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- [00:01]
A
Speaking with digital asset treasury companies. I think this week on the agenda for us where we're again trying to, trying to pitch the bigger borrowers in the market. But I'm also really excited. I'm speaking with a lot of folks in the tokenization space, bringing real world assets on chain, whether it be credit or. We're seeing this news with the DTCC as well. So I think that's going to be a big theme. Yeah.
- [00:23]
B
So for people who didn't see it, it's up here. DTCC basically has said they're going to pilot in July. I think it's every institution you can possibly name is a part of this pilot. I think they said over 50 institutions. And this is in line with Paul Atkins with Project Crypto saying he thinks everything would come online. And then of course the DTCC last year when they got that no action letter from the SEC said we're going to tokenize everything. This is happening fast, faster than anyone
- [00:47]
A
expected, I think given the speed at which these large organizations normally work. But I guess it, you know, it shows that they're kind of feeling the heat. The competition from crypto, it's a bit of a Rice can tradfi tokenize equities and bring crypto traders back to those venues before the crypto exchanges start offering the tokenized equities and winning the traditional traders.
- [01:11]
B
Yeah. So you were in Vegas last week, right, as you said and before we, I mean I think we all get the signal into DCC news. Right. Everything's coming on.
- [01:19]
A
Everything's coming.
- [01:20]
B
Like whether what that means for us as guys who own random tokens, I have no idea. But I thought when we were talking before you said when you were in Vegas you were effectively out there pitching treasury companies and miners on.
- [01:33]
A
Yeah, well, Maple is the, we are the second largest institutional lender globally now behind Tether. And so we were there pitching miners to borrow against their bitcoin, use that to fund CapEx expansion as they move into AI as well as the digital asset treasury companies. I mean some of the interesting observations, I think, you know though the, the treasury sector has been a little dormant for a while. These firms are still out there, they're still looking to do deals. And the, from the miners, just the focus on AI was, you know, was unequivocal. These guys are all in on that sector. Some of them are, some of them are selling their bitcoin, they're making acquisitions in the AI sector. So they are, you know, they are really pivoting.
- [02:16]
B
It's interesting that Bitcoin has been able to push to 81,000. When you actually find out that there has been a seller, I think a lot of people were asking who's possibly sell selling at this point. Right. All the whale wallets dumped and they've been accumulating. But Mara had the news, I guess last week.
- [02:31]
A
Yeah, they made that acquisition. So they're making a big push in the AI sector. I mean we've seen a mix. Some of these miners are selling their bitcoin to go all in on AI CapEx build outs. I mean our position and our pitch has been, look, while bitcoin's still quite a ways away from the all time highs, it makes sense to borrow against your bitcoin. You know, rates are reasonably cheap at the moment. You can borrow for 6% or less and hold your bitcoin until we get closer to the 52 week highs and then sell, then take some off the table. But right now you can fund these build outs pretty cheaply by just borrowing against your bitcoin.
- [03:11]
B
But as an individual, if you took a loan against it here and it went up to the all time highs, that's kind of a loan. You can never close at those rates. Some people, right, they take it sort of. I know that's the model, for instance, for individual retail lending, it sort of becomes a. Yeah, snowball. That pays for itself if price goes up.
- [03:29]
A
Yeah, I mean for retail lenders it's a little bit different but you know those folks who borrow on the retail side, typically they want to use it for a big lifestyle purchase, like. Yeah, a deposit on a house or something like that. A holiday for the family.
- [03:42]
B
So on the institutional side then I think it's interesting. So for people who missed that marathon deal, basically they made a huge acquisition but when you looked under the hood, yeah, they sold a lot of bitcoin and they paid off the convertible note. And just last year they were trying to be strategy. They were like, not only are we mining and holding our bitcoin, we're going to raise a convertible note to do a strategy doing and buy more bitcoin. We want to be a bitcoin miner and a bitcoin treasury company. What does that say right now about the bitcoin mining space and bitcoin treasury companies? They exited that entirely to go full AI.
