The Evolution of Digital Asset Infrastructure with Mike Belshe of BitGo

Thank you. Good to be here.

Yeah, look, we build all of these things and we do offer the service in different ways and it turns out that different financial institutions want to come in at different levels. Sometimes they're like, great, BitGo, you're going to get us in all of the US. Oh, by the way, I also have needs in Europe. They can do that there as well through BitGo. So, they want that custody component. Others are still thinking like, you know what, I like this model that BitGo uses for self custody. We want to bring that in-house and we're going to use that. Then they have to build more of the plumbing up top because the financial services are all kind of built on custody, but they have that option. But we now have this latest service, which is what we've been doing for the last couple years. We call it crypto as a service. And it's like software as a service but subtly different. When you have software as a service and everybody's familiar with that term of course, there you're buying some web APIs, some service APIs, maybe some software that you download. Sometimes it could even be hardware. This is software as a service models but it's all pure technology. In this case it's money, right? So money is regulated heavily across the globe and in many areas in order to operate the custody you need licenses. Oh, in order to trade you need licenses. Oh, in order to stake you need licenses. Oh, you want to borrow and lend, you need licenses. So, BitGo's acquired those and through our crypto as a service, you can create all through APIs accounts all the way into the most regulated component of BitGo from the foundation up and then service all of these activities. So, one of our clients is Fold. They're a publicly traded company. They do a Bitcoin app and a number of services on top of it. They very much want the market structure and capabilities that BitGo has at the lowest level, but they don't want to go get all those licenses. So, they ride on top of what we do. Now, they've got an AML KYC policy of their own, and they run through that as the first layer of support, and then it also comes through BitGo. We're on the hook for transaction monitoring. But here's the real glory. The glory is that every one of their clients gets a fiduciary protected segregated bankruptcy remote account inside a BitGo Trust Company. They are a first class client. Now, their service through our client like in this example, Fold, but they actually have a fully protected account, which means that if anything ever happened to Fold, and it's not going to, I'm not trying to say that, but they would be able to come to BitGo. So this is exactly what the FTX clients wish they had but of course did not have and it's actually I think the right way to build market structure. So one of the big criticisms that traditional finance has coming into crypto right now is like wait a minute we don't see a market structure here. It's not regulated or legislated like how do we manage this? BitGo's been building that just out of kind of necessity from day one. So we think every single user whether it's retail or institutional deserves to have that fiduciary protected bankruptcy remote segregated account. And then people can build service on top of it and it's hard. So anyway how do I think about how we potentially compete with our clients by offering the service in addition to providing the infrastructure. Our first and foremost would be we would love to do the infrastructure, the institutional access. They've got large pools of retail clients. They take that to market. We do the heavy lifting on the digital assets and crypto and because it's money it requires both regulatory as well as software technology components.

Well, look, we're a financial services company that provides infrastructure and direct access. So we pioneer on the innovative side of building this full stack of direct access and we move very quickly. So compared to traditional financial firms, we will adopt and take on more assets. We'll take on more features and functionality. We do staking, we do prime brokers, we do all these things quickly. And the traditional firms are going to move a little slower. They're just getting started now. But I'll give you an example. And I, you know, Fidelity does not get nearly enough credit for what they've done for the space. Everybody talks about BlackRock and their ETF, which is also great. I'm not trying to deny that. But Fidelity got in 2016, very early, recognized that they wanted to have product, be able to take custody of Bitcoin, offer that to their clients, and they did. And that was Bitcoin was what they got started with. From 2016 when they started until about 2020 they went from holding Bitcoin to now holding Bitcoin plus Ether. Now of course BitGo in that time period went from I don't know some number of tokens to thousands of tokens. And we added all kinds of services. The traditional firms need to move slower. They need the markets to grow. They need to do risk mitigated. They need regulators that are on board. There's a whole bunch of reasons why Fidelity couldn't move faster. But then now we've got a regulatory environment where staking is something that you can do. Remember just last year people thought oh that might be a security you can't do it. Now the SEC is like no that's not a security you can do that. So all of these companies want to provide those products. BitGo is doing all the innovation all the heavy lifting making all the scale work and when traditional finance comes along and needs it they can come and they can use BitGo. And we're going to have whatever asset they need. We're going to have the custody components wherever they need it, whether that's the US or abroad, we're going to have the financial services components that they need and they'll be able to build on us. So really, I think the only question that remains is how fast are these two things going to move? Will BitGo move faster and gain market share basically away from those large players before they get into the space or will they come in, adopt and then grow as the innovation grows quickly enough? And this is where, you know, I think I mentioned Innovator's Dilemma a fair amount. You've read that book, I assume.

