The Future of Lending with Zac Prince of BlockFi

Zac Prince is the Founder & CEO of BlockFi, an asset backed lending platform for crypto. In this conversation, Anthony Pompliano and Zac Prince cover how asset backed lending works in crypto, the psychology of a borrower, and tokenized stores of value.

• 0:02Speaker 00

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off the Chain, simply the best podcast in crypto. Let's kick this thing off.

• 0:16Speaker 00

  Zach Prince is the founder and CEO of BlockFi, an asset-backed lending platform for crypto. He previously worked at numerous online lending platforms and is intimately familiar with the space. In this conversation, we cover how asset-backed lending works in crypto, the psychology of a borrower, and tokenized stores of value. I learned a ton from this conversation, I hope you do as well.

• 0:37Speaker 00

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 1:05Speaker 00

  Before we get started, I wanted to tell you about our sponsor, BlockEstate, a security token project in the $200 trillion industry of real estate. They've partnered with Polymath and Coinlist Comply API to create one of the first tokenized real estate funds, and they have a unique buyback and burn model. To learn more, visit blockestate.com.

• 1:24Speaker 00

  Alright guys, we've got a bunch to get into here with Zach. Thank you for coming.

• 1:29Speaker 01

  Thanks for having me.

• 1:29Speaker 00

  Absolutely. Alright, so let's do this. Real quick background, kind of how you get to getting into crypto.

• 1:37Speaker 01

  Sure, so I've worked at venture-backed tech companies for a while, most recently in the fintech sector. And I heard about Bitcoin at a meetup or some type of event, basically as an investment tip. This is 2015, somebody was like, "Hey, it's come down from 1,000, it's gonna change the world, you should buy some." So I downloaded the Coinbase app, bought a little bit of Bitcoin, it was around $300 at the time. A month later, it went up to 450, and I was like, "You're a genius," and I sold it. And that was it. That was it for... You know, another few months and then it went higher up to 700. I'm like, you're an idiot. I bought back in. I started getting really, really just personally interested and intellectually curious about what was going on with Bitcoin, with blockchain. I learned about Ethereum

• 2:22Speaker 01

  in early 2016. I was fortunate to, you know, invest in that project pretty early. And at a certain point, my girlfriend, my girlfriend said, you need to stop talking to me about this because you're talking about it all the time and I'm not that into it. So I started going to meetups and here in New York City. And I watched the crowd at these meetups change from being computer scientists and kind of the super early anarchist type Bitcoin adopters to some venture capitalists, some more entrepreneurs, some Wall Street guys, especially around the time, early last year, when the Enterprise Ethereum Alliance got announced. And at a certain point, I just, you know, decided that I needed to get involved. And then I had an experience with a bank,

• 3:05Speaker 01

  which was basically a lightbulb moment for BlockFi where they were not happy that I listed Bitcoin and Ether on a, on a financial statement that I submitted to them. And, and so, you know, here we are.

• 3:16Speaker 00

  Absolutely. And so as you're going to the meetups and all that stuff, walk through kind of the fintech experience, right? So pre crypto, what were some of the things that you were interested in or working on?

• 3:28Speaker 01

  Yeah. So I was working in the online lending industry and there's a couple of really interesting parallels from the online lending industry into what's happening in the crypto world. I started in the online industry pretty early in its incarnation, which is kind of 2011, 2010 to 2012. And the thinking at that time was this is going to overtake the banks. Peer-to-peer lending is, is the way the economy is going to be driven. This is coming out of the financial crisis and we're going to completely disrupt the world. Every conference was sold out. Everybody was just so pumped. And the... Industry shifted over time. First, it switched from being peer-to-peer to being primarily institutionally funded. So this whole, you know, screw Goldman Sachs idea went out the

• 4:12Speaker 01

  window as soon as Goldman was willing to write a check to these companies and fund their business. And also, it didn't overtake the banks. It didn't completely change the financial system, but it did add to the financial system, where now, today, you have, I believe it's around 35% of all the consumer loans that are originated in the US, coming from online lending businesses. So it was complementary, and it shifted from being peer-to-peer and retail-focused into still having a bit of that peer-to-peer component, but being primarily backed by institutional investors of different types. And I worked at two different companies in that sector. The first was a company that was basically in the middle of the ecosystem. It was called Orchard. We had a broker-dealer, an RIA, an ATS, data products, technology

• 4:55Speaker 01

  products, and we worked with all the biggest lenders, so Lending Club, SoFi, Prosper, Funding Circle, and then the institutional investors that were buying the loans or lending to the platforms. And then after Orchard, I worked at a consumer lender called Zibi, which had a point-of-sale customer acquisition strategy, similar to like PayPal Credit.

• 5:15Speaker 00

  Got it. Fascinating stuff. Okay, all right. And so, as you kind of are having that fintech experience, you're going to the Bitcoin meetups here in New York City, et cetera, you eventually start a company, BlockFi, right? Why start the company? What was kind of the original idea?

• 5:32Speaker 01

  The original idea was, for all the same reasons that the online lending industry was successful, which were, there are areas of the lending and debt markets where banks are not participating. I thought that the crypto ecosystem was going to need debt and credit products, just like every other asset class, and that banks weren't going to do it. Also, I felt like, just in terms of my, you know, career, I had been really early at a few startups, but never a founder, but I was ready to kind of take that leap and start a company myself.