- [04:10]
A
Well you've seen, yeah, I mean you've seen the bitcoin treasury companies, you know, ProCap pivoted more towards AI, so and you know, a lot of them were trading at discounts for a long Time. So it suggests the, the equity markets are not rewarding them the way that they were initially. And so hence they've need to change up their strategy and whether that's shifting towards more of an AI focus. I think the miners have picked up that equity markets are giving bigger multiples to these AI plays, whether it's Iran or you know, Iran or any of these others that have, that have made that push and, and hence they've just made a, a sort of calculated rational decision that it's better to be selling a bitcoin and get the equity multiple appreciation of being seen as, as an AI play.
- [04:55]
B
So they're basically AI companies that buy bitcoin. Yes, and not bitcoin mining companies anymore. But that means there's going to be very little reason to hold a balance
- [05:03]
A
sheet unless it's for, But I mean maybe you know, we are seeing, you know, some of the, some of the digital asset treasury companies like there's still a few large ones out there that are looking to either borrow to buy Bitcoin or you know, still have the conviction of holding their Treasuries. Then there, there's also Saylor out there still buying. So it may just be that the, the marginal buy pressure on the market to kind of push up the price of Bitcoin just isn't coming from, from miners holding anymore. It's coming from, from either the dats or other plays.
- [05:33]
B
So I guess the downside for them, you're basically pitching them, hey, take a loan against this humongous. Yeah, I mean, hey, to work, buy more bitcoins. We want to good as long as we don, into the 50s or 40s if they do that.
- [05:43]
A
Right, exactly. I mean I think we're very conscious that these guys don't want to have a public liquidation price because they feel like they'll get punished by the equity markets. So you know, what we do is we pitch them like conservative LTVs. We can be flexible on the margin call arrangements. We ideally don't ever want to force them to liquidate their bitcoin. We want them to borrow and in future borrow even more. So the pitch from us has been hold onto your bitcoin. While we're closer to the 52 week lows than 52 week highs. Buy the equipment that you need, get the, get that rewrite from the equity markets and then continue holding your bitcoin and sell it later at a better price. It's better, better outcome for shareholders.
- [06:23]
B
Yeah, so you mentioned strategy before. Obviously he's like the whale in the Room. He didn't buy any bitcoin this week, which I think, you know that STRC is about to go above par and he's going to buy like $2 billion next week. But their shares at this story is, their shares are up 50% as Bitcoin tops 80. I think nobody's surprised by that because yes, of course, high bay to bitcoin, but do you think that there becomes a time when he does what you're talking about? You know, like Saylor himself, if he says, hey, we're going to put a lot of this to work in the lending market, is it a function of not understanding the counterparty risk? That's what he told me in the beginning when I asked him years ago, 20, 21.
- [07:01]
A
Yeah.
- [07:01]
B
I said, you know, why aren't you, you know, taking loans? He said, I don't understand the risk. He said it, you know, but now he's got SDRC, all these things like isn't there, couldn't he take 20 of it?
- [07:11]
A
And. Well, I, I actually think it would be a good idea for him. I mean, I know earlier on they had, I, I believe it was an SVB loan facility, you know, when they're much smaller, 200 million, something like that. Now I think if you look at his capital structure, the, the, the cost of capital on STRC is, is somewhere around the 10% mark. So if you can borrow against your bitcoin, you can get a cost of capital somewhere closer to the 6% mark. So I think ideally that's going to be accretive to common equity in strategy. So I would advise to do it. And it can be a relatively conservative loan to value ratio too. So there's very minimal risk of him getting liquidated. And even still today we look at putting in triggers like instead of a pure liquidation cap, an enhanced margin call. So it's just a margin call on a shorter duration than normal. If you, if you normally do 24 hours, your enhanced one is maybe 6 hours if price continues to drop. So there's various structures we can put in place that are friendly for publicly listed equities that have concerns around, you know, the investor optics. But I would definitely advise them to do something like that.
- [08:17]
B
He's got to have hundreds of thousands.
- [08:19]
A
We also see bitcoin.
- [08:20]
B
Right?
- [08:21]
A
Yeah, at least we also see, we also actually see some borrowers looking to borrow, to put on a stretch carry trade. So borrow at 6, put on position and stretch. Yeah, yeah, exactly. And just ride the positive carry. So that's been a popular trade as well, that we've seen.
