Crypto is Making TradFi Markets Better! | Mike Belshe

I think everyone in the crypto space deserves credit. We pushed the US stock market to figure out how to go 24/7. That is crypto. Crypto deserves full credit for this. It would not have happened if we had not had Bitcoin. Obviously, the US stock markets are not 24/7 yet. They will move in some waves. It'll probably be a little bit disappointing, but it's coming. And of course, this makes sense.

Good to see you again, Tony. How are you?

Well, thanks Tony. Yeah, on January 22nd we did, we entered into the public markets. We did the traditional IPO route, which takes about a year, so it's a lot of work in the making. So look, it's a proud moment. I think the entire company deserves credit as much as I do for persistence and continuing through it. Obviously I can't talk about things on the go forward but the reason we did go public was actually pretty simple. Look, we've been working with the world's largest institutions for a while. We're an infrastructure provider. You can buy and work with BitGo at the self-custody layer, just at the wallet layer. You can work at the custody layer. You can work on the financial service layer. The companies on Wall Street are predominantly public companies themselves. And it's so much easier for them to interface to another company that's public already. Because you've got this spotlight and for all of its faults, the SEC spotlight is a heavy one. And it means that we have signed up for all of the financial disclosures, all of the risk disclosures that another public company can need. So, we think this is very good for us. We think it allows us to work closer with those firms. And also, we're now OCC chartered, that's a national bank. So for our custody, it's been moved up to the highest level of regulation to get here in the United States. So, you put those two things together along with the SOC audits and everything else that goes behind it. And we're really just continuing on the mission of making sure that people know exactly who we are so they can count on us.

For sure. Look, this takes a long time. I think one thing if I want to say there's a difference between this and web 1.0. With web 1.0, we had this proliferation of applications and business models that all came out at once and there wasn't anything holding it back. There was no regulatory concern. Now, of course, in the crypto space, there is and there's a lot of difference between how different folks are regulated. Now, regulation by itself doesn't make a great product, doesn't make a business, doesn't mean that people want to buy it. What makes it so they want to buy it, of course, is the product's got to be good. It's got to add value, things like that. So, we've got all of the burdens that you would have in any business, but on top of it, it's money. And when it comes to money, we do regulate it differently. So, it takes a long time. Deployments take longer, confidence takes longer. And then, look, I hope that we are as a nation turning a corner in terms of being able to figure out how to embrace innovation in a way that's responsible rather than just completely thwarting it. So one answer to innovation that's new that you're not sure quite how to manage the risk of is just stop it. Just say, 'Hey, we're not going to have it.' And then the problem with that is your economy falls behind the competitors around the globe that will do it. And with digital assets in particular, they've finally unlocked a problem which had never been solved before, which is global access. So all of a sudden, we have digital assets that are usable everywhere around the planet. Previously with our monetary system, we'd taken a path of isolationism, right? We'd said, 'What we're going to do is we're going to stand up these banks as basically the bouncers to US money.' And then if you're not one of those guys or not already in the system, then you just can't participate. With digital assets, there's no bouncers. It goes everywhere. Everyone can create this. Everyone can move this. And look, this is coming. It's needed. We have a global economy. Of course, we need a global financial system. So, I would say that the compare and contrast between today and 20 years ago is mainly this. When it comes to money, it matters a lot more. We do not want people to get scammed out of their money. We do not want money to be used for illegal goods. So, it's harder. It's a little slower, slower than I thought it would be. We're 13 years in on this at BitGo. There's definitely 13 more years to go. But yeah, everything moves a little bit slower when it comes to money.

Everything's going to be digital. Like you don't have to just take my word for it. I mean of course you're hearing about it almost every day. We got Morgan Stanley making huge efforts that are very public about that. Citibank making huge efforts are public about it. BlackRock's already in. Fidelity is already in. WisdomTree is already in. So I mean just down the line like all of these parties are moving in. Why? The digitization makes the products programmable and it makes it so that you can be way more liquid. So look, I think everyone in the crypto space deserves credit. We pushed the US stock market to figure out how to go 24/7. That is crypto. Crypto deserves full credit for this. It would not have happened if we had not had Bitcoin. So obviously the US stock markets are not 24/7 yet. They will move in some waves. It'll probably be a little bit disappointing, but it's coming. And of course this makes sense. Like the markets around the world, imagine if you live completely on the opposite side of the world in Dubai, you know, and basically the markets are closed when you're awake every day, it's difficult to participate in that. And remember, also the US, everyone should know capital markets in the US are 50% of all capital markets in the world. There's nobody even close to having the US capital markets. So the idea that the US markets are closed during the waking hours for most people around the globe, imagine how much growth we're going to see when that's no longer true. So yes, everything's going digital now. You can program it. Now you can access it everywhere. Now you can fractionalize things and that gives you more liquidity. So of course everything's going to be digital.

