We Study Billionaires - The Investor’s Podcast Network - BTC177: The Future of Bitcoin Borrowing and Lending w/ Max Kei (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. On today's show, I have a very thoughtful guest, Mr. Max Kai. With all the financialization of Bitcoin ETFs happening and what's expected to occur in the coming years, there are many people concerned about the re-hypothecation of collateral and the commingling of funds, and in general, the games of fractional reserve antics that plague traditional markets getting ready to happen, all on top of Bitcoin. Well, today's guest is a veteran in managing these risks for many years, and he's somebody that I followed very closely because he continues to provide such services of borrowing and

Starting point is 00:00:39 lending without ever being impacted by counterparty risk and then nefarious actors of all these previous cycles where many of them had blown up. As you'll see in the interview, there's a reason why he's managed this risk appropriately, and his message to traditional banks and financial institutions is vital to hear right now. So without further delay, here's my chat with Mr. Max Kai. Celebrating 10 years, you are listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey, everyone, welcome to the show.

Starting point is 00:01:25 I am here with Max Kai. It has been, when did we record last, Max? Is it been four years or three years or something like that? It's been a while. Three years and four years. Yeah, it's been a while. Actually, right after we launched the first landing product, you know, it's kind of interesting thing. You were the first, you were the first podcast host.

Starting point is 00:01:49 I talk about it. But here I am launching another one. I remember how I got introduced or informed about you. And it was Adam back that told me. And Adam was just, you know, he was tinkering with Hoddle Hoddle. and we had, I forget where we had the conversation. It might have actually been just via text. And we were talking about borrowing and lending and over collateralization and the idea of

Starting point is 00:02:16 like, how can somebody actually go about this in a responsible kind of way that does not introduce systematic risk or compound risk to different participants? And he told me at the time that he thought the only way that it was possible to do it was and appear-to-peer direct between two parties as long as they're over-collateralized. He felt like that was the least risky way to do it. And then he told me about Hoddle-Hoddle. And from there, I was like, I was very interested. I was very curious.

Starting point is 00:02:48 And then you and I have gotten to know each other through the years and just it's been a lot of fun. But anyway, I don't want to start there with this conversation. And sorry, I'm talking so much. I want to start with something that I found interesting when I was in Madeira. And I had the privilege of being on stage with Michael Saylor, Lynn, and Larry Lepard asking questions. And one of the questions that I asked to Michael was about borrowing and lending and where I think everybody's looking at these ETFs and they're looking at Wall Street showing up in style to Bitcoin finally after a decade plus. And they're building these ETF products and then they're about

Starting point is 00:03:34 to construct derivatives on top of this. And I'm looking at you as this person who I think between you and Mauricio are like the only two people that I know that have gone through a full cycle and have not blown up a platform or an exchange or whatever because you're actually doing this in a reason, in what I would describe as a responsible way because you're doing actual peer-to-peer over collateralized lending. And so the question that I asked Saylor when we were in Medeiro was we've seen Mount Gawks blow up. We've seen FTCS blowing up. We've seen all of these borrowing and lending platforms, blockfire, whatever you name it, blow up. And now Wall Street's showing up and it looks like they're going to be playing the fractional reserve games and they're going to be

Starting point is 00:04:22 doing all the things that we know are literally incompatible with Bitcoin in the way that Bitcoin functions because it's just relentless in the way that it presents. itself, but nobody can step in and manipulate it. And so I asked him, I said, what would be your advice to Wall Street today knowing all of this history and this incompatibility with Bitcoin? And his response, to be quite honest with you, Max, surprised me in his response because he seemed to imply that he didn't think that it was going to be an issue for Wall Street. But what I want to do is play you the clip because I deeply trust your opinion on this matter. I want to play the clip and then I want to get your point of view as you hear his response.

Starting point is 00:05:08 So here we go. I'm going to play this clip and hopefully share it here correctly with the people that are watching it on YouTube. So here goes the clip. You know, I don't think they'll have any problem money against Bitcoin because they've already got the problem with these other examples is they're all wildcat banks. I mean, people were going to pride. Nobody in their right mind would put money in a private, opaque, unaudited operation run by two dudes out of their garage offshore without a mailing address, right? And so the problem wasn't barring against Bitcoin. The problem was actually dealing with, you know, people running personal banks out of their basement.

Starting point is 00:05:54 And they didn't know how to run a bank. The way all these wirehouses work right now is you have a portfolio of assets. They mark them to market every day and they give you loan, margin loans with loan to value no more than 50% or something. And actually, they will adjust the advance ratio. And the way they manage risk is they just mark them to market. They already know how to mark to market. With Bitcoin, they'll just be able to mark to market 24-7, 365.

Starting point is 00:06:23 and normally the way they work is they would say, well, we'll give you a loan of X. If your portfolio is Apple stock and Microsoft and Bitcoin, they'll give you a loan of up to 20, 30% of that. And then if those things trade down, they'll just ask you to post more collateral pay off the loan. And that's a business that works perfectly fine for the last 40 years.

