I think the really powerful thing about open finance, maybe new finance, is that there are massive returns to scale. It's a new description for what we're talking about, which is the convergence of financial technology, financial institutions, and decentralized technology.
What makes this different from that past regime? And why do you think this is a more sturdy and bulletproof thesis now than it was a few years ago?
What is the Neo finance thesis here? What is the new finance thesis in a nutshell, away from just the terminology?
Welcome back to The Rollup. I'm Robbie.
I'm Andy. Rob and I met at the University of Florida in 2017 where we first found out about digital assets.
We learned a lot along the way and we're bringing you face to face with the leaders of our industry.
Sit back, relax, and enjoy today's episode. Gentlemen, good to see you.
Happy New Year, Vance. Good to see you.
Welcome back, guys. 11 a.m. here in Hawaii. Yeah, I'm on it. Let me do my off. You on island time a bit. Yeah, I mean, I've been on a mental, physical, spiritual growth phase. Less on the business, less on the markets. So, that's been healthy.
Wow. What have you learned?
I've been reading this book, Book of Zen, and I've learned that fullness and emptiness are the same, and that the difference between a man and a Buddha is that one realizes that there is no difference. It's deep, man. It's deep. This is sober. This is sober, too. This is not like...
I was about to say, how many months?
Well, boys, happy new year. Rob and I started off talking about this neo finance category. We want to bring it to you guys, get your take. Obviously, you guys have probably invested upwards of $10, $20, $30, $40 million into this sector and have some of your largest positions in the sector. Upwards of $500 million. I mean, I think you have nine figures exposed to neo finance.
Nine figures? What are you talking about? Your size is not size. All right. So, Galaxy Digital... Yeah. We are the ones who didn't create the term, but I'd say we're the ones that popularized the term DeFi. I think it's also fair to say that it's probably time to shut that one down. I think it's been a good moniker for everything that's going on. The reason why when you floated this to us, and we've been trying to think of different names for describing what we do, we're at the convergence of fintech and decentralized finance. DeFi doesn't hold that meaning anymore. And so Neo, I think as being something new, but it's a new description for what we're talking about, which is the convergence of financial technology, financial institutions, and decentralized technology. So I like it. Yeah, it's a good term.
So Vance, you put out this tweet, right? Persistent buybacks, maximum financial discipline by protocol, stablecoins, RWAs, lending, capital markets, doing less, doing better, walking the regulated path. Mike, as you're saying, it's this convergence between the entire financial system, legacy finance, not tradFi, we don't call it tradFi, it's legacy finance and DeFi or fintech and DeFi. The Galaxy Digital CEO Mike Novogratz pushed that there's this shift happening to business-driven tokens away from narrative-driven tokens, measurable value and profits, wallets and exchanges evolving into these neobank-like platforms. We have this new superset of fintech with consumer frontends, DeFi backends, business-driven tokens. We expect an institutional bid on these DeFi blue chips that have this sensible value accrual. So, just throwing things your way. Andy, one more thing I think is important to mention here and it goes back to what Michael said about how DeFi is no longer the moniker that applies to a lot of the emerging technology and apps that we think are going to do extremely well because it's no longer decentralized for decentralization's sake, which is what I think a lot of teams raised on when they got into crypto and that is no longer going to get them the dollars that they're looking to raise. So I think what Neo finance is doing is it's taking a more pragmatic approach. It's saying decentralization works when you use it the right way, but really what consumers want is a forgot password button. They may never get sold on self-custody. And so DeFi is this old term and it's time to grow up and it's time to realize that if we want mass adoption with all the handwavy things that entails, there's a new way of building and there's a new way of thinking about crypto in this modern era.
I think instead of calling it Neo finance, the full term just like decentralized finance is, I think you got to call it NewFi. NewFi, that's really what it is. NeoFi? NeoFi I think is a little wordy. NewFi in terms of the shorthand I think is a much better description. And you could even write it out as NewFi. But I think having it described as NewFi is really probably the best description. Robbie, going back to what you're talking about, which is it's not decentralization for decentralization's sake. Users don't want to self-custody in a lot of ways. They want to entrust in security and a third party to manage it. They just don't want the people who they're entrusting to do bad things with it or do things that they don't know is happening. And I think describing this as NewFi is kind of like calling Web1 to Web2, Web2 to Web3. Like it is an innovation. It's an improvement on what we're doing. And it's like a step two for finance. And I think that that's really what decentralized technology applied to financial technology will bring, which is a step change in terms of all the different applications and what you're able to do with it.