- [08:39]
B
So I tweeted that recently and I got a lot of shit. So I said, like, if you deeply believe in STRC and in Bitcoin, because that has to be the caveat that, you know, in theory, sailor, one day could just say, no, we're not, you know, we're not, we're not, we're not paying it anymore. But there's no reason he would do that. But I think Robinhood, I saw probably not in great size, but I know Schwab under 5%, you can take loans against your portfolio. So if you have a portfolio, you can theoretically take a loan under 5%, buy strc for 11 and a half, you use the loan to buy more strc. I know it sounds Ponzi ish, but I mean, that's the carry trade. Yeah, but I mean a lot of
- [09:11]
A
traditional finance does carry trades. I mean, look, you know, there was the Japanese yen carry trade for decades, but we've actually seen, you know, we've seen interest from various parties, whether they're hedge funds, family offices, or even some of these digital asset treasury companies that like the positive carry trade and it allows them to generate returns on their treasury where otherwise, you know, there's usually not a whole lot you can do to generate yield on your Bitcoin without taking significant counterparty risk.
- [09:38]
B
Yeah, I think that we're just going to see them becoming more and more creative. But the thing is, it's interesting, is as much of a disaster as the digital asset treasury space has been. If prices go up 50% from here, they're cured.
- [09:53]
A
Yeah, exactly. I can see a recovery in that space. And what we've been advocating for the digital asset treasury companies is just run a very conventional, just run a very conventional strategy. So we've suggested that when they trade at discounts, borrow conservatively against your treasury holdings, buy back your shares, which is like buying the underlying asset itself at a discount and then just de lever a little bit as it gets more towards 52 week highs, sell a little bit, just have, you know, certain installments where you sell a little bit and pay off your debt. And then because this is a cyclical space where we go up and down, then just rinse and repeat next cycle.
- [10:30]
B
I mean, it kind of looks like what strategy was originally. Yes, like before he created all these instruments, you know, just kind of Engineer your shares 100%.
- [10:39]
A
And I think, I mean, unfortunately what we saw is, I think some of the digital asset treasury companies lacked the patience and the conviction to carry out that strategy and then they've pivoted in different directions. But I think if you just had a, if they just had a clear sort of North Star that they were going towards which is, you know, bitcoin per share or ETH per share and they just ran a very simple financial engineering strategy. I think you know, eventually the share market would reward them because it's easy to understand. You don't have to predict what they're going to pivot to in two or three months.
- [11:08]
B
How low do you think rates can go as this market becomes more efficient? I mean six and a half. You said six and a half. I mean we were at 10, 11,
- [11:16]
A
12 for a very long time. Not that long ago and not even that long ago early last year, probably around February, I think we were seeing rates close to 10. I think we are going to get closer to the asset backed security market. I mean if you look where RMBS and ABS trade, it's typically in the low fours. Maybe it's like SOFR plus 100. I think over time we will get closer to that level as the market gets more efficient. I mean we are already seeing, we've seen the first crypto loan backed ABS deal come out from Leden earlier this year. And so I think the market will get more efficient, the cost of capital will get cheaper. But it's worth noting I think the space is still relatively undersupplied. I mean all the major lenders at the moment are all crypto natives. Us, it's tether, there's Galaxy, there's Coinbase, there's not a lot of traditional money in this sector and that's, you know, that's keeping prices where they are today.
- [12:07]
B
Yeah, I mean let in got an S and P rating.
- [12:11]
A
They did, yeah.
- [12:12]
B
Yeah, so does. It wasn't the best I think but, but still the fact that it's even being rated by S and P. Right. I mean they're the first and you
- [12:19]
A
know the first rating was always going to be not that great because S and P has, you know these ratings agencies have reputational risk when they write a new asset but I think over time it's going to correct and I think those ratings will get better and better.
- [12:33]
B
I mean how's what you guys doing? Not rated better than US government debt. Come on, we were running that thing up.
- [12:38]
A
Yeah, yeah, you know. Yeah, yeah.
- [12:40]
B
I mean come on man.
- [12:43]
A
Yeah, yeah, I, well, yeah, look, I mean I think this stuff should price cheaper. I think you know, investors and allocators are getting a great deal with rates where they are at the moment. You know, you can get so for a plus two to 300 over by, you know, allocating and lending in bitcoin back stuff because it's underappreciated by the market and because it's not well adopted by traditional players yet. But that's the, that's the opportunity for us and we've got to grow and kind of scale bigger before the, the big private credit shops come in.
