wondered if you felt that that was wavering because it does feel like in various places, both, you know, not just in the U.S. but even like FADF that maybe that line is not as, is not as.

as clear as it used to be. I don't think it's wavering. I think the FATF has done a couple of reviews, the Financial Action Task Force. They're the global body that's trying to set some global standards. It doesn't apply to companies, but applies to countries.

And the U.S. is a leader at the FATF. They actually helped form it. So I don't think Treasury is going to back away of wanting more transparency in reporting. We just need to figure out a safe way to do this that we don't cause other problems. If we centralize some of this travel rule reporting, it will be a honeypot of information. That's not a good solution.

There are six or seven leading vendors that are trying to come up with a solution. We're part of and a founder of the U.S. Traveler Working Group, who's trying to do it within the U.S., with companies that are all regulated under FinCEN as a money service business, so we're on an equal footing. And long term, we're going to need to have an interoperable solution. but that's not going to happen for a number of years. There are privacy concerns or cross-border data concerns. And really, the conversation needs to happen is how much is this helping law enforcement? Are we going to do reporting for the sake of reporting?

We're really going to partner and help law enforcement. And I think that's the open question that the industry and the regulators really need to grapple with. Okay. Yeah, we'll get more into FAT-up financial action task for stuff. But I actually want to ask one more question about this, crypto provision in the infrastructure bill. Mike, I saw you tweeted that the bill claims it would generate $30 billion in tax revenue and you thought that that was preposterous and you said you suspected it would be closer to $50 million. So why do you think that? Well, I think in the U.S. actually, most

participants in digital assets are law-abiding tax-paying citizens. So the bill is hoping to capture, to get additional reporting to somehow capture people that otherwise would not have. have paid their full taxes. So it's got a premise there, which is that somehow this is not happening. I don't know where those numbers came from. As I did back of the envelope math on trading and projections of how much in the U.S., it didn't get close to $30 billion. I admit that the $50 million number was kind of just like this as well.

I don't have any data behind it. But my point is that it's very easy to come up with some numbers here, but we don't really know or have a way to vet out whether that was a good estimate of how much revenue could be generated by doing this. So anyway, that was the genesis of that. Okay. Yeah, I mean, like, it would be kind of hard to estimate that just because you would need an inside look at the books on certain exchanges.

I would imagine that would kind of be the main wave, right? You'd also have to know, like, how much of that is, how much this activity is happening with U.S. taxpayers versus people that are broad, you know, who's subjected to it? What are the cost basis of these transactions? And I think, you know, when you see an industry that's had such a positive success story in terms of growth in such a short period of time, and we've never had an asset class grow from zero to this before, there's a natural tendency to think those people might not be paying their taxes. And especially right now in the political environment where, you know, obviously there's a lot of spending going on. People are talking about, you know, whether billionaires are paying enough or where we're going to get money from, it makes it an easy target. But, you know, it doesn't mean that we should, you know, abandon our job of actually collecting

data and figuring out, look, is this going to work for raising revenue? Or is this just, you know, fitting in with the hyperbole? It doesn't seem like a lot of diligence was done, given the speed at which this came together and given the lack of details behind the $28 billion number. Okay. All right. So let's dig a little more into this Financial Action Task Force stuff because, so this is like a global body. and it's been looking at ways to handle defy.

And the FAAF tends to target its guidance against what it calls virtual asset service providers or VASPs. And traditionally, as I mentioned before, those were defined as those that custody assets. So before we get into kind of the full discussion around this, Jeff, do you want to just give us some background on, you know, what these FNAF rules are and how they would apply to a company like BICO, which does custody assets?

Sure. So I attended some of the original fat of plenary private sector, public sector meetings, going back to late 2018, when they started contemplating what would a travel rule mean and how do we define a VASP? And I don't think they were far off on their definition. You know, we're a custodian. We move assets for customers. There are exchanges that move assets for customers.

I think where we ran into trouble, though, is how do you define customers? customers of VASPs and the privacy concerns with, we're now tasked with sending information from one VASP to another. How do you know what VASP that is? All we have is addresses. It's not like the SWIFT network, which is what they based the travel rule implementation on. And that took nine years to build, you know, a rule came out and banks worked on it. We are still in the process of, you know, writing regulation for a white paper. And that's just not the right way. to go. So I think the definition of VASP is the right definition. As a global industry, we are working to define that and how do we share information in a secure way. Some are doing it in

closed loops, just between three or four exchanges or custodians. A lot of them are being designed regionally. There are a number happening in Singapore. We've got one in the U.S., and I'm sure there'll be others in Europe. The biggest challenge, though, is how do you define who exactly is a VASP? Are they regulated? And are you comfortable to share information with a VASP that's regulated and pick your developing country versus a framework like we have in the United States or Europe or Japan where they've spent time trying to figure out what is the best way to regulate? That's the big conundrum we're trying to face because we're dealing with customers information. And the way the rules are written, we're required to send information on non-customers.