Starting point is 00:06:49 All their systems are wired. And the risk here is the people that got screwed in the Bitcoin loans, they didn't get screwed because the Bitcoin Collateral went bad. They got screwed because the bank stole their money. Right. And so here you have JP Morgan Citigroup Bank of America, Wells Fargo with trillion dollar balance sheet. They don't normally steal their clients money as a normal thing, right? they're too big to fail. And so I think that, I mean, anybody wanting a mortgage or wanting a credit card or a home loan,

Starting point is 00:07:26 they would normally go to a mega, mega bank anyway. And the problem in the market is those banks haven't, they haven't custody Bitcoin. And because they don't custody it, it's not part of the collateral package. And there are a lot of reasons why they haven't or they couldn't. But as soon as they can, I actually think the rest of the credit issues become very straightforward. and you'll find a bank will give you either that margin loan in lieu of Apple or Microsoft stock, or sometimes they'll give you a mortgage and they'll say post some other assets as security against the mortgage, and you end up posting some securities and you get a 30-year mortgage with some securities posted to get it going,

Starting point is 00:08:10 and they may just take Bitcoin as that security to top up your mortgage or refinance it. So if I was going to push back on this, I think like if Caitlin Long was here, she would say there might be a frequency mismatch. So when we're looking at the speed of settlement of Bitcoin and we look at the volatility of Bitcoin and then we look at traditional rails, equity certificates, what's the frequency that they're able to, are they 24-7 that we can clear those? And if we're posting collateral with things that can't match Bitcoin's frequency, does that pose systemic risk for some of these custodians?

Starting point is 00:08:48 I don't think it's supposed to systemic risk. You're talking about 0.1% of the money. For example, a big bank would give you $100 million loan against Apple stock over the weekend if you had a billion dollars of Apple stock. If you had $300 million of Apple stock, they'd give you $100 million loan over the weekend. Maybe something happens in China declares that Apple can't manufacture iPhones, and in the morning, Apple stock gaps down. Well, the bank took the risk.

Starting point is 00:09:18 Not you. And the bank's already willing to take 48-hour or 72-hour settlement risk on all these other securities. They would be taking an order of magnitude less risk with Bitcoin. So Bitcoin de-risks the bank, but the point really is the banks are already taking more risk and they're comfortable with it. They've got and they've got massive balance sheets. They've got hundreds of billions of dollars of equity capital. So the point really is the only thing that's holding back Bitcoin credit markets is the big bulge bracket banks being able to custody Bitcoin.

Starting point is 00:09:59 And at the point that they begin to custody Bitcoin, they will start to extend credit as the natural next step. And there's nothing about the asset class that makes it harder for them. It's a better asset for them to extend credit. It's better than the $100 trillion of equity. is not worse. So I actually think they will embrace it. And their view would be a lot less risk. It's a lot easier to manage. The reason they're not doing it now is not because there's an issue with Bitcoin. It's just they're not able to custody it. And if they can't custody it, they can't, there's no handle on it. That's why you don't see that market taking off.

Starting point is 00:10:38 All right, Max. Okay, there was a lot to discuss there. But I'm curious to hear kind of your general take as somebody who's an absolute expert in this particular area. What are your thoughts? Actually, I like the part of, you know, that Michael remembered is saying to be to fail, which is no longer true, I think, since 2008 in Lemon Brothers, you know, AAA and all that stuff. I remember that year because I was actually working in asset management at that point. I think that the main problem, and actually Lynn later on the same panel,

Starting point is 00:11:13 she mentioned that there are companies that actually. allowing you to do it in a proper Bitcoin way. And she mentioned unchain capital, which is a multi-signature based, basically lending and borrowing, and which we do with hoddle, hoddle, and with Debify as well. So I think that the main issue that not many still yet understand, that there's a huge gap between borrowers and lenders, in that sense that if we say that lenders are a traditional finance companies, big institutional companies that are used to take custody of the assets. And we say that they want to start lending out money to bitcoins or to companies that own Bitcoin on the balance sheet.

Starting point is 00:12:00 But there's a huge problem because bitcoins and companies, whether it's a legal entity or a private individual, they saw what happened with Block 5 Celsius. They saw what happened in 2008. they saw what happened in general when you give a custody of your assets to someone else. I disagree that these companies like BlockFi and Celsius, they were run from a garage, basically. Obviously, there was some bad decision made, bad risk management. But in Bitcoin, I think the main value proposition, one of the main value proposition of Bitcoin as a superior asset. And I think Michael will agree with me and generally what he promotes as well is that this is something that you own.

Starting point is 00:12:47 If you have a key to your Bitcoin, this is your asset. It's independent from everything else out there. You don't need to custody those. You know, you take a hardware wallet, call storage, you send there your Bitcoin. That's it. That's your asset. So when we're talking about Bitcoin borrowing and lending and mentioning the custody, Maybe Wall Street and other traditional companies used to do a collateralized lending in that sense that they take a custody of the assets.

Starting point is 00:13:17 But with Bitcoin, what brings us to the next question, what is Bitcoin in general in terms of lending? In Bitcoin, you can do things different and it's not necessary bad or it's not necessary something worse for a lender or for a custodium. It's just different, way more efficient, and specifically way more forward thinking towards your customer, which is the end borrower. Who are you providing the services? So I generally disagree with the custody thing. I think I will always disagree with that because, again, we saw BlockFight Celsius multiple companies. There was like Voyager, which was, it was a good company, you know, with all that stuff, blew up. So it doesn't matter whether you have, you run it from your garage or you have an office on the Wall Street.