• 6:03Speaker 00

  Got it. Very, very cool. All right. So I don't think that very many people understand what we're talking about when we talk about lending, especially in the crypto space. So let's go kind of through the lending 101, right? So asset-backed lending, describe kind of how this works in crypto in terms of what is the collateral, what is the loans, you know, LTV, et cetera.

• 6:25Speaker 01

  Sure. So first, I think it's helpful to understand the different types of lending that are taking place in the ecosystem. And I broadly think of them as happening in four different buckets. So the first bucket, which is what BlockFi does, is lending USD backed by your crypto. So you have Bitcoin, you don't want to sell it, you can borrow USD backed by the value of your Bitcoin. The second type is lending Bitcoin, which is primarily for the purpose of initiating a short position. So I want to borrow Bitcoin, have a liability denominated in Bitcoin, which means I have a short position. The third type is on-exchange lending. So basically facilitating margin trading within a centralized ecosystem. And the last one is scams, which I think is important to mention because they are out there. And

• 7:09Speaker 01

  if you ever see anything that, you know, is 1% interest a day or something crazy like that, it's probably a scam and you should run away. BlockFi operates in that first bucket. So being able to borrow USD backed by your Bitcoin or Ether, which are the two assets we support now. And the way it works is very similar to a home equity line of credit or a securities-backed loan. So let's say you have $10,000 worth of Bitcoin. Today, with BlockFi, you could borrow up to 35% of that value in USD. So you post your Bitcoin as collateral, we wire $3,500 to your bank account, and then you make monthly interest-only payments throughout the duration of the term with a bullet of principal or the option to refinance at the end.

• 7:53Speaker 00

  Got it. And so, right now, you guys are doing 35% LTV or less, right? And then, what's that term life look like?

• 8:02Speaker 01

  So, right now, we're going out to a one-year term. And there's no prepayment penalty. So, a lot of our clients use it for shorter durations. The reason it's a one-year term is twofold. First, it's more attractive to institutional counterparties who want to finance these assets to have a shorter duration. Second, we think that for our customers' benefit, costs and interest rates are going to come down dramatically over time for this type of borrowing, probably pretty quickly. And so, locking yourself into a three-year, five-year, 10-year-duration-type loan at current rates isn't the best thing to do.

• 8:41Speaker 00

  Got it. Okay. And so, when somebody posts collateral, what they're doing is they're over-collateralizing the loan, right? So, if I've got that $10,000, I'm giving you $10,000 worth of Bitcoin, you're giving me a $3,500 loan. Where does my $10,000 of Bitcoin go?

• 8:57Speaker 01

  So, right now, we are custoding via a partnership with Gemini. So, we leverage their custody solution, which is highly regulated, never been hacked, used by lots of different institutional investors. They've got a cold storage setup where 95% or more percent of the assets at any point in time are kept in cold storage. So, we felt like it was better for us to partner there versus build. And we custody all of our assets with them currently.

• 9:27Speaker 00

  Got it. And so, as I give you my $10,000 worth of Bitcoin, you've given me that loan, you put my assets into Gemini with the storage partnership. Walk through how you're managing the margin and actually even what that means, right? So, how you actually are de-risking it from your end as that collateral is sitting in storage?

• 9:51Speaker 01

  Sure. This type of lending is very, it's not very risky at all from a lender's perspective. There are some decisions that need to be made from our client's perspective in terms of whether these products are right for them. But the way it works is, so you have $10,000 worth of Bitcoin. We lent you 3,500 USD. If the price of Bitcoin drops 50% and the Bitcoin is now worth 5,000 USD, we have a margin call. What happens in a margin call is there's a 72-hour window where you can either add more Bitcoin as collateral, pay down the loan in USD, or take no action. If you take no action and then at the end of 72 hours, your loan-to-value ratio is

• 10:33Speaker 01

  still above that trigger level, we will initiate a partial collateral sale. And when we initiate a partial collateral sale, we basically take all of the proceeds to pay down the loan and rebalance the LTV ratio.

• 10:46Speaker 00

  Got it. And so that 70% LTV is a trigger, right, from a margin standpoint? So if I've posted my $10,000, all of a sudden I go from a 35% LTV to a 70%, you go ahead and give me that 72-hour margin call window. If the price of Bitcoin recovers and I get out of that 70% LTV, how is that handled?

• 11:10Speaker 01

  You know, we're communicating with our clients on an automated basis and also via phone calls at every step along the way. But the way it's handled is you wouldn't need to do anything. You would get a notification saying, oh, the price has moved up to X, your LTV is now X, and you're no longer in the margin call.

• 11:30Speaker 00

  Got it. Okay. And so when you go to actually have that partial liquidation, right, to kind of relieve the margin there, are you guys doing this on exchanges through OTC? Like, walk me through, kind of... You've managed the margin, right? And now you're in a position where somebody's taken no action and you've got to actually do that partial sale. How do you actually execute that?

• 11:56Speaker 01

  So we've fully automated all of the process from customer communication to margin call issuance to liquidation if needed at the end of the 72-hour window. And we do it on exchanges currently. We like to be connected to places where we can trade 24/7 real-time via an API. But over time, that might evolve a little bit as our portfolio gets larger. We might start working with OTC desks. We might start looking at different ways that we can hedge and lock in large amounts of liquidity if we need it ahead of time or at the time where we need to initiate partial collateral liquidations. But in practice, so far, even through a bear market, so we've been lending since January,

• 12:40Speaker 01

  most of our clients are curing their margin calls. So what we've found is that while we have this, you know, fully automated, robust risk management system that can sell collateral if needed, it hasn't had to happen in practice that much. Most of our clients are responsive. They're either paying off their loan or telling us ahead of time, hey, sell a little bit and pay off the loan or adding more collateral. So while we have had a high rate of customer notifications, we've had a very low rate of margin call initiations and an incredibly low rate of partial collateral sales.

