Transcription:
Penny Crosman (00:04):
Welcome to the American Banker Podcast. I'm Penny Crosman. In December, five crypto companies received national trust bank charters from the Office of the Comtroller of the Currency: Circle, Ripple, Paxos, Fidelity Digital Assets, and Bitgo. To date, about nine such companies have received these charters and more are in line to get one. Traditional bank groups and some members of Congress have objected to the new charters, arguing that these crypto banks want to evade the fundamental safeguards and obligations that come with being a bank. They've suggested that these crypto banks pose risks to customers, the safety and soundness of the banking system and the separation of banking and commerce. Bankers have pointed out that national trust banks do not carry FDIC insurance and the consumers could mistakenly think their crypto funds carry the same federal protections as traditional bank deposits. We're here today with Mike Belshe, CEO of Bitgo, who argues that uninsured crypto banks are actually safer than traditional banks and we're going to unpack why.
(01:07):
Welcome, Mike.
Mike Belshe (01:09):
Hi, Penny. Nice to be here. Thank you.
Penny Crosman (01:11):
Thanks for coming. So what was the original idea and mission behind Bitgo when you founded it in 2013 and how has it evolved over time?
Mike Belshe (01:23):
Look, in the early days of crypto, people wanted to build some businesses originally around trading. And so exchanges as they're now known, you've probably heard of some of them like Coinbase and Kraken started to emerge. And this intersects money. And at that time, if you asked lawyers or legal professionals, "Hey, how do I start a Bitcoin exchange?" They really didn't know what to do. And it's not that the lawyers were bad or anything like that. They just didn't have any case precedent. This is a very new type of thing. Is it money? Is it something else? Et cetera. So in those early days, what happened was as an exchange, you'd have to hook up to a bank in order to be able to receive dollars for payments. And then you would build your exchange capability and then you had to store the digital asset and you had to build that yourself because there are no banks that would touch Bitcoin at the time.
(02:16):
And then because this is programmable money, look, it took off across the planet like wildfire. Obviously people know the tremendous growth story that Bitcoin has had. But as it started to get bigger, people kept losing their Bitcoins or losing their digital assets. And Bitgo set out to build technology originally, not necessarily a regulated product at the time, but just we wanted to make sure that people couldn't lose their money. Sometimes you'd have it on your own and you would lose it because you lost your password, maybe your hard disk would crash. Sometimes you put it on a seemingly safe exchange and then they might get hacked or they might have it stolen there. So we pioneered this thing called two out of three multi-sig, which is a fancy technology way of protecting digital assets so that there's no single point of failure. And everybody uses this to some degree, all the professionals do, at least to some degree today.
(03:08):
We use not just multi-sig, we would do MPC, but we'd stayed true to this concept of protecting against both theft and loss. And so the technology works for that, works very well. It's adopted by pretty much all institutions around the planet. But our original purpose was simply to help make sure that you wouldn't lose your digital assets by protecting with safer controls.
Penny Crosman (03:31):
And you've obviously branched out a lot. What are some of the additional products and services you've added in the intervening years?
Mike Belshe (03:41):
Of course. So this started to evolve. And who was naturally gravitating towards a product that had super high security for your Bitcoin? Well, it was businesses mostly. They had larger amounts of Bitcoin to protect. It was some high net worth individuals in the early days, but then it became what we now call institutions. One of our first big clients back around 2015, 2016 was CME Group. And at the time, we didn't have any regulatory standing. We weren't a financial institution. We were a software company. But it became clear that CME didn't want to hold the keys for the product we were working on. They wanted someone else to hold it. They wanted a bank. They searched high and low for someone to hold the keys. We didn't have the capability, but that was really kind of the final straw where we realized, look, if we want this product, this asset class to grow, we need to evolve.