Starting point is 00:14:09 It's a question of how you build your product in a way that you can appeal both to Bitquoers and both to traditional finance people. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories

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Starting point is 00:18:40 amount of risk, it seems like commingled funds for the escrow is where the issues are always manifesting themselves, especially when you're using Bitcoin as collateral. So, like, I look at BlockFi. This is something that I covered even when interviewing the founder of BlockFi back then. We knew back then that you had everyday retail people that were over collateralized with their deposits if they were borrowing. And you had institutions that were also putting collateral up, but they weren't over collateralized. And by commingling these two into the same company is why we had issues, even though there were people that were people that were. were completely over collateralized in a 24-7, seven days a week, all days of the year,

Starting point is 00:19:30 kind of way that should have had no risk whatsoever if it was just them that was over-collateralized. And so that's how you ran Hoddle-Hoddle, which was it's point-to-point with another person, it's over-collateralized. There's no commingling of some institution over here that's presenting additional risk. Is that the big one? Is that the big part that needs to be discussed when Wall Street? streets entering this space is the commingling of collateral. I think yes.

Starting point is 00:20:00 And also I think what they used to have, again, the custody of the funds, but they used to rehabilitate the funds, right? And that's the main issue. Yes. And what's they offer? Usually the scheme is like on one side, you get a collateral. On the other side, you get something. You match those.

Starting point is 00:20:20 And then you can, or on the one side, you get a person who wants. to earn yield on top of Bitcoin. And on the other side, you have a person who is happy to provide certain services to get that yield. So number one issue, of course, mingling all the funds. It's true. You need to be always over-collateralized. You don't mix them.

Starting point is 00:20:40 You need to store them in a separate multisignature account, which we do, multi-signature address. You don't re-hapticate the fund. But also what I said in the beginning of our panel, which we did with you in Madera, was that I think the yield generation products on top of Bitcoin should actually die because it's like Bitcoin itself is already yield generation product. It's already an asset that actually generates you yield. So here's my strategy if you want to generate yield on top of Bitcoin.

Starting point is 00:21:13 You buy Bitcoin. You buy hardware wallet. You send your Bitcoin to the hardware wallet. You forget about it. In four years, your yield is generated. So it's that simple. It's that simple. You don't need to do anything.

Starting point is 00:21:26 Because every time you think about, okay, I want to earn extra 3%, 4%, on top of what I'm earning with my asset, you ask yourself from where yield is coming. If you cannot answer that question, probably you are the yield generational asset with you and your Bitcoin. So I think that was the main reason that people get greedy. Of course, greed is good, Gordon Gecker, right? But it's not good when we're talking about Bitcoin, specifically when we talk about your generation products.

Starting point is 00:22:01 You know, grid is good. Hold your Bitcoin, hold your keys, don't give up on custody. If you have to give up on custody, at least make it collaborative custody. At least hold one key and make sure that if you borrow against your Bitcoin, your Bitcoin is stored in a multi-sec. It's not re-hypticated. It's technically impossible to re-hapticate one. And that you have, you as a private individual,

Starting point is 00:22:25 has a proper risk management in that sense that you don't borrow against all your stack. You always have something. In case of the LTV ratio is falling down, you can always add more to collateral. Because that's the best way to avoid liquidation. That's the best way to go forward. And again, I think the main thing is that we need to teach Wall Street,

Starting point is 00:22:48 I think we should do a heavy lifting, you know, not only provide them with the tools, but also talk with them, is that Bitcoin is a unique. It's a super, it's not digital assets. It's a super collateral. That's the mantra we have in DemiFi. And we need to teach them that actually in Bitcoin, collaborative custody is possibility. And every same bitterner is going to be your customer if you will offer a service that is not re-applicated his fund. And that gives him certain level of control and trust in things that you're building or doing or whatever services that you're providing. I cannot agree with you more. When I look at Bitcoin, it's just a fractal. It's like it started off. It demonstrated these properties at a very small level. Then you go through

Starting point is 00:23:36 another cycle and it's doing it at an even larger level. And now it's literally at this global scale where we have hundreds of billions of dollars in Fiat terms institutions, financial institutions that are now playing around with this. And I think it's naive for us to look at it and say, oh, yeah, well, they're the big boys in the room and they're the smart PhD people that have been schoolhouse trained in how to manage financial instruments. And it's the rules that applied at the lower fractals aren't going to apply up at this fractal. And I'm just kind of shaking my head and I'm saying if you're commingling funds, if you're doing something that's not over collateralized, you're just going to get destroyed. Like this thing is just relentless. It doesn't

Starting point is 00:24:22 care if you have the name Black Rock or you're just some trading card exchange from years ago. It just does not care. It's going to be relentless. Nobody's coming to rescue you. And I'm just looking at what's playing out. And I'm very guarded and very just very concerned as to like moving forward. It seems like you share the sentiment. I share the sentiment, but again, I'm more positive on that side that, you know, we can and we will provide tools. I mean, in general, as a community to, because again, my thesis in that sense is that every major financial institution, every bank out of there, the big one, have at least 100 or even 1,000 of people who own Bitcoin among their customers. And at some point, those customers are going to go to that bank and going to say, okay, guys, I don't want to sell my Bitcoin.