They did not consent that we would share their information with another regulated entity. And so we need to balance all of that with the money laundering and terrorist financing risk that does exist out there. I just don't know if all of this data sharing is really going to get us to the end game. We're all regulated. We can all receive subpoenas. Do we really need to share that information to help law enforcement? Well, yeah. I mean, it is, first of all, sensitive information.

and then second, you know, it sort of gives this picture of a huge global surveillance network. But I did wonder, so because under this travel rule, VASPs would be required to send personally identifiable information or what's called PII. How do you do that for crypto transactions? Because I don't know, you know, exactly how this works where, like, could that then associate a person with particular addresses on particular blockchains? and, you know, I'm sure it creates different risks. So can you talk a little bit about the security risks and how you guys are trying to mitigate those? Sure. No, it's a great question, right?

So as a regulated exchange or custodian, we're subject to KYC our clients. So we have that information on the beneficiary. What the rule is proposed is that we send information on the recipient. And so I need to go out to an exchange and say, do you own this address? You do. Oh, great. this is who my customer wanted to send it to, I'm now going to go into a private chat somewhere, and we're going to share information on that client. Now, that exchange that or custodian I'm sending

it to, if that information gets lost in transmission, it's not secure, it's hacked, somebody now has an address and a customer name. And yes, you can unwind that and figure out how to read the blockchain and figure out that this customer was a whale, this customer is whoever. That doesn't happen in traditional finance, you know, J.P. Morgan's customers or J.P. Morgan's customers or name your bank. And it's not out there. It's only in this network, which has rarely been hacked, sharing between two banks. That's where I'm really worried that we're trying to have an open and honest conversation with Treasury that we could create a bigger problem than you're trying to solve if any one of these steps go wrong. So that's why here in the U.S., we've started with regulated VASP. We have a process to vet them.

Are they regulated? Have they had, you know, AML and KYC concerns? How long have they been in business? And we need to do that before I'm going to trust to send my customer information or any other VASP is going to do that. We're then going to go down and do some pentests and check security because at the end of the day, the biggest risk here is that data gets out there on the internet and you can now take a look at the blockchain. That's the whole point of crypto, right?

It's suit anonymous. It's out there. And law enforcement, just in the recent cases today, is able to look at IP addresses and blockchain stuff and figure out who the bad guys are. I don't know that we need to do the travel rule to solve that problem. And if I can add a little bit here, it's kind of reiterating Jeff's point. But there's a big change, which is because it's a digital asset. So if you were to go back in time to before, travel rule was was ever a thing and they were determining whether or not they should implement travel rule, they didn't have to worry about exposure of travel rule data exposing your entire balance at the bank. It wasn't a thing. It wasn't a, it wasn't a risk. But if they implement the

same travel rule that we have for traditional finance with digital assets, that now becomes a risk where your entire financial history could be exposed because of compliance with this law that actually was designed for a different system. So because we have a different system with digital assets, we need to rethink not only like what does the regulator need, but what are the risks that accompany the collection of that data, however it gets handled. The second thing, which has changed, and we've all seen this over the years, I don't think the regulators have fully acknowledged it or acknowledged their contribution to it. Look, security is a huge problem, digital security, is a huge problem for our industry, whether you're talking about digital assets or whether you're

talking about information privacy or whether you're talking about corporate espionage. I mean, obviously there's a lot of digital security that we're now tuned into that we weren't in the past. The idea that this information can leak as a result of government collection of data is real. We have seen the government hacked and all personnel data from the military be leaked out onto the internet. We have seen Equifax leak all personnel data from all. all of the clients reporting credit information to them. I mean, these are huge, massive failures. And why do these things happen?

So unfortunately, to just take the rule that was created a long time ago, before we had this awareness around digital security and apply it today, as though those risks don't exist, I think it's a real misjustice to the people if we don't reevaluate kind of how we're doing that and the risks. And just to make it clear for people, So when I use an exchange and I either I take a payment at that exchange or let's say that I have some crypto on my own hardware wallet and then I deposit it. I mean, maybe to sell it or whatever.