• 13:13Speaker 00

  Got it. And so let's talk about kind of the psychology of a crypto borrower, right? So I've got crypto, I posted as collateral, you're giving me a USD loan. Why am I doing that?

• 13:24Speaker 01

  So this is primarily a wealth management product. And if you look at traditional markets, some of the types of individuals that typically use products like this to borrow against securities, for example, are optimizing for asset diversification and they're optimizing for tax costs. And what that means is that the majority of our clients are using the proceeds from the loan to invest in things. Frequently, that's real estate-related, but they're using it to, you know, optimize their personal financial situation. In some cases, it's paying down debt, but more frequently, it's purchasing other assets. And the tax benefits are that if you've owned Bitcoin for a long time and you have an embedded

• 14:07Speaker 01

  capital gain, by not selling, you're delaying that taxable event of incurring that capital gains tax event. Also, if you use the proceeds of the loan to invest in something, you're eligible for the investment interest expense deduction, which basically means you can deduct the interest cost from other investment income or capital gains in the same tax period.

• 14:29Speaker 00

  Got it. And so are these businesses taking these loans? Are they individuals? Like, you know, who is actually, you know, kind of pursuing these loans?

• 14:38Speaker 01

  It's both. So we've done loans as low as $2,000 to individuals and we've done loans as high as, you know, seven figures to high net worth individuals or businesses. On the business side, it's more frequently a kind of balance sheet optimization, an OpEx optimization. So you have a lot of ether on your balance sheet. You don't want to sell at current prices, but you have liabilities in USD. This can be a tool to help cover those liabilities while maintaining your ether position, for example.

• 15:09Speaker 00

  Got it. That makes sense. Okay. And then let's walk through the difference of, you know, you guys are operating in that first bucket where people are, you know, borrowing USD against crypto collateral. Walk me through kind of the other two buckets. Well, scams are self-explanatory, but let's go into, you know, kind of when people are either borrowing Bitcoin or that third bucket.

• 15:30Speaker 01

  Yeah, so in the borrowing Bitcoin bucket, companies like Genesis Capital have done a really good job of enabling that. It's a kind of critical market function to be able to borrow these assets. There's really two use cases. One is if you're trading, you want the ability to go short. And the other is if you have liquidity needs denominated in crypto, so you're facilitating trades or your business takes payments in crypto and you don't want to hold the volatility risk of those assets on your balance sheet. If you borrow them rather than just hold them, it's a kind of better way to manage risk. So typically, it's collateralized by USD. In some cases, it's not. So if you want to short Bitcoin,

• 16:15Speaker 01

  let's say you need $100,000 worth of Bitcoin to go short, you'll have to post, you know, maybe 120,000 USD. And then the interest works the same way that it works on the USD borrowing side.

• 16:27Speaker 00

  Got it. And the thought process there is?

• 16:31Speaker 00

  The psychology is very similar, right? Basically, I have an asset and I need a different asset. I don't want to actually just outright purchase it. I just want to borrow it for some predetermined amount of time. And so whether you're using US dollars to get access to crypto or using crypto to get access to US dollars, it's a very similar mechanism. It's just the individual needs are a little different.

• 16:52Speaker 01

  Similar, similar mechanism, but the, but the use case is completely different. When you're borrowing USD backed by Bitcoin, you have a long Bitcoin position that you want to maintain. When you're borrowing Bitcoin backed by USD, you're bearish and you want to short Bitcoin.

• 17:10Speaker 00

  Yep, makes sense. All right. So let's zoom out here and talk about just crypto in general, right? What's going on with kind of Bitcoin and the prices, the Wall Street, you know, kind of banks all looking at this? How does all of this play into, you know, you guys as a financial service in the crypto space?

• 17:29Speaker 01

  So our addressable market is ultimately a derivative of the total crypto market cap. So we are kind of bulls by, by design of our business and we want the ecosystem to grow. My personal view is that everything that happens, whether it's on the regulatory front in terms of adoption or on the institutional investment front, or with new institutional type structures being created, like the backed program, all of that is very, very good. The more this ecosystem gets connected to the traditional financial ecosystem, the stronger it is long-term and the, I think, bigger the market will get long-term as a,

• 18:11Speaker 01

  as a result. So, you know, my personal view is that we're still just in kind of a blow off period. I think we are seeing a decoupling of Bitcoin from other assets. I think that trend will probably continue, at least for a little while. And I think that a year, two year, three years from now, I don't know the exact timeframe, but we'll be looking at, you know, half a trillion to a trillion dollar market cap, some, somewhere in that window.

• 18:34Speaker 00

  Got it. And, and do you think that Wall Street just looks at this as another asset class? Do you think that they are looking at this as, you know, everything's going to be tokenized? Or where do you really think they see it? Because crypto is pretty obvious. Crypto wants the validation, sophistication, and kind of sustainability that Wall Street brings, right? You see this in the ETF, you see this in the banks coming in, et cetera. But flipping the table around, how do the banks actually look at crypto?

