Zac Prince on the Future of Banking With Bitcoin

Audio interview transcription — WBD051 Note: the following is a transcription of my interview with Zac Prince, Founder and CEO of BlockFi. I use Rev.com from translations and they remove ums, errs and half sentences. I have reviewed the transcription but if you find any mistakes, please feel free to email me . You can listen to the original recording here . You can subscribe to the podcast and listen to all episodes here . In this episode, I talk with Zac Prince, Founder and CEO of BlockFi, a company offering loads back by cryptocurrencies. We discuss credit and debt services with Bitcoin, how BlockFi works and the future of banking with crypto. Connect with What Bitcoin Did:Listen: | | | | | Follow: | | | | | | iTunes Spotify Stitcher SoundCloud YouTube TuneIn Website Email Blog Twitter Medium Instagram YouTube Interview Transcription Wednesday 21st Nov, 2018 Interview Date: “I think the term bank won’t be used so much when we are talking about banking services 20 years from now.” — Zac Prince Hey Zac, how are you? Peter McCormack : Hey Peter, great to see you in person. Zac Prince : Yes, great to meet you in person. Thank you for getting me a beer. Peter McCormack : Of course. We’ve got four more. Zac Prince : I was only kidding when I emailed you asking for a beer but now I’ve got it, I’m really glad. Is this a Thanksgiving thing? Do you drink a lot at Thanksgiving? Peter McCormack : I was actually at a holiday party last night where I drank a little bit. So when you emailed me about the beer, I got a little scared but I’ve now had two sips of a beer and I feel better. Zac Prince : I feel bad, actually, because your wife wants you home for Thanksgiving, doesn’t she? Peter McCormack : She does. We were supposed to record at like seven o’clock tonight, I think, but we moved it up, which she appreciates very much. Zac Prince : But it does show our dedication. Peter McCormack : The night before Thanksgiving in the midst of a bear market we’re working. Zac Prince : We’re working. This isn’t really working, not for me. This isn’t working. But great to finally meet you and, also, thank you because you are a long term sponsor of the podcast. Peter McCormack : Yeah, absolutely. We’re happy to support the show and we’re big fans ourselves. Zac Prince : So, we should probably prepare for the incoming accusations. I’ve been paid for this interview, so how many Bitcoins did you give me for this interview? Peter McCormack : I think you gave us a discount. We only gave you like 25 Bitcoins for this one. Zac Prince : So, it was quite funny, actually, when you first sponsored, and I looked at it and I thought, “No, I’m not interested in any of this credit market stuff because it sounds really boring.” And I do, actually, get offers sometimes. People offer to pay to come on the podcast. It was only after you became a sponsor and then I listened to the interview of Pomp and I then listened to the one with Stephan Livera, and I realised this is, actually, an incredibly important part of the market and I know nothing about it. So, I’m going to be a complete noob today and I want you to teach me everything you know about this. But, firstly, can you just let me know your background prior to BlockFi? What have you done for the last, what, 20 years? Peter McCormack : Yeah, sure. So, I put myself through college as a professional poker player, so I was fortunate to come out of school debt free and had my first experience with risk management and markets, and things like that in college. And, then, since graduating, I’ve always worked at venture backed technology companies. I was fortunate early on to be a part of two companies in the advertising technology sector that were successful, one that was acquired by Google. And then more recently, before starting BlockFi in the financial technology sector specifically the lending side of financial technology, I had two different companies. Zac Prince : One, Orchard, which was basically in the middle of the online lending ecosystem and we had data products, technology products, regulated entities; we created a broker dealer and RAA and ATS, and we worked with all of the large online lenders, lending clubs, SoFi, Prosper, On Deck and then institutional capital sources who are either buying those loans or lending to those companies. And after Orchard, I went to a consumer lending business that had a retail integration strategy. So we were basically like a PayPal credit or an Amazon credit type product except geared towards individuals that didn’t have strong credit scores or weren’t based in the U.S. and thus didn’t have a credit score at all. Zac Prince : Right. So tell me about the poker because I used to play poker and I played it quite a lot, actually. When I was younger I did a lot of online poker but not … I don’t know if you’d call it professional, but I made quite a bit of money. Were you playing just online or offline, everywhere? Peter McCormack : Yeah. So I did some air quotes when I said professional because it was definitely online. But, basically, in high school we had a guy’s poker night, just buddies, and we would play, and I won consistently because I read some books and just got really into it. And then I got my first debit card when I went to college and I took $25 off of this debit card, deposited it on