There's like a particular address on whether it's like the Bitcoin blockchain or Ethereum blockchain where either like a particular, I mean, on Ethereum you would call it an address or account. I guess on Bitcoin, it's still an address, I guess. but those kind of would change a lot, I guess. But anyway, but the point is that that's associated with your account at that exchange. And so even though, you know, exchanges will kind of like co-mingle the funds in a hot wallet, and, you know, they always kind of, you know, keep account of what your balance is on their own ledger. From the outside, looking at the blockchain, there can be a way to identify a person's own funds, even in this like commingled kind of state.

Is that correct? That's right. And there's dozens of companies that are building solutions to be able to analyze blockchain data and figure out who's who. As you point out, I mean, identifying who is the exchange is a little bit less sensitive other than it could have a particular user at that exchange being identified.

But when it's going out of the exchange to somewhere else, that's where you can really like expose a tremendous amount of data. So these analytics tools, though, are also an interesting concept. Remember, we don't have analytics tools in traditional finance. There's no way to go and look at this data. It's all private, right? So they created the idea of travel rule in part because they didn't have other tools, right? Now, if we live in a world where, A, we have a blockchain so we can build these tools,

which gives us a view that we've never had before. And by the way, this has been working already. I'll give a couple examples in a moment. But in near real time, you know, particular movements of money can start to be identified. There was a hack on the liquid exchange yesterday. You know, some of those addresses are being blocked already instantly, right, that never could have happened in the traditional finance system. A, we've got new tools that we never have before. And then B, applying the same old solutions is creating new risk vectors in terms of leaking people's personal information and personal finances.

And then also creating honeypots of personally identifiable information, which frankly, and you mentioned earlier about like regulators having slightly, you know, different views or is this undoing FinCEN or whatnot. You know, pretty much every regulator is looking at crypto in different ways. And it's no surprise that as they start to make definitions so that they can write their rules that you sometimes see those definitions conflict. This is not new to crypto, right? We have lots of conflicting rules on the books between state laws, federal laws, and international laws about what different roles are. And especially when you think about things like GDPR and being an American company, it actually turns out to be hard to navigate a line where you can comply with all of the laws that you're required to comply with. So, yeah.

Yeah. That is coming. As a result of everybody trying to change all at the same time. Yeah, this is clearly not an easy issue to resolve. All right. So in a moment, we're going to talk a little bit more about these fat-off rules. But first, a quick word from the sponsors who make this show possible. Today's sponsor is Polymarket, the world's leading information markets platform where you can trade on the most pressing global questions, all on the blockchain.

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Download the crypto.com app and get $25 when using the code Laura, L-A-U-R-A. The link is in the description. Back to my conversation with Mike Belchie and Jeff Horowitz. So, as, so, you know, this whole discussion we've had about FATOF has been, you know, for companies that do custody assets, which was who the travel rule was initially targeted to. But here we have now at the submergence of defy. And in defy, it's not really the same thing, right? There's instead of traditional intermediaries that are custody and customers funds, we've got these smart contracts. So how are regulators looking at that? Are they looking to regulate that? Are they looking to regulate that? Are they looking to redefine VASP in order to be able to target such things?

How do you see that they're thinking about regulating DFI? Well, I think first and foremost, it's back to education. Just when you thought you might be getting a handle on, you know, layer one, on-chain, Bitcoin or Ethereum, boom, income smart contracts to really blow your mind. And it's a new level. Now, there's some things being done at a legislative level there. Wyoming is now starting to recognize a potential for a Dow, a smart contract, and maybe be a thing. I think we could end up that way in the long run where actually a counterparty can have a legal status, even if it's code. But that's still coming.

Look, Defi is really only a couple of years old now. So it's no surprise that we've got less information around it. We were talking about travel rule all the way back to 2013 when we got started. it was kind of like this, you know, elephant in the room. How is travel rule going to be applied to digital assets? We're farther along now, but, you know, it's still not fully finished. I think the same is going to happen with defy. We do see industry starting to push for different types of smart contracts that may require

identity to be built in with them in order for the smart contract to interact with you. That's going to have some technology impacts. That's going to have some regulatory. possibilities both good and bad. So I think this space is still evolving. I hope that they let it evolve a little bit longer before we start clamping down too much, because as Jeff said earlier, like, we could end up just pushing all this stuff outside of the U.S.