Starting point is 00:25:19 I have Bitcoin. I don't want to sell my Bitcoin. I want to borrow. But we have a long-term relationship history here, right? And I want to borrow from my bank. Can you offer a proper service to me? And they said, if you're lucky, they will probably say, yeah, you can custody your Bitcoin with us.

Starting point is 00:25:37 And we'll give you 50% LTV ratio. And in case something, something, we're going to liquidate you, which is fine. That's how business work. But we can recapicate your funds. You know, I read those blueprints, you know, terms of services. There's always a possibility to be recapricated in that sense. And most of sane bitcoins, I would say, they're not going to agree with that. And they're going to go to another bank.

Starting point is 00:26:07 Yeah. who's probably might be able to provide a non-cissotial setup, a multi-signature setup for your lending and borrowing. It's actually already happening in certain regions. For example, in Switzerland, you have these banks that work with digital assets. They can custody your funds. They can custody Bitcoin, other crypto assets. And we actually have been approached by several customers of these banks

Starting point is 00:26:33 who told us, like, guys, I can introduce you, with the people from that bank, I want to borrow from them because it's like, we have a long-term relationship with that bank. I trust them. But as a bitcoiner, I don't trust any custody apart from my own custody or collaborative custody. Can you please provide this service to them? I can still borrow from them and they will be my lender.

Starting point is 00:27:01 But the Bitcoin that will be holding collateral would be holding a proper multi-signature set up. And we're now talking with several of these banks. And I think this use case are going to grow. As the price of Bitcoin will grow, there will be more and more people willing to borrow against that. And there will be less and less people willing to sell that because the cost of opportunity is very high. We already have a core layer of people in Bitcoin community, let's say the existing Bitcoin community, who already understand the long-term value of Bitcoin.

Starting point is 00:27:35 You know, low time preference people, you know, generational wealth, all these things that for us, it's not just sound, you know, and just words. And I think as more and more people will get to the Bitcoin, obviously, some of them will go through custodian, through, you know, large institutions. And then again, every cycle we see that people get burned because of the greed, because of trusting. because one of the core mantras in Bitcoin is not only hold your keys, but also don't trust verify. You don't need to trust. And that could be a problem for people or for institutions that actually they have a long-term experience in custody funds.

Starting point is 00:28:17 And again, I don't see anything bad in custody certain assets. I see bad when you need to custody Bitcoin because there's a lot of tools that can allow you not to do that. and it won't be even, it won't be less convenient than when you custody the funds. Actually, you're taking extra risk when you custody clients, customers, Bitcoin, you know? I think that multi-sick and, again, collaborative custody is less risk here also for a lender or for potential custodian. So if you offer that type of service, there's like, it's distributed risk, I would say. if we, you know, we figure it out a new term distributed risk.

Starting point is 00:29:00 So it's kind of, I think, a proper risk management here, even better for a potential custodian. I think one of the things also to discuss when we're talking about risks on borrowing and lending is really kind of where, where is the mark, the current spot mark coming from? And is that something that you're looking across multiple exchanges? Is it just one reference rate that's being used? what's the liquidity of that? I think it was just a couple weeks ago.

Starting point is 00:29:29 We saw somebody evidently keystroked in a massive, I think it was a sell order or something. And you saw the spot market on that particular exchange just plummet down to absurd levels. I forget what price it got to in Fiat terms, but it was like really low. And I'm looking at this and I'm saying, if I was borrowing and lending and I'm using that mark for adding more collateral or, you know, in that situation, you wouldn't even have the time. to add more collateral because it happened so quickly. Walk us through that risk and how you guys think about it from a debify or hoddle-hoddle standpoint. We usually have a price oracle. And the price oracle actually, it's a compound price feed from multiple exchanges,

Starting point is 00:30:12 the most liquid exchanges out there. So we don't take only one exchange or only one trading venue. We use several of them because, again, we are good at this with our experience. with Hodel Hodel, and now we take that that experience and move to Debify. And we understand that these things that you mentioned, you know, somebody pressed the button and, you know, the price just went nuts, completely nuts for a minute, but it's enough already to trigger the liquidation level. So we avoid that and we construct our own price work calls.

Starting point is 00:30:47 We actually explain that in our help guides and terms of services, how we do that. we're actually working on improving that. But usually our approach is that we take Timo's liquid, the biggest exchanges, and we take multiple of them, and if at least, and if majority of them shows the different price, then of course it's going to affect the price oracle. But usually even if it's one or even two spikes, then most probably is not affected on your collateral, on your liquidation level and LTE level. So it's like it's also a certain thing that you need to understand when you're doing Bitcoin borrowing.