(04:29):
And so that's where we evolved officially from a software company to a financial services company, a financial institution. We built the first purpose-built digital asset trust custodian in the world. We built that initially out of South Dakota under a state chartered trust company. And it allowed us to now take all of the keys for securing your Bitcoins and your digital assets and we could hold those. So a lot of people think of us as a custodian today, and it's true we are a custodian. We use that as a means to end, maybe not the end game itself, but we actually operate seven licensed custodians around the planet. We have two here in the United States. We have Switzerland, we have Bafin regulated in Germany. We have Vara regulated in Dubai. We have MAS regulated in Singapore and then coming soon in South Korea. And we put all these together and now we can settle transactions on behalf of other parties across the globe.
(05:24):
And we're a fully regulated financial institution today in the US. We're OCC National Bank. And we can have Americans that can connect to American financial institutions, American banks, that's us. We can have Europeans that are connecting to European banks, European financial institutions on the digital asset side. That's again, sorry, BICO, Germany. And then we can settle the transactions across what we call the GO network, which is between BICO. So those parties can all just deal locally in their regions and yet can settle across the global network that BICO's built.
Penny Crosman (06:02):
How many customers do you have today?
Mike Belshe (06:05):
So we're an institutionally focused business. I think we have the largest collection of institutional businesses in the world. It's over 5,500. We're now a public company as of earlier this year. Part of being a strong, I think, fiduciary financial institution, it's demonstrating your worthiness to your clients that they can trust you with their billions of dollars of assets. And so being a public company, we think assists with that. Everyone can see through the SEC process. It's got faults of course, but it's a very transparent thing. You can see the risks of the business. You can see our quarterly update on our financial health. You know exactly where we stand, you know who the management teams are, you know what policies and processes we put behind it. So anyway, we hit institutional clients, we hit them globally, and we've been trying to be as transparent as possible so that we can grow that part of the business.
Penny Crosman (06:58):
So you had a state trust company license. What were the advantages of going for the national trust charter?
Mike Belshe (07:08):
So here in the United States, I think banking is evolving. We have computer technology, which is very different than the way banks were created in the early days. So as we were coming in to build the state charter trust companies, and we actually had two, we had one in South Dakota. We later added one in New York under New York DFS. That gave us the capability to hold these assets, act as a fiduciary in terms of our clients' safety. It allowed us to access and build other services on top of it. But because digital assets have been so controversial, it's really been a state-by-state conversation to figure out, okay, what do we do in this state? What do we do in that state? So we had to add collections of money, transmission licenses and all kinds of things on top of it. It was good business, but it was made more complicated basically because everyone's confused like, wait, are digital assets different than other assets that we've had before?
(08:05):
And remember, trust companies can hold onto all kinds of assets. You can have, of course, bonds, you can have stocks, you can have your private trusts for your estate. You can have a collection of cars, you could have a large collection of pencils or Pokemon. All of these types of things could be held at trust companies. And this has been done for hundreds of years. So it's not really a new concept. The idea that you would take your Bitcoin and want to hold it in trust makes total sense. But being a state charter trust was limiting because there was so much confusion across the states. And it is true that Bitcoin, although it's been declared as an asset, it's decentralized. I think at this point there's not really any controversy about it anymore. 10 years ago, regulators were talking about this a lot, but it is a different type of asset in that it's highly fluid that it is you can electronically move it around the planet almost instantly, and then it's also an asset.
(09:03):
So it's got a lot of properties that look like money. And so it just intersects the financial system in a different way. Also being a bearer instrument, it's got different security properties. If you can get the private key, you can get the coins. So this is just something we haven't seen for a long time. Moving to an OCC chartered trust greatly helps us. A, it's the strongest fiduciary trust company we can have. It takes out any doubt that we can do custodial types of businesses at the federal level, whether that's securities, whether that's Bitcoin, digital assets or whatever else. And then B, it makes it so that we've got one regulator instead of 50 regulators. So that's a big advantage and our clients like to see that we've done this. Now, one last thing, the OCC requirements are substantially more advanced than probably any state chartered trust company.