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Conditions apply. Yeah, and actually going back to the travel rule as applied to companies, like here's one thing I did want to ask was, so what would you like to see in terms of how the travel rule is implemented and how this sensitive data gets passed around or even the extent of what data is passed around? I was going to say I actually think that travel rules shouldn't apply digital assets because we have a blockchain.

Since you have the blockchain and you have the forensics that lasts forever, I think we really have to question whether or not it still applies. I know that might be a little bit hard for regulators to accept, but you've got to go back and think about what was the purpose of travel rule, and then you have to say, what did it accomplish and how is it working? What crimes and activities is it catching today in traditional finance that are not being caught yet in crypto? And if there is a big gap there, let's go look at that gap.

But to say we're just going to apply the same reasoning, I'm sorry, the same solution without thinking about the inputs and the risks, et cetera, I think actually ties everybody up for no good reason. I agree with Mike. I think we need a kind of crawl, walk, run solution here. We don't want to do a travel rule if we're forced to do it because of enforcement. We're holding up new licensing. I think the industry has come together that we are trying to partner and figure

the best way to partner with law enforcement and what data do they need. But I think we got to go back to the original premise. FATIF is setting global AML standards. If every either VASP or custodian has an AML KIC obligation, we're doing proper sanctions check, you don't need to send the data to do that. I've done it on my part and the customer on the other side has done that. Sending the data is just a risk. I don't know how it really helps law enforcement, given the way our technology works. I don't know how much of a choice we're going to have in the end game, but I've been lobbying and pushing for a sensible solution and let them evaluate and come back and go, yep, this is helping law enforcement or not, you know, at the SEC and others, they have to do a review

of did a new rule actually help? And I think they need to do that in some of the rules that they are putting on the crypto industry. Because at the end of the day, we need to be smart about the time and resources we're putting towards this. And if we just send a lot of data either directly to the government or to other exchanges, right? I don't know what it's going to do. I don't think the government looks at all the SARS and all the CTRs and VCTRs that we filed today.

So why are we doing reporting for the sake of reporting? Yeah. And a SARS, I can't even speak, suspicious activity report. A CTI, I forget what that stands for. currency transaction report, which is what, you know, AML and the travel rule and all these things where we're based on it. When you're sending $10,000 in cash or cash equivalent, you're supposed to file a report. So essentially the solution that you're advocating for is one in which investigators just look at the public blockchain.

They have their forensics tools. And then they use other tools at their disposal such as subpoenas or they can look at the SARS reports that you file or whatever. is, and you think that that's sufficient. I think that's fine for where we are today. I think we could get into some additional reporting, but not the way these rules are laid out. There's too many variables. There's not enough definition. And until we're at a level AML playing field, there's no way for me to know who's a trusted VASP or not, right? But to get into the SWIFT network, you need to be approved and you need to be a regulated bank. We don't have that global solution yet. And I think that's what's going to hold this up. And I think we're doing a little

cart before the horse. Let's focus on if everybody is regulated properly, they're examined, we can then get to this next layer of how do we safely send information that may help law enforcement. I think the global template is important to consider here as well. You know, travel rules started here in the U.S., but FATIF has picked it up. Countries are applying it abroad. The global financial system is getting connected right now. It used to only be available to the light. of J.P. Morgan and the large banks, but now it's available to everyone. So if the U.S. implements this and all other countries follow suit, which is more or less the path that we're currently on, that means American taxpayer information is going to be sent out abroad in order

to be compliant with both U.S. and foreign policy. Does the U.S. have control over all of the entities outside the U.S. in terms of how they will protect that information and take care of it? I mean, we all know that, of course, they don't have the ability to do that. But secondarily, think about whose hands, your information is going to fall into if you actually implement this. And this is something that they didn't have to think about with the current U.S. law, but it's very much important for what's happening right now. So as far as I understand, though, this fat of travel rule, I mean, that's like an adopted, you know, a form of guidance at the moment. And so it's being rolled out. I mean, I did see a report saying, yeah, that maybe like a little less than half of jurisdictions have actually begun implementing it.