to a poker site, and in short order had turned the $25 into a few thousand dollars. And at a certain point, I decided that I was going to quit my work study job because I wasn’t making nearly as much money as I thought I could play poker. I played Limit Holdem, eight to 12 tables at a time, party poker, poker stars, and all the big sites back in the day. So Shorthanded, Limit Holdem all online. Zac Prince : Were you planning the second goes? Peter McCormack : I played tournaments a little bit at the beginning, but I switched into cash games as I got more experienced. Zac Prince : Because I was playing on Victor Chandler and I was playing the six-seat set-and-go $50 tables, and I played three at a time. And I was probably, not a lot, but I was pretty making £200 or £300 a day. I got the numbers right, I got the odds right, just to start making some money but didn’t spend any time with my family. It becomes quite addictive, right? Peter McCormack : It becomes addictive, you’re staring at a screen all day and that combined with … here in the U.S. a law was passed in 2006, I believe, called the UIEGA, Unlawful Internet Gambling Enforcement Act, where they basically made it so that financial institutions were not allowed to send money to these poker websites. And that, basically, dried the games up a lot because it got a lot harder for anyone who needed to deposit more money onto the sites to do that. Zac Prince : Yeah. I think I started to come up against the box as well and I had a bit of a loose game but it, kind of, worked. But when I stopped playing for a few years and I came back, almost the same strategy, and I was hardly winning at all. I found it really, really hard. Did you read Doyle Brunson’s Super System? Peter McCormack : I probably did. I went through so many poker books. Zac Prince : It’s the one where you had the famous 10 2 and I was trying to remember what happened. There was a … Oh, a card was dropped so they had to redo the deck and they showed the cards and he would have lost and he won this famous hand and that was the first book I did. I think there’s a lot of poker players in crypto. Peter McCormack : Yeah, absolutely. I mean it’s a sector that if you’re attracted to risk and you like making bets, that there’s just a lot of clear analogies from who would be the first movers in the online poker world to who would be attracted to the crypto sector. Zac Prince : So, you’re basically saying we’re all degenerate gamblers? Peter McCormack : Not necessarily degenerate but comfortable with taking risks, right? I mean, clearly, crypto isn’t for someone who only wants to invest in government bonds. It’s a bit farther out on the risk spectrum. Zac Prince : Yeah, certainly not now. God, we’re what, 10 months into a bear market now and I’m surviving, other people are surviving but … So I think, it’s been pretty brutal and, actually, you’re starting to see some quite sad stories and sad tweets now. I think it’s been proven to a lot of people this isn’t easy money, right? Peter McCormack : Yeah, it’s a different time. It’s a different time now than it was a year ago. I think there’s a lot of good things that will ultimately come out of this. It’s a learning experience but I also think that, obviously, prices got a bit ahead of themselves. And you have to be, when it comes to your finances, aware of what your goals and objectives are, and your risk tolerance, and thoughtful around when you make an investment, why you’re making that investment and how you plan to manage that investment. But, yeah, it’s definitely a different … it’s a different feeling in the room if you’re at a conference or going to a meet up than it was a year ago. Zac Prince : Yeah. You went to a lot of the early meetups, didn’t you? Peter McCormack : Yeah, that’s actually part of what drove me to start BlockFi as my … At a certain point, early 2016, my wife said, “You’re talking about Bitcoin way too much and I don’t want to hear about it, so you need to go find some friends that you can talk about this with.” I watched the composition of the meetups change from 2016 to early 2017. Obviously, the sector was attracting a lot more attention, there were some venture capital investors and bankers in addition to some of the earliest adopters that started attending. And that was part of what motivated me to make the decision that I just had to get involved myself. Zac Prince : Right. And does your wife talk about Bitcoin now? Peter McCormack : She actually does, a little bit, not nearly as much as me. But a little while after I started BlockFi or as I was in the process of starting BlockFi, she started investing herself. Zac Prince : All right. So she bought some Bitcoin? Peter McCormack : Yeah, she did. I also got her parents to invest in Bitcoin and Ether. They asked me if they should buy the Snapchat IPO and I said, “If you’re thinking about buying the Snapchat IPO, one, I don’t think you should do that and, two, I’ve got something way better for you.” Zac Prince : Wow, that’s amazing. So … Peter McCormack : And then a couple months later Angela’s mom sent me a text message saying, “This investment is performing so well but I think I’m getting addicted to checking the price.” Zac Prince : But we all did. Peter McCormack : Yeah, absolutely. Zac Prince : I’m getting addicted to not checking the price these days and then