B (4:20)

Last I checked, all those things were illegal anyways.

A (4:25)

Well, that's true. We're all covered by bsa. Right.

B (4:27)

So I love what it's like. You know, we talk about fraud in crypto. Fraud's legal. It doesn't matter if it's crypto or a check cashing scam or a Nigerian prince.

A (4:37)

Well, this is maybe this is an interesting thing to talk about. You know, how can technology, how can digital assets help prevent those types of crimes? We've gotten ourselves into an interesting contortion in the United States where, I mean, of course we don't want bad guys to amass large amounts of money and then do further bad things with it. So that's fine. But we've kind of gotten away from like, how do you stomp out the crime itself and Instead trying to use the monetary system to find the crime. And that's two levels of indirection away from when the crime occurred. Right? So, you know, I got this question from, I won't say which regulator, but they were asking about, you know, how do we stop? I'm in digital assets, right? Like, we're in the money system. But the way you stop fentanyl is by when you arrest the people on the street in San Francisco for dealing fentanyl, you put them in jail and you don't let them out three hours later to go back and deal more fentanyl. I tell you, if you do that, that'll be the number one thing we can do to stop fentanyl. It's kind of weird to be getting a financial regulator saying, hey, Bitco, what are you doing to stop fentanyl? But anyway, we can go into more detail about, like, actually where does crime enforcement and protection occur? Should it be at the banking layer or should it be at some other part of our economy? Talk about it over to you, Scott.

B (5:57)

We should talk about that because obviously they're approaching you for a reason, which could be either they are backhandedly saying, hey, crypto is funding fentanyl, or it's just because you're secure, you understand the industry, and you can give them the insight that they might need to stop it at the source. So which of those is it? Or both.

A (6:17)

Look, this was actually part of an outreach. So the good news is like, the regulators are reaching out to figure out, like, how do, how do we do better stuff? But when you tease apart where we've gotten to forget about crypto with the banking system today, we've gotten to this point where the, the enforcement folks, the investigators are dependent on the banks to do some amount of investigation work as well. By the way, when I challenge this idea, I'm like, well, why don't we send all this information to you, Mr. Regulator, and you can go and sort through it and you'll have the benefit of having all the banks information together. And the funny thing they said was they're like, well, that would be an invasion of privacy. And I thought that was okay. That's an interesting answer, except for that you didn't evade the invasion of privacy by just outsourcing it to somebody else to do. And in fact, if anything, you made it worse because now you've got all of these pockets of your same information everywhere, and it's still hard for the government to utilize it, to actually go and track down. Look, I think if you actually rethink how we enforce crime. You know, how do we stop, you know, monetary illicit uses of money. I think you'd come up with different answers than the system that we've built over the last 50 years.

B (7:37)

How much of that is specific to crypto at this point would you say? Because we've long pointed out the fact that that's a false narrative, that it's a very small percentage of transactions on the bitcoin network, certainly. But now we have stablecoins are illicit and we're basically being persecuted for a perception and not for reality. Right. And people love to point the fact that cash is used for criminal activity much more than crypto. We know the narratives.

A (8:04)

Yeah. I mean look, number one, the bad guys are not going to come to bitcoin anymore. Bitcoin is how they get caught. Right. So they learn this, they don't want to do that anymore, they're going to use other things. 99% of all the crime happens out on dollars. So we know this. But this gets more to like, all right, forget about the crypto persecution because I really do think there's most of government, most people are not trying to do that anymore.

B (8:26)

I think that's over.

A (8:27)

Let's try to solve the problem for real. Right. So even without crypto, we haven't been able to solve this on the existing banking rails. Why not? That system doesn't seem to work very well. You know, is there something else that would work better? And, and, and I'm not sure that I have an answer for like what would work better or that there is an answer of this. Would this particular approach would clear cut work better? It's a tough problem, law enforcement, criminal investigations, et cetera. But what we've fallen back on is surveil the entire population of good people and bad people and then hope that we caught the information at some private institution. And then if the investigator, if law enforcement picks up on something, go and try like to figure out which private banks to go talk to about it. I just think it's so far removed from the actual crime that we're just sniffing up, barking up the wrong tree.

B (9:23)

Yes. Especially at a crypto custodian. I can understand if they were going to self custody wallets or you know, even to the exchanges who people are actively using back and forth. But in what capacity would a criminal even possibly use something like Bitgo that's so regulated and overseen and you're watching, you know, all the transactions, you know exactly who your customers are. Doesn't seem to make Much sense to me.

A (9:50)

Well, like there's dumb bad guys too. You know, we had, it was before a regulated firm at all, you know, so we do this multi sig wallet. The client has two keys and we have one key. And when you provision your wallet, you get some choices for where you can put your keys. You can hold them both yourself, you can hold one yourself. And then we have some service providers that you can, you can store one with, which gives you the benefit of backup without having to hold all of them. And there had been an exchange hack remote. And it turns out that the hacker put a thousand bitcoins into a bitgo wallet and sure enough, and this is probably circa 2015, sure enough, he had provisioned his wallet using a backup key that he didn't have. So we were able to freeze it and then we were able to recover the funds. And this, this is also kind of interesting. You know, initially, you know, law, law enforcement comes to us, they get a, they get a, a court order for us to seize the question. We only had one key, remember, the other key was with the backup provider. They weren't used to this type of stuff. And we said, hey, you got to go to the backup provider and get a, a seizure warrant, a warrant for them to use their key as well. You can't just use ours. We can't use our warrant for that guy. And they were kind of grumpy about it. They're like, look, that's a different jurisdiction. We're going to have to go get a different judge to sign it. But we outlined a whole bunch of reasons why they should do it. And they said, all right, you're right. And then when they did it and they got the money back and they returned it to the exchange, so it actually had a happy ending. So yes, bad guys will do dumb stuff like put it in places where it doesn't make sense. But this is also how you get into the slippery slope of. Not only are we applying these types of rules to regulated custodians and things, and by the way, we want to help. Even though I'm skeptical about how well the current system works, we will do whatever, whatever is required.