Starting point is 00:31:30 You need to understand how the price feed works for your collateral. What company or platform that's giving you this opportunity to do your lending and borrowing activities, what tech they're using, what price feed they're using. So there's a different approach actually. But I think that's, again, from our experience doing this. for multiple years. I think that's the best approach so far that we have. When you and I have talked privately, you are a huge proponent of this idea of Bitcoin being a super collateral. For people that might hear that or just kind of hear that terminology,

Starting point is 00:32:11 that might say, oh, that's kind of an interesting idea. Put some context on that of why Bitcoin is such a revolutionary super collateral versus anything that the world has ever seen. before? I think it's number one, it's because it's high of liquid, like extremely liquid asset. If you're a lender, the best collateral that you can lend against is Bitcoin. Why? Because if there's a liquidation coming and your borrower fails to repay you alone, you can liquidate 24-7 any time of the year. Basically, you can automate this to a level that you even don't know that something happened on the backhand. Highly liquid for a lender,

Starting point is 00:32:55 from a lender standpoint of view, because like take any other asset out there, like real estate, months or even years before you can actually sell it and get some money back. Stocks, you know, usually during the weekend, doesn't work, working hours, all that stuff. Bitcoin, 24-7, 365 days a year,

Starting point is 00:33:19 easily to liquidate, deep market, deep liquidity, no issues at all. Now, second important thing is actually fitzboe borrower and lender is a collaborative custody opportunity. That's more important for a borrower, but as I said, I think lenders should also look from the point of view of security. You know, when you do collaborative custody, you spread the risk, as I mentioned, distributed risk in that sense that you do understand that there's certain amount of keys involved in the scheme if we're talking about multisic and that even if you fail with your key management so you lost

Starting point is 00:34:02 it somehow i don't know you were compromised it's not necessary that the collateral will be moved because usually it's we're talking about either two out of three so you need to have at least second key or it's in DeBify we do three of the four. So we have four keys distributed and you need to have at least three. Max, what's the breakdown of the four keys just so we can understand the what's going on? One key goes to the lender who are institution in case of DeBify and that's one of the main difference between Hodel Hodel and Hodel Hodel Hodel, like everyone can become a lender on DeBify, only institutional lenders. Okay. So one goes to the lender, one goes to the borrower, one key goes to debify, and fourth key is hold an authorized key holder possession,

Starting point is 00:34:50 which is an independent entity who holds the key. And in case of liquidation, or in case of dispute, they came co-signed with us, and the winning party, the release transaction in favor of the winning party or the party who needs to get the funds after the liquidation. And adding one extra key is actually was, to some extent, it was crazy idea because two out of three is more like an industry standard, but then we thought, like, well, we don't want to provide liquidity by ourselves. We just want to be a tech provider.

Starting point is 00:35:21 We want to provide a platform for institutional lenders to meet any type of borrower out there who owns Bitcoin. And in order to avoid that and be just technical tool providers, which we're good at, we need to ensure that there's a liquidity stream on the other side. And how we ensure that we offer the service to other lenders and liquidity providers. And that's how we came up with the solution.

Starting point is 00:35:43 But the issue is that we know how we manage the keys. And we know, for example, we do audit and due diligence on authorized keyholders, the independent entity that I mentioned to you. We know how they manage the keys, but we don't know how lenders and borrowers manage the key. We can provide you with all the necessary tools out there. You know, we can do hardware wallet integration. We actually have a different security system and model in Debbie Finlay. that in hoddle, hoddle.

Starting point is 00:36:11 Right, but it's always, you know, there's different levels of attack and getting the key, you know, there's even physical attack. You never can be sure that the lender and the border are storing their key properly. Even if you provide them with the most modern, advanced, sophisticated tools,

Starting point is 00:36:28 you know, there's still a human factor and there still could be an issue. So this is why we came up with the idea of three of the four. Again, as I mentioned, highly liquid, collaborative custody. And I think one of the main things is also that it's a global thing. You know, we saw with our existing with Hodel Hodel and we see now with DeBFi that we have lenders based in different regions who are providing the liquidity to borrowers

Starting point is 00:36:56 based in different regions. If it's not to be a Bitcoin, then most probably they would never met each other. It's a global thing. You as an institution who has liquidity, want to provide liquidity, you can actually open new markets easily with Bitcoin. You don't need to have a real estate agent who will go in a certain market, will access the property, you know, do the valuation, and then you'll understand. No, the price feed for Bitcoin is up and running. It's there. It's online. You can check on this every second, basically. It's very transparent. And it's also one of the reasons why Bitcoin is

Starting point is 00:37:32 super collateral. It's because it's like the price is highly objective. It's not subjective. It's not something that I value your house for one million and you think it's one and a half. No, there's a certain price for Bitcoin. You know, it's prices there. It's market driven asset. You cannot say that my Bitcoin here in New York should be traded at the premium plus 5% than your Bitcoin there in Berlin, let's say. It's a very objective asset. You have a deep market and the market decides what's the price of the asset. And there's like multiple other levels and layers of Bitcoin, why I believe it's super collateral. But I think that we have this unique opportunity in history of, I would say, in human, in mankind,

Starting point is 00:38:21 that we have this highly liquid collateral, which is digital already, which is global, which has a single price, whether you're in Japan, US or Europe, which can be stored across multiple institutions or across multiple parties involved. And that every party can understand that, okay, I can own part of that, and I can be in charge of part of that, and I can be safe and secure that nothing will happen with the collateral in case I will follow the consensus rules, which is if the price of collateral is falling down, the consensus rule for borrower, you add more to collateral or you do the partial repayment or you do a repayment.