(09:58):
So the full three lines of defense that you would expect when you're operating a bank are enforced upon Bitgo. Of course, we're subject to BSA. Of course we're subject to AML, KYC, and we've been doing those things for years even as a state charter trust. But this level of safety that goes in with the regulatory oversight from the OCC is a more advanced level.
Penny Crosman (10:18):
That makes sense. So I'm sure you saw a letter that Elizabeth Warren sent about the five crypto companies that received charters from the OCC in December. She argued that these companies' business plans do not include specific fiduciary trust activities and the business plans don't suggest that fiduciary trust activity would be the primary business of these companies. These business plans include language that suggests the companies intend to engage in non-fiduciary custodial activities, facilitating payments and lending activities and conducting stablecoin activities closely related to deposit taking. How do you respond to that kind of comment or objection?
Mike Belshe (11:12):
Well, let's see. First off, it's simply provably untrue that we don't provide fiduciary oversight. I mean, the storage of assets and the fiduciary protection thereof is long established and really not under question, although she keeps raising that point. So I'm not really quite sure how to respond to that part. The second part of her concern seems to indicate that somehow digital asset companies are trying to do something to replace depository companies or whatnot. I disagree with that. I mean, we are not a depository. So a depository just make sure everybody knows. There's two types of banks basically. One is a depository, which takes assets from clients, keeps it on balance sheet and then lends them out. That is a on - demand deposit system, meaning if you deposit $10 million into a depository and then the next day you want the money back, you need to be able to get the money back.
(12:16):
So the bank has this challenge. Usually what they want to do with the money so that they can make money themselves is they want to lend out the assets that come into the bank and they might lend it out for someone's mortgage. Maybe it's a 30-year term or maybe it's something that's a business loan for five years or whatnot. But if that $10 million comes into the bank, the bank lends it out for five years and then the next day the guy shows up to get his $10 million back. This is a complicated procedure that depository banks have to be ready for. And this is where the phrase safety and soundness comes from, which is like, how are you going to make sure, Mr. Bank, that you're going to be able to fulfill that on - demand withdrawal should it come? As a reserve bank or a trust bank, which is what we are and what these crypto firms are looking to do, we don't do depository actions.
(13:06):
So we don't take money and then lend it out. We don't put it on our balance sheet. It's actually offer balance sheet. It's segregated storage. I mean, it's separate from all of our other clients. It's bankruptcy protected. Our clients absolutely want that. When you do look at some of the failures that have happened in the crypto industry, a lot of them deal with there's been hacks and there's been stealing and all kinds of terrible stuff. Had those users been under fiduciary oversight by a trust company, they wouldn't have lost their money. I guarantee you that all the FTX users wish that they had what Bitgo provides. So maybe the big irony here is while Senator Warren indicates that we're trying to do something inappropriate, actually we're trying to solve the very problems that have happened before. And it's not like she's got some other proposal for how to do it.
(13:56):
So anyway, if there is another proposal for how to do it, I'd love to hear it. But I think what Bitgo does is strictly to the benefit of the industry and all of our clients.
Penny Crosman (14:09):
So another related objection I think is that consumers might be confused or misled into thinking the money they put into a national trust bank is FDIC insured. What do you say to that? Do you try to make it very clear to... And I understand you're not really serving consumers, you're serving businesses so it's slightly different, but what would you say to that objection that people might think it's FDIC insured when it's not?
Mike Belshe (14:39):
Well, I mean, I guess I would counter it back and say she's somehow implying that FDIC insurance is safer than what we do. And I would argue it's not. So who needs FDIC insurance? FDIC stands for Federal Deposit Insurance Corporation. So if you're taking on - demand deposits, you can get FDIC insurance. Of course, you have to meet a number of criterion through FDIC and you're submitting yourself to additional oversight, et cetera. All of that's true. But because you're taking deposits and lending them out and because banks have historically messed this up, just like the crypto industry has had mistakes, the banking industry is also riddled with hundreds of cases where the depository action failed ultimately retail depositors. So FDIC insurance was established decades ago in order to help build confidence in the banking system that, hey, if something does go wrong, your bank is FDIC insured, you're protected up to a certain amount per account.