Absolutely.

Well, look, we've been building it over a long time. I'd like to point out that the foundation of traditional finance, if you want to call that custody, it's been building for 100 plus years. State Street, JPM, and BNY, they're all 100 years old. So, look, we're one of the I guess elder companies in the space. We're at 13, and it takes a long time to build this, but we have a great team. Look, we've brought people in from traditional finance to make sure that we can speak the language that regulators need, potential clients need. This is true. Jod, our COO, she's great. She comes out of Citi. Jeff Horowitz, our chief compliance officer, comes out of BNY. They have helped tremendously. And then of course in our go to markets, there's a whole bunch of people that do a really great job. Overall, I think we just been building it for a long time and we've been building it actually I think on Bitcoin ethos. Deserves a lot of credit. So I'm not a Bitcoin maximalist, but you know, Bitcoin is still my favorite of all the digital assets. I like innovation. I think that, you know, Ethereum brings us smart contracts and programmable money. Solana brings us a little bit more scale. Canton brings us some privacy. Each of these are innovations that allow new things to unlock. Stable coins, another example. But, BitGo has always held to this principle of like you want transparency, you want to be able to remove middlemen as much as possible. You want to put everybody on an equal playing field. And so we've been building market structure towards that. And as the industry has grown, we've made sure that we grow our regulatory capability that preserves those principles. So, you know, we talked a little bit about crypto as a service and, you know, our clients can create accounts inside of BitGo and bankers and all that kind of stuff. Fiduciary protected. Look, not every industry has fiduciary protection for their clients. You know, most people think and I've even said wrongly in the past that the banks are a fiduciary to the clients. Not really. Actually they're not a fiduciary to their depositors. They take their money and they don't have to take them in good stead. But look, your broker, you know, is usually a fiduciary for you. Your RIAs are fiduciaries for you. This is your money. I think you should have a fiduciary protecting you. And so, when you just go down the natural course, when you start with those principles, you'll end up building this thing, right? So, back to answering your question about, you know, on the regulatory side, it's not fun to have seven custodians around the planet, but we did it because that's the way you protect the money. Now, once you've done that, it turns out you've kind of, you know, I don't know, perfected maybe is the wrong word, but you've learned a lot about what different types of regulators need and expect. And of course, you know that they've all got a target on your back, especially, you know, a couple years ago where, you know, we were in a different political time. So, it turns out that all of that works. So, we just upgraded from our state charter trust to an OCC national bank. And I think it might be the first of its kind. You know, most people don't know this, but when you go to create an OCC national bank or convert one, you go through first a set of examinations and procedures and vetting of what you do. And then they usually give you a list of conditions and they say meet all these conditions and then we'll convert you. In our case, they converted us right away. And I think that might have been the first one that happened. Why was that possible? Well, all of the work that we had been doing because we were setting a higher bar because we knew that, you know, the world is out to get crypto to some degree. And we do it in so many different places. We were already meeting the bar. That doesn't mean that there isn't more to be done like security and regulation like you constantly evolve and do even more. But we're already operating and running. Even though on the day that we were approved, several other banks were approved. I think we're the only one that's actually already converted of them. The others still have conditions.

And then lastly, running a public company. Look, we volunteered to run a public company because we think it gives you transparency to your clients. And you know, the SEC process is expensive. I applaud Paul Atkins trying to make it better and cheaper so that we can have more public companies that are, you know, have a good spotlight on them. But we wanted our clients to know, take a look at us, see our financials, see how we're doing. I know some of our competitors, you know, they're still losing money. Look, we had to figure this out. We've seen the ups and downs of Bitcoin. We've been through four cycles, and nobody's perfect, and I wouldn't say we are either, but there's been a lot of learning out of that, which has graduated us to, I think, a higher bar. And we want people to see that.