B (11:32)

Crime is bad.

A (11:34)

This is how you get to the slippery slope of now, like self custody wallets get banned and regulators keep entertaining this. I think we're going to get past that as people start to realize, look, there's real value to having cash. And effectively bearer instruments are cash.

B (11:50)

Six months ago, that was a much greater concern. So I think it's fair to say that it looked like there was going to be an attack on self custody in the last administration. And that's largely diminished with the new administration. But that said, administrations do change again. So it sort of speaks to the importance of getting legislation on the books that would be very difficult to overturn rather than either just statements from the administration or executive orders that we know can be overturned. So I still think we have a lot of work to do.

A (12:21)

I was at the crypto summit at the White House a month ago, was very humbled to be able to go to that on part of, on behalf of bitcoin and a little bit of the industry. And you know, we, we had a great collection of mines there and they did a walk around the table and There were about 30 people overall there and it must have been about 20 of us said this is wonderful. What's going on. Thank you for recognizing it. Thank you for being willing to address the problem. Thank you for the executive orders. Can we please codify this in code into law? And so look, I think the administration gets it and wants to accomplish that. And you know, they're moving fast for a reason. They know that like midterms come and then politically, politically things can get tied up. So look, I think one thing you should be impressed by, regardless of which party you're in, I think this administration is setting the tone for, for pace. I, I honestly have never seen anything like it. I'm, I'm not the most politically expert, but from what I hear, nobody else has seen anything like it either. This is an administration that came in warm, ready to go with an agenda and they put them all in parallel and they're just going boom, boom, boom. So anyway, hopefully we'll see codification into law and yes, these issues will never be around and the US leads. Right. So remember, there's also regulators all over the planet with the same questions about self custody and potential assault on self custody. But they will definitely observe and see what the US is doing and that'll have a big impact globally.

B (13:56)

So we sort of joked before I said, it looks like you're in a nice vacation spot right now, a better background than me. I said, what are you doing? You said a bit of business, a bit of politics. So it's clearly at the forefront of your daily efforts. And seemingly everyone I speak to in the industry that being political, whether that doesn't mean Democrat or Republican, but being involved in this process has become essential. So much so that you describe it as part of your daily job basically.

A (14:24)

Yeah, look, I mean, I would advise to any young business leader. You know, business and politics generally don't mix. All you do is alienate people. So in terms of politics about, you know, issues not related to my industry, I have no interest in using my small little platform for that. On the other hand, we got bills up for stablecoins right now. We got bills up for market structure right now. We got, like, proof of reserves bills coming. There's a lot going on. And, you know, look, we've got a whole bunch of people all up and down Washington that are interested in getting perspectives. We also have regulators that are listening and they're trying to figure out what should they be addressing, what shouldn't they be. So it's a good time. It's actually, you know, we say it's politics, but maybe actually now it's really more of helping make sure we get the smart ideas communicated and shared.

B (15:13)

So that's my next question. You led me right there, which is, it's great that we have legislation on the books, but we've seen in the past that legislation that isn't thoughtful or doesn't have proper contribution from the industry that's being legislated or regulated can have unseen pitfalls and consequences down the road. I think we're seeing it to some degree, actually, with MICA in Europe. If you talk to any of the stablecoin providers, they're not thrilled with the amount of money they have to put in a fractionally reserved bank to back their assets. We've seen Binance have to delist tether in Europe because of mica. So there's still once again, this real chance or a real threat that they legislate, but they get it wrong.

A (15:57)

You threw a bunch of issues out which are all actually pretty interesting to go into. One of the things that is happening, however, is now that we have regulators actually thinking about crypto. Of course, industries that think or are worried that they might lose some of their regulatory capture are also showing up in Washington and trying to say, like, wait a minute, maybe this isn't what they want. And they haven't been publicly vocal, but now they're being kind of, kind of brought out. Yes. When it comes to banks, for instance, there's a lot of concern about stablecoins, and is that going to eat into their business? Like, my opinion on all of financial services is that the reason we haven't seen innovative progress in financial services is one reason and only one reason, regulatory capture over the last 50 years. And, you know, it just happens. Bill Gurley does this great Talk, I forgot called 2219 miles or something like that. I'm not sure if you saw it. It was one of the all in.

B (16:52)

Pod songs I've seen on the all in.

A (16:54)

