How Crypto Is Eating Wall Street with Nathan Mccauley, Co-Founder & Chief Executive Officer, Anchorage Digital. Dan Morehead, Chief Executive Officer, Pantera Capital. Zac Prince, Chief Executive Officer, BlockFi. Katherine Molnar, Chief Investment Officer, Fairfax County Police Officers Retirement System. Michael Shaulov, Chief Executive Officer & Co-Founder, Fireblocks.
Moderated by Michael Casey, Chief Content Officer, Coinbase.
SPEAKERS
Nathan Mccauley
Co-Founder & Chief Executive Officer
Anchorage Digital
Dan Morehead
Chief Executive Officer
Pantera Capital
Zac Prince
Chief Executive Officer
BlockFi
Katherine Molnar
Chief Investment Officer
Fairfax County Police Officers Retirement System
Michael Shaulov
Chief Executive Officer & Co-Founder
Fireblocks
MODERATOR
Michael Casey
Chief Content Officer
CoinDesk
TIMESTAMPS
EPISODE TRANSCRIPT
Michael Casey: (00:00)
So you can tell from the way that they walked in that they're really not going to follow my lead here at all. I got a panel that's going to be autonomous and independent, which is great. So I'm Michael Casey. I am the chief content officer at CoinDesk, which is the leading media platform for the cryptocurrency digital assets and blockchain space. And I'm thrilled to have a tremendous panel with us today to talk through what truly is I think, I've been covering this space for eight years as a journalist. And I feel like we're at this moment right now where things are getting really quite interesting. Just the SALT Conference itself speaks to that in terms of the crypto presence here.
Michael Casey: (00:48)
But before you want to hear from me, you want to hear from these guys so quick introductions, we have Nathan McCauley who is the CEO of Anchorage, Dan Morehead, the CEO and founder of Pantera Capital, Zac Prince from BlockFi, Katherine Molnar who's the COO of Fairfax County Police Officers Retirement Fund and Michael Shaulov from Fireblocks. So look, Dan, I thought I'd throw it to you first, if you don't mind, just to give people a sense of the journey. You, something of a visionary, started investing you really as a VC back in 2013 in this space. You've seen a lot change over the time. What are the big lessons that you take away from this for anybody here who's looking to get their feet wet?
Dan Morehead: (01:31)
Yeah, I think we're still in the early innings of the multi-decade transformation that's going to have a huge impact on literally billions of people. And this conference is a great example of how much the interest has grown in this space. The community used to be a really tiny little thing. And I was thinking back when you first asked about that, when I first was pitching endowments and other institutional investors on Bitcoin, the space had one asset manager with one fund with one asset. That doesn't really sell very well. People certainly didn't want to take that very focused risk.
Dan Morehead: (02:06)
And I remember going into meetings with big endowments. You'd say, "Hey, I'm willing to come out to your college and talk about what Bitcoin is," in 2013. And you get the CIO and 20 people in a room and you have this great conversation for an hour. And you kind of get to the end of it and nothing happens. And it's obvious you're not going to get any interest or any subscription from the endowment. So then you say goodbye and they're walking out to the elevator and everybody's whispering, what's the minimum? Because they all want to invest personally. And now it's flipped. Institutional investors are calling us and it's much more engaged. So I love seeing that this journey we're on, which I think still has a couple more decades to go, is really taking off.
Michael Casey: (02:49)
So on that note, Katherine, you are one of those institutions that, earlier than most, I would say from certainly from the pension fund world, decided that this was something that you were going to get into. Yeah. First of all, how did you convince your trustees and others to dive into this crazy space?
Katherine Molnar: (03:09)
Sure. Thank you. And it's a pleasure to be here today. So a colleague and I, we managed two different systems, but we work closely together. We started looking closely at the Bitcoin, but really more blockchain technology space in the spring of 2018. And we identified a manager that we were really interested in investing with. And to be very clear, it's venture capital. So we were not trying to invest in Bitcoin. We were not even trying to more broadly invest in cryptocurrency only, rather the infrastructure that underlies all of the cryptocurrencies and all the protocols, so really blockchain technology itself. So we've made four investments now. Going back to how the approval process, we went on site to see the manager in the summer of 2018, so a little more than three years ago. And of course staff went on site as we always would do.
Katherine Molnar: (03:58)
But in addition to that, we took a number of trustees from the different systems with us because we wanted them to really hear the message directly from the manager. So a group of probably eight to 10 people that represented Fairfax County between staff and trustees went and stayed there for about four hours. And so the following month in September of 2018, I presented it to my board and they approved it. But I would tell you that it wasn't without a lot of discussion. And even once it was approved, there were definitely employee groups within the county that were pretty upset about it actually. And there were concerns such as is this a way to launder money? And of course, representing a police officer's retirement system, that's something that's pretty important to them. And just in general there was some pushback, but I think ultimately we tried to impress upon them that we thought that this was a really potentially high growth area.