(15:42):
All right. Bitgo doesn't need FDIC insurance. We're actually not eligible for FDIC insurance because we're not taking the risks that the banks are taking. Depository risks take your money and lend it out. They've got counterparty credit risk, they've got duration risk, they've got investment risk. They've got a whole bunch of risks that they're taking when they do that. And that's what most of the banking regulation in the United States is about protecting. It's about helping prevent banks from failure during all those things. Eventually we add FDIC insurance as a layer to protect there. Bitgo doesn't do any of those things. So the safety and soundness issues aren't even relevant. Now every bank, whether you're a depository bank or whether you're a reserve bank like Bitco is, has operational risk, has financial, like you can go out of business risk, these types of risk. Those aren't protected by FDIC insurance anyway.
(16:38):
So anyway, to Senator Warren, I would say simply yes, the existing banks need FDIC insurance, the depository banks. For the crypto banks that are trying to come in, we're not asking to do depository actions. We just want to be able to hold the assets. Of course we audit it. We do more audits than any bank ever has. As an example with stablecoins, have our auditors do checkpoints twice a month to verify that the assets are actually backing the stablecoin. I don't know of any bank ever that has done twice a month verifications through a third-party auditor. So anyway, I think what we have is very strong. I think it's super easy to make safe. Operational risks are there for all banks. I'd say that those are very manageable and contained. That's why the FDIC insurance doesn't cover them. And yeah, overall, she basically just doesn't understand that there's a new option of banking, which is a reserve bank as opposed to a depository bank.
Penny Crosman (17:39):
Could Bitgo survive what you think of as a bank run where every client wants to take their money out at the same time, or in this case, their digital assets out at the same time?
Mike Belshe (17:52):
Absolutely. So we hold the assets in reserve. That means you can come and all hundred billion dollars, we can get it all out in 24 hours. So we can absolutely fulfill the needs of any bank run. This is a claim that depositories can't make. So depositories lend out the assets, they lend them out with duration. By definition, they cannot give you all of the assets in a quick period of time. This is why I call them, many people call them fractional reserve. That is they don't hold all the reserves, they only hold a fraction of the reserves. And in fact, their goal is to lend out literally as much as they can. So 90 plus percent of the assets they want to have lent out, which makes them subject to bank runs in a way that a custodial bank, a reserve bank like Bitgo is not vulnerable to.
Penny Crosman (18:45):
Does Bitgo do any lending or does it plan to do any lending?
Mike Belshe (18:51):
So Bitgo is, we've got Bitgo, the bank. The bank does no lending. We're not licensed to do that. Outside of the bank, we can do lending. So we've got separate entities that do that, but we don't ever take deposits and then lend it out. It's the opposite. What happens is someone comes and says, "Hey, I've got capital I'd like to earn yield on. I've got capital I'd like to use as collateral so that I can borrow against it. " But those are explicit actions always taken by clients. It's never us lending out assets inside the bank.
Penny Crosman (19:28):
So basically the safety that you talked about and the reason why a company like Bitgo is safer than a traditional bank is because you don't do fractional reserves. You have all the underlying assets and funds there and available. What if there was, God forbid, a hacking event? And we have seen that happen at some exchanges and such.
Mike Belshe (19:56):
Yeah.
Penny Crosman (19:57):
What would be the backup plan?
Mike Belshe (20:00):
Great question. So we've all heard of bank robberies. There's a million movies about bank robberies, complicated heists that get into vaults and steal the assets. So bank robberies hacking are the same thing. And of course they exist from the dawn of time. What's unique about digital assets is that they are bearer instruments. So it's like gold. Whoever's got the gold can kind of use the gold and sell it. By the way, we used to have bearer bonds both in the US and abroad. They're still, I think, in reference in some James Bond movies and things like that. Mostly we've not used them. Why? Because they're difficult assets to keep secure. They could be used for money laundering. They're not usually very good, but cash is also a bearer instrument. People love to steal cash from banks, break into the vault and do that. Look, Bitcoin's got a whole bunch of safeguards that we take in order to protect your Bitcoin and digital assets and also to segregate the assets.