Yeah. I also think people have co-opted the DeFi term for bad purposes. Like always saying 'DeFi will win, dude.' They delist the third largest stablecoin. They have this committee to list you and if you tweet badly about them, they won't up your supply caps. There are things that are DeFi and things that are not DeFi. And these bad actors have blurred that line. I think the whole term is cooked and we either need to refound it and actually call things decentralized that are decentralized. Otherwise, it's just going to be co-opted as a lame marketing term. So I'm not even sure what to call what we're currently doing. But when Sky has $10 billion of money, we should probably figure out what we're actually going to call this category. And you can call these things capital market stablecoin or decentralized stablecoins or whatever you want. But I think the really powerful thing about open finance, maybe new finance, is that there are massive returns to scale. And that's probably the key point that a lot of people don't understand. You see these things, they look like rinky-dink toys at this current scale, but what happens when Sky has $50 billion, what happens when Sky has $100 billion of actual assets under management? The massive returns to scale and the democratization of being able to govern that is truly what I think the quote-unquote DeFi opportunity is or was. But a lot of people in crypto and DeFi and decentralization theater just got too high on their own supply and built things that either people didn't want to use or didn't have the massive returns to scale that characterize why crypto is powerful. So I'm with Michael in terms of we got to figure out something else to call this, but neo finance, new finance, open finance, all good candidates. I'm personally hopeful that we can resurrect DeFi and have it actually mean something.
Yeah. So moving away from the specific nomenclature here, thinking about the thesis at large, obviously you guys have spent a long time thinking about this and allocating towards it. So what is the thesis in a nutshell for this category? You guys are obviously bulls on Sky, on Syrup, and on the likes. There's this category that is bridging institutions on chain. They've got a very clear product-market fit, they have tons of capital, and they're doing things in a different way than just DeFi. Michael, Vance, what is the NeoFi thesis here? What is the new finance thesis in a nutshell, away from just the terminology?
What I would say is that it has very little to do with decentralization. I think decentralization is a means to an end. You can think about it this way. Money transmitter laws are a hugely influential and consequential piece of legislation within the US and it basically adjudicates who can and cannot move money around. Vitalik comes around, builds a decentralized blockchain with smart contract functionality, and it just makes that concept irrelevant. And so I think there's some of that in terms of what we're trying to do with DeFi here. And really, if you think about a decentralized stablecoin, it's not decentralization theater in terms of the cypherpunk vision. It's decentralization in terms of risk management, in terms of transparency, in terms of people being able to understand what yield they will get on what cadence and in what format. And I think that's probably the best of DeFi. But when you think about what we are specifically bullish on in this category, it's that stablecoins and asset management, Sky and Syrup respectively, and I would also say Spark, have this very narrow path but a path to connect to tradFi. And the language that tradFi speaks is inflows and AUM and ROI, and that is exactly what Syrup and Spark both offer this landscape. And so that's why I like NewFi or NeoFi. But really, if you combine the massive returns to scale of a decentralized system with the ability to connect to tradFi, that is the opportunity here. And that doesn't really cut across to things like derivatives because that's so heavily regulated on one side and completely unregulated on the other, and even spot trading as well. So I think the actual opportunity is specific to stablecoins, asset management, and lending. And that's really what we're bullish on: massive returns to scale, being able to connect to Wall Street to accelerate that flywheel.