Katherine Molnar: (04:56)
It's part of a broader innovation allocation. We consider it venture capital, even though there is a certain portion that's actually liquid. Up to 20% to 30% can be liquid cryptocurrency, but nevertheless, we consider it to be venture capital. Its size is venture capital. So starting out initially and for my system is about a 50 basis point allocation. We re-upped once to one percent, so doubling it. And then we've since made two additional investments. So we're now at four investments so far. Are all of them so far in venture capital I would tell you. That two percent target is now worth over seven percent in our portfolio. It's done that well. And we are potentially or planning to recommend a new manager next month that will be truly classic liquid cryptocurrency, to put like a proper long, short hedge fund evergreen structure.
Michael Casey: (05:46)
So those doubters now are a little bit more comfortable with the steps you took then.
Katherine Molnar: (05:52)
Were they more comfortable now?
Michael Casey: (05:53)
Yeah. The trustees, the people who had their doubts, they're probably happy to see those sorts of returns I imagine.
Katherine Molnar: (05:58)
Yeah. So I think that definitely the second and third and fourth time around were certainly a lot easier than the initial approval naturally. But the performance has been very good. And then I just think in general, the service providers in this realm of asset management are better known. There are some very well known institutions that are now willing to custody digital assets. That wasn't the case three years ago when we made our initial investments. So even just some of the community around digital assets, I would tell you, has become more institutional, certainly better known to investors. And so I think that's also gone a long way.
Michael Casey: (06:34)
Yeah. I mean, we were talking in the green room before about say the emergence of [inaudible 00:06:37] in the custody space and Fidelity. These are sort of common names and how that has helped people to, I suppose, just feel more comfortable with it. But Fireblocks might have a different take on this and on what really the quality of custody. So first of all, if you don't mind, Michael, explain your service. You're a custody provider, but you've got an interesting structure there where you service both institutions and you've got two custody models. Yeah.
Michael Shaulov: (07:02)
Yeah. So I think that from where we stand and what we do, we basically provide a technology infrastructure that is custodial for the different players in this space, which is relying on technology that's called multipart competition that I'll explain in a second.
Michael Shaulov: (07:17)
But the idea is that the way that we provide our technology service, if it's basically directed to funds or for companies that consuming it directly, it's almost, it's basically self-custody, right? So they basically able to manage the wallets. But although people have this kind of notion when you tell people self-custody, they think that someone has a [inaudible 00:07:44] key in their back pocket. And they're basically running with million dollars of crypto on a [inaudible 00:07:52] key. It's actually the complete opposite. Basically there are very sophisticated systems that are able to protect the wallet and they are able to protect the keys that secure the wallets in a way that creates all those layers around security, governance, approval processes, compliance. And first of all, people can basically access it directly. So you have hedge funds that can basically consume it. And then in a sense, it's basically like self-custody. But it is secure.
Michael Shaulov: (08:23)
On the other side, we do power some of the biggest custodians. So the earlier this year, it was made public that Bank of New York Mellon invested in our company. And we are working with Bank of New York Mellon to basically establish their custody technology and offering. And we're working with quite a few of the other Tier 1 banks.
Michael Shaulov: (08:43)
So when this technology is basically consumed by a licensed institution, then you're basically getting the sort of the traditional custodial infrastructure through which people can access. But again, highly secure with all the right protocols and then also the operational procedures and the balance sheets that I think a lot of the people, the balance sheet and the brand that a lot of the people on in the traditional financial side on Wall Street really looking for to partner. And I think that the most interesting and most fascinating thing about maybe people like [inaudible 00:09:20] and the Bank of New York Mellon and Fidelity is that they already have agreements in place with pretty much most of the hedge funds or asset managers on Wall Street and they can basically service them under the same agreements.
Michael Casey: (09:37)
One of the aspects of that question around custody and the two models you're talking about, I think inevitably leads us to questions around regulation. There's this sort of inherently different regulatory structure when there is a custodian of the client's assets. So to Nathan, I thought of just throw to you just to give us some picture. Anchorage has taken a very distinct path as to how you are going to get yourself regulated. You've opted to be a bank. Maybe talk a little bit about that and what the logic behind that is and how you see the regulatory framework kind of evolving right now.
Nathan McCauley: (10:14)
Sure. I think on our side, our animating force at Anchorage continues to be service of our clients. And so when clients look at looking to invest in crypto assets, looking invest in blockchain-based technologies, certainly they need very secure custody. They need flexible custody so they can do whatever they want with their assets. But they also need that to be inside a regulated entity and a regulated environment. And so we kind of took it upon ourselves to do what we think of as some of the trail blazing in that space. We actually went to the federal regulators, the OCC, and got a bank charter. And so what we did was we took our state charter trust company, converted it into a national bank. And so when you're holding your Bitcoin or your Ethereum or any of your other long tail of assets that you might have, whether it's some of our clients have bought NFTs and they're holding those in our bank or Ethereum other assets and they're say, staking, their assets, you do all of that within a chartered bank.
