Why Every Bank Needs a Digital Asset Strategy

Nathan McCauley leads the only federally chartered digital asset bank—Anchorage Digital—and partners with other banks looking to crack into crypto. With regulatory progress and market momentum driving more institutions into the digital-asset ecosystem, McCauley unpacks why banks of all sizes need to develop comprehensive crypto strategies today to remain competitive as the crypto industry swiftly evolves. Drawing on insights from the latest in blockchain innovation—including tokenization, stablecoins, and wealth management solutions—McCauley outlines how banks can dive into digital asset technology to create new revenue streams while meeting client demand.


Transcription:

Nathan McCauley (00:12):

Good morning everybody. It's a pleasure to be here and thanks Holly for the wonderful introduction. As Holly mentioned, I am Nathan McCauley. I run at this point America's only digital asset bank, Anchorage Digital. We were chartered in early 2021 and have been building in the space for the last four years. That's been extremely exciting and we've gotten to do a lot of really fun things over the last four years. To tell you a little bit about our client base, our clients are the large hedge funds, large Chauvin wealth funds, large institutional investors, large corporates. Many public companies now are adding Bitcoin to their balance sheet. And so we serve a whole host of institutional use cases. We started there with custody, actually built the custody system in late 2017, early 2018, and that's been really our bread and butter for a lot of our time. But we've increasingly expanded our set of services to include things like trading, things like collateralization and platform-based services where other folks can build on top of the infrastructure that we've built in order to bring crypto to their institution. So that's a little bit about me.

(01:32):

Since this is a banking conference, we like to talk about numbers. So I want to start with talking about three numbers that I find very interesting and those numbers are 3 55 and one. What does three stand for? Three stands for the current market cap of digital assets, not $3, but $3 trillion. And this is to put it into perspective, this is roughly the same size as say Apple in terms of market cap. If you look at it in terms of GDP, it's roughly equivalent to some countries like the UK, France, or India. So on one hand it's a relatively small number only. There's a single stock that is the same size, the entire crypto market. On the other hand, it's the size of some countries. And my overall point there to emphasize is that it is definitely enough to take it seriously, but not so large that everybody's missed out on the fun. I thought when I started Anchorage in 2017 that I had missed out on all the fun, that everything interesting in crypto had already happened, and boy was I wrong. And I expect over the next decade for even more interesting things to happen in crypto.

(03:00):

So one of the things that's interesting about that $3 trillion market cap is that it allows a broad set of use cases to be flourishing. One example that I want to point out is to my second number. My second number is 55. 55 stands for 55 million Americans who own some form of digital assets, be it Bitcoin, be it stable coins, be it their favorite altcoin. This is a huge phenomenon, 55 million, that's about actually 25% of the adults within the country are holding digital assets in some form. And my question to you is where are they holding it? And I would guess that the answer is not at your institution. They are not holding their digital assets at your institution. The reason that I know that is because of the last number that I have, which is one, there's one of us in the room who has a bank that is actively involved with digital assets, and that's me.

(04:08):

So I know that it's not at your institutions because I'm the only one in the game right now, but that's a little bit of a bummer. One is the loneliest number, and I would like all of you to join me in this journey. There's an incredible amount of things that we can build within digital assets. And so that's what I want to talk about today is how you all can get involved, how you all can join me on this journey. And so let's set as a goal. Let's come back here in 10 years and let's have 4,577 digital asset banks to the point that there will be no such thing as a digital asset bank because it'll be obvious we we'll all be digital asset banks. Let's do it. Alright, before I talk a little bit about crypto a little bit more, I have to take a brief aside and tell you all that I grew up in Indiana and in the year 2000, in the year 2000, the Pacers went to the NBA finals only to be crushed by Kobe Bryant and Shaquille O'Neal.

(05:14):

It was a big bummer back then. And we're back. We're back in business guys. So quick shout out for the Pacers, Siakam's Tyrese Halliburton. I think they're going to bring it home. The Pacers have never won an NBA finals. We won back in the ABA days before the NBA was even established, but I'm hoping for them today. And so growing up in Indiana, I followed basketball. I was an avid basketball fan, but my sport in high school was not basketball. My sport, if you want to call it that in high school, was this wonderful game called chess. Alright, so I fit in here, okay, this is not the conference for athletes. This is the confluence for athletes, okay? And so mine was chess. And I want to tell you about this particular tournament I went to because I think it creates an incredible set of lessons for us.