Yeah, I mean he's a funny talker, but he talks about basically the reason Silicon Valley exists in, in San Francisco is because it's basically as far as you can possibly get away from Washington D.C. and, and the influences of regular capture. So all right, I guess there's a little bit of political fighting happening kind of there as banks are starting to say, like wait a minute, is this overlapping on our space? But again, I think crypto's on the right side of history here. Like the stablecoins are going to be the banks you wish you had, but you've never had. They are better in every single regard. I tweeted, I think it was just this morning actually. Like, how does a bank that has a fiduciary duty to you give you a 0.01% interest rate when the risk free rate is 4.3? Okay, is that doing your fiduciary duty? I'm pretty sure it's not, but I'm not making up numbers. The 4.38 is today's risk free rate. The 0.01 is today's bank of America checking account savings rate. It's incredibly pathetic. And not only that, not only do you only get 0.01% they put it at risk, whereas you could put it into the risk free and there's no risk. So look, there's a lot to be rethought about banking and I don't think we should be afraid of it. We should do it responsibly, like, you know, liquidity in our markets. And the banks play a critical role today in terms of how that works. But that doesn't mean that you can't do it better. And that doesn't mean that new technologies don't come along that do it better. So just real quick on stablecoins, three things. Number one, one to one, backed all the time. T bills obviously safest thing you can get. No bank risk, no nothing risk. Number two, you should be able to get the risk free rate on it. I know the stablecoin bill currently is prohibiting that because there's some fear, but that's a much better rate than what you get with your bank. And number three, it's a way better payment system than what the banks give you 24 7, almost free. You can do it from peer to peer, you can do it from peer to Business you can do business. Business you can do a bank to bank. All of those things work. So it's simply better at payments, better at return and better at safety. Now the thing that banks do is they're supposed to loan out money and we need loan loan lending of money, the liquidity in the market in order to keep the economy like healthy and strong. It's a key part. So you can't just take away the banks. And nobody's that foolish to say like they don't play a key role there. But you can reimagine the two different types of things that you're doing. One is how do you help people preserve the cash that they need for their daily lives risk free, get a return that they should be returned. And then number two, how do you manage lending, how do you do counterparty risk? If you're doing asset backed loans, how do you make sure that you're not at risk of market risk? You know, but these are separate things and they used to need to be combined because we didn't have these magical things called computers. But now we have computers and so we can separate these functions out and build a much, much healthier system.

B (19:56)

I'm wondering why yield bearing stablecoins have become the point of contention for these bills. I spoke with Kirsten Gillibrand actually about it recently and she obviously was the author of the Genius act and she kind of gave me the we're looking at it answer. But you know, Brian Armstrong and the industry have been very, very vocal that this should be a part of it. And it seems that that's where the legislators are getting scared. I wonder if it's because of Luna and algorithmic stablecoins and them just not fully understanding. But it seems rational that a stablecoin provider, which largely will be banks in the future to some degree I would imagine should be able to pass on some of the interest that they're earning to the customer. Even the 0.001% in a bank is better than the zero that they're going to do on stablecoins that are earning that yield.

A (20:41)

I'm not sure that's true given that you get payment benefits, but I think the answer is a couple of things. First is just the fear and the regulatory capture. You mentioned Mica earlier. So in Europe, basically if you're a stablecoin issuer like tether, Mika says, hey tether, you got to put, put a bunch of this at banks and you can't just go buy T bills. Okay, so that's just banks Trying to insert themselves into an industry that they, of course they're not needing for and they make it actually worse. The second thing is the banks trying to do that in the US the banking lobby is clearly waking up. I was talking to one senator, he was, he was joking about, I'll leave him know, Anonymous, because it probably isn't fair, but he had had somebody pitching him that said bank CEO that says, hey, stablecoin shouldn't be allowed to use Treasuries. They should only be allowed to have cash. And that means it has to be at the bank. And of course the senator's like, do you know what a Treasury is? Because it's kind of the same as cash. And then I, I think the third thing, that actually there is a little bit of legitimate fear here, but I think we can learn from history. I'm not sure if you're familiar with the history of money markets, but we went through a very similar thing back in the, in the early 70s as the money market innovation came about. You know, people were concerned, wait a minute, if this money market is able to give you a return and it's much better than the banks, then people are going to flee the banks and we're going to run on the banks is going to take down the entire economy. So initially money markets were not allowed to return interest and it was just basically fear. And of course what we realized is that hey, it's not that dire. It's not like these institutions just go away overnight. It's not like everybody's ready to move to stablecoins today. It's not like stablecoins are ready to fully take its day. But you could definitely have it, you could have it return interest. It would be great for everybody and it would allow us to do, you know, more with dollars.

B (22:32)

You said that there is some risk. What do you view as the risks to offering some sort of yield on these stablecoins? I mean depending obviously on the level of legislation and regulation in which parties we're talking about, we know that there's a lot of stable coins that are probably not honest actors out there that are smaller but do have market share to some degree.

A (22:51)

Sure. When I'm talking about stablecoins, I'm talking about one to one backed stablecoins for the moment. And you know, I don't think algorithmic stablecoins should be considered at all without a whole lot more scrutiny. But you know, the stablecoin bill is all about that. So you know, auditing and verifying that you've got Dollars. That combination of banks and asset managers is a very doable thing. But there's still risk. There's a bunch of risk. A smart contracts are new, blockchains are new. There is possibility for failure there. Right. We've got cases where people lose private keys, get scammed out of private keys. Don't know exactly how to deal with that yet. None of this is FDIC insured, Right? The banks are mostly FDIC insured at this point, depending on where you're doing your banking. So. So there's a number of things, but the way you solve those types of problems is by letting the market do what it does and innovate on these products and people start using it. The risk I was also referring to, which people are afraid of, is that there would be a run on the bank. I think that's a false fear. You can't really prove it one way or another, but we didn't see it with money markets.

B (23:57)

I run on a fractionally reserve bank's a lot worse than a run on a stablecoin provider. Remember times when Tether, and this was when they had half the market cap they do now. Right. I mean, they're probably 130, 140 now, when they were in the 60s or 70s, back in the Silicon Valley bank days, I think tether redeemed $7 billion in 24 hours without breaking a sweat. I mean, no bank could have done that.