Nathan McCauley: (11:17)
So this is extremely meaningful for any kind of institutional investor. Their primary regulator is the SEC. And so we want to make sure that we can help our clients meet any of their obligations to the SEC. And increasingly one of those sets of clients that wants to do that is FinTechs and banks. Others who are kind of looking to roll out services in this area really like the idea of working with a technology provider that is also regulated at the same level as them. There's a lot of kind of joint shared responsibility that you can do if you have kind of blockchain focused compliance people. And as we look at banks coming in, especially looking at all of the compliance and regulatory obligations they might have as a bank, looking at how to make sure that they properly think about capital adequacy and balance sheet versus non balanced sheet treatment for the assets. There's just a really irreducible complexity when it comes to coming into the space.
Nathan McCauley: (12:15)
And so we look at packaging kind of all of that together, both the technology to do the custody, and kind of a partner on the regulatory and compliance side to really bring things to market sooner. Whole reason we want to do this is that we think that this is probably the most exciting asset class that has come up and certainly the most exciting asset class that will come up in our lifetimes. And what we want to do is make sure it's available to everybody. And the best way to make it available to everybody is that every bank becomes a crypto bank. And really every business becomes a crypto bank in the same way that there's no notion at this point of an internet business. Everybody is an internet business. We assume that everybody will become a crypto business and we want to be an enabling force for that movement.
Michael Casey: (13:02)
So everybody becomes a crypto bank or a crypto business, because a bank is a very specific regulatory status. Or is it that we are moving to a world where these lines get blurred somewhat?
Nathan McCauley: (13:14)
I think the way we think about it is that increasingly, say over the next several decades, it is very likely that most banks will decide that they want to hold Bitcoin, will decide that they want to hold this asset class for their clients. And a lot of that is going to be because of their retail clients wanting to do it, but also their institutional clients doing it. So especially when you look at the diversity of kinds of assets that you look at, sure, you've got Bitcoin and Ethereum, which are primarily right there as investment assets. You start to look at stable coins, stablecoins might well be the underpinning of the next generation of payments for America and for the world globally. If you're going to be a bank that builds on USDC or other stablecoins, you're going to want a partner that you can work with. In our case, just to take an example of that, Visa is working with us in order to settle USDC payments entirely within the Visa network. So you can settle a payment entirely in USDC using the Anchorage infrastructure that is built up there.
Nathan McCauley: (14:22)
And so we think as there is a ongoing proliferation of digital assets, a lot of these use cases will start to come together. So yes, it will be banks that come, but then it will be all of the other businesses will be processing and looking at maybe accepting payments in stablecoins, holding assets, and really kind of building up their infrastructure on top of this blockchain ecosystem.
Michael Casey: (14:47)
[inaudible 00:14:47] one of the most interesting and dynamic areas of digital assets in the past year has been the lending business and been built on top of that. And BlockFi is truly a trailblazer in that. But you've run into some challenges lately on the regulatory front, speaking of that. I know there's probably limits to what you can answer here. But how is this all going to play out? And what's your expectation? You've had a number of cease and desist letters from state regulators. And of course we had the case last week where Coinbase revealed that they had a Wells letter from the SEC about their own lending program. It looks to some as if there's a big bucket of cold water being thrown on this business. Is that the case, or is there a more positive outlook from all of this?
Zac Prince: (15:35)
Yeah, so I certainly think there's a positive angle. So first off, in case anyone's not familiar with BlockFi, we're a financial services provider to both retail and institutional market participants in the space. So on the retail side of our platform, we're most well known for being one of the first news that enabled folks to earn interest on their cryptocurrency and also stable coin holdings at really attractive rates. Recently, we also launched the world's first Bitcoin rewards credit card where you earn Bitcoin instead of airline miles or regular cash back. And then on the institutional side of our platform, we provide bespoke financing and trade execution for both this spot and derivatives market to institutional clients that include hedge funds, asset managers, market making firms, proprietary trading firms, and crypto corporates.
Zac Prince: (16:23)
Prior to starting BlockFi, I was in the online lending industry. And like a lot of other FinTech sectors, I think the cryptocurrency and specifically the cryptocurrency lending sector is starting to go through a regulatory come to Jesus moment in time. And these things happen. It happened in online lending. It happened in payments if you read books about PayPal. And so what's happened so far for BlockFi is New Jersey sent us a order requiring us to stop accepting new clients to earn interest on our platform. This happened back in July. The order initially had a 48 hour effective date or a 48 hour effective window of time. That's now been pushed back multiple times. But there have been four other states who have jumped into the fray and sent information requests or public hearing notifications to BlockFi.
Zac Prince: (17:16)
And ultimately, I think, and the Coinbase news points to this, there needs to be clarity at the national level. So we're not going to decide what box crypto lending belongs in based on what New Jersey does or what Texas does or what any one other state does. It's going to come down to federal regulators like the SEC or the OCC creating a path for this type of activity to happen, which I believe is fundamentally activity that's good for consumers. It's good for the cryptocurrency market. And it's activity that we want America to lead on.
