BitGo CEO Mike Belshe: Crypto vs the Banking Cartel | BMP 016

Hey Spencer, great to see you. Thanks for having me on.

It was a great event. Thanks for you guys' participation helping indirectly organize it or I'm not sure exactly, but it's a good crowd. The thing I like most about the Bitcoin dominant, I wouldn't say it was quite specific, but pretty close to Bitcoin specific. The folks that are in there have been around for quite some time. I think you don't have to worry about their ethos as much. They're in it for the right reasons. A lot of really good people there that are in it because they see the long-term potential and value of Bitcoin. Everybody's kind of scratching their head when you're in that space right now thinking, look, we know that there are real issues with the US dollar. We know that Bitcoin can be used as a global settlement system in a way that we've never had the ability to do before. And yet Bitcoin is not trading super great right now and there are a lot of questions. I think there are two things on people's minds. Number one is quantum. Whether you believe that's an issue or not, that's not my point. There's a lot of people that are worried about that. The second thing that people are looking at, at least for the short term, is they don't really understand what Michael Saylor's products are, how they work. And they hear leverage. Leverage obviously a lot of bad things can happen when you're overlevered. They don't know whether MicroStrategy and Saylor are overlevered or not. They don't understand the basics of it. But they are confused by it. I think those two things are leaving everybody befuddled as to why Bitcoin isn't performing a little bit better right now. Of course, we have AI out there. The vibes of the conference are very nice. It's a great group of people. We go through ups and downs and I think everybody there is pretty patient.

Part of the reason I got into Bitcoin in particular, it's the first time I ever got into anything even close to finance. I spent my entire career as a technologist. I spent all my time doing software engineering and technology. I had friends in college that went off to work in finance. For me, I've always felt finance is kind of just a bit of a scam. There are these people that produce nothing. They take an oversized bite for giving you advice on how to invest and allegedly help you make more money. Yet if you look at them, even on average they aren't that good. The vast majority of them are not that good. You look at funds, about three quarters of them are always underperforming the S&P. What kind of a career do you have if the best you could do is run a fund that couldn't even beat the S&P? I think finance is riddled with these people. I'm a little bit off track from your question. You were asking what is holding back institutions. The institutions don't really understand what Bitcoin is. They'll invest in anything. They'll invest in meat pies, they'll invest in crypto, they'll invest in AI, whatever they think is going to make money. Frankly, they don't really have as much insight as they'd like you to believe they do. Nonetheless, the girl in the red dress is absolutely AI. She is enamored all of them, and they're only focused on that right now. When they think about Bitcoin a little bit, they've never really understood it. They think it doesn't look like it's doing much right now. But I mentioned quantum already. They're really worried about quantum. They don't get quantum either. It's a crazy complex technical topic. You have to go read a lot of papers to understand where quantum might be on a timeline, what impact it might have. I think we do have to address this. As much as I complain about others, we are here because we'd like to see Bitcoin proceed further and faster. Part of what you have to do to get people to work with you is to demonstrate and convince them that whatever their fears may be, there are good solutions, they're addressed. The good news is that the Bitcoin core team and a number of initiatives are all moving much faster than they were a year ago to address this problem. I think we should get a quantum-resistant signature inside the Bitcoin core protocol ASAP. As soon as we do that, I think we'll unlock a lot more institutional interest again.

I think it's actually real. When we were doing our roadshow for BitGo going out to the public markets just in January this year, I was surprised. I expected to get questions about BitGo and how we're performing. Of course, we did get those, but a top three question all the way through was what's going on with quantum computing. It's a real concern that they have. Think about it this way. You're going to run a fund and you're going to have billions of dollars in it. Imagine if one day billions of dollars is gone. They also don't really understand anything about the products that they invest in. When they hear this quantum computing threat, they don't know what to make of it. It is so new that it's kind of an outside thing. There are not very many risks that are just like, hey, that's a risk that could completely take all of my capital. It's an unusual thing and they're more concerned about it than they should be. For the record, I personally don't think quantum is a significant threat in the near term. Doesn't matter what I think. What matters is what the world thinks. If the world thinks it's an issue, we should just address it. We're getting close to being able to do it. I have zero doubt that the Bitcoin community will come through and come up with a quantum-resistant algorithm. They will then have enough time to get it into wallets. BitGo will absolutely lead that just like we did. We're the first to put a taproot transaction on chain years ago, adopting both taproot and Schnorr. We designed the UTXO spending algorithm that's inside Bitcoin Core today. We will continue to be Bitcoin forward. We pioneered multi-sig as well, which you absolutely should be using if you're using Bitcoin. We'll be there. The industry will be there. The core devs would absolutely come together if there was ever a need to scramble, but I don't think we're going to need it. Nonetheless, let's make sure that nobody has to worry about it.