A (24:18)

Absolutely. Stablecoins have held. Tether's done an admirable job. They've had to go through a long period of like, what's going on? By the way, one of the realizations that I've had just from having worked with traditional finance and if you watch where traditional finance has gotten to with audits, you can start to appreciate a problem that Tether certainly has run into, which is people claim like, hey, why doesn't Tether have an audit? Like, if they're legit, why don't they just go get Deloitte to do an audit? And the reason is Deloitte won't do the audit. And it has nothing to do with Tether. It has to do with Deloitte and their risk profile. So basically we've turned auditors into insurance programs and they're basically underwriting some amount of risk with you. And if they are wrong, they can go out of business. Like, we used to have the big five, now we have the big four. Right. So Anderson's gone and, and that's because they had a, did a bad risk on, on Enron crypto is too new. We haven't had regulation in play. We've now got that coming that's going to help make it better. But the auditors won't write a policy.

B (25:31)

They don't want the reputational risk of being the one who stuck their nose out there first.

A (25:36)

Well, reputational risk also an interesting. When you saw that, that was just taken out from the occ. Right. So it used to be that literally.

B (25:42)

The term reputational risk. Yeah.

A (25:44)

So OCC regulators used to be able to say to you, we don't think your reputational risk policy is good enough. And you're like, well wait, what's wrong with Scott Malka's reputation? I thought he was a good guy. And they're like, well I don't know, it seems like a crypto guy. Maybe that's not very good reputation. I hear that it's such a subjective thing. How do you provide even handed regulatory frameworks on top of completely subjective rules? You can't. So anyway, yeah, it's funny you mentioned that.

B (26:15)

So no upside to being the auditor for a crypto company certainly in previous times, now maybe things are changing but you just didn't want to even be the one to go out there and do it. Imagine being the auditor of ftx.

A (26:28)

Well that's exactly right. But now that we've got all of the various regulators, whether it's occ, fdic, sec, et cetera, taking a stand and saying here's what the definitions and the rules are going to be for each of their prospective areas. Now auditors can come and say okay, I know how to address the regulator. I can actually start to think about how I would do a big audit of a company. And by the way, I do think Tether is now at the size and they've got, I think they've proven themselves. I suspect they're going to have success here but you know, in that tweener stage where they were, you know, bigger than a little guy but, but not quite as big as they are now.

B (27:04)

And they were banked in, you know, the Bahamas and all over the world. And listen, there may have been a time when Tether was more questionably backed. I won't say when they weren't fully backed, but maybe they did have Chinese paper or things that weren't immediately redeemable, that had some because they were learning along the way. But to your point, I think when you've got the Secretary of Commerce as a owner of partial owner of your company and saying we're custodying these assets you're good. Now there's, I have zero doubt about tether at this point.

A (27:34)

I think it's undeniable. I think, I think that's true. But remember one of the big features that tether had to do. And again regulators had a choice to either help us or hurt us. Right. And by having been certainly not helpful pre last administration, being completely counter helpful in the last administration tether, one of their big features was they said, okay, we're just going to stay out of the US which is a fair thing for them to do. There's nothing wrong with it. And it turns out to be a feature when you've got a regulator that's working against you. Now, had the US regulators stepped up, leaned in, said, okay, we understand this is something new. We understand it's got new risks. We need to understand it, we need to put something around it. We could have had a different outcome. You could have had Tether embracing the US early saying hey, these regulators are great and it could have been a much smoother process. But anyway, we are where we are. I'm very grateful every day that things have changed so much in the last six months.

B (28:27)

And just as a aside to all of that, there's a world now especially and we will not get into tariffs and macro and global policy, but there's a world where tether goes from being the sixth largest buyer of United States treasuries to being top three to one. And stablecorns as a whole may end up being, if this industry grows as fast as we think, the number one buyer of United States treasuries in the future.

A (28:53)

Okay, well now we can start to talk about how politics creeps in here. So the good side of working with regulators right now is helping them understand what's going on. The bad side is, well, sometimes people are looking for a little regulatory capture. And one of the stablecoin bills says, hey, you have to be a US company holding T bills in order to be a licensed stablecoin issuer in the U.S. look, it's clearly designed by U.S. companies to say we don't want non U.S. companies participating. And I can't think of any reason otherwise that you would make such a policy. And hey, we're a US Company, we've got stablecoin initiatives, we've got. Wouldn't that be good for us? No, I don't think so. I think we want markets that are open, I think we want markets that are competitive. I think everybody needs to have a fair shot. So this idea that we're not going to allow a company to do a stablecoin because they're not a US Company. I think is is bad. And yet there are people in our industry lobbying for that. You can probably get there.

B (29:55)

Yeah. I mean, listen, you're not going to outright say it's circle, but obviously we have, you know, United States born stablecoins that want tether outside the United States. It's not controversial to say that. I mean, it's pretty much an open battle at this point and actually I wanted you to comment on that. Then that leads me to another question, but go ahead.

A (30:16)

Well, this is this whole problem of regulatory capture. One of the challenges of having regulations is that it allows companies to hide behind regulations to evade competition. And no regulator, no legislator will tell you that that's what they want to accomplish. Certainly American citizens don't want to accomplish that. We want healthy competition. But it's pretty natural once you have the ability to influence what can be put in that this will happen. So there's several that are related to the crypto thing. So this is one. Can non US companies be stablecoins? I think absolutely. They should be able to. It would be silly to lock out the largest, strongest stablecoin today.

B (30:57)

And there are probably ways, by the way, for them to become compliant partner with a US bank or launch a separate product. With Dave Topout doing so outright banning them would be ridiculous.