And maybe just to add a little bit, using the same analogy, we were actually asked this question at a panel a couple days ago. Using the money transmitter example, I'd say that movement of money, payments, is kind of like what that category is. And you used to have money transmitter laws for two reasons. One, because you had to entrust customer funds in a centralized black box entity, like I'm going to give this payment processor all of my money and hope that they move it by when I tell them to move it. There were also people who ran off with that money, which is why the laws exist. But the other element is KYC. You have to know that you're sending the money to someone who isn't a sanctioned terrorist. And when we think about what an Ethereum network enabled, it enabled you to not need the money transmitter laws for one reason, which is you don't have to put trust in a centralized entity to move money around. And that being said, you still have to have rules. There are still rules around you can't send money to North Korea because that's against the law in the United States. But if you use stablecoins as an example, you look at stablecoin volume transactions and it's gone from basically zero five years ago to Visa today. And that scale is unprecedented in basically any other financial market or growth sector for financial technology. That is a zero to hero movement in record time at venture scale outcome, similar to what we're seeing in AI these days. It is that level of unprecedented growth. Now that's Ethereum and that's stablecoins. If you were to apply that same process and logic to every single other category of financial institution, whether it's lending, trading, banking, insurance, all of those categories will experience similar trajectories of growth if you bring about decentralized technology because it will provide a global scale and finance truly moving at the speed of software that we haven't seen before. Where I would say things got misaligned or out of whack was the expectation that we have to be fully decentralized to do it. And it's actually not the case. You still need laws. You still need institutions, just like you still need KYC for payments and stablecoins. But if you have one element that allows for the speed and the government regulators to agree with you and see the value in this, they're going to come around recognizing this as a huge boon for the financial services industry. Just in the same way that they passed GENIUS and that we're excited about stablecoins, you got the Treasury Department saying we're going to 10x in five years. That is the best analogy for what the potential is. And so we're just at the start. We've done payments and we've done stablecoins. What about every other category of finance?
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And we're seeing it happen. And I think this is the reason why we're seeing a lot of the institutions that are starting to take, at first it was they put their toe in the water and now they're ready to dive deep. And they're doing so with tokenization because that feels like the unlock that brings a lot of their services on chain and ultimately allows them to then process their financial stack at the type of software scale Michael mentioned. I'm, and we've thought a lot about this over the last few weeks as we started to recognize more and more and we saw the juxtaposition that was happening in the institutional world, the legacy financial world, and their break point into this space. So, I've been trying to think about what are the potential holes in this thesis and one of the ones I keep coming back to is the 2020-2021 CeFi offshoot where we had the Celsius, BlockFi liquidity contagions and we had centralized frontends and decentralized backends and they were serving DeFi yields to regular consumers and it feels similar to what we're talking about but I think there's a fundamental difference and it's essentially that the yields are sustainable. So I'm just curious if you guys have also thought about this. What makes this different from that past regime and why do you think this is a more sturdy and bulletproof thesis now than it was a few years ago?
Well, first and foremost, every single founder of those companies that you just mentioned are in jail right now.
So that's one. Let's call a spade a spade. Fraud was going on during that period of time. And I think broadly what we now have and what we're excited about, Spark, Sky, Syrup, they're all doing amazing things on chain. The stuff that we've invested in and announced recently, whether it's the Daylight product where you're doing energy and basically a decentralized utility that generates yield on chain from solar and storage on residences throughout the United States, or you're talking about USDA which is enabling GPU-backed lending as a new business model that brings yield that isn't endogenous to the crypto industry. It's not we're just trading back and forth with each other or giving you these tokens that have an asymptote to zero over time. We're talking about bringing real business models, real business activity that's happening off chain on chain, and that's where the yield comes from. That's a fundamentally different perspective.
We had Re Protocol on yesterday talking about the reinsurance market. Another really good neo finance example there. Another Framework portfolio company.
They just keep coming on the show. What the hell, man? So, that is actually so this idea of, and Rob gave me this thesis like, dude, I'm actually pro-centralization. And I sat on this for like two weeks and I was like, dude, we cannot come out and be publicly saying that we're pro-centralization when we're running a crypto podcast. And then now that we think about it more and more, the regime that we're in is actually enabling that, right? And so this is a good segue into this market structure bill voting next week and into the midterms and all of this where we built a lot of these systems based on regulatory arbitrage for the previous regimes that we were in. Obviously this new one is much more friendly towards crypto regulation and innovation as a whole. We've got this market structure markup bill vote happening next week. Also midterms at the end of the year. How do you guys see the evolution of this general category and the space at large as it pertains to the market structure bill? What are the pros and cons of that and GENIUS as it relates to neo finance? And then coming into midterms and even thinking further out to the next election cycle, how do you guys kind of position around this centralized frontends, decentralized backends or this general shift towards this newer approach? How do you see it changing? How do you see it evolving here?