(06:11):

So this tournament, it's called the Queen City Classic. It took place in Cincinnati, Ohio for what it's worth at the stadium there. And so the chess tournaments actually do happen at stadiums as well. There was no audience, but still you get to play in a fun venue. And there was a couple of interesting things that happened. It's an all weekend event. The first night we actually got to play in what's called a simul. A simul is where say 40 people play against one player each on different boards. So 40 different boards and the grand playing against everybody I got to participate in this against the grand are named Maurice Ashley and me and my friend were sitting next to each other. I'll cut to the chase and say that Maurice Ashley beat all of us. Every single one of us lost. He played against 40 of us at once and we all were defeated.

(07:00):

But one of the interesting things that happens was that Maurice Ashley opened up with a first couple of moves sequence that had him sacrifice one of his pieces early on, he moved a pawn directly into harm's way. And so for a brief moment, my friend John, who was sitting next to me, was ahead of Maurice Ashley in terms of material. He played an opening that is, and I've looked into it now and assessed the game afterward, looked through the notation, walked through it, and the opening there is called the Queen's Gambit. You may have watched the Netflix show that made the queen's gambit popular. It has you sacrifice one of your pieces early on and then it leads to a structural advantage despite what looks like taking a step back. And so after seeing that for Maurice, actually that became my opening for the next several years.

(07:49):

But so the next day we actually had the tournament, and this tournament was really kind of the high point of my chess career. So I want to tell you a little bit about it. It's four games you play in a round robin style. I won the first three games in the fourth game, fourth game. I was deep in thought about the middle of the game and I saw something. I saw something beautiful. There was a sacrifice that I could make with one of my pieces and with that sacrifice, I would have incredible structural advantage. And I looked at this for five minutes, and by the way, I'm just going to say this story is 100% true. It's going to make me sound awesome, but it's 100% true. Okay, I saw this move and this move would allow me to have structural advantage. I looked at it for probably five, 10 minutes, which I was taking up a ton of clock, but I was just like, I got to make sure this is right, focused, achieved, true oneness with the board.

(08:45):

And I decided, hey, it's going to work, it's going to work. And I was playing, as I mentioned, against the highest rated person in the tournament. And so I was severe underdog, not dissimilar to the Pacers playing against Jack and Kobe, but this one ends a little differently. So I make the move and my opponent in notating the moves. You write down the moves so you can go assess the game later on. He writes down my move and then puts a question mark on my move. That means blunder. That means what the hell that means why did this person do this? So he put a question mark to say, man, this person really messed up. And so I looked at that question mark, he wrote down the question mark and then looked at me and it was just like it was on, okay, it was on in this chess match in Cincinnati. And so I started to doubt myself. I was like, okay, what's going on here? Did I miss something? Am I wrong? This guy's really good. This guy's actually the best in the tournament. So I had that.

(09:54):

Speaking of best in the tournament, let's take a brief aside for a moment. Let's talk about Bitcoin. Bitcoin is the best performing asset of the last 15 years. There is no second best. I was at a round table at the White House recently. A bunch of the crypto execs were invited to a round table at the White House. And at that literally inside the East Wing, David Sachs, the crypto czar, said that the Bitcoin was created via the Immaculate conception. Now, I'm not up here saying that Bitcoin is Jesus. That's the White House saying that, okay? And the White House, that is official policy that Bitcoin was created via the Immaculate Conception. The Immaculate conception apparently happened in 2008, which as many of you know was as a difficult year for banking, difficult year for many Americans. But from that, Bitcoin was formed. The pseudonymous creator of Bitcoin named Satoshi Nakamoto actually in the way the Bitcoin works is that each block points to the previous block. This is how you create what is called the chain, the block chain. So every transaction points to the previous one. So you have an uninterrupted chain. Does anyone know what the first block points at? It? Points at a newspaper article about the bank bailouts. So the genesis block of Bitcoin points to an article about the bank bailouts. And so the idea here is clear that maybe there's another way, maybe there's a way that we could build systems differently.