• 19:04Speaker 01

  I think the vast majority of them are still scratching their heads and not really looking at it. Some of the fast movers understand it, probably a lot more than they get credit for. I think they're looking at Bitcoin as a digital gold use case. I think they're looking at blockchain technology as potentially something that they can get value out of. But more so right now, kind of a good way to do innovation theater within their innovation labs and say, "Oh, we did a blockchain trial of something and it's great, but we're not actually going to use it." I don't think they are thinking too much about tokenized securities.

• 19:46Speaker 01

  And they're certainly not thinking too much about the utility token model or anything further downstream. I think they understand it. I just don't think it's top of mind relative to crypto. I think they're thinking about Bitcoin. And they're maybe thinking about what types of products they can create in general for the asset class that will be relevant for their clients.

• 20:05Speaker 00

  Got it. I've never heard of innovation theater before. That's pretty good. All right, so let's go kind of further in the tokenized security side. So if you think of Bitcoin, right, it is a tokenized or a digital currency, right? And so there's four asset classes you can own: stocks, bonds, currencies, commodities. Obviously Bitcoin is a version of a tokenized or digital currency. Tokenized securities, you know, kind of in general, are just the stocks, the bonds, the commodities, etc. that could be tokenized. How does that play out from the lens of lending, right? Is that something that, you know, eventually a lot of these lending businesses will be able to use as collateral? Or is it a similar mechanism? You know, what do you guys think there?

• 20:45Speaker 01

  So we think that we may become an issuer of fixed income type tokenized securities. So think of being able to get exposure to the cash flows that are produced from the lending activities that BlockFi does, you know, via a fund that maybe is tokenized. We see that as being a product that will be a valuable diversification for us over time on our platform. It's not a near-term priority, but we're kind of watching how liquidity and structures and fundraising evolves in the tokenized security market pretty closely.

• 21:23Speaker 01

  As it relates to other tokenized securities, I come from this world where there were all different types of crowdfunding companies. And I actually think that access in markets like the US is really, really strong. What I think is interesting is how do you give access to people in other markets? And it could even be to the most traditional investments out there, like an S and P 500 ETF. Can tokenization facilitate someone in a market as a retail investor who isn't able to buy that ETF right now to be able to purchase it? I think that use case, rather than the, you know, let's tokenize an asset that doesn't

• 22:04Speaker 01

  have a lot of demand in the traditional world, is stronger than, you know, let's tokenize an apartment in Brooklyn. Like, people can get exposure to that right now. How do you bring something that people don't have exposure to today into the market? And those are the areas that I think will be the biggest.

• 22:22Speaker 00

  Got it. And so, as you think about lending against these tokenized securities, right? I think it remains to be seen how liquid those markets are, how quickly they develop, is the infrastructure there, etc. Today, you guys only lend against Bitcoin and Ethereum. There's obviously, you know, 1,000-plus other digital assets. Why not lend against those?

• 22:46Speaker 01

  From a risk modeling perspective, we can look at everything. The biggest inputs to our risk models are liquidity, and that's by far the most important. And then volatility has a close second. So if there's not liquidity, and I mean, at least, you know, 100 million, 250 million of daily traded volume against a USD pair, it's just not big enough. We're also still in the process of getting our name out there and capturing the largely untapped market for what we're doing with Bitcoin and Ether right now. We have plenty of wood to chop in that regard. For securities specifically, there's a different set of regs that we'll need to comply

• 23:29Speaker 01

  with, at least in the US market. So there'll be a bit of work to do there if that becomes an attractive opportunity. But it's something we're following closely and we don't view ourselves as a lender against a single asset or a handful of assets over time. It's just a question of how quickly the market evolves and then we'll be right there with it.

• 23:48Speaker 00

  Got it. And then, talking about attracting users or borrowers, where are you seeing the demand from today and how do you see that evolving over the next, let's call it, 24 months?

• 24:01Speaker 01

  So, we're seeing most of our demand coming largely from word of mouth. So, existing clients that have used our product are going to their friends, their network and saying, "I worked with BlockFi, this is what I did. It was fantastic. You should try it out." We also see a lot of repeat business from existing clients. But our longer-term plan is to generate as much customer acquisition via integrated partnerships as we possibly can. So, think of keeping your crypto in custody with whatever custody provider you're working with now, but being able to access liquidity in the form of a BlockFi loan via

• 24:41Speaker 01

  that same interface that you're used to using, whether it's an exchange or a wallet. So that's going to be a big focus for us, initiating those partnerships over the next six to 12 months.

• 24:53Speaker 00

  Yeah, it's interesting you say this because I actually wrote recently about Goldman and everyone's talking about, "Is Goldman going to trade? Are they not going to trade?" And all these rumors are flying around. And I said, "One of the key things for any Wall Street bank is getting the custody solution." So if you have a proprietary custody solution, you can offer that to your clients, especially a younger demographic of investors who have an unusually high percentage of their net worth in these digital assets. It's just like a retail bank trying to force consumers to get a bank account, right? Once they get you to get the bank account, then they can basically sell you all the other financial services and the switching cost is actually pretty high.

• 25:30Speaker 01

  Yeah, but the problem is the regulators. So, there are at least a handful of regulators that would want to nod their heads and approve Goldman custodying Bitcoin, and that's just not going to happen anytime soon.

• 25:48Speaker 00

  Why not?