A (31:06)

The second piece is what we talked about earlier. Well, some of the banks are coming in and saying, oh, stablecoins shouldn't be able to not use banks. We need all of the banks. Well, that's also a form of regulatory capture. It's not really based off of risk because if you hold T bills you've got less risk. All right, so that's another one. A third one is we got the market structure bill up. Market structure. I guess what I like to say about it is market structure is two words that's going to lead to tens of thousands of words of legislation. And everybody's got a very different view as to what that should be. And even though there's a lot of people saying yay, yay, I want a market structure bill. I don't think we're all talking about the same thing. And I definitely see some parties looking to take the opportunity now to lock in their business and then lock out others. So I hope we can prevent that. This is the politics part. Yes, we want the regulation, we want the definition, we want the safety, we want the ability to go build. No, we don't want this Selfish regulatory capture.

B (32:09)

So you just jumped all over my next question. But there's still more to say on that, which is that you mentioned before how the industry effectively came together, backed into a corner, raised the money, influenced the election to some degree and got what they wanted, right? So we had this sort of interesting situation where there was a common enemy to some degree, and everybody galvanized around that and made sure that that common enemy was gone. Being the last administration that said, once that common enemy is gone, everybody goes back to their self interest, right? And so now would you say from what you're seeing that we have a cohesive bitcoin and crypto lobby, or would you say that it's fracturing and we're going to see a lot more of that self interest? Because obviously, listen, you're never going to name names, but circle versus tether is a great example. Ripple versus Bitcoiners to some degree, right? Has been an example to whatever degree. All of that's true, I have no idea. But clearly there's infighting and we're not just one solid, you know, industry or lobby.

A (33:11)

To some degree, different perspectives are natural. And okay, the, the, the place where it gets bad is when it becomes, you know, self interested and it's hard to define. And sometimes if you disagree with somebody, you know, they'll say, oh no, it's national security, that's why it should be us only. And you're like, no, you're just being self interested. So look, those are two different points of view. This is part of the democratic process. I guess I have one thing I would say to, to, to bitcoiners in particular. I think bitcoiners lean a little bit heavy on libertarianism. And I know when you get into some of the politics of it, maybe you run into some splintering, but there's a lot of libertarian concepts in the economics that bitcoiners value. And mostly what that is about is don't have too much regulation, don't have too many laws. And the way you prevent regulatory capture is by keeping the laws and the regulation very, very simple. Now this is super hard to do because we're trying to help with the law enforcement, help with the investor declarations and disclosures, investor protections, help with the market structure. So we're asking the government to do all these things and then when it turns out to be complicated, then we get upset that there's regulatory capture. So one thing that can help us all, principle based thinking. What are your principles? When it comes to money, what are your principles when it comes to should you get interest on an account, what are your principles when it comes to the safety of markets? And I personally think, actually maybe even though we could get a lot passed legislatively right now, I think we should be super cautious about just, you know, you get the wrong stuff, you're going.

B (34:54)

To unintended consequences down the road.

A (34:57)

And you know how it is. Like every single bill, it seems like it's titled the opposite of what it actually is. Right?

B (35:03)

Inflation Reduction Act.

A (35:05)

There's also the Net Neutrality Act. A few years ago, that was where Netscape had been. Not Netscape, Google had been so poor.

B (35:12)

I mean, even the Patriot act was to be spied on.

A (35:18)

Anyway. We could end up with something that's the Make Bitcoin Great Again act and have it not be for not careful.

B (35:26)

Well, it seems like the administration at least now largely understands that. Right? Because what we're seeing is we don't know what will come for the actual legislation and regulation, but we are seeing very clearly what they're taking away. Right? I mean, the SEC has completely refigured their crypto unit to get rid of the enforcement side and to make sure that they focus on fraud and disclosures, which is what the SEC is supposed to do. Right. So to answer your question about what the regulation should be, it should just be that everybody knows the risks that they're taking and an adult and makes their own decisions. Right? But DOJ basically dismantling their enforcement team recently, we're seeing that basically at every institution. Right. They're getting rid of at least the bad policies of the past. I mean, the SEC rolled back every enforcement action.

A (36:13)

Well, Letitia James put out, I think this week a letter where she was saying, hey, you shouldn't dismantle all that enforcement stuff. From my view, the enforcement isn't bad by itself. The reason the enforcement was problematic was because they were starting with, let's lock everything down. Let's go after people that haven't evidently done anything wrong, assume they're doing something wrong, go find the crime. And it just wasn't the right phase for it. Like, there's an innovation phase, and then like, hey, if there's a problem, let's go solve it. But remember, the largest two asset recoveries ever in the history of the DOJ were both Bitcoin. Right? So it turns out that without having travel rule, without having BSA enforced fully, the blockchain itself is already better than the sum total of the banking technology that's been used over the last 50 years. Just the Blockchain, Right? That's all you needed. Now look, we're talking about privacy and there's more innovation. There's a lot of things to still be considered. So it's not a fait accompli that like blockchain is just better and we should not have any regulation. But it was wrong to start with. Let's go enforce first and figure out, you know, who's innocent later.

B (37:21)

I don't even think they were doing that. I think they were just. I literally believe, and I don't think this is a tinfoil hat, they were just trying to kill the industry or at least slow it for as long as humanly possible. I don't think they actually were trying to even find bad actors. I think they just wanted to freeze it.

A (37:36)

Okay, well, I try not to say too much. People's intentions were let them speak for themselves. But anyway, I think we agree on the conclusion.