Zac Prince: (17:52)
So from the early days of BlockFi, we've blazed trails in terms of regulation. Going back to 2017, we were the first company in a lot of states to get licensed to make loans to people secured by their Bitcoin as collateral. And I think that we're having very productive conversations now. I can't talk too much about who we're having those conversations with and what that may result in. But I think that ultimately we'll get this right. There's going to be a period of time where things are getting sorted out for BlockFi and others in the industry. But I think that America will land on the right side of this, and there'll be clarity provided, which will just further fuel growth of the industry.
Michael Casey: (18:34)
So I want to, in a moment, drill down into all of the interesting things that can be done with these new lending protocols and the like, and what that means for institutions like the Fairfax County Police Officers Fund. But just running with the regulatory story for a little bit, because it has become, I think, quite interesting of late. Certainly it feels more intense. In both directions, you feel as if there is a growing awareness of the opportunity here and on Capitol Hill. A bipartisan interest amongst certain lawmakers in some sort of very constructive, innovative approaches to regulation, but also a somewhat more vociferous voice of the antagonist as well. So first of all, Dan, I was just thinking, because you've been watching this again for eight years now, what's your read on where it's going? Is this just sort of a natural part of the evolution? Because you say there's still a number of decades to go until we end up wherever this is supposed to be. What's your read on the current regulatory outlook for the space?
Dan Morehead: (19:32)
Well, I think it's important to focus on the fact that most of the regulatory bodies in most countries have ruled very favorably about blockchain. And most of them ruled eight years ago. The IRS ruled that cryptocurrencies properties, you get long term capital gain tax treatment. The OCC, CFTC has always been very progressive. So most of the regulatory bodies have ruled. There's a few that are still trying to figure it out, which it's going to take it a little bit of time. But most of the bodies have ruled and that's globally, too. Most countries, they're regulatory bodies are at least neutral. There's a few countries like Luxembourg who are very positive on crypto. So, and it's a global phenomenon. China has a blockchain. And so the blockchain toothpaste is out of the tube and the U.S. has to have a policy and catch up. And the federal reserve is building a blockchain, but it is one of those things that whether you love it or hate it, blockchain is here. And so regulators have to get on it.
Michael Casey: (20:36)
Nathan, Zac was talking about this kind of this almost pivotal moment. Somebody has some sort of reconciliation or it needs to happen perhaps at that national level. And there are folks who are saying it's time for a legislative response that it's just the SEC might be sort of dealing with some outdated laws at this stage. And I think you've mentioned to us in one of our conversations that there's this international component to this. Dan was alluding to it that U.S. leadership in many respects is at stake. Talk us through that if you don't mind. How do you see that playing out?
Nathan McCauley: (21:10)
Yeah. Yeah. I mean, I think, to Dan's point earlier, we are in very, very early innings of what maybe decades or centuries long movements that'll be I think we all on stage probably feel that this is going to be extremely important for America and kind of America's place in the global financial system, global financial capital markets really dominance in a lot of ways. And so getting a real handle on the way we want to set that up, strategically the way that the United States financial system will kind of continue to have increased relevance in this new ecosystem. All of these are kind the core policy questions that need to get answered. But we're incredibly [inaudible 00:21:58] that. I mean, we are the first crypto bank to kind of be live, be taking clients' assets on and processing that.
Nathan McCauley: (22:08)
And so there's just one so far. There are a few folks that are doing lending programs like Zac's. So there's just a lot of work to do. And we're very early on with this. Likely the rise of the kind of the tech and internet ecosystem is helpful to kind of think about this. It is very good from a national security sense, from a global policy sense that some of the biggest internet companies are based here in America.
Nathan McCauley: (22:38)
And I think that we would do well to make sure that the big crypto companies are based here. And any nation on earth should probably want that. And that is kind of the core policy question on how do we do that? How do we do that while maintaining the safety and soundness of the system? But how do we make sure that the value accrual that comes from being such a big player in the global financial markets perpetuates? And I think that a lot of that is around keeping the innovation here, making sure that lots of that kind of innovation can happen, but then also providing the clarity that's needed and likely clarity at the federal level will be the most helpful and the highest impact.
Zac Prince: (23:26)
Yeah. If I could expand on that a little bit. So one of the things that I think is often a misnomer from folks who are learning about crypto for the first time and they come in with an expectation that inherently the cryptocurrency industry is anti-dollar or Bitcoin is meant to disrupt the dollar and take over as the global reserve currency. And I actually think that if you look at what's happening in the industry, if you look at the growth of stablecoins, if you look at adoption on platforms like BlockFi and others of not just folks in the U.S. but companies and individuals outside the U.S. borrowing in dollars, which is a massive market in the traditional financial system. It's over a $12 trillion market of dollar denominated debt that's held by ex-U.S. companies and governments, which has typically had very restricted access in terms of smaller companies and individuals. But the cryptocurrency industry and the platforms like the ones represented on this stage enables that to become much more available on a global scale.
