NYDIG Presentation with Robby Gutmann - Bitcoin for Corporations 2021 (02/04/2021)

Sure, absolutely. And thanks very much for having me today and having both Ross and I at this event. And thanks for putting this on. It's a great, great thing you guys are doing and a great event. I thought I would start by telling you a little bit of a funny story about the founding of Stone Ridge, which is NYDIG's parent company. And so for me, that story starts in 2011, when my career on the south side of Wall Street was really flaming out. And so I've known Ross a long time, and I reached out to him seeing if there was an opportunity for us to work together. And he said, 'You know, this call is really timely because I am actually thinking about starting a business.' I was like, oh, I got this tingly feeling in my stomach. It's like, this is how it starts. And he said, yeah, it's a stand-up paddle boarding race registration company. It's like, okay, well, good luck with that, dude. I'm not so interested. He's like, all right, okay, that's good feedback. You know, let's talk again in a week. And he came back to me in about a week and he said, all right, let me try this one. It's a mission-driven, principles-based financial services company where we pursue the mission of financial security for all, operating under the principles of kindness, humility, and focus. It's like, yes, that one, that idea that grabbed a hold of me and it wouldn't let go. And I basically quit my job the next day. And the next thing I did was call my now co-founder, Yenzi, who essentially quit her job the next day to come join us. And what we found over the last almost 10 years that we've been doing this together is those three principles are our secret weapon.

Because what happens is when you create a business based on the principle of kindness, you create an environment of safety and trust, people feel comfortable and they can really do their best, most productive, most creative work. The second thing is when you create an environment based on humility, that's how you stay curious and that leaves people safe to admit they don't know. And that's how we stay at the forefront of innovation. And finally, the environment based on focus. It's got a bunch of different meanings. A little bit overloaded, but it means at least two things to us. So first, it's an acknowledgement that domain mastery is not born. It doesn't happen by accident. It's only the result of long periods of focused effort. And the other thing it means to us is there have been inflection points along the way like NYDIG where we've made bold, abrupt decisions about how to focus the business. For example, focusing NYDIG on Bitcoin. And so when you recruit under these principles, you recruit the best people in the world. And you create an environment where they feel safe to do their best work and you get a kind of crackling creative energy. And it was in that field of crackling creative energy, like you can feel it in our office when you come in, that this idea of money as an open-source protocol, that idea grabbed us and wouldn't let go. And so NYDIG was really born because we had the same problem that you did. We just had it a little bit earlier. And that problem is if Phong the individual wants to buy $1,000 worth of Bitcoin on his cell phone, that's actually pretty easy. If MicroStrategy, the corporation, wants to buy a billion dollars worth of Bitcoin, that's actually pretty hard. And for us, we broke the challenge down into three parts. So, first, how do you accumulate the Bitcoin in a compliant and auditable fashion? How do you store the Bitcoin securely and in an auditable fashion? And finally, how do you account for the Bitcoin on your balance sheet? Again, in an auditable fashion. And I think for us, as I think you found as well, not only did we have trouble with each individual piece of that, but the idea of stitching different things together to solve that problem, that was an untenable challenge. And so we solved that problem ourselves internally. And as a result, we have something that we think is unique in the market, which is a completely proprietary, integrated, full-stack solution that incorporates asset management, custody, execution — those were the first three things — as well as the accounting expertise. And since that time, we've added derivatives, financing, a research function, and most recently, a data platform that we're making available to our clients shortly. We operate the business out of two regulated subsidiaries. We have both a BitLicense from the state of New York as well as a limited purpose trust charter. We're one of only two companies in the world that have both of those licenses. We have a SOC 1 Type 1, a SOC 1 Type 2, a SOC 2 Type 1, a SOC 2 Type 2. Collect all the acronyms. And somewhat uniquely in the space, we don't operate a retail business. We don't operate an exchange. We don't deal with end investors or two-legged individuals, which really allows us to focus on our core audience of corporations, institutional and high-net-worth investors, and more and more recently banks, making our full-stack integrated platform available to them by API.

I am not a partner in the sub business.

I missed out. He was right as always.

To be honest, that target is a little low. I think if I only hit 25 billion, you're probably talking to a different guy next year. He's pretty demanding, but I'm confident we'll get there based on the pipeline.

We're about 80 as of Monday. And going strong and we are recruiting. So if there are people out there that want to be part of that crackling creative energy field, look us up. We'd love to talk.

