Kraken Co-CEO: Sovereign Bitcoin Accumulation is an "Inevitability"

I mean much the same as sovereigns hold gold today, they hold foreign currency today. Bitcoin is another currency. I think when it happens, it might happen reasonably quickly once word gets out that decent-sized sovereigns are starting to build Bitcoin positions. The US could actually go and, you know, have a strategic Bitcoin reserve. I mean, they're definitely talking about it given that we're like in discussions directly with a number of these different, you know, states or federal level though, like what would it look like? How would we do it? All those types of things.

Great. How you doing? Great to be here.

It's a good one. You know first off on the cycles it's amazing how reliably volatile our cycles are. I mean, the bear bull four-year cycle every single time everyone has, you know, said like, look, it's done. It's not going to happen again. And they, you know, here we are on another leg of the four-year cycle. I think you know, the reality is though, they get more muted each time, right? The highs aren't as high and the lows aren't as low. And so there is kind of this like still volatile four-year cycle but decreasing you know level of extreness in each cycle. And I you know I would say this like this one you know for what it's worth you know if this is a you know we refer to as kind of like the bear part of the cycle it's you know it's quite mild right now versus the last few. Like, you know, in the 22 cycle, I kind of like had been through several bear cycles and I looked at it and I was like, 'Oh, this is going to be a piece of cake.' And it ended up being the hardest one running a company of all of them because, you know, you had all the crazy Gary Gensler shit and everything like that. It was quite brutal for what it's worth. But for this time, I really don't think we're going to be in that situation where we have like an extremely challenging cycle, you know, based on what we're seeing then.

And then again, you know, your second piece that you mentioned, the institutions, this is actually I again I've been in crypto for now what like 13 years since 2013. There's been like kind of a chorus of you know the year this is the year of the institution the institutions are coming and so forth and I you know after some time kind of decided it doesn't really have a matter about these institutions and you know whether they come or not is not actually you know a huge thing that's going to dictate anything but you know then you know I kind of evolved from that to say like okay yes it will be it's inevitable it's a meaningful piece and that's probably where I sit today. But I've certainly heard for many years this is, you know, this is the year of the institutions, right? And I've sometimes actually felt that that was going to be the case. And it, you know, only, you know, didn't happen or happened only in very narrow instances. And I could go through the cycle of like which institutions kind of came through out all of history in each kind of like various different stage. But I do think like right now as with everything in crypto like we are at a place where we're going to see like we are seeing and will see kind of like the most significant uptick in adoption of institutions right now. You know we have over the past 18 months I'd say and we will you know going forward in the next couple of years.

It's a little bit of both, but more of the latter. And you know so a handful of different things you know so you know historically way back when it was very much about someone coming in you know obtaining a position on Bitcoin or another asset hold invest speculate whatever it was was very much you know the approach because you know a lot of the infrastructure and use cases and technology was not integrated into all the businesses and individuals and defaults. And so that was kind of like the first step, right? We had to get people in a place where they can actually hold the assets and send the assets. And then, you know, that took us some, frankly, it took us some time, probably took us more time than a lot of us expected. And I think now we're seeing a few things happen. So, one is really all of the traditional financial services companies are going to add crypto into their offerings. And they're all working on it now. We know this because we're talking with them. We're going to be infrastructure providers for many of them that are kind of like in implementation mode now. And that's one thing that's going to happen.

Another thing that's going to happen is well crypto native companies are actually going to offer TradFi assets. Payward family of brands. I'm not too sure if all the kind of listeners are you know familiar with this. You know, Payward is kind of like the overarching parent company, holdco for Kraken, and we have Kraken being the flagship product and brand under that. We have a number of other brands now, via acquisition and other paths as well. Ninja Trader being the most significant, which is really kind of what we refer to as traditional financial services, derivatives, largest retail futures broker in the US, pure play, and then Breakout and a number of other brands. So that's the second thing that's going to happen.