Zac Prince: (24:33)
And so I think that as education happens, folks will learn that the cryptocurrency industry and the technology that supports it is actually very positive for the interest of America and the interest of the dollar. And that's a storyline that I think will continue to come out as data is shared and folks educate themselves on what's happening in the industry.
Michael Casey: (24:57)
On that note, Michael, when Dan first started investing in this space, he said there was just one asset. That was all you really focused on. And now there's this proliferation of so many different, not just assets, but actually investing strategies. There's lending strategies and a whole host of yield farming games and so forth. What are you seeing as a provider to this industry about where the activity is going right now?
Michael Shaulov: (25:22)
I mean, we actually see that there is a tremendous momentum around DeFi, decentralized finance. And for people here that are not familiar with what DeFi is. So DeFi is essentially sort of those autonomous financial applications that are able to run on the blockchain and facilitate whether it's trading or lending or anything that you basically familiar from the traditional financial shelf space. They're able to perform that by running on top of the blockchain in a way with where there is no sort of single counter party that you're taking risk into and it's all programmatic. So clearly in the last 18 months, we've seen an explosion around the utilization of DeFi protocols. And it's actually like almost everything in crypto it's actually started from retail.
Michael Shaulov: (26:16)
It was a retail phenomenon. You had retail investors that were basically working with those DeFi protocol using something's called MetaMask. It's like a really cute plugin for Chrome with a fox that you can use. And suddenly, I would say a bit over a year ago, we started to see this massive influx of hedge funds and market makers and essentially anyone who was interested in this technology coming in. We were sort of a bit lucky because we've made some technology investments to support it ahead of time. And about nine months, I would say, we created institutional capabilities to do it in a secure way with the policies and workflows and all that. And nowadays we have say about 25% to 30% of our clients are basically using DeFi as part of their strategies. Everything from yield farming, which is basically creating some financial incentives, but we are seeing a real world use cases around using DeFi.
Michael Shaulov: (27:28)
So I'll just give an interesting example of how this relates to stablecoins. So stablecoin is basically a token that it represents a real FX currency, one to one. And there are protocols like Uniswap and Curve that essentially allow you to do this exchange between one stablecoin to another stablecoin. So you can do it between one form of U.S. dollar such as USDC to USDT, which is the stablecoin that is actually popular in Asia. Or you can do it between, for example USDC to a tokenized Japanese yen. And the efficiency of those markets that you see on DeFi protocol are in some cases are actually better from a slippage standpoint than the FX rate that you would get through the bank.
Michael Shaulov: (28:19)
So you're actually starting to see people basically looking into that. And interesting enough, we have been seeing quite a lot of those banks, quite a lot of the banks that we working with, or having conversation with seriously looking into DeFi because now when you're basically thinking about what does it mean for FX? You have 24/7 system that settles immediately. You don't have cutoffs. It's not like 5:00 PM, that's it. You cannot send the wire. You can basically execute hedge on a foreign exchange and every given point. You can do it over the weekends. So it has this amazing promise. The caveat there is really that if we talked earlier about compliance and regulatory oversight, DeFi is probably in the most extreme area of the non-regulated right now.
Michael Shaulov: (29:17)
Those are completely permissionless protocols. Anyone can access those protocols from anywhere in the world. And clearly there is a lot of questions that comes from an anti-money laundering over there. So there are multiple initiatives right now going on in the industry in terms of figuring out, I would say that part and basically make it more kosher and basically bring it to the very regulated institutions that they will be able to use those protocols as well, and basically push it into the mainstream.
Michael Casey: (29:53)
I want to bring Katherine in a moment, if I could hear about the sort of a very regulated, or at least more conservative institution would feel about these opportunities. But just before I do, what is the profile of the 30% clients that you referred to? What kind of investors are we talking about who are really sort of using those services right now?
Michael Shaulov: (30:09)
Yeah, so right now we are seeing mostly I would say hedge funds, market makers, prop traders. But we actually seeing asset managers sort of stepping in and want to use there are two very famous protocols over there, Aave and Compound that are basically are able to generate yield on stablecoin or on other assets. And, but I would say for the next right now, the people that are interacting with those protocols, they're able to wrap their head around the compliance aspects. The next wave of investors that I think we are going to see coming in is once we are able to solve the compliance issues that surround those protocols. And there are a few initiatives over there that are being some of them already in beta and some of them will launch by the end of the year.
Michael Shaulov: (31:09)
So just as an example, we have a project going on with Aave, which is sort of like this multi billion dollar DeFi protocol which creates a sanctioned sort of pool. You only interact with people, although it's running on DeFi, you only interact with people that pass the same KYC, AML procedures as you are. And we already have about 40 institutions that are participating in that beta. And you actually see over there, banks, you see some of the biggest asset managers that are in that beta. And it's like a very different demography of people that are coming to [inaudible 00:31:51]
Michael Casey: (31:51)
Yeah. It's amazing how quick it's moving. But Katherine, are you looking to take those policemen's money and farm some yield in the DeFi world at this stage?