But, I mean, it almost seems like the ship has sailed. Is that correct? Or do you feel like there's a way to stop it at this point? Yeah. So they've published their guidance and it's written into their guidance. But their guidance is not law. It now is up to each country to adopt those fat of standards. And if they don't, they can end up being, you know, named or shame that they're deficient.

in a number of fad if best practices. But no country is fully compliant with all of the fad of best practices. I don't think they're going to back away from it, but I hope that the fact that they've continued to have the dialogue, they've postponed saying that they need to take a closer look, how are companies being compliant, what are the issues with being compliant, that ongoing conversation will help us develop one of these solutions. The fear I have is that certain countries have been reluctant to license crypto exchanges or custodians because of this fattif rule hanging over their head. But to Mike's point, until we have a global interoperable solution, we've only solved a small piece of this puzzle. So I think we can continue to chip away at

it. Here in the U.S., we are driving to adopt a rule and come up with a solution for that rule. The U.S. travel rule is looking to start testing in October, but it's a small subset. It's 30 VASPs here in the U.S., but it's a good step. And it showed Treasury and FinCEN. Look, we understand that rules need to apply to us. We are giving our best efforts. But we need to continue to talk about how the technology differs and what are those challenges.

I think Commissioner Clayton and others had said, we have a rulebook that works. We don't want to rewrite the rule book. I think we actually need to change some of these rule books. We didn't have some of this technology. We didn't have decentralized smart contracts. as a country and as a, you know, a financial industry, we need to adopt. And had we stifled the internet in the early days, we wouldn't have Amazon and the Ubers of the world that have changed and made our life easier.

I think the same promise for crypto of can we move assets around the globe, cut out a lot of the middlemen, and make it cheaper. We need to make sure that we continue down that path. And so just going back to Defi, then, what would you like to see in terms of terms of how defy gets regulated? That's a great question. I wish I had a great answer. Other than, from what I've heard, the regulators are starting to turn their heads

towards how do they surveil decentralized protocols? How would they apply regs and rules? Some of the recent enforcement actions have come out and said, I didn't care whether you were half defy or partially defy. There are some controlling people, and that may fall under the securities rules. So, you know, somebody who is 100% totally decentralized, I don't know that the rules could apply, but I don't know if we have any of those yet. There are still people behind some of these protocols that help make the decisions.

And, you know, I think at the end of the day, we do need better consumer protection. We need better disclosures so that consumers know what they're getting into. But I don't know if we need to do that for AML purposes or suitability purposes. but I think the regulators here in the U.S. are not giving up on decentralized regulation. I also think there's a first pass of this that actually industry will take on on its own. You know, you can't deny that there's some element of reputational risk with working with unknown parties. So industry, in order to participate at a large level, is going to need some amount of help for this. I think they'll come out with at least part of the solution by itself.

I think DFI is too early to really say, hey, here's the prescriptive route. If we do that, we could end up with a very complicated rule set that applies to some technologies, not others, and also stifles innovation in America. But let it play out for a little while, see what industry comes up with. If industry stays away and doesn't participate, then that might actually answer some of the questions itself.

But defy is definitely in the earlier stages than other parts of digital assets. Yeah, yeah, it's almost like we don't even know what it's really going to look like. So one of their regulatory question I did want to ask about was, as we've seen in recent months, there have been all kinds of warnings and actions from regulators against finance. And I did see, Jeff, that you did an interview with CoinDesk talking about how Binance U.S. hired Brian Brooks, the former acting control of the currency, and you call that a smart move. And I just wanted to get your reading on his abrupt departure,

and just in general, sort of this moment in time for Binance and the kind of situation you think it's in. Sure. So I had the privilege of working with Brian for over a year at Coinbase. And even when he was the controller, right? He was doing a lot to try and manage risk,

come up with a way forward for the industry. to allow it some room to grow and breathe and we'll figure out what does regulation mean along that path. You know, the brief conversations I had with Brian before he left, you know, he was trying to operate a standalone business here in the U.S. I can only tell you what I've read, you know, out there that it may have been falling apart around his fundraise and that he wasn't getting the funding that he was trying to achieve. And that may have led to his departure. Brian's a smart guy. He understands both sides of that coin.

And if Brian couldn't be successful, I have my doubts of who could turn that around. Look, certain firm BitGo and Coinbase and others, right? We took the long road. We worked with regulators on sensible regulation that will work for this industry. And others haven't. And I think the level playing field is starting to happen now that you can't outrun the the long arm of the U.S., and we've seen some of those enforcement actions. And that the best thing for the crypto industry is sensible regulation where people feel

trust and that their assets are safe. And that's one of the things that Bicko focuses on in our cold storage and safety of our customer assets. So I don't have too much to add in there. I'm looking forward to see what Brian does next. But I think long term, we need firms to embrace regulation that helps the entire industry. Oh, yeah. Okay. Yeah, so maybe the writing is on the wall for finance. I guess we'll have to see how that plays out. All right. So let's talk about Bicco. There's been so much regular story news. Obviously, having you here on the show was a good opportunity to cover that. But obviously, Bicco had the big news about the $1.2 billion acquisition by Galaxy. And that was the first crypto deal greater than $1 billion. And I was wondering, Mike, if he wanted to talk a little bit of, about why you thought that was the right move for Bicco?