- [13:13]
B
How much do you think the Clarity act theoretically passing would impact all of this?
- [13:18]
A
I think, I think, I think it helps. I mean already I think the Genius act helped usher in new stablecoins coming from traditional players. I think the Clarity Act, I mean what I hear from all these, you know, these partners, whether they're traditional commercial banks or investment banks, is that they are looking for clarity as kind of a sign to push further ahead. A lot of them are still running projects in the crypto space, but I think that will really accelerate the number of projects and the amount of adoption you see from them. And you got to remember that RIA money has still yet to come in. RIAs are not doing defi allocations. They're not doing allocations to crypto backed loans. And once Clarity comes in, I think those investment advisors and wealth advisors will start to put more client money into the sector.
- [14:05]
B
That's interesting because I guess everything's slower than you would anticipate. So when the ETFs were approved, everybody said RIAs will just say 5% into Bitcoin. Everybody will buy them.
- [14:15]
A
But we're still at the point where,
- [14:16]
B
I think we're still at the point where we're just ramping into getting, they're get ramping into getting their customers comfortable just buying an ETF and having some sort of exposure. So you're saying that eventually RIAs could be fully in, they could be allocating to defi do that carry trade for you?
- [14:31]
A
Yeah, I mean bitwise, you know, bitwise is called vaults, ETFs, you know, ETFs 2.0. And you know, I very much think that way. I think a lot of players are getting into the vault curation game and I have no difficulty seeing that maybe three years from now ras could be allocating their clients into vaults. I think Clarity is going to bring some rigor and transparency around reporting standards and custody and segregation of user funds. But yeah, I think vaults are going to be a huge trend for years to come.
- [15:02]
B
I don't think still most people know what vaults are.
- [15:04]
A
No. Well, the way you can think of vaults are. It's, it's not a fund, but it performs similarly, but it's on chain. So it's effectively you are allocating stablecoins to a strategy run by typically an investment manager that will do either lending or trading or market neutral arbitrage and it generates a yield directly to you, the depositor in stablecoins that you can withdraw typically at very short notice.
- [15:33]
B
Having your own little funds, it is,
- [15:35]
A
it's like having your own fund. It's very easy to access. You can choose from any number of different strategies and it's, you know, it's a simple interface to allocate to. So I think it's going to be very disruptive to what we've traditionally seen. I mean, the user experience in traditional wealth management and investing is terrible, as
- [15:53]
B
you know, but they're used to, but they're used to allocating by risk level.
- [15:58]
A
Yes. Right.
- [15:58]
B
So like, you know, the first questionnaire you get when you sign up for E Trade or something, what's your risk? What are your intentions? Yeah. High risk, fast growth. So if you can give someone 50 vaults that are labeled in a manner that they are used to. Right. Just by risk, they don't need to
- [16:14]
A
know that you're high risk, moderate balanced, conservative income generating. For sure.
- [16:20]
B
Yeah. So let's talk about the state of DeFi again. Obviously, I think you were on last. Was it last Tuesday already? I mean, not even a week.
- [16:26]
A
Maybe only a couple, couple of weeks ago.
- [16:28]
B
Okay. I was gonna say either six days or like 13 days ago. So now we've had this crazy turn in the AAVE situation. I guess I free it up. But we had the kelp dao hacks, obviously the toxic, the toxic debt that went across Defi the AVE bailout and Defi United. And then we had this crazy twist where Arbitra basically went to return the hacked funds.
- [16:47]
A
Yeah.
- [16:48]
B
And lawyers claim that those assets belong to people whose families had been killed by the North Koreans years ago. Yeah, they have nothing to do with this. They're just saying any money that's basically siphoned out of North Korea belongs to these people first. And now AVE is trying to get an emergency injunction basically to get that money released. I mean, this is a crazy unexpected.
- [17:06]
A
Yeah, I mean, you know, you couldn't, you couldn't write this stuff. So as, as you said, Scott, arbitrum froze about $70 million and on of eth on Arbitrum that North Korea had. Had stolen and these, these relatives of folks who'd been killed by the North Korean regime got a freezing order. They. So in the past, they'd won an order for something like 600 or 800 million in damages from North Korea. But of course, good luck getting that. And. And so what they've said is, well, these assets are the property of North Korea. So since North Korea owes us damages, these are actually our property now, which is. It's pretty wild because it raises the obvious question, if somebody steals something, is it actually their property? If they have control over it, does it become the property of North Korea or is it the property of the person it was stolen from? So, yeah, I mean, a lot of people are watching this.