Katherine Molnar: (32:02)
Absolutely. And so some of the companies that have been mentioned today up here are portfolio companies and the funds that we already have investments in. And so happily, some of them have done very, very well already in the last few years. And so I guess as an investor, and I'll just, I'll pivot this a little bit, but when we started looking at the space, there's a lot to look at and it depends on if you want to be completely liquid. So on the cryptocurrency side, it depends on if you're willing to be locked up. So venture capital, which is making obviously private investments in some of these companies. And so that's just one thing to mention. And as I mentioned earlier, our investments today have all been in the venture capital realm. But in each case also, there is a certain portion that's liquid cryptocurrency.
Katherine Molnar: (32:47)
As I also mentioned, we're about to recommend a manager which is completely liquid cryptocurrency, and it's long and short. And I mentioned that because they do do yield farming. They do do basis trading. They have part of their strategy that's market neutral. And it's not something when you think about like a classic hedge fund that might be market neutral, that they're typically taking out beta to equities. Well, in this case, they're market neutral, they're taking out beta to Bitcoin and other cryptocurrencies themselves. So we think of that as a hedge fund strategy like we would think of a market neutral equity market neutral manager, or other type of a relative value strategy. So it's really interesting. So in that case, it's not directional, whereas as I keep kind of going back and forth here, but whereas the cryptocurrency that I have in my venture capital funds is completely long only. So I have long only beta, if you will, to cryptocurrency over here. And then over here, I'm going to, hopefully if it gets approved, have a classic hedge fund.
Katherine Molnar: (33:43)
And I think that there really are a lot of inefficiencies. I mean, this part of this realm, if you will, is still really new. So I think that there's still a decent amount of inefficiency, which hopefully means that there's a lot of interesting alpha opportunities for the crypto hedge funds to take advantage of.
Michael Casey: (34:01)
Zac, it's useful to think about this because Michael was talking about 24/7 markets, realtime settlement and so forth. And I think the not so well informed folks who look at the lending space, the DeFi space as well, and look at these yields and say, okay, this has got to be some scam. The fed funds rate's at zero. And how are you getting four or six, seven, eight? Walk us through the math because some of it is in fact, the efficiencies of this settlement process. And or is it just opportunistic lending? Because you've also got this institutional marketplace that you're operating in on behalf of others, maybe just explaining how all that comes together to enable the kind of yields that are available would be useful.
Zac Prince: (34:49)
Yeah, sure. So I think one of the things that can be confusing is that it is quite different on the dollar or stablecoin side versus the cryptocurrency side. But in both cases, the fundamental reason why you see platforms like BlockFi offering mid or high single digit annual interest rates on these assets is that the cryptocurrency sector is not connected to traditional debt capital markets yet. You don't have large scale banks making loans to cryptocurrency companies, maybe with the exception of Coinbase and MicroStrategy now who are in the public equity markets and able to raise debt using their publicly traded equity. But other than that, you don't really have connectivity there. So as a result, you're left with private debt markets or just higher cost of capital debt markets like BlockFi and other alternative lenders.
Zac Prince: (35:43)
And this happens in other sectors. I frequently reference a publicly traded [inaudible 00:35:49] called Innovative Industrial Properties. And they do triple net leases on warehouses where folks grow cannabis. And you can't do bank financing for that. If they were growing carrots, it would have a three, four percent cost of capital. But they're growing cannabis, so it's 15%. And so by participating in these lending programs, you're helping to finance this market that doesn't have access to traditional financing. And therefore the cost of capital is higher. And what's I think particularly compelling if you're thinking about a risk adjusted return as a debt investor, is that when you're lending in these markets, you typically have liquid collateral. So it's kind of like this super low risk form of lending where you can manage the risk in the book, liquidate a position if needed. And in the three and a half years since BlockFi has been lending, we've never lost a penny across any of the lending that we do. So despite it being in an asset class that's very volatile, it's low risk and you're getting very well compensated for that.
Zac Prince: (36:49)
And then on the cryptocurrency side, if you are a market making firm or a proprietary trading firm and you're make a market or participating in any asset class, commodities, FX, generally you want to have some inventory. And in the cryptocurrency sector, the inventory that you need is Bitcoin and Ethereum. And furthermore, there are lots of compelling arbitrage opportunities. It could be the futures basis, which, which blows out very frequently. It could be trust products that are traded over the counter at big premiums or discounts to nav. And for these types of trades, you want to be short the underlying for one leg of that trade to execute it effectively. And so you need to borrow cryptocurrency for that. So the institutional clients at BlockFi generally borrow and cryptocurrency. Dollars are borrowed by institutions and retail investors participating in the space. And I think the rates will stay high for quite a while.