Starting point is 00:39:01 And for a lender, you know, you pay loan and receive loan back, and then do the release transaction in favor of the borrower because he has repaid the loan. So that's, I think, and there's like, again, you can build a lot of different things on top of Bitcoin, which actually can improve the current credit markets across the globe, traditional finance market. Like, I'll give you a short example. Take credit cards. Like, the average interest rate in US for a credit card, I think it was last year, it was 28%. 28% the average interest rate for a credit card.

Starting point is 00:39:41 Why is so? Well, I assume it's because banks give you this credit card loan as to individual because the repayment and your obligations are based on the promise that in the future, you will have the same cash flow stream that you had before you have taking this credit card. So you will have a salary. You won't go crazy. you will do a proper repayment, but they don't have any collateral

Starting point is 00:40:10 underlying this credit card interest rate, right? They only have your promise, your certain credit history, which is a history. We know that something that happened in past doesn't necessarily going to happen in the future, and usually that's how it goes. So they have this risk premium,

Starting point is 00:40:29 and they put a certain risk because they do understand that part of their customers are not going to pay back. So they charge 28% and they charge it for most of the customers, right? So with Bitcoin, if you have this underlying asset for a credit card, then you can actually drop down this risk premium and you can actually ensure that you can provide a better service, lower interest rate, and that you can be secure as a lender

Starting point is 00:40:56 because that credit card loan is actually over collateralized and there's an underlying asset. And there's no asset out there for a retail guy, for a simple, you know, average Joe that he can go to the bank and say, okay, I can collateralize my credit card loan and get better interest other than Bitcoin out there. Because like Bitcoin is for everyone. If you own a fraction of Bitcoin, you can already do that. And actually that's one. I already kind of, you know, probably share some secrets with you. but that's where we're moving with DeBify.

Starting point is 00:41:32 And that's only one part of the credit markets, you know, that can be improved with Bitcoin because it's very easy to build credit products on top of that. It's very easy to use Bitcoin as a collateral. You don't need, like, there's no stocks who are being used as underlying collateral for your credit card. It's nonsense. There's no real estate, probably, right?

Starting point is 00:41:55 But Bitcoin can be used for that. And Bitcoin can become a pretty nice. for most of the use cases out there. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together

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Starting point is 00:45:24 All right. Back to the show. How do you think through, so on the credit card piece, my mind immediately jumps to the volatility of the underlying collateral, which is Bitcoin, which is call it 70% annualized volatility. And so when you're looking at how much that person would be able to borrow against at a much lower rate than the, what was the number you said, 25% annualized for traditional credit cards somewhere in that ballpark? 28% percent, 28% the average rate. 28% annualized.

Starting point is 00:45:53 I would imagine that if you had some type of. Bitcoin collateral, it drops it to what, 12%, 15%, somewhere in that ballpark? Am I close? We've been doing our research, talking with lenders. Well, most of them, because again, more greedy, so most of them are saying it's somewhere in the range between 40% to 20%, but still, it's like twice lower than this current interest rate. Yeah. But some of that lower rate is also dependent on the collateral having to be.

Starting point is 00:46:26 the pretty substantial, or at least the additional backing that you would have to be able to put in there to not have it called or converted because it dips below that is also a part of the calculation, I guess. So if a person has a lot of Bitcoin, they can, they can obviously have a much higher rate without the threat of it being converted because of such intense volatility of the underlying collateral. So I guess how would you think about that in an offering to, the public or to anybody that would be looking at that and saying, well, of course I want to pay half the rate, but you also have to have a whole lot more collateral to make sure that it doesn't convert. Well, actually, that's the mindset we need to change, you know? You don't have credit cards with underlying collateral. Your credit card is usually like triple of your salary, right? So you get like one, let's say, let's simplify.

Starting point is 00:47:21 You get $1,000 salary per month. they will provide you 3,000. So, 2,000 is nonexistent. You can cover 1,000 with your salary. Most probably you won't be able because you also have other expenses. So that's the mindset you need to change because suddenly for credit card, there's an underlying asset. And usually if we talk about Fiat versus Bitcoin in terms of lending,

Starting point is 00:47:47 it's 50% LTV ratio. So in order to borrow, let's say, 1,000 in Fiat, you need to put $2,000 in Bitcoin, which is, again, it's a multi-sake-based, and you don't sell Bitcoin. It's non-taxable event. And you get double the interest rate

Starting point is 00:48:06 that you actually will pay for a credit card. I think it's a good offering. But again, it should be changed, the mindset that suddenly there's a collateral that can be divided in small fractions and it can be easily delivered

Starting point is 00:48:22 to basically, underlying account that supports your credit card and that the credit card for average show can be actually collateralized as well. It's not only something, some big, heavy loans, real estate loan can be collateralized. With Bitcoin, you can collateralize very small loans and, you know, like lenders will be happy to pay because they don't have, they're over collateralized. It's win-win for them. If you get liquidated, they will get Bitcoin or they will get Fiat if you have a liquidation agent in place. So it's a win-win.