- [18:03]
B
Defi United can't even do what they want to.
- [18:05]
A
Yeah.
- [18:06]
B
Until they have clarity on.
- [18:07]
A
Yeah, I think we need clarity on this. I mean, hopefully, you know, my hope would be that it goes the way of Defy United rather than the. Rather than the families in this case, obviously, you know, very sympathetic to. To them having had lost relatives to the regime. But I think it would set a very dangerous precedent if you said, well, somebody who's stolen property, that property now belongs to them and can be awarded to other third parties in damages.
- [18:35]
B
It's interesting, though, because this to me is funny in the context of all the pig butchering and the strategic bitcoin reserve of the United States, because those are all confiscated tokens which belong to somebody at some point, like the October pig butchering. I think they got 15 billion in Bitcoin. Nobody said that we're going to go out and find the 10,000 people that were scammed or 100,000, and give them this money back. The United States government.
- [19:00]
A
Yeah. And also, you know, how do you. How do you decide to prioritize, you know, the. The people who might have judgments against North Korea or other terrorist regimes? I mean, I'm sure there. There's many thousands of them. So who do you put at the top of the queue and. And why should they be above the people who, you know, originally owned the property?
- [19:20]
B
Yeah. It's such a crazy situation. How do you think that this all shakes out for defi. I haven't. You know, we had all the initial stories about kind of capital flight. I think it was 10 to 12 billion somewhere in that ballpark. Has that, I think. Do, you know, like, I mean, I
- [19:33]
A
mean, for us, we, you know, we processed about 8 or 900 million in redemptions in the first. First 48 hours following the Killtao hack. Then by the end of the week, we'd start to see, you know, that had stopped. We saw inflows of maybe 30 mil in that first week. But by the end of the second week we'd had, you know, net another 300 to 350 million come in. So for us it's, for us it started coming back. We're back in, back in the black.
- [19:56]
B
In terms of your guys were kind of. This wasn't directly you. Yeah, we weren't directly sort of contagion in sentiment, right? Yeah, it wasn't anything that happened.
- [20:05]
A
Yeah, correct, correct. So yeah, so I think, you know, maybe we pick up some market share big given that we have, you know, what I would call pretty conservative strategies with just institutional bitcoin and large cap backed loans plus T bill allocations. I think for broader defi, there's still probably going to take a little bit more time for the dust to settle and for sentiment to return. I think, you know, Defi United was, you know, was a great move and a great outcome for them. Like the absolute best thing they could have done was to, to fully repair the hole and not have to, to utilize the umbrella module or any of the other mechanisms. So hopefully sentiment returns quickly.
- [20:42]
B
I guess my big question is what if that hole had been $5 billion
- [20:47]
A
then I think it would be a very different conversation. And I think, you know, I think that that would have been a, you know, that that would have been a real body blow to Defi and you know, might have taken us 12 months to recover as a sector. So you know, that that would have been on par with, you know, FTX for the defi space.
- [21:05]
B
So you think that most people who pulled all those funds that capital flight were sidelining to see what happened and not basically making a move that stated we're never participating.
- [21:15]
A
Yeah, well, I think.
- [21:16]
B
Let me take this off and see what happens.
- [21:18]
A
No, we did, we didn't see many people who said they're just never going to participate in defi again. I think a lot of them went to just passively holding cash. Some of them reallocated it to placers like us. And also you got to remember that some of it was looping that just got unwound. There's kind of like a multiplier effect. You have a fund that loops six times. Well, that's like, you know, six times the TVL is going. So. Yeah, so but on the question of, you know, if it had been 5 billion, I mean, I think fortunately, you know, there's not really an asset that's got you know, say 5 billion of collateral. That's a synthetic derivative. Asset. So I think that is, you know, that that helps to limit the, the risk factors, but it has forced us as a sector now anytime you deposit to a protocol, you effectively have to underwrite every asset on that protocol. And, you know, that's, I think that ups the, you know, the resourcing required to do defi allocations. As I think, you know, you should expect to see either risk premiums in defi need to go up or the tvl, you know, won't quite rebound to the previous size.