And then the third thing is, you know, crypto tech is going to power TradFi asset classes and TradFi tech and so forth. I mean, the first use case that has been a resounding success for this is our stable coins, right? You take the most liquid TradFi asset out there, the US dollar, and we put it on chain, right? And this ended up being a meaningful number of use cases out there. People that want to hold dollars in various different places where it was difficult for them to do so. It was the kind of like quote currency settlement currency for all of centralized exchanges and DeFi. That's a huge meaningful use case. And then also what we're seeing most significantly now are B2B payments particularly kind of like cross-border. And often like when both legs don't have a quote unquote like US market as part of it or developed market. So think like Brazil to Hong Kong for example. We see a ton of that with stable coins in our customer base right now for B2B payments just better faster cheaper.

And so that's the first step stable coins. But now we're going to see this with many other asset classes. Frankly, a similar approach. Our implementation xStocks happens to be the market leader in US public equity tokenized equities, soon to be many other equities from many other places. And it's a similar implementation, right? You know, it's one token back one for one with a share of stock and a regulated custodian basically the same as a stable coin and we're seeing like massive adoption right now for xStocks.

Yeah, that's a good question. You know, I actually haven't thought about it from that lens like investing in tokenization. You know, I kind of think about it from the builder lens like we're building into tokenization as a business, right? I mean, that's probably one path is look at who the builders are and then see if you can invest in those companies. I don't know that there's necessarily a lot of like public companies out there, but look at you know some of the different private companies that are investing in that trend and then you know which chains as well are you where we're seeing more activity and real world asset tokenization than others. That's another potential way to do it. So yeah, I mean I think just looking where the activity is and then seeing if there's kind of like an investable asset around there, whether it's just like a tech company or a you know or a protocol or chain that happens to have a lot of activity in that area.

Well, I mean, yeah, this is the I mean, many people kind of like over the years we talked about this and Bitcoin's role and you know, is it digital gold or is it something more? Or is it the chain where everything will happen on the chain? And I do think like look for a number of reasons you know multiple chains make sense and even for like the you know the most ardent you know Bitcoin supporters that kind of like believe in a single chain world I do think this path of like hey there's a number of other chains where we'll see innovation some of that innovation is successful and some of it isn't but by definition you know trying new things, innovating on a new chain, building new things. You know, that's change, right? And you know, Bitcoin is some of its you know, its strength is like it is incredibly secure, incredibly reliable. Part of that is because there isn't a huge amount of like crazy new innovation and different things that you know it's not extremely flexible in all those various different ways, right? So we see all this innovation happen on various other chains and these various different things.

But as you noted like there is a path you know Bitcoin does offer some level of programmability to take those various different innovations and someday you know build some of them on some or all of them that are like meaningfully successful on Bitcoin. I think that's like happened to like some extent, right? You know, we're starting to see some more smart contracting and various other things on Bitcoin. And then on top of it, you know, you see kind of like the path to like actually use Bitcoin's kind of strength as a store of value to ride on these other chains, you know? So, we see wrapped Bitcoin being one of the most meaningful assets on a lot of these other chains. And so, I think it's I think they're both complimentary. And I think like by its nature, you know, Bitcoin isn't built for like a you know huge amount of like rapid change and innovation and new applications and so forth. But that's also like one of the strengths of it because that therein also is tied to kind of like the durability, the security, the you know built for longevity, all those various different things.

Well, yeah, there's a lot of things to unpack the whole political thing. So I mean a few points you know one we're super we're incredibly global company we operate you know everywhere we have licenses all over Europe, UK, Canada of course US. It's amazing how crypto became a political topic here in the US. I mean it's still to this day unclear what the political forces were that kind of like drove that incredible belligerent approach to a technology. It still has not even like remotely been articulated by any of the folks that took this belligerent approach, you know. Yeah, it was frankly extremely bizarre given Gary Gensler had taught classes at MIT on Bitcoin and crypto and he had even gone as far as to say positive things about it and turned around and it was just a kind of several people is it interesting several people you know kind of in the DC sphere have noted that fact and noted it even more strongly than you just did in so far as yes I talked with him he was collaborative. He was supportive. And then something happened with the administration and Elizabeth Warren and kind of the deal that was made between Elizabeth Warren and President Biden for her to kind of like run Senate Banking and have like de facto control over all things financial services. And that like kind of led to him coming under her purview. And you know, that's really where the source of it was. But it's still unclear like why the belligerence comes from that camp. There's never been a meaningful articulation at any point at any time. But yeah, that was noted by a lot of people in DC that like he actually initially wasn't and then somehow got like roped in and was like the arms and legs of this you know, goon squad.