• 25:50Speaker 01

  It doesn't happen that quickly. They're not comfortable enough today to say, yeah, fully signed off. We understand how you're going to do it. We think it's safe. We think it's something that should be out in the market. Things just don't move that quickly. We have to remember that this really wasn't on people's radar until Q4 of last year. And decision cycles, whether it's from big institutional investors, or especially from regulators, don't move on that fast of a timeline. The CFTC is kind of unique. They've got this kind of gunslinging Chicago vibe, which is incredible. But different parts of the market on the institutional investment side, and certainly on the regulatory

• 26:35Speaker 01

  side, they don't move that quickly.

• 26:37Speaker 00

  And obviously, the regulators are different than the institutional investors, right? So regulators have kind of a somewhat fiduciary duty, or a mandate to protect the market, to protect investors, etc. On the institutional investor side, they're more making decisions for themselves, right? So they don't necessarily have any sort of mandate to protect other investors, protect the market, and so it's a more internal decision.

• 27:01Speaker 01

  Well, it depends what kind.

• 27:03Speaker 00

  Okay, explain.

• 27:04Speaker 01

  So you've seen that the first movers who would fall under the institutional investor category in this space have primarily been family offices and proprietary trading firms. And the reason for that is that it's not other people's money. Family office, it's a family's money. We can be pretty quick and nimble. Proprietary trading firm, it's our own capital. We trade with it. Regulatoryly, they're both kind of light-touch asset management models. But hedge funds and other types of structures where it's other people's money have a completely different set of considerations, and also a kind of higher threshold, because they have to believe it, a bigger investment committee has to believe it, and then their

• 27:48Speaker 01

  investors have to believe it, because otherwise they'll lose the assets that they're managing, or potentially lose their jobs. So I think you'll see a progression from family offices and proprietary trading firms to more asset management groups over the next six to 12 months also getting involved in the space.

• 28:06Speaker 00

  Absolutely.

• 28:08Speaker 00

  What about the endowments, pensions, foundations, sovereign wealth, like, you know, the, I think, kind of the middle ground, right? So you've got the family offices, proprietary traders, who, you know, are relatively small in size in general. And then, on the other end of the spectrum, you've got the large banks that have, you know, multiple billions or trillions of dollars of assets. But in the middle there, you've got, you know, those endowments, pensions, foundations, et cetera. What's kind of the general sense that you're seeing there?

• 28:35Speaker 01

  Endowments and pensions and foundations, I think, are on the slower-moving side. Sovereign wealth, I think it depends on which sovereign wealth group you're, which sovereign wealth group you're talking about. I don't have a ton of exposure to that market at all. I primarily worked with family offices, banks, specifically asset managers on the credit or alternatives side of the world. So I don't think I have a qualified opinion to say how long that would take, and I haven't talked with any of them to have a strong POV, but they'll probably invest through a fund. So, you know, if you're raising assets in a, in a, you know, typical fund structure, that's probably part of your addressable market.

• 29:19Speaker 01

  And I'm confident that, you know, some of the asset managers in the crypto world will make, you know, strong progress there as well.

• 29:27Speaker 00

  Absolutely. Okay, all right, so let's go to kind of some quick-fire questions here. What is the most controversial thing that you believe in the crypto space that a high percentage of other people would disagree with?

• 29:40Speaker 01

  I think the US dollar is going to be the strongest or most liquid tokenized asset in the entire crypto ecosystem at some point over the next 12 to 24 months.

• 29:51Speaker 00

  Okay, so I'll caveat this next question. So the US dollar, right, up until whatever, the 50s, 60s, 70s, whatever it was, was 100% paper notes, right? And today, it is 92% non-paper, right? And so I always joke around, I say, it was the first digital currency, right? What you're saying here is that we will actually have a tokenized dollar, similar to a Tether, TrueUSD, et cetera, but it will become the most liquid. Why do you think that?

• 30:21Speaker 01

  I just think... That there's a very strong emerging markets use case that's bigger than the investment use case for Bitcoin. And if they can get their hands on a tokenized and trustworthy US dollar, they would probably allocate more of their capital to that versus Bitcoin, at least in the immediate future. I don't think it comes at the expense of Bitcoin's growth. I just think that there's so much demand for that. If you look at stats around things, for example, like the amount of US dollar-denominated debt around the world, which has only been available to governments and large corporations, it's over 11 trillion dollars. And retail investors have never had access to that before.

• 31:04Speaker 01

  They've never had access to USD in a lot of places. So the ability to hold USD in the same kind of relatively private and secure way that you can hold Bitcoin, I think is huge. And then from BlockFi's perspective, the ability to get access to dollar-denominated debt, even if you're not a huge government or a huge corporation, is equally huge and adds so much to the utility value of Bitcoin and other crypto assets.

• 31:32Speaker 00

  Absolutely. And really what you're talking about here is, so take Venezuela is the classic example. You've got people on the ground who are living through this hyperinflation that's driven from government monetary policy decisions, et cetera. And what you're saying is today, as these individuals are going into digital assets, mainly Bitcoin, right? We see with the kind of transaction volume, exchange volume, et cetera. You're saying that they would, in many cases, rather go into a stable store of value, like the digitized or tokenized US dollar, rather than Bitcoin. Doesn't mean that it necessarily hurts Bitcoin as much as it's just that's what actually is going to solve the problem on the ground for those individuals at the time.

• 32:13Speaker 01

  Yeah, I mean, put yourself in their shoes. What would you want? I mean, Bitcoin was down, you know, 15% yesterday, 10%, whatever the numbers are. It's not a knock on the merits of owning Bitcoin. I'm a huge Bitcoin bull.