(11:38):

I have to say unfortunately that I missed Bitcoin. I was at Square early on early in my career, little credit card reader. I was lucky enough to get to help design that design a bunch of the systems at Square. And all my friends at Square were talking about Bitcoin and I did not pay attention at all. I was in many ways assuming that the US dollar worked or the US dollar would work well and that would be the path forward that would continue to be why do we need alternative currency? So I missed it, Mia Culpa, but someone who didn't miss it is this engineer from right here in Florida named Laszlo. He was an early coiner and he did a very interesting thing. He did the first transaction to actually buy something with Bitcoin. Does anyone know what he bought pizza? Yes, he bought two Papa John's pizzas that would've cost roughly $41 and he spent 10,000 Bitcoin for those pizzas cents.

(12:50):

Now, don't feel bad for Laszlo. This is a guy who had much Bitcoin. And so the 10,000 was big. And if you anybody doing the math at home, that does mean that those Papa John's pizzas cost over a billion dollars in current terms. But I'm sure he has more Bitcoin, he's fine. And is actually in hindsight feels very good about this purchase because he thinks it kind of helped Bitcoin cross the chasm from being just kind of a fun thing to actually being spent for something. But I think what's also interesting to think about is those $41 that it would've cost to buy that pizza were those two pizzas actually. What does that $41 buy now? And it turns out it only buys seven slices of one pizza at that particular Papa John's. And so the devaluation story of the dollar cast against the incredible price runup of Bitcoin is what I think is driving so much of the interest in Bitcoin these days.

(13:54):

You have Bitcoin ETFs that have come out, the Bitcoin ETF is the most successful et f launch in the history of ETFs. Nothing has gone as fast, nothing has accumulated capital so quickly. And there's not just one of these ETFs, there's actually 13 of them. And if you count them in aggregate, the success is even more striking. But even just on an individual level, say BlackRock ETFs or Fidelity ETFs, any one of these would be the fastest growing product of all time. But it's not just the large asset managers that are getting into Bitcoin. You have the establishment of the Bitcoin strategic reserve. So governments are getting in as well. It's the official government policy right now to hold onto the Bitcoin that the US government has and to potentially look at ways to acquire more through what they're calling budget neutral ways, other ways to look at accumulating more Bitcoin.

(14:51):

And so in many ways, the fast forward here is to start treating Bitcoin as if it is digital gold. It's not just the US government that's doing it. There are states on both coasts, New Hampshire live free or die state has decided that they're also going to establish a Bitcoin strategic reserve and Arizona as well. So this is a big story that is happening. So you've got national government, you've got state governments, you've got public companies, there's a huge number of public companies and not just the Bitcoin oriented public companies that are buying Bitcoin. Look at companies like Strategy Rumble, even Tesla is looking at putting Bitcoin on their balance sheet in order to diversify their asset base, help them to beat inflation over time. And so really kind of across the stack, we've got nothing less than full embrace of Bitcoin across the ecosystem. And what does that mean for us as bankers?

(15:55):

How do we integrate digital assets? How do we integrate Bitcoin into our offerings? I would candidly recommend that there might be a few ways that we could do it. The first one, maybe one of the most interesting is to start treating it as a collateral asset lend against Bitcoin. Many of you probably lend against real estate a relatively illiquid asset. Why not lend against the most liquid asset in the world that has a 24 7 markets and allows many of your clients to borrow against their assets so they could pay for those pizzas with dollars instead of having to pay with Bitcoin, whether it's across your wealth management platforms, whether it's taking Bitcoin as collateral, I think there's a whole host of interesting opportunities to think about integrating Bitcoin into your offerings and we would be happy to help. But there's going to be a lot of questions.

(16:49):

There's going to be a lot of questions about how to do that, how to do it compliantly, how to integrate it into the offering and how to make everything work. So with all of those questions, maybe Bitcoin isn't for you. If Bitcoin isn't for you, there's still a path to become a digital asset bank. Let's talk about stable coins. Stable coins are incredible. You take all of the immediate finality, the blockchain-based unlocks that have happened for Bitcoin and apply that to the US dollar. The US dollar in my view is the best product to ever come out of America. This is the greatest thing we've ever created. The most popular thing we've ever created is the US dollar, and that is because of the work of all of you that the dollar does such great stuff. Remember earlier I was saying that the dollar is why I didn't pay attention to Bitcoin because the dollar is so good.