I hate to say it's political, but I mean a little bit it is. You know, look, I don't want to be political. I've had to be a little bit over the last couple of years. Our clients actually want us to go and fight to get a good legislated and regulated path forward for all of what we do. And previously we had an administration that was just trying to shoot it all down. I think that was unfair. I think it was unjust. I think it was unnecessary. And so look, we did fight to kind of push that. If you're not at the federal level, then you're regulated state level, which is where we've been. We had two state charters. We had one in South Dakota. By the way, South Dakota, people ask why. And it's like, well, South Dakota is more or less the just like Delaware is where everybody incorporates their companies, South Dakota's got the best tax law, the best privacy law. So it's got more trust companies than any other state that's not related to crypto. We also had New York because New York considers itself special and created this thing called the bit license. Which required us to get a whole separate trust company. By being a federal charter, there's still a lot of churn at the state level which we get to avoid. So it just takes out all questions. Even though we had the ability to operate in all 50 states, you know, when your clients have to go look at 50 states to see if you can do all the things that you're doing in each of those 50 states, it's painful. Going to the federal level is better. By the way, the federal regulator, the OCC staff is really head and shoulders better than any of the states. I mean, they're much better funded. So, to some degree, it shouldn't be a surprise, but you know, when you apply with them, they ask you an exhaustive set of questions, and then they come back with very thoughtful questions, very pointed like at like, 'Wait a minute, what are you doing right here?' They know how to home in on risk very, very specifically, and I think they're just a better regulator. So, anyway, it takes away the question. It's federally regulated. Now there's another thing which comes which is digital assets and banking are intersecting as a result of stable coins. Of course we need to move this forward. Now we offer a stable coin as a service. We just announced last week I think it was last week the week before that we're helping SoFi with their stable coin that they're taking to market. They're a public company right? They're a top 50 bank here in the United States. So this is a big deal for everybody in our space. They want us to be federally regulated. So this helps us with clients, takes away all those questions and ultimately should be good for everybody that uses BitGo as well.

Accounts, yes. Access to the Fed. Look, I do think banking is going to change and being part of the Fed system I think is going to be a requirement for stable coins at some point so anyway we are applying for that already. This is an area that needs a little bit more work from the regulator side. I wouldn't say in any bad way I think they're open to trying to figure this all out but we did see that Kraken just got connected on a Fed master account. So, I think the door is open and I think that'll be happening. It's going to make us just much stronger. By the way, I personally think that banking, you know, there's a big debate about stable coins and interest right now. And by the way, the interesting thing there is that Genius Act, which was passed last year, said no interest on stable coins. And it left a loophole that you can do this reward system, which Coinbase uses a lot. Okay. So now this year we've got Clarity Act about market structure and we very much need market structure. I think it's really, really important. It's not really related to stable coins.

Look, the number one thing that these banks could do to help themselves would be to pass Clarity regardless of the interest. I think they're really making a fundamental mistake. Look, all the asset managers from, you know, Larry Fink at BlackRock to Abby Johnson at Fidelity to Jonathan Steinberg at WisdomTree. I mean, down, we got Morgan Stanley coming in this week. All of them are going super heavy digital. If you have clarity, all of the banks can jump in to digital assets. They won't have to worry about regulator smackdown. If they don't get clarity, they will be prevented from entering this space. Now, it's not going to block BitGo like we're already in the space. We're already regulated, not just in the US, but seven different places around the world. So, we're going to be fine whether clarity has passed or not. And we will continue to grow in the space that every single one of the major asset managers says is the next thing to happen. Why would the banks, why would anyone lock themselves out of that possibility? So, I think there's a real opportunity for everybody to get clarity and we get it all done and we can all move forward together. And yeah, we'll have to compete to win. I mean, nobody should be afraid of competing on business. That's the job.