• 32:29Speaker 01

  But if you're in that situation, what do you think you would want? I would, I would absolutely rather hold the dollar. It's just not as volatile.

• 32:36Speaker 00

  And, and really what ends up happening is it furthers this idea of every stock, bond, currency, commodity getting tokenized. And so, you know, I, I always laugh and, and, you know, we permeate this, you know, anti-US dollar narrative all time, right? We, look, I do it. Everyone does it in the crypto space. Some of it is just the psychological aspects of, of the crypto industry. But most people have almost, you know, a very high percentage of their net worth in dollars, right? It's not like everyone's just going immediately into just digital assets. And so, you know, what you're describing is almost a halfway point, right? Of hey, it's still dollar denominated or, or dollar backed, but it is a digital asset

• 33:19Speaker 00

  that you can still get all the benefits of, um, kind of the fractionalization, the movements, et cetera, of a digital asset.

• 33:25Speaker 01

  Yeah, I mean, I think, I think we'll see, uh, broad currency market consolidation. So I think, uh, currencies that are kind of at the bottom of the list in terms of size will get knocked off as a result of, uh, you know, the digital asset, um, ecosystem continuing to grow. But when it comes to the dollar specifically, and I have a huge amount of bias here because I'm, you know, born and raised in the US and, and live here, um, two things. One, I think it's really, really scary to think about how a global dollar unwinding as a reserve currency would work. The global economy runs on the dollar. So a scenario where that happens and a massive amount of pain and suffering is not created is one that I can't envision.

• 34:10Speaker 01

  And the second thing is that I actually think that the capital market system and the system behind the US dollar is the best thing that the world has ever seen when it comes to storing value and creating a currency. Maybe it has some unfair advantages based on our economic situation or oil being pegged to the dollar and, and, you know, that is what it is, but it's the reality of the situation. This is the best thing the world's ever seen until there's something better. It's not going to get disrupted, in my opinion.

• 34:38Speaker 00

  So I'll agree with you that this is the best the world's ever seen.

• 34:43Speaker 00

  That doesn't mean that it could be the best ever, right? Obviously. Do you think crypto has the potential to be better?

• 34:52Speaker 01

  I don't see that right now. I do not see in my lifetime crypto overtaking the US dollar. I will fully admit that I'm, that I could be wrong. I see Bitcoin and other crypto assets having a massive impact on the world and growing many, many, many multiples above what they are today. But I don't think that 30 years from now, we're going to say, oh, Bitcoin has a bigger total market cap than the US dollar. I just, I don't see it.

• 35:18Speaker 00

  Got it. And what do you think are the obstacles for that happening, right? Like, what keeps you from having the confidence to say that that will happen?

• 35:24Speaker 01

  Well, you need, you would need the US government to stand down and say, everybody can pay their taxes in Bitcoin and we can peg oil to Bitcoin. And, you know, we're not gonna, um, we're not going to maintain our military industrial complex to assert our economic power over the world anymore.

• 35:45Speaker 00

  Got it. And really, the government, I think the first step to even getting to that point would be they've got to say, you can pay your taxes in Bitcoin, right? So, so it's not just saying, hey, no longer is the US dollar accepted or something like that, but they've just got to accept them as coexisting with each other. And then once you get the coexistence, then, you know, the market should determine which is better, right?

• 36:08Speaker 01

  Yeah, I mean, absolutely. Absolutely. I just, I struggle to see it in the US. I think it could happen in other markets. Uh, I just struggle to see it in the US. And it scares me a little bit because I don't think it's a pretty picture.

• 36:26Speaker 00

  I, I tend to agree with you that the world chaos that would ensue from the underwriting of the US dollar would be, uh, something that, you know, frankly, no one could imagine.

• 36:36Speaker 01

  We actually don't want that. We want, in my opinion, what we want is for Bitcoin to have a, you know, 10 trillion or whatever the number is, uh, market cap and increase in value dramatically, um, without, uh, creating, uh, unnecessary pain and suffering along the way, which is what I think would happen if the US dollar collapsed.

• 36:59Speaker 00

  Makes sense. Okay. So crypto market outside of the lending space, what do you think is the most interesting company or the most important company?

• 37:12Speaker 01

  What do I think is the most interesting company or most important company outside of the lending space?

• 37:19Speaker 01

  I think it's either Binance or Coinbase. I mean, it's gotta be, or actually BitMEX.

• 37:24Speaker 00

  Really? Okay, alright, so explain the logic behind these.

• 37:27Speaker 01

  BitMEX has the most Bitcoin liquidity on a daily basis and it's still going up. They're breaking records in terms of volume, even in a bear market. And they are thinking about some of the most sophisticated concepts in terms of enabling further financialization of these assets, which I view as being important and valuable to the ecosystem.

• 37:52Speaker 00

  Explain what some of those, you know, kind of the financialization, what that means and kind of how they're thinking about it from your perspective.

• 37:59Speaker 01

  Yeah, so, you know, they're thinking about creating different types of markets. They're thinking about creating better connectivity into different types of fiat currencies.

• 38:12Speaker 01

  Just different types of structures. I don't want to reveal more than I should based on conversations, but they're just really, really smart and they are aggressively pushing the ball forward and I get really excited about what they're doing.