you come back and see it’s dropped another thousand dollars and you say, “Yeah, oh great.” So, I’m going to want to ask you about the impact of the bear market on BlockFi but I think we should unpack the company first, talk about that first. So at what point did you decide that you wanted to start the company and how did it go from an idea in your head to us being inside here now with an office in New York and the team? Peter McCormack : Sure. So, basically at the beginning of last year, I decided that I had to do something in crypto. And after having experience with a bank, where they basically scoffed at the fact that I had Bitcoin and Ether as assets on my financial statement, and almost declined to work with me, that light bulb went off in my head that the sector that I had been working in the online lending sector, in debt and credit markets, was going to be needed in the crypto sector just like it is in every other major asset class; and that given my background, it was a very logical thing to do. Zac Prince : And I called a law firm that I’ve worked with a lot in the online lending world, and said, “Hey, so is there a product that I could create without running a lot of regulatory risk or handcuff risk? Is there a box we can put this in that would make sense from a legal and compliance perspective?” And as soon as they said yes, I let the place I was working at know that I had to leave. Zac Prince : Right, okay. So job one, raise money? Peter McCormack : Job one, build a team. Zac Prince : Build a team? Peter McCormack : Yeah, I got a few people because I have some skills but not that many. Zac Prince : Build a team who were committed to come or actually start building … did you bootstrap it? Peter McCormack : Yeah. So we bootstrapped it with our own money for about six months, three of us, and we got an MVP developed which was basically just a website describing the product in a very simple application to understand if there are people that would be interested in borrowing money against their crypto. And then, during that time, we were also working on raising money and ultimately, we were successful raising a sit-around in December of last year. Zac Prince : How many investors? Peter McCormack : There were, probably, seven or eight investors in that round. It was led by consensus ventures. Zac Prince : Right. Okay. Peter McCormack : And we had SoFi, participated Point Judith, Capital PJC which is a venture firm out of Boston, Connecticut Capital which is a venture for amount of Hong Kong and then a few angel investors. We had former CEOs of companies that we worked at or friends that liked to do some venture investing. Zac Prince : And how much was that round? Peter McCormack : That round was 1.55 million. Zac Prince : Okay. And then you’ve done a further raise since, right, with Galaxy? Peter McCormack : Yeah. So then we raised a 52.5 million that was led by Galaxy Digital this past summer. The bulk of that is allocated, specifically, towards the lending activities versus being purely equity capital. Zac Prince : You can’t raise a small amount if you’re lending money out, right? Peter McCormack : Yeah. I mean, basically, the product is money so you need a lot of it. Zac Prince : And I guess if the product’s really successful, and you ended up lending pretty much the majority of that out, is it quite easy then to borrow more and who tends to lend in this? Do you go out to traditional capital markets? Bear in mind, remember, I know nothing about this. But all I know is … I know, say, for the banks, the high street banks who lend to provide me with a mortgage, they borrow from elsewhere, right? So there’s markets you can raise capital from. Explain that to me as somebody who doesn’t know anything. Peter McCormack : Sure. So there’s a few different paths that you can go down but you can think of the buckets as, basically, being private credit markets, institutional private credit markets, so hedge funds, family offices, more public credit markets, so that’s like bond markets with banks and then retail investors. And we decided that the place we thought made the most sense to start was in that first bucket, the private credit markets and there’s a number of different asset management firms who specialise in alternative lending. A lot of them were the biggest participants in that online lending sector that I worked in previously and so, we felt that that was the best place to start. Zac Prince : But over time we will be diversifying the places where we’re raising capital from for lending into the other buckets as well. And I think it’s really exciting to think about bank starting to participate in this sector because it’ll just make it that much more resilient from a regulatory perspective, from a cost of capital perspective. So we’re actively working on that and we’ll have some announcements about banking partners that are extending credit to BlockFi to facilitate the lending that we’re doing, probably coming up before the end of the year. Zac Prince : And when you’re borrowing money to lend out as capital to people who want to take out loans, are you giving away equity in the business for that money or is it just some kind of guaranteed interest they get? Peter McCormack : It depends. There’s a lot of different structures that you can do it in. Galaxy invested on the equity side as