Well, we just talked about how quantum can really inhibit the adoption of Bitcoin because people don't quite understand it. The good thing about stablecoins is they're really easy to understand. First, you have to understand that there's this blockchain primitive that allows you to move value around seamlessly very quickly. But then the idea of a one-to-one correlation between the stablecoin and the dollar is super easy to understand. The Genius Act was passed last year already. It was not only easy for people to understand from a how-it-works perspective, but it was also pretty easy for legislators to understand how they might regulate it. We're going to have a token, we're going to verify that there's a backing of at least this type of asset behind it. Turns out we've had this for a long time. It's called the Reserve Bank. That's what BitGo does. We are an OCC-chartered national bank. We are not a depository bank, which is the type of bank that takes risks and needs to buy extra insurance to cover those risks. Instead, we just hold your assets, and you have them a long time. Stablecoins fit the bill for how do you make something that people can conceptually understand and not have to say, I don't get this, I can't adopt this. Everybody sees the potential. There's been a pent-up demand prior to crypto for something like a stablecoin. This is evidenced by the myriad of different payment fintechs over the last few decades that shouldn't have existed if the banking system worked well. If banks did a great job of payments, we used to write checks, then we moved on to credit card banking a bit different, but people use it for payments all the time. Debit cards, ACH, then you end up with PayPal, Venmo, Cash App. Why do these payment apps exist if banks are making payments great? They failed. They don't make it easy. It takes them a long time to move. They get stuck on regulatory. I'm not trying to blame them alone. They have been heaped with a very high regulatory burden, which makes it difficult to roll out new products. There's a bit of innovator's dilemma. Once you are the incumbent, you have this innovative team with a new idea and you're like, I don't know if it's going to work. Instead, PayPal does it. It turns out to be an interesting thing. So stablecoins, there's a lot of pent-up demand. When you really start talking about a global economy and a global financial system to go along with it, this is where the banks got stuck, mostly due to regulation. Every jurisdiction, whether it's the US, China, Europe, the UK, has its own controls on money. Everybody decides differently. Every government wants to control its money. That's natural. What happened prior to having stablecoins is that we never solved the problem. Moving money internationally is hard to this day. Western Union charges exorbitant fees to people that want to move money globally. Stablecoins finally disintermediate that. You can move money super easy. It's a dollar. People get it. We had a zero interest rate environment just a few years ago. Tether was operating all through that, kudos to them. They weren't making a lot of money in a zero interest rate environment. Then as the US started to increase rates after the COVID period, the US dollar got stronger against other currencies. The US is already a strong currency, the reserve currency of the world, despite its flaws. But for some of the more brittle currencies, they start to inflate. A little drop in strength and they go crazy. This happened in Turkey. The poor people of the country that is losing control of its money, and it's always losing control of money, just ask Milton Friedman. It's government overspend every single time. Their savings are disappearing in front of them. They have to do something. What did they turn to? They didn't turn to Bitcoin. They turned to Tether because it's conceptually easier to understand. It's a digital dollar. They can get it. They need something that gets off their currency. They can get to the dollar and save their family. Stablecoins are clearly here. What's good about them is that people get it conceptually. We're getting stuff in place legislatively. That'll come down to regulation. Companies like BitGo, an OCC national bank, can provide a Genius compliance mechanism. Today, we're doing that for the USD one. It's now a little under $5 billion in size. We're doing that with SoFi, a top 50 bank in the US. You can do it through them. They use BitGo behind the scenes. United States recently moved over to us. We have a half dozen others doing as well. The bad news is that Genius doesn't allow for interest on your stablecoins. As with any regulatory capture, the guy that's got the regulatory capture doesn't want to let go easily. He's benefiting from it. The banks are like, come on, we know you want a better banking system, but can't we just keep making a lot of money for now? Wouldn't that be nice? Eventually, the banks are going to have to give it up. Stablecoins are a better way to save and hold deposits. You should get interest. It's your money. You deserve it. The idea that the government is going to tell you can't get your own hard-earned money, the risk-free rate is insane. As excited as I am about stablecoins, it's a massive change to payments. It's not completely done either. We still need more innovation. Most of the payment stablecoins run on Ethereum. If you want to run small transactions, the Ethereum fees are simply too high. You want to run a $10 transaction but paying a dollar ETH fee doesn't work. You can't do it there. You might move to Tron, Solana, or something else. There are places to go to lower fees, but if those coins go up in value and get more traffic, they'll also have a fee-related issue. More importantly, there's a second thing: ease of use. If I could give the crypto industry one thing to focus on for the next couple years, it's ease of use. If you get your grandmother to agree to pay you in stablecoins, she'll say, okay, it's $1. Then she tries to move it and it says she doesn't have enough to pay the gas fee because it needs an ETH fee or a Solana fee. These aren't plumbed through universally yet. There are some solutions. Stripe along with Paradigm created a blockchain called Tempo that allows you to pay fees in the stablecoin. It's early days, but they're up and coming. Circle has its own blockchain called Arc. Both of these guys realize you can't have a world where you're trying to move dollars but have to have some other foreign currency to move it. It doesn't make sense. Imagine going to Burger King and buying a $10 burger and they say it'll be $10 plus 0.3 euros. Nobody wants to do that. We have to fix two problems. First, fix the fee problem so it's not variable tied to the chain going to rates that are too high. Second, probably more importantly, make the usability so that you don't have to pay in the native coin. This is being addressed now for the first time, and that's due to people finally getting their heads around the opportunity with stablecoins.