(20:59):
So it is true we have vaults, and I have a picture here of a legacy vault in the background. These are, of course, they're virtual vaults. They're software vaults, but they also include physical components, physical hardware, separation of online and offline systems and whatnot. So we go to great lengths to do that. I can go into detail about how we manage all of that. We reduce the risk by separating basically into multiple piles of money, each of which is relatively small, and then reducing the chance of a correlated loss across those different vaults of money. Our insurance underwriters are aware of what we do. Our regulators are aware of what we do. We've been doing it, I guess, over 10 years now. So we have a lot of experience and we're in multiple iterations of improving that process. We have never had a heist from Bitgo, and we take great precautions to make sure that we don't.
Penny Crosman (22:02):
Okay. The last question, I believe in your last earnings call, you said that you believe stablecoins will continue to be more relevant to real-world payments and financial workflows and the tokenization will continue to create new infrastructure needs. What do you see as the need and demand for stablecoins and tokenization? I guess that's two different questions, but what do people really need these for or what do companies really need these for?
Mike Belshe (22:33):
Yeah, look, people are using payments all the time and this is not new. And frankly, the banking industry itself has struggled to keep up with technology with regard to payments. And this is not new to crypto or stablecoins. This has been going on for a while. If banks were providing really great payments, for instance, like PayPal wouldn't exist. Venmo wouldn't exist. Cash Ap wouldn't exist. WeChat Pay wouldn't exist. What's happened is as the technology's evolved, fintechs have been able to fill the payment sector and the needs of people for convenient payments faster than banking has been able to do it. So this is just something we've seen for a long time and stablecoins are the next generation of this. So stablecoins have a few attributes which are simply better than what you get with your bank. Number one, they're 100% backed all the time by T-bills.
(23:27):
There's no risks being taken with the backing. And by the way, I should clarify, there's two types of stablecoins that could exist. One is a one-to-one backed, which is like what a genius compliant stablecoin would be. Others would be like algorithmic stablecoins that are backed by multiple things. When I'm talking about stablecoins being safer, I'm talking about the genius compliant one-to-one backed. All right, so number one, they're backed. There's no risk of counterparty risk or loans or duration mismatch or any of that. They're always backed. Number two, they should be able to give you at least the risk-free rate. When you put them into T-bills, the issuer of that stablecoin is getting the risk-free rate. They ought to be able to pass that through to the end user. I know there's some concern about Senator Warren thinks that somehow this is going to hurt the banks or whatnot.
(24:15):
I argue it will not, and there's historical precedent that proves it will not. Anyway, you should be able to get interest. And then number three, you can move them around the glob instantly at almost no cost. So unlike ACH, unlike wire transfers, the fees are just basically zero. And this can be done instantly and at scale. So I believe they're just better payment systems. I had an experience just last week. I was in Mexico City and I needed some cash to give a guy a tip. And of course I usually have dollars. I didn't have Mexico Pesos.Tried seven different ATMs. I don't know, my banking card just wouldn't work. I'm not sure why. I'm sure there's some valid reason why the bank didn't want to give me $100, but they didn't. Really should have been able to just use a stablecoin and should have been a tap tap on my phone to his phone and I could have transferred that money.
(25:09):
So anyway, stablecoins, I believe, are the next generation of payments and they're strictly better than anything we've seen before.
Penny Crosman (25:17):
All right. Well, Mike Belshe, thanks so much for joining us today. And to all of you, thank you for listening to the American Banker Podcast. I produced this episode with audio production by Adnan Khan and Wenwyst Jeanmarie. Special thanks this week to Mike Belshe at Bitco. Rate us, review us, and subscribe to our content at www.americanbanker.com/subscribe. For American Banker, I'm Penny Crossman, and thanks for listening.