- [22:20]
B
It's interesting that you kind of laid out how looping could increase TVL sort of manufacture tv. It does.
- [22:26]
A
It's like a multiplier effect. It's like, you know, when a dollar goes through the central banking system, isn't
- [22:31]
B
that what we were here to.
- [22:32]
A
Yeah, we're here to stop. But in, you know, in true fashion, we, you know, you kind of live long enough to adopt some of the elements of the thing you want to disrupt.
- [22:43]
B
So do you think that maybe some of those more risky strategies will take a long time to come back or may die like that? You know, the composable Legos part I think has seen a major blow more than defi itself.
- [22:56]
A
Yeah, I think so. So the, Yeah, I think the composability will probably be suppressed for a while. I think folks will not be doing, you know, as much in the way of aggressive looping strategies as what they were doing before. And also you're just going to get paid a little bit more now for doing conservative stuff because the risk premiums have come up, folks have come out. So the supply of capital has reduced, which is pulling up the prices of, of allocating in defi. And we've already, I mean, we've already seen some funds who were previously borrowing from defi platforms and thereby taking the smart contract risk on their collateral. Now pivot across and, you know, put in requests to borrow from us because they just decided they want their collateral to be held in a custodian.
- [23:38]
B
I remember you and I having conversations where I would bring up like RWA XYZ or something. And it was the really early days and it was kind of this race you guys, Franklin Templeton and came up, but it was just tokenizing treasuries. Yeah, doesn't feel like it was that long way. That's all RWA was. So like, you know, what are you guys building now? I guess, you know, and, and where do you see institutional adoption happening first as we head towards DTCC 4.5 quadrillion. Settle the year right we are.
- [24:07]
A
So we're looking at other forms of RWA credit. So you're, you're quite right. RWA just began as T bills on chain. What we found is, you know our primary specialty has been allocating to Bitcoin backed loans, ETH back loans, Solana backed loans, XRP backed. But now because that borrow side of the market was slower to begin the year, we've actually found that we, it's pushed us to look at more direct RWA allocations. So we have been looking at say FinTech ABL programs like could we lend to a cards issuer or a lender of you know, home loans or, or small business loans, SMB securitizations. But we are looking, what we're looking for is things that are conservative asset backed bankruptcy remote and have a conservative risk adjusted return. And so we're now looking at could we be the funder to some of these web two fintechs who are just breaking into the securitization markets. We want to come in and offer them more competitive cost of capital than what the big private credit shops are doing of what you know, Victory park or Blue Hour or any of these others are doing. And those guys have their hands full frankly with software backed right now. Like they have a lot to worry about.
- [25:16]
B
Private credit looks worse than DeFi.
- [25:18]
A
Yeah. So we want to be conservative. We only want to go in asset backed stuff. We're not going to be doing software backed private credit type type lending. But we think this is a real opportunity for DEFI to start to bridge into traditional finance. And you know, really we're going to see for a long time people have asked well why do this on chain? Well we're going to, we're going to show that you can actually offer these players much more competitive financing that's more attractive than what they can get from traditional finance.
- [25:46]
B
That's interesting. So do you see the timeline now accelerated definitely from what we thought because of all this project crypto last year.
- [25:54]
A
I think last year I would have said the timeline was two, three years out. Now I can see it happening this year. I mean we have a KPI to do our first FinTech ABL loan within the next six months. Wow.
- [26:07]
B
So I mean this, everything on chain
- [26:10]
A
thing is actually, it's happening and you know the DTC is pushing from the other side on, on equities and we're doing fixed income.
- [26:17]
B
It's crazy to me. Anything else I missed before I let you go explore this, this conference here?
- [26:22]
A
No, no, I think, I think we covered everything.
- [26:24]
B
Awesome. I really appreciate always having you on and you're willing to show up. Fun to do this in person for. For us. We'll be shooting a lot of content and then we'll be doing this show at 9am and the noon Yahoo show right here. I've got today Paul Grewall from Coinbase on at noon. So that'll be an interesting conversation. All right, everybody, we'll see you at noon. For the Daily Wolf, Sid, thanks so much. Thanks, everybody. You can find him on the Internet tagged below. And we'll see you at noon. Bye. Let's do.
- [27:05]
A
Let's dope.