Starting point is 00:48:59 They don't need to. And obviously, the biggest win for them is that they can be sure that 100% of their loans will be repaid instead of usually the rate is like 70% and 30%. So they 70% will repay with 28% of interest and 30% of most probably will fail. and with that 28, they will cover the rest. So adjusted, it will be around 20%, which is fine for them. Here you will have across the population of your credit card owners. You will have 100% of repayment.

Starting point is 00:49:35 Even if they will fail repay you with Fiat, you will always have a collateral that you can get and cover all your expenses and obligations. Max, if that's the beauty of Bitcoin. If I'm an executive at a traditional bank and I'm listening to this conversation, I'm thinking to myself, all right, so how in the world can I access DeBify via some type of API or something to start incorporating what deep knowledge you have on this particular subject and doing it in a very responsible kind of way? And so I guess my question is, is that an offering that you guys are trying to work with traditional institutions to provide it via an API?

Starting point is 00:50:16 or is it just they have to come directly to DeBify and start using the interface that you have there? Is it something that you're... Yeah. Yeah, yeah. Currently, they have to go to DeBify and start using the interface. So we'll have them with onboarding. We have a team, like a concierge team who are doing the onboarding, helping them. But soon we will release an API so they can actually use our API and they can integrate Debify in their systems.

Starting point is 00:50:44 So if you're using an internet bank and suddenly you want to borrow with Bitcoin, you don't necessarily need to leave the internet bank of your bank. You can just use it as it is with the interfaces that are familiar to you. So we're already like building the API so you will be able to connect. And then there again, there's two ways of how lenders can interact with debify. So we have a hybrid model in that sense. So you can go and become a lender directly on the platform, which is great because you will have direct access to the borrowers that we bring on the platform. You will have direct success.

Starting point is 00:51:23 You will get all your interest payment to your pocket, basically. And there's also certain partnerships we have where the funds, like licensensensate and regulated funds, they can provide you a service of managing the liquidity on DeBFi. So you can basically do the arrangement with them, wire the money, they will manage that liquidity, and you will earn certain interest from that, and they will charge you a certain fee for that. So we're trying to build a different type of approach to Bitcoin as a collateral. Of course, we prefer if banks will be onboarded directly to DeBFi, and they will actually start managing. and we're actually building the platform in that way that even non-technical person

Starting point is 00:52:11 like from traditional finance work can be easily onboarded and can use that easily with basically no hustle in that sense. But we understand that there could be, as we call them, lazy lenders who just have a bunch of liquidity. They don't want a micromanage anything. They are happy to wire funds to a regulated entity, which will do the micromanagement. on their behalf. How do you see the key management for, let's say I'm a bank, I'm going to tap into this API

Starting point is 00:52:43 that it seems like you guys are going to be rolling out pretty soon. How would the key management look like for a customer of that bank that's basically using DeBify, but the wrapper is the bank for the customer's standpoint? How would the customer be using those keys from that bank? We have several approaches, but two most common approaches that we're always. So first of all, we have as Debify, we have an app. So Debify is an ecosystem which contains two parts, equal parts, app, which is a Debify app and a website. So Debify app, I'm going to show it to you.

Starting point is 00:53:21 There's like, I don't know where probably it's blurring, but there's like a bunch of keys. Yeah, there it is. So the app is actually your key storage. So the only purpose of app at the moment is to hold your key on your mobile. device. So every time you need to create escrow or you need to release funds, our website will send you a signal here to the app, to press a button to enter 2FA, password, all this encodes, whatever. And you will do it then release. So we separated the utility, which is website, from the actual security, which is your app. So your mobile phone effectively becoming

Starting point is 00:54:00 a key storage device. Yeah. Not similar to the hardware. wallet, but it's way more better if we also remember that there's like four keys distributed across several parties. And of course, we're going to add pretty much soon hardware wallet support. So you will be able to hold your keys on the hardware wallet working together with that. So the keys will be distributed. And of course, through API, you can also do a different type of key management. You can even store it like online on your server, which we don't encourage.

Starting point is 00:54:34 but that's a possibility if, for example, other involved parties will say, okay, we're storing our keys in cold storage and we can allow you to store your keys in a hot storage, which is not very secured, but again, it's a multi-sick. You know, there's multiple keys. Even if your key somehow get hijacked or compromised, then you need to get two more keys in order to do something with the collateral. So there's different options where still, like, working, developing them, but at the moment it's just an app that holds the key. For institutional

Starting point is 00:55:11 landers, we have a different approach. Usually we have a technical, yeah, the cold storage are coming because it's highly requested feature, but again, it's from the borrower side. They want to store their keys on their hardware device. They know like cold card, for example, or Trezor or Ledger. So that's the next step. It's going to be available pretty much soon. I have for you, Max, is just I think anybody listening to this will quickly realize that so much of the future of this is really dependent on stable coins and the liquidity of stable coins. And depending on where you live in the world, there's different policies that are emerging. I'm just kind of curious your general thoughts on the direction of stable coin issuers, whether you

Starting point is 00:55:58 think that this is something that from a policy standpoint globally is trending in a direction that's becoming more open or more closed or just your general thoughts on it all around? Like on Hodel Hodel, if we compare to again, on Hodel Hodel, you can only borrow with stable coins. So on DeB5, currently you can borrow with stable coins, but in one month from now, as we speak, there will be also Fiat loans available. We actually already help to basically deliver some Fiat loans to that extent. So we are trying to, we understand that the most liquidity still is.