Michael Casey: (37:49)
Yeah. Often reminds me of the repo market, this activity which is interesting seeing how these models emerge in a digital world. Dan, as somebody who's gone on this journey, what are you excited about now? I mean these new DeFi lending models, what's the next big zeitgeist you think?
Dan Morehead: (38:09)
Yeah, I guess I would say that to bring it full circle is there is more than one asset now. And a lot of my friends are Bitcoin maximalists and it's got to be about Bitcoin. But the only thing I would share as advice to investors is there are so many different interesting protocols to invest in out there and so many different companies. And so a portfolio should be more than just one thing. And the perspective I would have is Bitcoin's been amazing. Our fund is up 600X. So Bitcoin's done great, but and I think it's going to go up another 10X or something from here. But I'm not sure that I actually think the majority of future gains are from things other than Bitcoin. And I know that sounds radical to some people in the audience, but it's kind of like in 1998, saying that majority of future tech gains were not in Microsoft.
Dan Morehead: (39:02)
Microsoft did great. It was worth $260 billion then, but Amazon was worth $10 billion. Apple was worth one and Google and Facebook were zero. They weren't even existing yet. And since then, Microsoft's only been 20% of the gains since 1988 in tech. All these other companies that didn't even exist in 1998. And that's the spirit I have here is that I think Bitcoin's going to go up a ton. It's a huge, great investment. If that's all you can get through your IC, you should be long Bitcoin. But if you can be long a basket of things, I think it's going to outperform.
Michael Casey: (39:38)
Did they let you speak at Bitcoin Miami? That would've been heresy. How about you, Nathan, what do you see from your sort of-
Nathan McCauley: (39:51)
I think just to kind of piggyback off what Dan is saying, this is one of the things that is clear in the conversation we having with many of the global financial institutions, say banks or others. They're really kind of looking at the next 10, 20 years and understanding this is an asset class. And this is truly a comprehensive asset class [inaudible 00:40:12] think about strategically. And so anybody kind of developing a strategy in this, whether you're a bank or an investment advisor, or even a pension, is to look at what is the sum total of the opportunities here? The way that I think about Bitcoin is Bitcoin was in many ways it was a gift to the world. And that Bitcoin functionally acts as a global public utility.
Nathan McCauley: (40:39)
It is owned by no one. Everybody gets to participate in it. And the most optimistic version of what's what's coming within crypto is that we can have dozens if not hundreds of global public utilities that are available and co-owned as know really infrastructure for the world. And so Bitcoin kind of blazed that trail for us. But there's a huge, huge amount of these that are going to come out over the next several decades. Going to be really exciting and going to be really kind of leveling of the playing field for a lot of financial inclusion acts-
Dan Morehead: (41:16)
... Of all the crypto gains have been things other than Bitcoin. Since mid-February, Bitcoin has kind of drifted down and other tokens have created hundreds of billions of value.
Michael Casey: (41:30)
So the market cap itself has grown, but Bitcoin has not been driver.
Dan Morehead: (41:34)
Yeah. And during that time it's been non Bitcoin tokens that have done more than 100% of the game.
Michael Casey: (41:39)
Yeah. I mean, there's a lot of focus on the flippiting with the [inaudible 00:41:42] and that may be just missing the point really. It's actually sort of this bigger universe. So this is the vision, Katherine. You heard it from Nathan, this sort of this emerging asset class, this idea of all of these sort of opportunities that exist in what I think you described as it almost like a technology player, bet on the internet, almost a new internet. But what needs to happen so that a lot of these other funds can follow the Fairfax County Policemen into this space. We've talked about custody, but there's other elements of the infrastructure that need to be in place, right?
Katherine Molnar: (42:18)
Obviously we were comfortable doing this three years ago. And, I wouldn't say that it was perfect. And I guess I wouldn't say that many investments are probably perfect. But as I said earlier, the service providers weren't kind of as institutional in nature, if you will, three years ago. And that's changing. But I think that in general, I made that comment that if we see a manager that self-custodies, if this were five years ago and I we're looking at a different strategy, and I would think I would never hire a manager who would do that. But indeed we did. And I understand the reasons why when some of these tokens initially get released and you can't find a custodian that is able to custody them for a certain period. So I understand the rationale for why people do self-custody.
Katherine Molnar: (43:04)
In the case of one of the managers I mentioned, they self-custody and but then they do also use an external custodian, but then they actually own that custodian as well. And so there can be a lot of kind of entangling potential conflicts of interest that if you were looking at any other sector, and I spent a lot of time looking at alternatives and hedge funds prior to my current role. And there are a lot of reasons to say no. There are plenty of reasons to say no, to be perfectly frank, as an institutional investor. Plenty of reasons to say no. But I wouldn't say that you should just suspend your judgment. But I would say that you need to look with an open mind and realize that it's an emerging area. And that means that all of the service providers and everything around it is also still emerging and for all of us to be a little bit open-minded.