well, so they just like a venture capital firm would, they invested equity in the business and then they separately created a vehicle with committed funds to back the loans. Zac Prince : Right. Peter McCormack : And, basically, the way it works is they have a return that they will receive and then BlockFi makes a percentage of that. So back of the envelope math, if we were charging 8% on a loan, maybe 7.5% off that would go to Galaxy or another investor, and half a percent would go to BlockFi. Zac Prince : Okay. So it’s quite a small amount you take of the interest, right? Peter McCormack : Yes. So, with lending, you need a lot of scale before the revenue numbers start to get interesting. So, having a lot of money available to lend and doing it in a market where you can facilitate hundreds of millions of dollars or billions of dollars worth of transactions is really important. Zac Prince : Yeah. So if you lent out $100 million, you would make around half million from that. Peter McCormack : That’s directionally accurate. Zac Prince : Directionally accurate. Yeah, yeah, so I’m just trying to understand what’s the scale you’re going for as a business and almost like what’s the trajectory in the timeline? Because you’re going to have credit for protections, are you predicting this is going to be a $20 billion market within five years? What kind of predictions are you making for this? Peter McCormack : Sure. So we think of the addressable market for the product that we have now, which is a U.S. dollar loans secured by Bitcoin, for example, as collateral, as being 1% to 3% of the total market gap of the assets that we’re lending against; and that number comes from the margin debt to stock market cap ratio from the public equities sector. So you can back into … if crypto’s around $100 billion right now, we think we can lend against 1% to 3% of that. Maybe the penetration rate for margin debt is a little bit higher because crypto is international, so having access to low cost capital, if you’re someone in a market where that’s not typically available, could drive that penetration ratio a bit higher. Zac Prince : But, really, the way we built a very large company is by diversifying our product set, and not just offering margin loans, but also having other products and creating a customer relationship and product suite where we can do more than just loans backed by your Bitcoin. Zac Prince : Right. Okay. So the two things I find really interesting about BlockFi, which I confess I’ve learned more about in the last few weeks with that when you first advertised. When you first advertised, obviously, I took a look and I was like, “Okay, it’s just kind of like loans,” and I didn’t really get it. I just didn’t fundamentally understand it actually until I started looking into and in a bit of detail. And the two things I really liked about it, it’s like, firstly … You might, disagree with this but, essentially, you are kind of a crypto bank. Peter McCormack : Correct. Zac Prince : Okay. So you’re comfortable with that? Peter McCormack : 100%. We have to be a little careful about when we use that word because it comes with a lot of regulatory burdens, in the United States specifically, but yes. Zac Prince : And that’s something I really want to unpack with you and we’ll come onto that. But also, I think, what is really interesting is that you’re really legitimising crypto in that you are creating traditional financial products with crypto. And I find that super interesting because it legitimises it with the … because you’re going to be working with a lot of traditional capital markets, right? And blending crypto with traditional, it’s just legitimising it. Peter McCormack : Absolutely. And what’s really exciting about it is that you can deliver these banking products, because you’re operating in a crypto first world, at a global and digital scale that wasn’t possible in a traditional banking context. Because everything was defined by what market are you operating in and there’s all these legacy technology systems associated with every part of the process. But if we can build this new infrastructure starting from a BlockChain and crypto first mind set, still bringing capital from that old world, but really just rethink how do you deliver these products, where can you deliver these products and how do you deliver them against Bitcoin, then, that’s what we get really excited about. Zac Prince : And having not to spent time working here. I don’t know how you guys as plan your strategy for the future but I’m assuming therefore emerging markets, they’re actually quite exciting. Peter McCormack : Yeah, absolutely. Zac Prince : You’re going to be able to provide services that …you know that banking the unbanked gets said a lot. But, actually, I never known what it actually really means. You can give somebody service on their phone but you are actually now going to be able to provide services in emerging markets to people who can’t get them elsewhere, right? Peter McCormack : Yeah. And for the foreseeable future, it’s more of a private banking, the abnormally banked or insufficiently banked because we aren’t really, today, creating products for people that have caught less than a thousand dollars of total net worth and, really, just need a place to put $5 of their savings in a hap, for example. But yes, delivering