Starting point is 00:56:33 in Fiat and the traditional financial institutions, they work mostly with Fiat. They still don't understand what is a stable coin. For StableCoin, I think the general approach is the same as with Bitcoin. There are markets and regions that are very aggressive towards regulating, you know, enforcing, even prohibiting even Bitcoin, you know, not only StableCoy, but even Bitcoin. And there are markets who are happy to, you know, to get this adoption. up and running. Like in Latin America, for example, if you compare,

Starting point is 00:57:08 there are countries like Salvador, El Salvador, which is basically, Bitcoin is a legal tender there. And there's also countries like Argentina. If you go to Argentina, everyone is using Thessor. You know, everyone is using USDT. People are happy to borrow against Bitcoin with USDT. They don't care. They don't do conversion to the fiat because USDT is widely used in Argentina.

Starting point is 00:57:31 And in multiple countries in Latin America, actually. You know, and the stable coins are widely used for cross-border payments in Asia, in Eastern Europe, a lot of countries, actually. And I think that the general, I would say it's becoming more and more obvious that it's an elephant in the room that you cannot ignore anymore. And I think that I see that most of the stable coin issuers, they're happy to, you know, to work together with government authorities, to help them understand, to, because I don't think anything bad.

Starting point is 00:58:05 I don't find anything bad in that sense. Because for me, stablecoin is way more better version of Fiat. If we choose between Fiat and Stablecoin, again, we don't take Bitcoin in that equation. But if we choose between Fiat and Stablecoin, then actually Stablecoin allows you to be more peer-to-peer than Fiat. You know, with Stablecoin, I can just send you, let's take a liquid, for example. there's tether on top of liquid. I can send you a tether directly, with no middleman.

Starting point is 00:58:39 You will receive that in like five minutes or less. I will pay 10 cents for sending you, let's say, a million worth of tether. It will be confidential. And there's nothing wrong about. We are like, it's an evolution of money. There was like traditional finance. There was money.

Starting point is 00:58:57 There was gold. Then there was banknotes. Then we know what happened in 1971. I think now it's, then there was Bitcoin, now it's stable coins. And we're just moving. It's an evolution. It's a normal process. You know, we are moving forward.

Starting point is 00:59:14 We are improving. And I think in general, like, again, I might answer your question, I'm not as a politician. But I think that the case with Stablecoin is similar to the case with Bitcoin. I think that there will always be countries that is going to be, wrong on the history path. Those who encourage the innovation, they will prevail and win eventually. Those who will try to ban something, they will lose because, as I say, life will always find a path to grow somewhere. And I think that financial freedom is something that you cannot ignore

Starting point is 00:59:54 anymore in 21st century, and you need to embrace it. As a government, you need to embrace that. Well, I just want to tell you as a person who's been your friend through the years and I've seen you navigate something as complex as a borrowing and lending platform through a period of just intense volatility and disruption where all these people with just unbound amounts of counterparty risk blow up and then the next one blows up and the next one blows up. And here you guys are just continuing to plug away, offering a service. to people that are borrowing and lending without any interruption. There's no greater compliment than just your performance that I can really kind of talk to

Starting point is 01:00:38 for people to kind of really understand why I trust a person like yourself to cover this really, what's the word I'm looking for? This is a very energized topic for a lot of people in the space. And I really appreciate you and what you've done to kind of lead by example. And it's really exciting for me to know that you're offering a product to Instantiated. for them to see how this can be done in a thoughtful in a way that is de-risk as much as possible and in a responsible manner because I'm very concerned that a lot of them are going to show up playing fractional reserve Fiat games at a time when this thing this thing's going to be relentless if you

Starting point is 01:01:22 bring that mindset and that approach to it. So just really appreciate it. Of course. Yeah, of course, Thank you. We just covered like basically I think we covered just 5% off, you know, lending and everything. But we'll continue. Eventually, we know we will continue. But I think that eventually they will play the old school playbook. And there will be like, some people will get burned, of course, because Bitcoin is a different. You know, they think that it's the same asset as it was, you know, previous one and previous one, but it's a different. You know, but if at least 5% of them will try to understand and use different approach,

Starting point is 01:02:04 I mean like non-cissodial approach, respecting your borrower and respecting your customer and your customer rights to having their own asset and independent asset, then I think those 5% again will prevail and eventually they will grow stronger and bigger. Because like all beer market, they happen. we see that, you know, some get bust and some get stronger. And I think that we're there, we can provide them with tools. It's up to them to decide whether they want to use that tool or not. Because we know that some of them will use and those who will use will be on the forefront of the adoption

Starting point is 01:02:43 and the forefront of actual making money in an ethical way. So yeah, that's my final thought. Love it. Love it. Max, thank you so much for making time and coming on. We'll have links to Hodel, hoddle, we'll have links to DeBify in there if people want to read up and learn more. And just thank you for your time and coming on the show. Thank you very much, Preston. It was a pleasure. Talk soon with you.

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We Study Billionaires - The Investor’s Podcast Network - BTC177: The Future of Bitcoin Borrowing and Lending w/ Max Kei (Bitcoin Podcast)

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