So there's that. You know, we were, you know, this is the only place in the world where it's this, I mean, maybe China, it's like meaningfully political, right? You know, they ban it. It's kind of like the only other place, honestly, where it's like the same meaningfulness of being political. But, you know, fast forward to today, of course, we've had this, you know, incredibly, you know, massive change, a complete 180, totally favorable administration. It's been meaningful, beneficial, great innovation has happened across a number of technologies including crypto because of it. It's been super helpful. And so that's been a real positive.

I think like look you know the inevitability of regulatory licensure and rules for certain parts of the technology we know whether they were initially inevitable or not you know I mean just it's the reality of the world that they're going to be inevitable right like for example like taking custody of crypto for a user it's you know it's just like a stretch that that wasn't going to like eventually be regulated as an activity and it has become like mostly regulated in you know huge parts of the world and that's like probably an inevitability for the US as well right because that's kind of like you take control of someone there's all this risk involved and blah blah blah and so you bring it under a license and regulatory and so forth and you can debate whether that's actually the best way to ensure security and safety for users but that's where we're at and so I think that's like going to happen now it's like and it has happened in you know many places in the world. Is it going to happen in the US? Yes. When's it going to happen? I mean, we are down to it with Clarity. I mean, we are down to it. We really have a couple weeks left. I mean, it's basically next week is do or die for you know, for the near term. I mean, we don't hit next week, we kind of run into all these other things which recess and the election cycle and a number of other things that kind of leave us with, you know, it needs to be picked up at some point down the road. And so, we're going to find out real soon.

I do think, you know, one, it's an inevitability. So, it's almost not worth like debating whether there will be a license for some of these activities or not because it's just going to happen. And I think it's really just about like having the best set of laws possible, you know, ones that kind of like preserve as many of the benefits of crypto as possible. And that's namely per its permissionless nature, you know, the fact that you can build this stuff being open source, the fact that you can hold assets non-custodially, censorship resistance as much as possible, all these various different things. While still, you know, having regulation for things like XYZ business is going to take custody of some user's crypto. Okay, let's make sure there's like some safety, you know, guidelines. That's kind of like a clear objective of the regulations.

Yeah. Yeah. I think it's definitively the case and that crypto had a meaningful impact on the presidential election and other elections as well. You know at the Senate level, House level. I think there are a number of elections that were you know impacted by crypto as well. Some of the strongest those most strongly belligerent towards crypto were on average not successful and those that were supporters of crypto were on average more successful. That's just what happened during the cycle. And yeah, I don't think that's a coincidence or by chance at all.

Yeah. Well, it's you know it's something that's like in some ways it's a little bit more in the background, right? You don't you know if you're when I'm an individual user like I'm not thinking about like going to one financial services company versus another thinking like which one has a Fed master, right? I mean this is not something that's typically known for individuals. So it's a little bit less clear to individuals. So let me unpack it a little bit. I mean first of all we have one of our many licensed entities you know of which we have over a hundred across the globe. Is a special purpose is what's called a special purpose depository institution in Wyoming. And it's basically what it is is it's a full reserve bank with some crypto-specific laws built into the license structure. And that's what we have. We've you know kind of had a long partnership with Wyoming. We've had this license for a while. That's how where we offer our qualified custody business in the US out of license because this is a qualified custodian, right? And so qualified custody for Bitcoin and many other crypto assets. Also ability to hold USD, but we despite it being a full reserve bank, the USD was still held in partnership with another partner bank, right? And now with a Fed master in the USD move, you know, sending and receiving via Fed wire or anything else was still handled via partner bank. And so what now a Fed Master account allows us to do via this entity is simply skip the partner bank and go straight to the Fed, which is where ultimately any bank, any institution needs to connect in order to actually hold move dollars. And so that's like what we have set up now with a Fed master account. We're in implementation mode with it. And the implications for a user is that we'll just be able to ideally potentially, you know, share more interest with them on US dollars and or move money at faster, lower cost, fewer errors and issues just given there's fewer intermediaries in the mix.