I think there's going to be numerous regulatory pathways for people to be non-securities and also deal in new financial products like tokenized stocks or tokenized bonds. Be it clarity, be it the SEC innovation hub, be it other avenues. So I think there's going to be a variety of avenues. I think the cost of compliance is going to be meaningful, or frankly the ability of a space to get into an SEC innovation hub or other kind of sandbox type environment. So, it won't be for everyone. There's also going to be a difference between people who have already launched a token or a product and are probably thinking about establishing a US branch, kind of like a US entity, versus people who are more evergreen entrepreneurs starting out and wanting to do things at small scale. I think there's going to be a question as to at the end of the day what does being a non-security get you on top of all the hurdles to get there. And if you are deemed a security, what happens? And I'm assuming that a lot of the current tokens on Coinbase will probably be deemed securities at one point or another. And I think what their strategy is, frankly, is to have a broker-dealer license and be able to trade those things right next to coins. But it's a shitty outcome because if you are a public security but you're listed on not the NYSE or NASDAQ but the Coinbase alternative broker-dealer, that's a pretty tough position from a liquidity perspective. So, I think there's going to be some tough times for some tokens, but for the other tokens, they will generally be held to a very high standard of decentralization and education as to what they do, and they will either graduate from the SEC program or they will be non-securities on day one of the Clarity Act. For everyone else in the middle, there's going to be a lot of work to do. And for a lot of entrepreneurs, I think they're going to see the path of just being a normal private company may actually be for them. Once everything is laid out in front of them, it's going to be easy to tell versus today where it's this nebulous journey which seemed to be very valuable because you can launch a token, but there's no actual regulatory hurdle. So, point being is that there's going to be winners and losers and it's going to be a pretty winding path and it won't all happen overnight, but it will be good for the space. The worst thing that can happen is that we're still stuck in this no man's land where nobody can buy what we're selling because nobody knows what it is.
Are those products that they're going outside of crypto, so they're avoiding that endogenous risk that the CeFi world was susceptible to a few years ago, and they're bringing real business and revenue into crypto and they're serving it as yield, maybe in a yield-bearing stablecoin, a yield coin. Are you suggesting that the best path for them is to start getting ahead of the eight ball and exploring securities laws and probably launch as a security?
Matters when it comes to like newi if that's what we're calling it is really going to be about participation and conversation with the SEC via the innovation hub. That's where the nuance and the real rule making that's more important, you know, than what is decentralized, what is not. That's where that's going to take place.
I think that's broadly right. A lot of these programs will also require you to rep that you are a non-security, and that is like a... and I think that's being set probably by the Democrats with the sense that like if you're going to go for this, you actually have to replically that you are not a security, and so you can't be doing like some fugazi decentralization for no reason. It ups the stakes for protocols for sure. But once again, it's like what is you and what is repping? Like you is not like the product that you're building, the yield coin that you're building. It could be, but you could use the exemption for that. And that says that you are a security, but your securities offering doesn't have to go through the exemption process.
It probably doesn't mean like the governance token. That one is the one that you're repping and saying, 'Hey, that's not a security.'
Yeah. Well, that kind of brings us to another good point. We had Jordy Alexander on earlier and he's talking about, you know, like the whole model of buybacks and how he's more of a fan of actually doing buybacks in a way that is, let's just say, more game theoretically apt rather than just aping every day programmatically hyperliquid style, which forces retail to be buying in at highs where, you know, because there's always this buyback and yada yada. He has a very fund manager approach to this, and we got into kind of like the token equity dilemma which we're kind of orbiting around here right now. And so I guess the point and the question is, is this new kind of like NEO finance category tokens, are they going to be able to create a more unified approach to what your claims on ownership are? What really you are owning? Like how do you guys see the evolution of the token infrastructure standards evolving this year in this category? I think these teams will probably be leading this because they have real flows, because they have revenues. How do you guys see this token equity dynamic evolving as it relates to kind of what we're talking about here?