(17:47):

But what's funny about when I say it's so good is that all of my work at Square was optimizing for issues around the dollar. For example, the dollar only settles five days a week. You have to meet a four o'clock cutoff time in order to do wires. When you talk about actual credit card infrastructure, the settlement actually happens two days later. And so a lot of the work I did there was to help merchants get their money earlier so that they could pay for goods and services and be able to keep things going. And so in many ways, the dollar does need a bit of an upgrade. The dollar needs better infrastructure, the dollar needs to be global. A lot of the growth that we're seeing in stable coins is actually in the global south. And the reason in many ways that I think that is happening is because foreign correspondent banking is so difficult.

(18:38):

I'm sure many of you would like to bank foreign correspondent banks, but it is wildly difficult to actually do that as a regulated US entity. And that complexity is what is creating the opportunity for stable coins to come in for stable coins, to grow in popularity. Really the inventor of the stablecoin market is this company called Tether. Tether, for those of you who haven't looked into it currently has the largest market cap of a stable coin. Their market cap is just over 150 billion in this stable coin, and that has made them the most profitable company in the history of capitalism on a per employee basis. And so what we're seeing with stable coins is a rise in a bunch of different use cases that are a natural extension of the dollar. The way I like to say it is that in 2008, if you had asked me in 17 years or so what will be the biggest taxi company, it turns out that the biggest taxi company would be Uber because you expand the market when you bring in technology, you expand the market dramatically.

(19:53):

Same question about hotels. What will be the biggest hotel chain in 15, 20 years? Turns out it was Airbnb because technology unlocked an entire set of innovative use cases that allowed for things previously not even thought possible to be brought in and commercialized. This is what is happening with stable coins for a market whose tam is money itself. So the amount of profound use cases we're going to see with stable coins across the landscape could not be overstated. Back to that round table I went to at the White House after David Sachs called Bitcoin, Jesus kind of got over that one. And then the next bomb that was dropped at that round table was Secretary of Treasury Scott Besant saying that the administration's policy is to advance the cause of the US dollar globally and they're going to use stable coins to do it. And so it is an official policy of the current administration to advance the dollar and to do it via stable coins.

(21:05):

Other countries are taking note. There's actually incredible white paper written, you have to get it translated, but it's actually, it's written from a member of the CCP in China talking about how the rise of stable coins threatens their expansion globally because the dollar will be so popular and the stablecoin product will be so perfect that it will likely get adopted across the global south and mediate some of their extension plans. And they're currently thinking, Hey, how do we respond to this? And so the importance of stable coins couldn't be overstated. And the great news for everyone in this room is we are all being granted a front row seat to this industry, the stablecoin bill going through the house, the genius Bill going through the Senate. By the way, it's just a brief aside. I think it is funny that the two bills here about this industry are called stable genius.

(22:03):

It's pretty obvious what these people are doing. I can't blame them, but I did think that that was funny. Nevertheless, we're all being granted a front row seat to build in this industry to benefit from this because the official policy will be after these bills pass that banks are in a privileged position when it comes to issuing stable coins when it comes to moving stable coins, when it comes to redeeming stable coins. And so almost all of you within this room have an opportunity to build and build something very interesting when it comes to stable coins. This could be that you issue your own stable coins. It could be that you allow your clients to instead of depositing dollars like deposit stable coins, now there's infrastructure that needs to get built. There's integration needs to happen with the core banking providers. A lot of that is going to come together.

(22:51):

But I think over the next several years there's going to be really tangible use cases to build and expand within stable coins. And the amount of creativity that is possible there is nearly unmatched. But maybe that's still too much of a question for you need you grab some water here. Maybe stable coins are still a step too far for your institution and you're not sure that you want to get into the stablecoin game. So the last area that I think you should be thinking about as a bank that's going to join us all on the journey, the 4,577 banks in this country that are going to be in digital assets in 10 years. The last option you have to get into digital assets is tokenization. I like to think of tokenization as part of a century long journey that America has been taking that kicked off about 95 years ago with the passage of the Securities Act of 1930.