Katherine Molnar: (43:47)
But I think it'll get there. And I think we happen to be somewhat of the mindset that we do think eventually that most assets are probably are going to be digitized. And so if you think that, then you ought to be an adopter of everything that we're talking about. So I think people will get there. I mean, I will say the following. I think that that crypto is extremely volatile. So I think you need to go into it expecting that and size it appropriately and have an appetite or at least a willingness to accept a lot of volatility. And I do also think that, and I think this comment was made this morning on a panel, but I think that if every institution were today or tomorrow going to go out and populate one percent of their portfolio with Bitcoin, I think you'd have some tremendous issues with liquidity as well. So, I mean, I think that it's still growing, but I think we'll get there.
Michael Casey: (44:40)
Be careful what you wish for in a way. You don't when them all coming in at once. But just to draw that a little bit more, it seems to me there's been quite a bit of discussion about these [inaudible 00:44:49] providers and prime brokerages for example. You went into this without the kind of handholding of a prime brokerage. How valuable will it be for maybe funds that don't have the capacity to sort of take this more radical views that you did to have something like that kind of more focused service?
Katherine Molnar: (45:12)
Yeah, absolutely. I think that would be great. I'm sure that would be really helpful. I mean for us, it just even, honestly, just even trying to get a sense of how large the universe is of managers. You have people like Pantera that are very well known, and they've been doing this for a long time. And there's a group of managers who I would put in that camp.
Katherine Molnar: (45:35)
But you have a lot of people who've been doing this two years or less. And I mean, I don't know how many crypto funds there are, but there are a lot. So even just honestly trying to get your hands around, okay, how large is the universe? Who's doing this? Are they doing crypto? Are they doing venture? Are they doing tokens? Even just trying to get your arms around that, when we forget understanding that the actual technology part of this, it's a lot to take on. And so depending the size of your team, and we have a very small team, I mean, it's a lot to get your arms around. So and I think as a result of that, I think the consultant community is probably kind of coming up to speed now. And, but I think things will get there.
Michael Casey: (46:12)
Michael, what have you seen in terms of that kind of educational element to it? I mean, these clients who come to you and you've got to walk them through this new field. Explaining something like NPC for one is difficult, but then all these other elements as well.
Michael Shaulov: (46:27)
I mean, I think that I spend probably 50% of my time on education. I think that it takes time to familiarize people with the concepts of this brave new world. And I think that to Katherine's point, I think a lot of the concepts in this space are actually contradictory to the way that finance was working for last 500 years, 100 years. And in many aspects, really blockchain is a revolution that probably is the most impactful revolution since the federal reserve was set up in terms of how clearing and settlement is working and this technology. Yeah, I remember that we spent about maybe three hours on the workshop with all the sort of the chief information officers and the CISOs and one of the big banks. And after two hours, they basically, we need a break. Our mind has just exploded from everything that you guys were explaining.
Michael Shaulov: (47:35)
So we spend a lot of time on education. I think that there are many layers. And I think that clearly different people want to understand different things. But it's also very clear that this is going to replatform finance. I mean, the aspect around the fact that the assets are going to be tokenized. I think if two years ago people were not so sure about it. I think that now it's sort of a common thesis among pretty much all the practitioners. And I think that understanding exactly how it works is sort of important because it does fundamentally changes the way that things work.
Michael Shaulov: (48:24)
I mean, just an interesting example, I was sitting with one of the partners of a hedge fund that was affected in the GameStop saga. And when I explain to them how blockchain works and especially how the clearing works, they like suddenly there was silence and they say, hey if this was actually tokenized and there wasn't this three day gap between the point that the trade was booked and until it was actually cleared, we wouldn't be short squeezed. And that's just something that is sort of very technical aspect, but it's important to the level of the partners and the people that really take the decisions.
Michael Casey: (49:12)
Yes. It's like where I come from, the penny drop moment, the sort of sudden realization that it all comes together. And I think that's one of the experiences that a lot of us have had in this space. I did want you to have one quick, last word, Zac, just we've got half a minute. We don't have much time, unfortunately. But just you service both retail institutions. We have a lot of focus on the institutions here, but it seems like the trailblazers in terms of investors in this space have always been retail. Is that going to continue?
Zac Prince: (49:39)
Yeah, I think absolutely. And I really wanted to answer the question of what am I excited about because I did something the other day that wowed me. It reminded me of the first time I transferred money off of Coinbase to buy Ethereum back in 2016. And that was really scary for a year because Ethereum crashed 60%, but I remember it being wild. And that happened to me recently with Solana who I know is here and Phantom wallet. So I would encourage everyone to, if you can find five minutes, 10 minutes, interact with some of the actual tools out there in the ecosystem. Try Meta Mask, try Phantom wallet on Solana, there's some really, really cool stuff. And when you see it in action, you really have this kind of aha moment. And I think that can be eye opening and motivating to take it into whatever your professional day job is and help create some advocates within the firm.
Michael Casey: (50:38)
So there go folks. You have your CTA, some homework to do. Get out there, play around with it. It's definitely the best way to learn. A round of applause for this tremendous panel. Thanks very much.