Sure. Well, we've seen a tremendous growth on the institutional space, you know, within the last 12 months. You know, BICCO's been after institutions, businesses, you know, kind of the side of the client segment since our beginnings. And in some ways you could argue that maybe, you know, BICO institutional access was too early back in 2013-14. But this last year, we finally started to see, you know,

it's really growing. And to get there, we want to do more. So Galaxy has also been after the institutional mission. They've got a fantastic team that a lot of them come out of traditional finance. They've got a great trading product. They've got great investment products. The combination of these two firms is going to take the tech that Bickgo's got, apply it to the knowledge that they've got, and really hit hard on the institutional space.

So we're building a very strong industry leading technology company. I don't think there's anyone in a better position to build a technology first, you know, prime brokerage for the future. And that's what we're after to do. And talk a little bit about kind of where the institutional market is at. You know, there was a period in a long time ago, like 2017, when we would often hear the phrase, the wall of institutional money is coming. It didn't quite happen back when people originally said that.

And then it looks like it's actually started to pick up maybe in the last year or so. But I was wondering just, you know, what are you seeing now? How are different institutional investors thinking about the space and, you know, what are they interested in? Well, I think even when you and I spoke, like, you know, I always said it would never be a wall. It would be like just a growth. And I think that's what we've seen. The line has been heavy, you know, this last six, nine months, which is great. But of course, it's not some binary on-off switch step function that's going to happen.

But no, I think the backdrop of coronavirus actually has had pretty much everybody on the planet rethinking their portfolios and what they mean. Secondarily, with Bitcoin now over 10 years running. I mean, frankly, how much money are you going to put into a system and it's only five years old? And people have all these questions, whether it's regulatory or technical or security. It was just hard back then. Today, a lot of those objections are gone, but we now also have a very uncertain future in terms of the traditional assets. So anybody that's been building a portfolio on a 60-40 mix of stocks and bonds transitioning over time, they have to rethink it. Obviously, the stock market has had a very good run in recent years.

And everyone attributes this to money being super cheap, incredibly cheap, and printing a lot of it. And everybody's waiting for the shoe to drop on that. We know it's going to happen sometime. We just don't know when and we don't know how bad. On the bond side, you know, outside of the U.S., I mean, it's negative yields completely. Even inside the U.S., you know, you can't make any money off of cash. So people are looking for an alternative. And if you have a model that requires you to return money to your retirees or investors,

you know, you're thinking like, how am I going to meet that model? We've got pension funds that are going to go belly up unless they figure out something to do. They simply will not have the funds that they are legally required to distribute to their investors. So to crypto's surprise, yeah, some of the most conservative assets out there are investors out there in like retirement space with endowments and with pension funds, they are absolutely looking at crypto. So all of this has made it so that pretty much every sector of institutional, whether you're talking about hedge funds, whether you're talking about long-term investments, whether you're talking about family offices or high net worth, everybody's looking at digital assets now. The more aggressive of those already have made their investments, and we just see more coming. So I think that's why this last 12 months have been so strong for crypto and digital assets. And as you see this part of the industry develop, how do you think the institutional part of this industry can compete with traditional financial services firms that are trying to get into crypto?

Oh, well, I mean, that's the great thing about what we're doing. This is software. And, you know, software, when it gets into an industry, it has a pattern of completely upending it. So we get to rethink how pretty much everything works. And, you know, I ask questions all the time of people. I say, hey, who are raised your hand if you love your bank, and nobody ever raises their hands. You know, the fact is, is that these institutions, you know, on the traditional side, were built a very long time ago before we had technology.