at a global scale and that credit functionality and the low cost credit functionality is really, really big. So in traditional markets, borrowing dollars from outside the U.S. is in $11 trillion and rapidly growing market. Zac Prince : So that companies and governments tapping into us credit markets because they’re cheap and they’re large, and they’re available, and that’s never been available to retail before. So if we can use Bitcoin as a mechanism to lend against and offer some 10% cost credit in markets where it’s usually not available, and certainly not available to retail investors, we think that’s a really attractive value proposition for the customer and also a really valuable utility for Bitcoin to have. Zac Prince : Right. So, okay. Okay, so let me ask you a couple of questions because I’ve got some ideas that’ll go around in my head after you said that. So I wasn’t aware of this U.S. dollar foreign market corporate market and you’re saying you want to open up to retail. So if you were to open it up to, say … give me a good example. What’s a good … would Argentina be a good example? Peter McCormack : Yeah, absolutely. Zac Prince : Okay. So somebody in Argentina wants to borrow, it becomes easier because of online facilities, right? On Line facilities are there, I’m assuming there are certain regulations, or certain licenses, you have to have to operate within the Argentinian market. Peter McCormack : Sure. Zac Prince : Sure. Okay. So somebody wants to borrow. They want to borrow $10,000. Let’s say in this scenario they’ve got Bitcoins, they’ve got $20,000 of Bitcoin, they receive the loan, how do you get them dollars when they have a account which isn’t denominated in USD? Peter McCormack : So, right now, what we’re doing is we’re using the Fiat Back Stable coins. So we have the ability to fund loans in GUSD, USDC, Packs or true USD. Zac Prince : Right. Okay. And if they are using an exchange which has services in Argentina they can convert to the local currency? Peter McCormack : Yeah, absolutely. Zac Prince : Okay. So stable coins, which maximalists hate, and I’ve wanted to hate, actually can have a nice symbiotic relationship with Bitcoin in this scenario. Peter McCormack : Well, I think it will, ultimately, drive more adoption because it creates an opportunity to deliver these products and services in a way where it doesn’t always have to be primarily Bitcoin. So if someone, for example that is unbanked and maybe that’s not part of BlockFi’s addressable market but just step away from BlockFi for a second, if they’re going to access a financial system, that’s not the traditional financial system, I think we could probably agree that right now it doesn’t make sense for them to have all of their money in Bitcoin. Zac Prince : Yeah, of course. Peter McCormack : So wouldn’t they be more likely to start using this new financial system to power the majority of what they’re doing, if they also had the ability to hold other assets. Zac Prince : Right. Okay. Peter McCormack : Like traditional Fiat currencies while they’re still around it and before they get taken over by Bitcoin? Zac Prince : I see it, but do you believe that will happen? Peter McCormack : I don’t know. I don’t know. I think there’s a lot of things that could point you in a direction that the dollar, being the reserve currency of the world, is not something that will still be true 50 years from now. I find it hard to understand what steps might occur in between now and then and what that would look like but I don’t rule it out as a possibility. Zac Prince : Yeah. So, I mean, you’re arguably not just a crypto company, you’re a FinTech company too. Right? Peter McCormack : Yeah, absolutely. Zac Prince : Okay. So do you also, then, see a scenario whereby you may lend without authorising collateralising with crypto? Peter McCormack : Yes. Yeah. I mean, one of the things we intend to launch next year is a credit card, an unsecured credit card, where instead of dollars or airline miles, you can earn Bitcoin as cash back and that’s just the traditional unsecured loan. Zac Prince : I want one. Peter McCormack : We’ve got the money, we’ve got the understanding of credit markets, we’ve got the banking relationships, we’ve got the connectivity into the Bitcoin world, we know our customers are the exact type of people who would be interested in that type of product; we think we’re in a really good position to bring it to market. Zac Prince : Okay, wow. Okay, that’s really interesting. So let me just go back a step. So, I think, let’s talk about the product first and how it works because there’s a few … We’re not even going to get onto the questions I’ve written down otherwise, even though this is super interesting. So, talk me through what a customer … a customer has a certain amount of Bitcoin, they want to take out a loan, what is the process online to take out the loan? What do you check? Do you do credit checks? Peter McCormack : So we do a public record check to look for whether or not someone basically, if we’re lending in the U.S., whether or not they have a lien from the federal government because they owe them taxes. Other than that, we’re not looking at fico scores right now or checking other credit variables. And the way the process works is someone comes to our website, typically they read a lot of the educational type