Absolutely. Look, so there's a bunch of different ways forward. We just did the work with Figure going public on the blockchain I think in February. And there's a few different approaches. So you've had already the special purpose vehicles, SPV, single asset products where they create these wrappers and these are securities so they can't trade them inside the US and then they give access to non-US people. You can buy those today, I think, through Kraken, through Gemini, probably even Coinbase. I'm not sure, but they're okay products, but they don't trade in the US. And the US, like I just said, is absolutely capital markets. So, it's good, but not great. There's also, I think, a lot of parties that are just really excited to digitize private companies. You know, obviously SpaceX, OpenAI, very exciting companies. A lot of people want to have access to it. Why are people trying to digitize it so badly? Well, because if you can be the first person to build that market, you can basically charge, you know, 200 basis points to everybody to access it, rate it, which I think is exactly the wrong reason why you should be digitizing. Digitizing is about open networks. It's about reducing costs, eliminating middlemen in my opinion. But there's always a lot of people doing different types of business. Then, so now the Figure product, they're completely on chain. The downside of that one is that you actually have to issue the shares directly from the issuer on chain. And that takes work. However, it's going to build better markets. You know, having seen kind of what it looks like when you go through this IPO process, you realize what a game this thing is. You know, we're all familiar with the IPO pop. Everybody wants to get in on an IPO pop. Then you know when a company does go public for the first 6 months there's this lockout period. So all you've got is whatever the flow of shares that were sold kind of in that beginning period. So that means you got a small market. Hedge funds love to bat this back and forth and like, you know, manipulate markets. They do this all the time. It's been studied. There's lots of research about it. And then finally, you've got the unlock that happens where a bunch of people, the majority of the shares suddenly become available to sell. And so what happens? Well, shorting happens. Again, going back to Cagney, you know, he went public late last year, sorry, fall last year. And then he posted that he had 50 plus percent short interest in his stock just before their unlocking. All right. We can do much better. We can build blockchain based markets which are going to take all this on chain. It's going to make it so that you can see exactly what's going on. Shorting's going to continue to happen. You know, shorting is a natural part of any market. I'm not complaining about that part. What I'm complaining about is the processes that we're using are designed for playing games for 6 months on the financial markets. It's a casino. It's the SEC sanctioned casino. And we can do better.

all right, I didn't answer your final question. So, the other part you asked about was whether the traditional financial firms are looking to tokenize equities. Yes, there's a whole bunch of different models and I can't talk about them because we haven't announced them. Some of them you've probably heard of. And we do look forward to participating on those. Yes.

Maybe. Look, the SEC has rules about who's allowed to have access to the equities and how they can be traded and which participants. That actually is going to take regulatory and legislative change. There's nothing you can do about that part. There will be however these SPVs like what's been created which can give you kind of wrapper type access. It's sort of like an ETF, maybe more like a closed end fund I guess you would call it. But yes, you will have more global access. No, but more importantly, you'll have equities that are programmable and visible on chain, so you'll know exactly what's going on. You know, there's a lot of speculation as to whether naked shorting happens out in the market. It's not supposed to happen. It's illegal, I guess, except when you have a green shoe in an IPO, but that's a different story. And you know, when it's on chain, you'll know exactly what's going on all the time, and you'll be able to see who's shorting. Interesting thing about shorts, you know, the exchanges publish roughly twice a month what the short interest is in a stock and it's not a perfect thing but anytime you have like some market designed around a twice a month reporting, I don't, it just sounds pretty arbitrary to me like why wouldn't you want that real time? You've got the long interests available all the time when the markets are open but the short interests I guess for some reason those are considered to be special. I don't, it sounds fishy to me.

Look, I do think we also take out middlemen. So the challenge of the Figure model is that every issuer has to go and issue direct so it'll take time to take full effect. But there's real benefits when you do that which is you kind of take out all the middlemen, you take all the risk elements. So I do believe there's also going to be models where we see registered securities are wrapped and available and you can start to use them. I think the number one use case is going to be securities lending or collateral lending. What you can do now is you can have your Tesla stock and you can use that as collateral. Today, that can only be done if you're like really wealthy and you have a big, you know, private wealth management account and prime broker, but that can be brought all the way down to retail just like what we've done with lending against your Bitcoin. And it can be done in a very safe and secure way and agreed on a very transparent way, too.