B (37:46)

So on the banking side, we kind of touched briefly on Operation Chokepoint 2.0 without saying it, obviously, but reputational risk. Now we're seeing a lot of clarity that our feelings about what was happening with the banking industry and crypto were not unfounded. There's a lot of proof that those things were happening. For you as a custodian, how much did operation choke point 2.0 show its face for your business, for your customers? And what meaningful change will that bring about now that you know that the banking system is effectively open to the industry?

A (38:18)

Well, most people don't know this, but, you know, we, we do a lot of US dollar Fiat Rail, so we're a trust company and then we use banks and you can hold dollars with us alongside your. Your crypto assets, and we can help you use those in all kinds of interesting ways, whether it's lending or trading or other things. So Fiat Rails are very, very important to us, of course. And you know, prior to a couple of banks failing, we had, we had three banks, we had silvergate, we had Signature, and we had one other. And when Silvergate and Signature died, we're assassin.

B (38:50)

Say we both murdered on a Sunday. Yes.

A (38:54)

But when those two went down, we were down to one bank. So then we go to look for more our position. You know, we didn't really have problems with like bank closures and stuff like that, but we go to get banks and basically the big banks were all out. So what had happened is through Operation Choke Point, basically the OCC said, and you know, this is Martin Groenberg, put out a letter 2022. I think it was in April. And he said, if you touch crypto, I'm going to scrutinize your business. And so, you know, I'm sorry, that was fdic, sorry, I misspoke that pretty much turned off half the banks at the state level and know most of the banks at the federal level. The OCC also went to all of its federal level banks and said don't, don't touch it. So that meant, you know, J.P. morgan won't bank us, BNY won't bank us. And it was a pretty easy conversation. So we didn't have any accounts dropped or things like that, but we just couldn't get the best banks that we want. And you know, our clients want to move a lot of money. Institutional money is easiest if they're using the big banks by the way. It's also safer. You know when you're moving, most people don't know this, right, but like so you're moving a billion dollars and let's say you're sending it to a mid sized bank which is like 25 billion in size. Well a billion is a lot to them. So it affects their reserve requirements and they monitor these things all the time. And so if you just send a billion dollars to a mid sized bank, they freak out because they got to go find cash to go put up the Fed to meet the reserve requirements. So this is all about safety of that bank. Now you could argue whether those reserve requirements are the right thing or not, but they're supposed to be the right thing. The regulators put it in play by having pushed us down to the small banks. We're now stretching the small bank ability to be safe by the rules outlined by the banking regulator. So you can see it's a bit of a catch 22. The right answer is let us use the biggest banks so that you've got the most safety. And look, operation choke point's over. We now banks are all opening up. I seen number of people in the industry just this last week and everybody's saying yep, same thing, we're all opening. So it's great.

B (40:48)

Yeah, one of the sort of unintended centralization issues that came with I guess SAB 121 and all of that was that when these ETFs launched, Coinbase effectively ended up being the custodian for 85, 90% of those assets.

A (41:02)

Right.

B (41:03)

And I think that most people wouldn't want a single company of any sort having that much of the assets custodians fail. You and I have discussed prime trust in the past Right. I mean, these things happen.

A (41:16)

Well, this gets into market structure a little bit and be happy to chat about that, but I think it was actually a little different than SAB 121. So it's true the big banks have been out because of that, but they also were just struggling to figure out how to get into crypto generally. So remember, they have large effective businesses based on dollars and they know how to make lots of money and have manageable risk. And when it comes to crypto, it's a small market, they don't understand it. So it's the opposite. Make a little money, big risk. So it's. It's not unusual or surprising that it's taken them a long time to figure it out. So they had been on the sidelines. So the reason all the ETFs initially went to Coinbase was one reason, one reason alone. Gary Gensler. So Gary Gensler was very anti ETF for forever. I mean, how long take the ETF? I don't know, eight years.

B (42:07)

I think the first filings were in 2014 or 15 by the Winklevoss twin.

A (42:11)

So, yeah, So, I mean, we tie, we talk about Operation Choke Point from the banking side, but we also had an ETF lockout, which was completely unfounded, certainly for many years. Even if you think it was founded in 2014, to reject that first one, whatever it was, certainly by 2018, 2019, we should have had an approved ETF. So anyway, because everybody knew that the SEC was trigger happy on shooting down crypto stuff, they went to the only guy that was a public company crypto guy, and of course that was Coinbase. So I'm not trying to dis their business. They're perfectly fine business. But they were already through the SEC gates, and so everybody felt like this would be the easiest way to get an ETF application through. Good news. You know, they've all diversified now, so, you know.

B (42:56)

Yeah, I think that was one of the big news stories last week, was that BlackRock was diversifying to Anchorage as well. Correct?

A (43:02)

I think they've added that now, yes.

B (43:04)

Yeah. And so is that how you see the ETFs as they grow, eventually being custodied, which is multiple custodians, and spreading the risk over multiple entities instead of having everything in one place?

A (43:16)

I mean, of course, since 2008, the SEC has generally been encouraging more custodians not related to crypto. For other stuff.

B (43:22)

Yeah, for everything.

A (43:23)

Yeah. That's part of what you do to mitigate risk. It just kind of makes sense.

B (43:29)

So one of the huge narratives in crypto right now is obviously real world assets and tokenization. Is that something that Bitgo is actively building in, participating in things that you're looking forward to, to the future? I mean, how are you sort of adjusting to this new atmosphere and being on top of these emerging sort of narratives and markets within crypto?