And then, you know, through regulation and through conservatism, you know, being conservative, they just haven't gotten to where people want it to be. We now have a global society. We are connected informationally in ways we've never been connected before. and we need a financial system that's for the future. So the other thing that's happening, I mean, we're lucky we're here in the U.S. We might be concerned about fiscal policy here. But if you're abroad, you know, you have real questions depending on where you live

about whether the money that you earned yesterday is going to be useful to you tomorrow. And this happens over and over again when people are in charge. So, you know, can we use computers to apply for? fiscal policy in a way that, frankly, humans aren't as good at doing. And I've said this one before, which is, I think, exciting. I think the longest standing unchanged fiscal policy in the history of mankind is Bitcoin. Think of any society anywhere that had a fiscal policy that stayed constant as for a period of a decade. I don't think has happened. So, you know, that's a tremendous opportunity for what the future can hold. And it also comes with transparency. And it also comes

comes with smart contracts, we can barely even imagine all of the combinations of better service that we're going to get going down the line. And the crypto markets have really ballooned this year with the total crypto markets hitting $2 trillion again recently. A year ago, they were at less than $500 billion. And as the industry grows and as companies such as yours begin costing larger amounts of crypto, such as perhaps one day, one trillion dollars worth or more, how does that affect security practices?

Oh, great question. You know, at our roots is security. It's where we started really kind of at a nuts and bolts level. You know, you're never done with security. You just keep raising the bar. So, you know, one thing that's happened in terms of bringing more people into the space is we've had to address how do you secure assets for fiduciaries that are holding money on behalf of other people?

So we're huge believers in the benefits of decentralization, but we also want the industry to be able to participate everywhere, which sometimes requires more centralized storage. Would you want a trillion dollars stored in a single wallet or under a single vendor? Not really, right? So we've got to split that apart with backstops and insurance and ways to handle disasters. The industry is getting smart about this, and we're seeing it.

So crypto technology is going to get better. allow us to have decentralized holding of assets. It'll be interesting to see how regulation and legislation keeps up with that. Imagine a multi-sig wallet today that has a key in the United States, a key in Canada and a key in Europe. Whose jurisdiction is that? I don't know the answer to that question. I'm not trying to be difficult for the regulators, but do people want their money protected by the judicial system of multiple countries? Absolutely they do.

And it gets much more complicated than that. that. So we'll see things get more decentralized. And in terms of having any single vendor with trillion dollar wallets, of course we have to kick back back steps of that. Part of what's happening is you're seeing safety funds get built. And a couple of protocols have had safety funds that they actually needed to exercise. You know, it's early days. There's still been some technology failures, some security holes, right? But I think we're going to find ways with technology where certain amounts of profit is held in publicly visible, you know, safety funds. And this is basically insurance, but now you can see it on chain. And it's, you know, kind of as you go, you build it.

I think we're going to get good at this over time. And it's going to create a safer financial system in the end. Well, speaking of finance, I guess that was one of the first exchanges that did that, right? Yeah, it was. That's right. So, now switching gears, wrapped Bitcoin is a state in Bicco's business. And RAPT-Bitcoin actually accounts for more than 1% of Bitcoin circulating supply. And obviously, we're seeing people wrap their Bitcoin so that they can participate in defy on Ethereum, mostly to chase yield. Have you seen the drivers of that change in any way, especially since, you know,

we're not in the kind of crazy DeFi summer that we were in last year? It hasn't really come down. It goes up and down with price, I suppose. but in terms of the number of coins, you can see actually it hasn't really come down significantly. I think it's got real utility. In terms of a centralized storage of this, you know,

as it grows, we're going to have to do other things, whether that means splitting across custodians in a still central way or hopefully get to more of a decentralized technology for holding it, one of these things is going to happen. Like you simply don't want to wrap all of the world's Bitcoin

and then have a big honeypot. Like we work too hard to decentralize, this to create that model. So it will change. One interesting thing that's happened as well there, though, and it's related to anything that's a stable coin. And of course, WBTC is a stable coin of Bitcoin as opposed to a stable coin of dollars, is what happens when things go wrong.

There was a hack at some, I'm forgetting which one it was. It was just a few weeks ago. And some rap Bitcoin, no fault of rap Bitcoin, but a smart contract was hacked. And then they reached out to us. The only network one, I think. There we go. Thank you. And they reach out to us to freeze the asset.

And the RAP Bitcoin smart contract does not have a capability to freeze. We did not want that responsibility. We think that's a centralized digital asset technology that we don't want. Now, when most of the U.S. dollar-backed stable coins are implemented, they pretty much all have freeze capabilities. behind them. What this means is that, you know, there's a single party that can freeze any asset regardless of where it is in the world. And this is a little bit like, you know, taking your email and instead of storing it personally, storing it now at Google, and then having someone subpoena it from Google instead of from you. The same thing is happening with stable coins. So this is an

interesting development. I can see why regulators might like that. This one stop shopping. But in terms of centralization, I think it's not really the direction that we want to be in. So another hot topic right now is NFTs, and we are seeing investors, including a number of hedge funds that have been investing in these digital collectibles. And I wondered, do you see Bicko ever doing something like custodying NFTs? And if so, how would that differ from custody traditional crypto assets? Absolutely, we do. I mean, custodians can hold all kinds of things from art to fire trucks. So there's no reason why we wouldn't, we wouldn't do that.