Yes, security, stablecoins, you know, we do infrastructure for them. We've got a service that's got a modular service. It's got the tokenization layer which you can put on Ethereum, you can put on Solana, you can put it on BNB and a bunch of different chains. You've got the mint component which is being able to take dollars or any other type of stablecoin convert it to your token. Of course is also a capability there and then you got the treasury. So those are the three parts and clients can use our infrastructure in any kind of piece of that that they want. In the case of USD1, you know, which is now about five billion in size, they've used all three of those things, allowed them to get to market way faster. And we've had a great partnership there. SoFi is coming in. They're going to use those first two parts. They're going to manage Treasury on their own, as you would expect. They're a bank. But they have the ability to take this to their broad distribution of retail members and really open up the way payments work. Additionally, you know, you got people starting to understand the differences of, you know, tokenized deposits versus stablecoins. Slightly different. I think we'll see products coming there. So is a stablecoin so far. But there's definitely more to come. And then this just, it's just better payments. You know, it's 24/7. It's almost no fees. You know, you can put all kinds of wallets, so it's just a better product. But yeah, we're proud to have been selected by SoFi. They're a great company. They've been tech forward for like forever. They've had a huge growth story of their own despite being, you know, a pretty large-sized company. So yeah, we're going to continue to see lots of movement on the stablecoin front. The government's got a play in it in terms of interest, which as you know is being debated like crazy right now. Of course, people should be able to get interest on their stablecoins. We'll see what the law comes back with. The banker claim that somehow this is going to cause a deposit risk at the banks is ridiculous. And it's ridiculous, you know, kind of with data. We saw the same argument made back in the early '70s when we first had treasury-backed money markets that gave interest and of course there was no run on the bank and we didn't have a liquidity dry up in that. That's silly. By the way, what is going to happen once you do have stablecoins in broad distribution in the US, lending markets are going to get tokenized and get better, too. And you know, we're seeing some of this where how do you take like loans, pull them together, and then tokenize them in a way that you can now make them liquid. So, all of a sudden, it makes it so that the chance of a bank run is like way less because you can make these loans liquid kind of all the time. Obviously there's a lot of maturing in this market to happen. There's risks in lending, but everybody should be able to lend. You know why? Why is it only this thing that banks do like private equity lends? Of course that they take their own set of risks. Corporates take their own set of risks. Governments take their own set of risks. Retail takes their own set of risks. Everyone should be able to participate in this. We can make it so that there's no problem with there's no chance of a bank run by decoupling the deposits from the lending markets. This is an antiquated notion. It doesn't need to exist anymore. We can create lending markets and have, you know, stablecoin savings deposits side by side in a very, very different way.

I think it comes down to the folks that are borrowing from them have more power than the folks that are lending to them. What's really happening is not so much the banks taking a lot of profit, although that's part of it. What's happening is retail is unknowingly subsidizing lending. So, think about it. At the end of the day, you've got somebody that's lending the money to the bank. That's the depositor. And we got somebody that the bank is lending to. That's the borrower. The borrowers are getting subsidized rates from the depositors because the banks aren't paying the depositors. So, as a depositor, you're getting 0.1%. You should be able to get the risk-free rate. It's called the risk-free rate for a reason. It's where the bar should be held for like all you have to do is go put it in T-bills and you get 4%. So it should be four. Now if they gave four to the depositors, they would have to give, you know, an additional, I'm sorry, they would have to take an additional 3.9% from the borrower. So what's really happening is the borrowers are being subsidized by the depositors. Now you could argue, well, no, the bank should just take less. Maybe, you know, maybe it would cause that, right? Where you prevent gouging is competition. And you need to have lots of banks that are competing against each other to kind of have their fee be lower. But at the end of the day, of course, depositors should get the risk-free rate and then lenders just have to pay, you know, the price. And right now, the banks are saying like, hey, we really want to compete and win that big chunky business from the borrower. So, we're going to give him lower rates and we're going to just continue to try to trick our depositors into not taking that much. So, it really comes down to like the big guy versus the little guy in negotiating with the bank. And you know, look, this needs to be taken away. It needs to be stopped. It's ridiculous in my opinion, but that's what's happening today. It's not so much that the banks are just pocketing the money as it is you're being forced to subsidize some corporate loan that you don't even know exists.