• 38:26Speaker 00

  Got it. It makes a lot of sense. Okay, and so let's talk about regulation for a second. So, you're doing in the lending space relatively well-understood from a regulatory standpoint. Where do you think the biggest question marks lie in the regulation uncertainty? And, you know, hopefully if they get cured, then these institutional investors, etc., get more comfortable. Where are the question marks right now that you're really focused on?

• 38:54Speaker 01

  I don't think there's too many question marks for Bitcoin. I think it was great that Ethereum, you know, from the SEC perspective was labeled not a security. I think the question marks are more in other markets outside the US, China, India, how friendly versus unfriendly are these different countries going to ultimately become for crypto asset trading? But I actually think the US has done a really good job so far of not stifling innovation while trying to stamp out, you know, really bad activity and fraud. Biggest regulatory question mark that probably exists is Ripple as security.

• 39:35Speaker 01

  But for the entire market, I don't think there's too much stuff that's threatening from a US perspective at this point.

• 39:42Speaker 00

  Yeah, it's funny you bring up Ripple because I think that there's really heated opinions on both sides, right? And people kind of dig their heels in on that one specifically. Without, you can reveal your opinion or you don't have to, but walk us through kind of why, like what is the question mark around Ripple being a security, right? So kind of what's the argument for and against it in terms of that one?

• 40:07Speaker 01

  Yeah, I mean, I don't even want to go down that rabbit hole. The question mark is just, you know, is the SEC going to call Ripple a security or not? And yeah, I don't even want to go into it.

• 40:19Speaker 00

  Smart man, smart man. Okay, so on the lending side, the last question I have for you is today, most of the lending seems like it's coming domestically. How does it play out in terms of lending internationally, right? How does this evolve over, you know, let's say, the next 24, 36 months? And how does that impact what you guys are doing at BlockFi?

• 40:42Speaker 01

  Yeah, so great question. We are just focused on the US market today, but we're already seeing with zero marketing, around 40% of the traffic to our website and applications for loans coming from outside the US. As a result, we kind of moved up international expansion on our roadmap. From us, what you'll see first is the availability of international loans to corporations. And then second, targeted expansion into different international markets for consumers.

• 41:15Speaker 01

  Some of the things we have to think about there is like where we're going to take an approach like we did in the US, fully buttoned up, compliant with every single different regulation and fully licensed versus a more Uber-esque approach. And that probably correlates with how developed the laws and regulations are in different markets. So in the UK, we're going to be fully licensed. In other markets, we may not be fully licensed. There may not be a licensing scheme that we could effectively put ourselves into. But you'll see us actively lending USD in a tokenized form outside the US, definitely before the end of 2019, probably in the first half of 2019.

• 41:54Speaker 00

  Got it. It's fascinating. And, you know, another thing that I've been thinking a lot about, so you can tokenize assets themselves, right? But now we're starting to see a lot of these tokenized funds, right? So we've had a sponsor, BlockEstate, that, basically a real estate tokenized fund, right? If I'm an LP in a fund, so basically my LP interest is held by a digital token, right? My equity in the fund is that digital token. Is there a difference between holding, let's say, equity in a real estate building versus equity in the fund? And from a lending perspective, it's the same mechanism with the digital asset, but how do you think about underwriting risk, right?

• 42:38Speaker 00

  So not just the LP interest in a fund, but across all these asset classes? How do you actually underwrite that risk?

• 42:43Speaker 01

  Well, there's definitely a lot of differences there. So an LP interest in a fund is a lot different than direct ownership of a building. And it's going to be on a case-by-case basis in terms of how that fund is structured, whether or not it's diversified, what redemption rights you have, what lockup periods there are, how much demand there is from external investors to participate in the fund. So it's a bit case-by-case. One of the things I would just reiterate from earlier, though, is that, you know, as someone who invests in real estate directly and also on different crowdfunding platforms like Realty Shares and Fundrise here in the US, I think it's way more interesting if

• 43:26Speaker 01

  you can tokenize something that I don't have access to now. I can buy a diversified portfolio of commercial real estate in the US. I can buy individual homes in different markets. You know what I can't buy? Well, and one of the things here in the US is that different markets have different cash on cash returns. And internationally, that's probably also true. You're taking some FX risk. But I think what's more interesting is how do you give emerging market investors exposure to those same assets that US investors have exposure to already? And how do you give US investors exposure to assets outside the US that they don't have access to easily today?

• 44:05Speaker 00

  Absolutely.

• 44:06Speaker 01

  So it's a question of like, who's your audience?

• 44:08Speaker 00

  For sure.

• 44:09Speaker 01

  Who's your audience and how is what you're giving them different than what they already have access to today?

• 44:14Speaker 00

  For sure. All right, so actual last question now is lending market in crypto today. What's the biggest challenges that are going to kind of present themselves over the next 12 months?

• 44:27Speaker 01

  I think it's just awareness, you know? Everywhere we go, every podcast I'm on, we hear a lot of people say, we didn't know this existed. And I think that, you know, companies like BlockFi who are doing things the right way, institutionally backed, really, you know, professional teams and valuable products coming into the market. As more and more people understand that they exist, understand that they can get access to them and that access is easy and it's really friendly from a customer and client perspective. The overall ecosystem gets stronger and more utility value is created for crypto assets as a result.

• 45:08Speaker 00

  Makes sense. All right, so everybody gets to ask me one question at the end. What question do you have?

• 45:15Speaker 01

  Yeah, so my question for you is, why are the haters wrong? I've followed you on Twitter for a little while. I'm a fan, but some people aren't. Why are they wrong? What are they missing?