It's an emerging space. I think it's, it's just getting started. You're starting to, you know, the early days of NFTs, people associate with art, art, art, art, art. You're starting to see people realize, wait a minute, this is about proof of ownership and provenance, right? As those things come true, a custodian is a perfect solution. So, of course, we'll be supporting NFTs in a myriad of ways and helping people secure them. Another big trend this year has been, well, actually last year and early this year,

has been corporate treasuries holding Bitcoin on their balance sheets. And I noticed actually in the last few months this has been kind of more rare of a new story. And I wondered if you had any insight into what the slowdown was. I think it's still pretty difficult to put on your court balance sheets. So, you know, I mean, the two big prominent ones, we've got, you know, micro strategy, obviously he's got a corporate strategy around being a Bitcoin asset to and of itself. You've got Tesla, which I also think, you know, Bitcoin is very much for the people type of thing. Elon has built a tremendous brand that people love. It doesn't surprise me at all that he would associate with Bitcoin as a way to build his brand. But I don't think most

companies really want to have commodities on their balance sheet. It's not to say that Bitcoin isn't a great commodity. We carry a lot on our balance sheet, but that's because we're in the space. We know what we're doing. Typically, you don't see companies really investing in gold or other things. So that could change as, you know, the monetary situation in the U.S. changes if you really do need to get away from Fiat, which I think is going to be a growing concern. But in terms of why companies have done it so far, I think it's been more about kind of

the brand wins and positioning than it is about actually wanting to have assets on the budget. Okay. Well, so I know you can't talk too much about the galaxy acquisition, but, you know, obviously you have an important role in the industry. And I just wondered, you know, from your perspective, where do you think the industry will go through the rest of the year? Or what do you expect to be the major storylines?

And this is a question for both Mike and Jeff. Jeff, you want to take this one? Sure. So look, we're excited about the merger. And we can't get into too many specifics. But both Mike and I will have prominent roles at the combined firm. And I think Mike said it early, right? At Silicon Valley meeting up with, you know, Wall Street.

And that's a powerful combination. You know, they're very good at trading. We're good at security and custody. they've got a number of businesses, asset management, investment banking, and the combined effort of those two, if you really want to do prime brokerage, prime brokerage infrastructure, you need a custodian to do that. And the combination of the two players will be a force to reckon with as the institutional adoption grows. And as we get more creative in this space, you just mentioned NFTs, right? There's a whole host of new and emerging technologies and ones that haven't even been

thought of that will end up on the blockchain. So we hope to be a player in all of them. Mike? So I think we're going to enter a great build phase. I think in general, the interest is here to stay. I don't see it going away. The institutional interest in digital assets is not wavering at all in spite of the price drop. Really, it's more about timing. It's about continuing to figuring out logistics of how they're going to participate and how they're going to provide that to their clients. So it's all good. and then with defy evolving, with NFTs coming, with the next wave of layer two on the Bitcoin side, this is going to be a great couple of years of build and grow.

I don't think we're really going to enter into a crypto winter quite like what we entered before, because I think we've reached a critical mass. That's not to say it's not going to be volatile. It's going to be hugely volatile. But I don't think we're going to quite see the kind of the two-year bearish period that we've we've seen the past. Yeah, I've actually been thinking the same things because it's like almost

like the space is getting too diversified now for that to happen. So yeah, well, we'll see if we were right or wrong to check back in a couple years. Yeah. All right. Well, where can people learn more about each of you and Bicco? Easy to find Bickgo.com. And as we move to to Galaxy, it's galaxydigital.io. So anyway, happy to connect. You can find us there. I think Jeff is easy to find there as well. And happy to answer questions for anybody that's got them. Perfect.

All right. Well, thank you both so much for coming on Unchained. Thank you, Laura. With a pleasure. Thanks so much for joining us today. To learn more about Mike, Jeff, and Bickow. Check out the show notes for this episode. Unchained is produced by me, Laura Shin,

with help from Anthony Yun, Daniel Ness, and Mark Murdoch. Thanks for listening. Thank you.