A (43:50)

I think it's definitely happening. I think there's a lot of poor ideas out there. And blockchains are great. Obviously. I love defi. I love the use cases, I love the innovation. But it doesn't mean that you just put it on a blockchain. Everything's magically better. So, you know, the first wave of kind of move it onto a blockchain is like, hey, that existing infrastructure is kind of like a lot of overhead. Why don't we cut the overhead and we'll make a better market? But just because you got high overhead doesn't mean that you're inefficient, because the traditional finance does a boatload of volume. We have the best capital markets in America, in the world here in America. And they do so much volume that brokers charge 5 cents a transaction and still make money. And that just shows that even though there's overhead in the costs and making it all work, the volume is really good. So when you try to replicate that onto just a blockchain system, the difficulty is priming the pump. How do you get the flywheel spinning? And. And that's been the tricky issue. It's not a technology issue. Bitco is participating in this, by the way. We bought a company called Brassica a little over a year ago. They've got a transfer agent, custodian, and technology on top of it, which is all kind of, you know, what can power any, any RWA that you want to run. So these things are going to happen. But I don't think the nut has been cracked. And I think there is a race between the technology firms and traditional finance. On most of crypto. I think technology firms win on the rwa. I think the traditional firms have a better shot simply because they have so much distribution. But remember, there's a reason why there's that book Innovator's Dilemma, which is that large incumbents underestimate innovative technologies over and over again. And this is what toppled IBM as the world's biggest computer maker. Microsoft, you know, down the line, Fujitsu, like, all these guys that had, like, the market cornered that are now gone.

B (45:53)

Blockbuster, Kodak, you know, Sears. That's the famous examples.

A (45:56)

Yeah, correct. So, you know, can traditional finance markets figure out how to capture RWA while not being so afraid of, you know, cannibalizing their existing business that they win? And that, that'll be the tricky question. I think because there's so much regulation involved here, they have a better shot than cases. But, but we'll see. And regardless, it's going to be good for investors and, and consumers.

B (46:23)

Yeah. I recently spoke with Sergey Nazarov from Chainlink, who was at the summit with you as well. And we spoke, I think the day after the summit or two days after, and he made the exact same point. He said, listen, I think the growth potential for this market with crypto natives is 2, 3x. But if you consider the growth perspective coming from outside of crypto, for all of the assets that need to be moved around the world, it's hundreds of times bigger than that.

A (46:48)

I mostly agree. I think the crypto side is bigger than that and I think the, the non crypto side is, is, is equally that big. So look, the opportunity is huge. And you know, one of the nice things about having regulators that are now like trying to help figure this out is that we finally get to actually start sorting this out legitimately. Whereas.

B (47:05)

Well, let's dig more into market structure because you said we could talk about that a bit more in the past. I think Tim Scott just said that we're going to get market structure on the books by obviously I know, whatever that may be and I've heard that this is important to Trump.

A (47:20)

Well, let's talk, let's talk about market structure. Look, I think there's three classes of regulatory stuff. One is law enforcement. That's like the bsa, the transaction monitoring, that's the ofac and screening, all that, that's pretty easy to deal with. It's laws. It's kind of, you know, the existing banks aren't very good at it, but with technology we saw that. And by the way, I think Bitgo already does solve that, along with a number of crypto players. The second area is investor protections. This is largely the realm of the sec. If you're issuing certain types of financial instruments, the SEC wants to make sure that you are disclosing, not pumping and dumping, running in a good healthy way. That's not ripping people off. We need a definition of what's a security, what's not a security. Obviously with digital tokens there's new things that can get created. I sympathize with the regulators because it's a global market now and the cat's out of the bag. So they didn't have to contend with assets being created everywhere before. But I think this is also solvable. I think Hester Purse at the SEC has been working on this for years. She's got a safe harbor for innovation that also accounts for decentralization. All right, that part will get started. So those are the two things we've been hearing about. Now, the one we haven't been hearing about is probably the most important, and that's market structure. Market structure has to do with how do we make sure that the US Capital markets are the best markets in the world. How do we make sure that they never go down? Now, we all have lots of stones to throw at the equities markets and say, oh, this is inefficient, or da, da, da, da, da. But you have to admit it's been incredibly resilient over the last 50 years. We don't really have the markets going down very much. They've been robust. And how do you build that? So in my mind, market structure should be how do you isolate the risks that are inherent with various types of markets so that the market never goes down? That's what I think market structure should be. I think what's being discussed in Washington is mostly a little bit of how do we define a security? Which I think.

B (49:20)

Yeah, I was going to say securities versus commodities seems to be all everyone else is talking about. Right.

A (49:24)