• 45:27Speaker 00

  So I think that there's two things. One is there's a lot of people who don't, they have no clue what we're doing. They have no clue how we see the world. And then I think two is anybody who gets a large audience, has a larger voice, immediately attracts both people who are excited and who aren't excited. Right? And so one of the things that kind of cracks us up a lot of times is we can do something that asset managers have done for the last 30 years, right? I mean, literally, exact, you know, distribute research, whatever it is.

• 46:08Speaker 00

  And we will have people who say, you know, this is incredibly helpful. Thank you so much for doing this. We will have, you know, our clientele who will say, you know, I've been looking for information like this. This is fantastic. And then we'll have people say, you guys are scam artists. Right? And so, you know, I think that I used to worry about that and kind of engage with it and kind of, you know, you just, why, why do you have this negative reaction? You try to explain it all, stuff. Now I'm just, look, knock yourself out. Hope you have a great day. Right? And so I think that the, you know, are they wrong? Right? I actually probably have a unique opinion in that. Given the information that they have, given the perspective that they're looking at that information through, they actually believe that they're right. Right?

• 46:53Speaker 00

  And so if I was sitting in their seat and I had the information that they had and I had their perspective, I probably would think the same thing. But I think that, you know, it's, it's once you get all the details, once you get all the information, right? And then you realize, oh, this is actually what's going on. I think they would change their mind. It really comes down to less about them being right and wrong and more about, you know, who is that target market? And is it worth our time, energy and resources to try to educate, you know, kind of the anonymous accounts on Twitter or go in and, you know, go to work for our clients? Right? And so I think that that's really where crypto is unique in that it is so public and it is such like an open forum engagement model that what used to be said from,

• 47:36Speaker 00

  you know, somebody turning to somebody in their family, sitting on a couch, watching television, saying, oh, you know, this guy's an idiot, is now said publicly. And then they find the other people who say, oh, this guy is an idiot. And they all, you know, kind of. Kind of coordinate on the internet, knock themselves out, right?

• 47:51Speaker 01

  And here's another saying that I really like to go back to. I mean, first off, I'm a big supporter. I think you should, you know, absolutely keep it up. If people aren't hating, it's because you're not doing anything. People only hate on people who are doing something and you're making stuff happen and that's cool.

• 48:08Speaker 00

  Listen, I, um, the one that, uh, that absolutely cracks me up, right, is, uh, i- is the index fund. So, so we launched this index fund and, uh, you know, we basically had institutional clients calling us saying, hey, I want to get exposure to the market. I, I, I kind of understand it. I kind of don't. Uh, it was the best performing asset class last year. I've got no exposure. Help me get off zero, get, you know, 10 basis points of, uh, of exposure here. And, you know, should I buy Bitcoin or Ethereum or something else? And, and our answer is, well, we actually don't think from a fiduciary standpoint, we can tell you which stock to pick. Right? And so if you look at the data, well, if we index kind of large cap, you know, cryptos, market weighted, rebalanced, you know, periodically.

• 48:52Speaker 00

  That's going to be the best way for you to get just kind of beta exposure. And so we went out and we found, uh, you know, bitwise and, you know, think that they're, you know, kind of the leader in the crypto indexing side. Uh, and so we create this index and, and, you know, we did some things around, uh, trying to reduce risk. So we took out any tokens that had the centralized, uh, you know, too much centralization and all this stuff. And, uh, we announce it, again, 99% of people extremely excited that we're going to go get a bunch of institutional investors to start owning the asset and paying attention and learning and getting exposure and all this stuff. And then there's that 1% that, you know, you're, you're charging ridiculous fees. You're doing this, you're doing, you know, you're doing all this stuff. And, and, you know, you start to look at it like, actually, when you start looking at how expensive, um, you know, custody is and all this stuff, like,

• 49:36Speaker 00

  it's actually not a great business, right? And so it, it really is a way to, um, you know, Get as much information out there as you can, but also realize, you know, who is that target market? And at some point, you just realize, you know, the clientele is the focus and the anonymous trolls on Twitter are going to keep trolling no matter what you do. So just let them go.

• 49:58Speaker 01

  Yeah, you're raising money for the ecosystem and that's, that's what's exciting. Can I do a shameless plug to wrap us up?

• 50:03Speaker 00

  Absolutely.

• 50:04Speaker 01

  So.

• 50:05Speaker 00

  I've never let anyone do this before. Go ahead.

• 50:07Speaker 01

  I'm honored. If you, if you go to blockfi.com/pomp and you take a loan from BlockFi, we will add a hundred dollars of Bitcoin or Ether to your collateral balance. Blockfi.com/pomp.

• 50:24Speaker 00

  So, so does that mean that I'm now raising additional money for the ecosystem?

• 50:30Speaker 01

  Yes.

• 50:32Speaker 00

  Amazing. All right, man. Thank you so much for coming. I really appreciate this. This is fantastic.

• 50:35Speaker 01

  Thanks.

• 50:37Speaker 00

  Thanks again to our sponsor, BlockEstate. To check out their tokenized real estate fund, you can check out www.blokestate.com. Hey, everyone. Pomp here. If you liked this episode of Off the Chain and want to help us take crypto to the top of the Apple, Spotify, and other podcast charts, please do us a favor and rate, review, and subscribe. To review, simply go to the Off the Chain homepage, scroll down until you see the five blank stars. Taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts. I appreciate you listening and see you next time on Off the Chain.