Yeah, absolutely. And so one caveat I would give is one thing that NYDIG clients expect and receive is complete discretion about their activity. So ordinarily I would never speak about a client's dealings. I do have two clients that have given explicit permission to talk about what we do with them. And so the first one, you're absolutely right, is MassMutual, a 150-year-old mutual institution that late last year we helped allocate $100 million of their general account to Bitcoin. And I think the MassMutual experience is really instructive of three dynamics that we're seeing in the market today. So the first dynamic is there is a rarified tier of institutional investor that just has the highest fiduciary standards in the world. So MassMutual has been around for 160 years. They're double-A+ rated. They have not been around and maintained that rating by being careless. They are extremely thorough, extremely diligent in their diligence. And so an advantage that we've discovered is both the fact that the platform was designed by institutional investors with serious skin in the game for institutional investors and hasn't really had to solve other problems. That's a big advantage, and the fact that it's fully integrated across the asset management, the custody and the execution as well as the financing and the derivatives. That's a big advantage for us in terms of the diligence. I'll give you one funny anecdote. So we actually know the diligence team at MassMutual pretty well. We manage assets for them in other contexts as well. And it's a large, serious team. And in the process of the diligence around the Bitcoin allocation, we scheduled a two-hour session and there were something like eight of us on the call. And we log into the Zoom and it's one gentleman and it's someone we've known before, but it's kind of like, where are the other 19 people? And he says, 'Oh, no, no, no. This is just my two-hour session.' And he wasn't kidding. He had two hours of questions lined up and we had to go person by person. And so I think that just gives you a sense of the kind of investor and the kind of diligence that we're going through. You know, I have a little boy in kindergarten. We're starting to do like, what do mommy and daddy do for a living? And it's like, well, son, daddy responds to diligence requests for a living. He doesn't get it, but I think it's funny. And you know, so the second dynamic that I think that the MassMutual experience is really telling of is really about the macro backdrop and the allocations. You know, Ross gave you the bamboo analogy yesterday. You know, first 10 quarters at least of NYDIG's existence, we were proactively out in the market selling the idea of an allocation to Bitcoin in the portfolio with, you know, rounds to zero success. Like, I'm not afraid to say it. At this point in the market, including, you know, we've been talking to MassMutual about Bitcoin for at least three years from Ross to the CEO, at this point in the market we are no longer selling the idea of an allocation to Bitcoin. The macro backdrop, the great work that you and Michael and the rest of the team are doing, that's selling it for us at this point. What we're doing is helping people who have decided to allocate to Bitcoin with what is the right way for them to do it. And you know, if you think about that 160-year history of MassMutual, this is really the first time based on the rate environment where if they look forward from where they are today, they see for the first time the merest hint of a possibility that they might not be able to make good on obligations to their policyholders. And you know, this is an incredible team that takes that responsibility incredibly seriously. They just can't not do anything about it. And the dynamics of a life and annuity company are they have to price their products with the forward yield that they see in the market today. Like, they can't not do that. Other investors, they have a little bit more latitude of how backward-looking they can be. But from our perspective, given the rate environment, low, no, negative yields, it's a when, not an if, that every long-term allocator is going to have to be looking at this. And the final dynamic, as you and I have spent a lot of time talking about, is simply buying and storing Bitcoin in custody may not achieve the accounting outcome that certain kinds of investors are looking for. So you guys have opted to take the general intangible treatment on your balance sheet. That doesn't always work for the investors that we work with. So a big part of our practice is actually structuring bespoke solutions for each investor. We spend time understanding what their needs are. We listen and we create a solution. And that's what we did for MassMutual and that's what we do for more and more of our investors as they come into the space. And I think it's really those three dynamics that are what we're seeing in the market today: the necessity of an allocation, the intensity of the diligence by this kind of investor, and the opportunity to structure solutions around the investment to achieve the accounting or other goals that an investor might have.

Yeah, I mean, for us, we tend to see investors going through a four-part journey. So the first part is the investment decision and the investment process. And again, you know, we've been talking to MassMutual about Bitcoin, you know, mostly to no success for over three years. And it was really the collapsing of rates that changed what they're looking at. This again, this is a team and an institution that has made good on obligations to policyholders for well over a hundred years and you know, be damned if this team is the ones that aren't going to do that. And so I have to give them an immense amount of credit for the forward-thinkingness and the thoughtfulness with which they're approaching how to create their general account so that they continue to make good. I mean, I don't want to claim that Bitcoin is some magic bullet. You just put the whole thing in Bitcoin and your problem is solved, but it's clearly a part of the solution and they've understood and acknowledged that. And I would expect to see, you know, rounds to every investor that has the same kind of horizon and liability challenge that MassMutual does making an allocation, you know, in the coming years.

Yeah, I mean, I would say the best thing about our business is we're wrapper agnostic. That's the beauty of the fully integrated full-stack solution. If the right answer for our client is an asset management product, whether that's a co-mingled fund, whether that's a separately managed account, whether that's a bespoke structured investment vehicle, or whether the right answer for them is direct ownership of the Bitcoin on the blockchain because they want to trade the position actively or because that's the right accounting answer for them, or they want to use financing, whether the right answer is for the Bitcoin to be collateral in a repurchase agreement, whether the right answer is for the Bitcoin to be collateral in a bilateral derivatives arrangement — all of that is on the table for what we do. And you know, I'd say our approach is there is no one-size-fits-all. And different organizations have different goals. For some organizations, the general intangible treatment may actually be what they want, the in some ways lack of volatility of the position on the balance sheet. For other organizations, they really do want the mark-to-market treatment. And depending on the industry they're in, the standards they set, sort of all of the different facts and circumstances, we're able to listen to that and structure a solution accordingly.