I think that's a small thing. I think that's so easy. That's a definition of how, how, how do you classify and what taxonomy of, of assets you have. The, the second thing is, like, how do you regulate us? Crypto exchange, basically. All right, so, but, but basically what the exchanges are asking for is, hey, let me just do everything. I'll do it. Great. And trust me. Okay, let's talk about market structure in the equities world. And by the way, if you look in the CFTC world, it's more or less the same. You know, you'll find in the middle is an exchange like the New York Stock Exchange, like the nasdaq. Now, in traditional finance, the exchanges don't custody the assets. And the exchanges also are not broker dealers of the asset. Instead, in order to access that market, buyers go through brokers and sellers go through brokers. And these guys love to trade, and they trade as fast as they can. Now, when those trades happen, that falls down into clearing processes. There's a couple of different models in CFTC and equities, but you go through some amount of clearinghouse, central Clearing party. Ultimately, you land down in transfer agents to keep track of it and custodians and banks to move all the assets around. So this vertical axis doesn't really take risks. It's very defined risks. You don't have exchanges extending leverage. You don't have exchanges holding onto assets. And those are two very important risks. So in the crypto world, probably the number one cause for exchanges going defunct is they lost the asset. Maybe they were hacked, maybe they ran away with it, Rug, pull, whatever. When the exchange holds the asset, if they lose the asset, the exchange goes down. So imagine we play this forward 20 years, and we've got a really big exchange in the US they kind of lead themselves to monopolies. Exchanges do this, right? CME's Globex is the far and away biggest commodities derivatives exchange. So we've got one big exchange, and then they lose the assets. Well, that means the whole market goes down because of one guy. Right? Okay. So I think, for one, exchanges and custody shouldn't be there. And in particular with digital assets, which are bearer instruments, they're the hardest thing to secure. We've struggled with this as an industry. We're still struggling with it. Humans struggle with it. To have. Now, exchanges didn't even used to be able to hold stocks and. And things which you could actually replay back because you can give them back if something fails, but with crypto, you can't. Right. It's gone. It's gone. So I think that's one separation of risk from exchanges that you do. A second separation, which hasn't really been an issue in the US but it's about to become one, is that of leverage. So pretty much all the leverage trading is happening outside the US Today because it was unclear how you could do it legally in the US up until now. Okay. So people have been running this through Asia, through the Bahamas, Caymans, et cetera, to avoid any US Regulation around it. When you extend leverage, you're taking a significant number of risks. You're taking market risks, you're taking counterparty risks. How you manage that is very critical. If you mess that up, you will go out of business. Now, in the current equities world, a broker dealer is the guy that would extend that leverage to you. And it's bad if a broker dealer goes down, but at least the market doesn't go down. All right, so that's the other part. And you know, Coinbase, and sorry, I don't mean to point out, I'm talking about market structure here, but, you know, they just got an fcm, they want to go do derivatives. They want to get into that. I get it. They need it for their business in order to expand. The next thing that's going to come into that is leverage. That's where you typically would do leverage. And then if they happen to get over their skis, something goes really bad and you know, humans screw up over time, then you could imagine the entire exchange going down. So these are the two places I think we could look at market structure to help us solve some problems, which is all about isolating risk so that we can have the best capital markets in the world.

B (53:09)

So the custodian should not be the exchange.

A (53:12)

Yeah, that's right.

B (53:14)

But that's the way it is in traditional markets, correct?

A (53:17)

Yeah.

B (53:18)

So why is that not the case yet with crypto, do you think?

A (53:22)

Well, look, I mean, we're hiding this under the, under a bill called market structure. And I do think there's some good problems being solved with the market structure bill, but some of them are a little bit dated. Like part of it is the classification of what's a security and what's not. Well, the reason that crypto wanted to go to the CFTC for this previously is because that's kind of a better, more reasonable regulator. Except for that, guess what, we've just made the SEC reasonable again. So now that the SEC is reasonable, we could probably figured out that definition. And look, I definitely want to see that. I think stable coins should not be securities. I think certain other types of class assets, maybe meme coins or whatever, should not be securities decentralized. There should be a safe harbor again. Hester Purses, I think got a much better articulation of this than I do. Then the other stuff that's in the market structure bill is really how to regulate us crypto exchanges. Number one, I'm not sure we actually need anything. Remember the running just fine, you know, as money transmission businesses. Now if you do want something better, which I do think could be better, that's good. But I think if you want to call it market structure, you should be talking about where is the risk being taken and how do we kind of partition these things? It's probably not going to be a problem right now. And if we get good mature parties in there, it won't be a problem even in the next couple of years. But we're also setting ourselves up for once digital takes over. And heck, if Larry Fink is right and everything's moving digital within the Next, you know, 612 months, I'm not sure you Said that. But if, if it's really happening really fast, it'll creep up on you, it'll sneak up on you very, very quickly and then you'll wish you had the market structure and it'll be too late.

B (54:59)

The contagion of the last cycle snuck up fast, right? I mean, you saw Block 5 Voyager Celsius back to back to back to back. And then of course, FTX is kind of the final blow. Some would say that all of that would have been avoided if they had been properly regulated in the United States. But I think we know what the stakes are after seeing what happened a few years ago.

A (55:17)

I mean, look, that was the lending market, right? Which is closely related to the leverage market. The reason it's so closely related is because all those lenders, they knew what was happening. People were borrowing in order to be able to go trade on rickety exchanges, right? And so they were using this to get leverage. And then the only way you get leverage is to have under collateralized lending if you're taking it out, right? So now you got this race to under collateralized the most, to get the most lending, and then it turns out they all pop at the same time. So yeah, look, we are going to start once we have an official way to run derivatives in the us. Leverage is the next thing. Once you throw that in there, humans screw it up over and over again. So I think, yes, we should have more, more structure around it.

B (56:05)

Well, I have to say I'm glad that you've decided to participate in politics and take an active interest in that because we need cooler heads to prevail when all of these things are said and done. And it's nice that you're there.

A (56:18)

I'm going to win this war. Some pretty powerful people that just like, no, no, I can do it.

B (56:24)

Yeah. We need the right minds and voices in Washington to make sure this is done right. So I'm glad that you're participating. Thank you so much, Mike, as always. I know we ran out of time. I feel like you could do this for five hours.

A (56:37)

Well, thank you, Scott. It's always a pleasure to be here. I love seeing you. Thank you.

B (56:41)

Thank you so much. We'll do it again soon. Are you going to be in Dubai for token or bitcoin conference in Vegas?

A (56:48)

I will be in kind of all of these things. Yeah.

B (56:50)

So see you soon. We'll do it. Well, maybe we'll catch up very soon and do it in person. Thanks, man.

A (56:56)

All right, take care, man.

B (56:57)

Bye. Bye.

A (56:58)

Let's dope.