(23:56):

You have the Securities Act of 1930, you have the Exchange Act 1934 and the Advisors Act of 1940 that in many ways created the framework upon which our capital markets grew within America. Now, regulators will tell you that the strength of our capital markets came from the regulation. I don't necessarily believe that. I think the strength of our capital markets came from capitalism. And so I'd give capitalism most of the credit there. But nevertheless, the rules of the road and the fairness of the system has been enhanced by the regulatory setup that we have. To the point that you saw from the 1930s to the 1960s, such a growth of the securities markets that by the 1960s everybody in banking and trading on Wall Street was actually taking Wednesdays off. Why were they taking Wednesdays off? Because Wednesday was the day they settled all the trades and there was such a backup of the infrastructure that people took Wednesdays off to settle back offices, allow all the back offices to settle the trades.

(25:06):

And then what you did in response to that as an industry and what we now benefit from today is a digitization of the entire securities market, a move from paper certificates that had to be settled on Wednesdays and on the weekends to fully digital representation of them so that the market could continue to grow. And in many ways, that helped a lot where a year passed year and change passed the movement to t plus one settlement, which to the credit of many of the people here, many of people building in the industry went extremely well. There were no issues. The t plus one settlement move off without any issues. But there are still some funny things that happen. So Hurricane Sandy for example, many of you probably read that during Hurricane Sandy DTCs basement flooded and they had to actually dry millions of stock certificates and bond certificates that were held in the basement there.

(26:13):

And so the digitization allowed that to not be a disastrous catastrophe, but instead something that had no real issues. And so it's funny to talk about sixties having to take Wednesday off to settle all the trades. Well, as I sit here within the crypto industry, I will say that that is a little bit how we think about bankers taking the weekends off. Crypto is 24 7, we settle the same day every day, 24 7. And it's kind of funny that banking turns off at four o'clock every day. It's funny that banking turns off on the weekends, and I wonder if we will view that as a relic of the past and the market's shutting on the weekends, the ACH systems shutting on the weekends will be viewed similarly to the way that in the sixties people shut down the stock trading so that everything can settle.

(27:21):

But what do we get out of tokenization? Well, first of all, I think we have the opportunity to get to T zero. And so if you look at that from 1930 to now, maybe if we tokenize all the stocks, bonds, equities, we can get to t plus zero. Maybe we'll be able to put everything on chain so that we can benefit from all of the incredible use cases and revolution that's really happening within the defi space. Automated market makers on exchanges, lending protocols where you can use all the stocks, bonds, and equities as collateral and fully autonomous defi protocols. So there's a whole host of innovation that is possible if we bring a lot of the assets on chain. Not to mention the fact that I think we can systematically reduce risk in the system right now. So much of the risk in the system, so much of the risk that is considered.

(28:13):

The reason we have this idea of a systemically important financial institution is because of settlement times. If we can reduce settlement times, we can systematically reduce risk across the industry. And I think this is worth doing and the leaders in this space will not just reduce risk, but the leaders will be able to do very interesting use cases on top of the digitization of securities. So maybe even that is a step too far. Maybe tokenization of stocks, bonds and equities, despite the fact that it's part of this broad arc that's happening across the industry. Maybe even that is a step too far and there's too many questions. You don't necessarily know which way you want to go. You aren't ready for the bold moves. And if that's where you are, if Bitcoin doesn't make sense to you, if stable coins don't make sense to you and tokenization doesn't make sense to you, then I want to take you back to Cincinnati.

(29:09):

I want to take you back to the Queen City classic where I was playing that game of chess against again the top rated guy in the tournament just because that makes me sound cool. Okay, so the top rated guy in the tournament put a question mark on my move. He said, blunder. He said, what is this guy doing? And what I'm here to tell you, God is my witness. Six moves later, he resigned, knocked over his king, and I swear this is true. Erase the question mark and put an exclamation point saying, incredible move. What a bold move. What a, he didn't say any of this stuff, honestly. He took my hand and left. But he was thinking, wow, the brilliance of this guy, he made the bold move. He made the move that everybody was questioning. And so what I hope each and every one of you will do as you leave this conference is go make the bold move.