I hope we see a full transformation. When it comes down to regulatory things, it's not a fair playing field. A lot of different outcomes could be possible. Senator Elizabeth Warren published a piece accusing the OCC of granting companies, including BitGo, trust charters inappropriately, and it's going to make the banking system unsafe. In her letter, she didn't say anything about how that would actually come to be. From our side at BitGo, we very much think not only is she wrong, she's completely opposite wrong. What BitGo does as a national trust bank is a reserve bank. It's actually the bank you wish you had but never had. Pre-computers, it wasn't realistic to have a reserve bank like what we do. Instead, you were using a traditional bank, a depository bank. These guys take risks with your money and from time to time they screw up. It's happened over the last 120 years. When it happens, it can be spectacular. The most recent banks that failed were SVB and Signature Bank. You probably remember Washington Mutual and many others that have failed. Every time they fail, it leads to some new regulations and laws, all well-intended, designed to protect against that type of failure happening again. Unfortunately, when you have a demand deposit bank which lends out money, there's no set of rules or regulations that will ever drop the risk to zero. It just can't happen. A demand deposit bank, a depository bank, means that you as a client can come in and make a deposit today, and tomorrow you can demand that money back and they have to give it to you. Imagine you walked into a bank that just opened the day before. You're the first account holder and you deposit a million dollars. The bank is happy, you're happy, your money is safe. Then the bank takes your million dollars and lends out 80% or 90% of it to somebody in a perfectly good loan, to be paid back in two years. If you show up the next day and say, I want my million dollars back, they'd say, we lent it out.

Yeah. Okay, so this is safety and soundness. Obviously, the banks are not allowed to do the scenario I just described. They're required to have policies and rules to make sure you'll always be able to get your money back. Yet they lend it out so they make money and keep the whole thing safe. Bankers have proven over and over again they're not very good at this. I'll give you one quick example. Silicon Valley Bank, run by financial professionals. These really smart, intelligent men decided in the middle of a zero interest rate environment that the best way to make money was to take depositors' money and put it into 10-year T-bills, making about 1.8%. That was their best idea. They're supposed to be financial professionals, and their best idea was to put your hard-earned money into a 10-year T-bill. I'd argue you can probably put it in a 10-year T-bill yourself if that's what you wanted, and then you get to keep the full 1.8%. Moreover, they didn't think that if interest rates go up above 1.8%, clients might want their money back to put into something that earns more. The bank went under as a result. These financial institution professionals are not always the sharpest tools in the shed, yet they're heralded to steward billions of dollars. We carry regulations to help prevent these things from happening, but it makes it very difficult for these businesses to do a lot of innovative things. We now have banks that can't keep up with payments. That's why you have all those apps that wouldn't exist if the banks were doing their job. I hope we can get a revolution. The depository bank has two functions: help the retail guy keep their money safe, hopefully give them a little interest, and lend out that money to businesses to provide liquidity. Those two things are coupled. You take depositor money and lend it. It used to have to run that way because we didn't have computers. But these days we have computers, so there's no reason these two things have to be coupled. You can have one place where you save your money and a different place where you go and lend and borrow money.