(30:20):

Make the move that not everyone says makes sense. Make the move that you're going to get a lot of questions about. Make the move that you know is right because you have considered it. You know where the future is heading, where this industry is going. And I guarantee you, even if no one else does it, I will come and put an exclamation point on your plan because now is the time. There has never been a better time to get in digital assets. There has never been a better time to make the bold moves. Everything has come together. We have the administration, we have the SEC, the Fed, the FDIC, the OCC, everybody saying green light, go for it. There has never been a confluence of this much positivity for this industry. And now is the time to make the bold moves. Thank you so much. Appreciate the time. Alright, I think we have a little bit of time for questions. If anybody has any questions, we can dig into some things.

(31:30):

Cool.

Audience Member 1 (31:37):

As a bank, what should we consider when deciding whether to build our own digital assets infrastructure or partner with a provider such as yourself?

Nathan McCauley (31:46):

Good question. So there's lots to consider here. So there's really, I would say two large buckets of, let we call it things that need to get solved within a bank in order to be able to properly roll out a digital asset strategy. The first one is tech. And tech is actually relatively complex when it comes to digital assets, the accounting systems, the security systems, everything that needs to come together to build a safe and sound tech platform for digital assets is shall we say, non-trivial. And you have to be careful in order to get that right, but in some ways that's actually easier than the compliance lift, the compliance lift across interacting with self-hosted wallets, moving funds in an entirely new way, handling things like BSA/AML, OFAC screening of wallets. There's a lot there. And so almost certainly the right path is going to be to partner.

(32:52):

You can partner with, thank you for the question. You can partner with folks like us. We're working with a number of large institutions in a number of capacities. Point out one to you, there's a large Wall Street firm called Cantor Fitzgerald. Cantor Fitzgerald is now rolling out a lending program and we have a number of loans live where their clients are posting Bitcoin. The Bitcoin gets posted at Anchorage Digital Bank and then Cantor lend against those assets that are held within the platform. So this is a very nice partnership where they're able to do what they're good at lending, we're able to do what we're good at custody and deliver a nice tangible value to the client. Other banks are integrating with us right now more in their wealth management side, so allowing their clients to buy, hold and sell digital assets, buy, hold and sell Bitcoin within their firm. Like I talked about earlier, 55 million Americans, 25% of adults hold digital assets in some form and they're not holding it with you. It's a bummer. They should all be holding it with you. The banks operate as the most trusted counterparty to Americans, and so why not allow them to hold it with you? That's a wonderful way to get involved and that's another area where we can partner with you if you're looking to roll out a digital asset strategy.

Audience Member 2 (34:23):

I'm just curious how you assess cryptocurrencies value, given its liquidity versus traditional approach. Say make a mortgage versus something that's a little bit more stable. How from a bank's perspective might you assess that value in current value and then of course the future value?

Nathan McCauley (34:41):

Yeah, yeah, great question. So in case anybody couldn't hear the question, the question is about how do you assess the value of a digital asset? And the answer is, I think the shortcut from the answer is to think of it not dissimilarly to the way that you think of stocks. Stocks can be volatile, their price can change over the time. In the case of say bankruptcies of the stock, it can actually actually go to zero. And there are absolutely examples of that. And so underwriting of digital assets needs to account for the risk that is inherent there. So the way, say for example, our Bitcoin lending program works, the view there is that you do a two to one collateralization. And so if you're borrowing say a hundred bucks, you're posting 200 bucks of Bitcoin. And the idea there is to have it relatively highly over collateralized in order to account for some of the volatility that happens.

(35:45):

So the volatility definitely happens on a day by day, month by month, quarter by quarter basis. But for at least from my point of view, the big digital assets like Bitcoin assessing the long-term value is clear. This is a scarce asset. More and more people want it. We're getting less and less of it in the market. And so I don't want to stand here and give a price prediction, but I'll put it this way, higher, it's going to be higher. So hopefully that helps. And that's how you think about Bitcoin. The other digital assets might have a different profile, and so you need to kind of develop a asset theory of what you think the valuation model ought to be in terms of it at a technical level, we tend to go look at the market. And so you look at a number of the regulated exchanges globally, see what price they are trading at and use that as a averaging of that in order to bring in the current mark to market for any particular asset. But thank you. A good question. It's a big one. Right on.

Audience Member 3 (36:56):

What do you see as the benefits and risk of stable coin versus simply tokenizing US dollars?

Nathan McCauley (37:03):

Yeah, so this one's pretty interesting. So tokenizing stable coins. Let's talk a little bit about what the say Genius Act and stable act are going to ask for in terms of stable coin products. Basically what they're going to ask for is having the reserves behind a stable coin. So you bring in people buy the stable coin, all of that cash or cash equivalences get sent to a bank or an issuer and they will one-to-one back that with a series of assets. What stable ingenious are going to call for is basically dollars in bank accounts in FDIC insured bank accounts or tokenized, not tokenized, but short term money market funds. So short duration T-bills, so highly liquid backing that would back those assets. And so I think this is a reasonably safe product if done well back it with bank deposits, and T-bills, the idea over time to eventually back stable coins with bank deposits has its own risks. I would say the same risks that can happen to any particular bank.

(38:25):

There was a unfortunate weekend for one stablecoin USDC where it actually broke the PEG by about 13 cents coincident with Silicon Valley banks. We call it unpleasantness. That happened there. And so that bank backing is what led to some of the issues with USDC, whereas the treasury backing that came behind it was solid in many ways. So I think that's going to be fundamentally the trade-offs. I think the first set of these products that will come out after stable ingenious pass and get through reconciliation process will likely be these fully reserved assets backed by a large series of T-bills. And that'll probably be the path forward over time. We may see something moving more towards tokenized deposits, but we'll need to be thoughtful and careful there about what exactly that looks like. The more that you treat the stable coins like tokenized deposits, the more that you want to answer questions like, what is FDIC insurance for these? When you are an owner of the stable coin, what is the claim against the bank that issued them? There's some more things that need to get figured out as the industry evolves there.

Audience Member 4 (39:47):

Can I start off, can you share your perspective on risk management here with respect to traditional assets and now backing the digital assets here and banks are in the business of risk management or risk mitigation. So what is the regulation going to look like? What is it now? What will be in five years?

Nathan McCauley (40:07):

Yeah. Yeah, it's a good question. And frankly, when thinking about risk, there's so many different stripes for risk. Any particular bank needs to look at, certainly the financial risk, make sure the financial risks that you're taking are safe and sound. And so any kinds of use cases where you're depending on the value of the asset for some sort of the operation, you need to be very careful and thoughtful about the risk management there. And then you've got a whole host of other risks that come into operational risks, security risks and infrastructure risks. Thinking through, as I mentioned earlier, B-S-A-M-L, OFAC risks, how to build rock solid compliance on top of digital assets. My firm has proved that that is possible. And so I'm confident that all of you will be able to succeed there. It was not easy road. We needed to spend tens of millions of dollars in order to build up the systems from scratch that could handle the B-S-A-M-L risks.

(41:12):

But now that we've done that work, we are making that available to the broader industry in order to be able to build on the insights that we've had there. And so I think having risk management as kind of a central pillar to a digital asset strategy is critical. And it's not a one size fits all. It's going to be dependent on the kinds of use cases that you're going to utilize and whether you're integrating technology and then taking on those risks yourselves versus partnering with another firm that has figured out the risk there and can match your risk profile and be able to do that in a safe and sound way as a critical part of the story and be happy to help think through that. And we have a number of people that can help think through that and help develop the strategy there. I think you got time for one more. If there's another question,

Audience Member 5 (42:11):

We heard it earlier about taxes circle and some coin base looking to get bank charters. Yeah. PAC host Circle and others trying to get bank charters. Right now, from what you're describing, it sounds like you do some things with other banks now for digital assets. Do you view yourself as a little bit of almost like a future digital asset correspondent bank where you're working with other banks in that way and what does that look like in the future?

Nathan McCauley (42:34):

Yeah, yeah, I think that's exactly right. It's not obvious right now, but I think over time the model is going to be digital asset correspondent banking where say a foreign correspondent bank would come to a US bank to get access to dollar rails, get access to settlement at the Fed. We and maybe some others will act as digital asset correspondent banks, where you'll be able to tie into us, we will handle a lot of the crypto specific technology risks, compliance risks, and then you'll be able to build your program on top of a correspondent banking relationship. And so yeah, I think that's the right way to think about it and I'm glad you're kind of thinking ahead there because I think that's exactly the right model that'll develop. Thanks. Thanks. Alright, thanks everyone. Have a great conference. Appreciate the time.