articles that we have either about lending in general or about specifically our product, then they play with a loan calculator that we have up on our website to understand more of the function and pricing and how it all works then they apply. Zac Prince : And applying takes less than a minute. It’s just like creating an account on Coinbase, for example. They receive a decision or receive a loan offer. Assuming that they want to move forward, they sign that, send their crypto that they’ll be using as collateral and then we either wire funds to their bank account or fund their loan using a stable coin if they’ve selected that option. Zac Prince : And you use something called a Loan-To-Value, right? LTV? And it’s around 50% now? Peter McCormack : Yeah, up to 50%. Zac Prince : 50% Peter McCormack : So you can borrow up to half the value of your Bitcoin on the day that you’re borrowing. Zac Prince : Okay, I’m going to send you my Bitcoin, do you keep that in some kind of bad ass cold storage. Peter McCormack : We custody it with Gemini, so we take advantage of their tried and true cold storage system. They’ve got insurance and regulatory designations and legal liability and they custody billions of dollars of crypto assets so we keep everything with them. Zac Prince : Okay, so say I borrowed $5,000 of you, I send you $10,000 Bitcoin, which was half a Bitcoin a year ago, two Bitcoin now. Peter McCormack : Two and a half. Zac Prince : I send you the Bitcoin, price crushes to $1,000 what happens? Peter McCormack : So along the way you will receive notifications from BlockFi that your required loan devalue ratio is at risk of not being maintained and there’s a few different levels. First, there’s some notification levels then there’s an official margin call level, and then there’s a final level where we sell a little bit of the Bitcoin before its worth less than the amount that we lent to you. Zac Prince : Right, okay. Okay. So, in some ways, this is also like trading, right? You can get a margin call on a loan, you’ve got to be considering price. Peter McCormack : Absolutely. Absolutely. Zac Prince : Right. Peter McCormack : You are making a trade of sorts by deciding to use a product like this. What usually it’s different for our customers is that it’s more of a wealth management type of trade versus a ‘I’m investing in something for the first time’. So it’s usually … Most of our clients are individuals or companies who have held Bitcoin for a long time. They’ve already made the trading decision that they want to be long Bitcoin and then they might have large embedded capital gains in that position. Zac Prince : So even though a Bitcoins down a little bit this year, I’m not sure when you originally purchased it, but you might still have a very large gain there, but you want some cash to make another investment or diversify your assets, or start a company, or purchase house. And by not selling the Bitcoin you’re saving yourself that tax expense and you’re keeping your core Bitcoin position and still stand to benefit from future appreciation and the price of that Bitcoin. Zac Prince : Okay. Say price has crashed and I ignore the margin call. My account, at some point become liquidated, do I have a depth with you for the difference? Peter McCormack : No. So we would sell Bitcoin along the way in small pieces and pay back your loan for you. So it’s not that you wake up one day and we’re like, “Your Bitcoins were worth nothing and you still owe us a bunch of money.” Zac Prince : Is there any risk to you, like such a price crash, that you hadn’t sold in time? Peter McCormack : Yeah, absolutely. I mean, the risks that we manage are … the risks that we are exposed to is there’s no liquidity in the market and it gaps down an amount that leaves us underwater relative to the amount of money that we’ve lent out. Zac Prince : Right. Okay. So that’s the biggest risk. So I guess in some ways, like any start-ups, BlockFi is a bet on the future of crypto, right? If crypto dies, BlockFi dies. Peter McCormack : We are a long crypto business by design. Zac Prince : Okay. And you are confident because …? Peter McCormack : I think there’s a lot of things that make me confident. So I go back to the slide from BlockChain capital that resonated with me a long time ago about how Bitcoin is a platypus. And I still think it’s very true. And the analogy was basically that when the platypus was first discovered a bunch of people, scientists back in Europe who were reading these discovery notifications, called bullshit. Because how could there be an animal that has a beak like a duck, a tail like a beaver, fur like an otter, warm blooded and lays eggs? It doesn’t exist. Zac Prince : Yeah. Peter McCormack : I think there’s so many things that Bitcoin does that are better than comparables in the old world. Which one is going to be the most successful? I think it’s still TBD but I think any one of them alone is a trillion dollar plus opportunity. The market cap is still well below that. So, yeah. Absolutely, we’re very bullish. Zac Prince : And I was with Peter Van Valkenberg from Coin Center out here yesterday and one of the things he said is they are aggressively coin agnostic. So even if you were a Bitcoin app, I’m guessing that doesn’t really matter, because you will provide products for coins that, I guess, have the right amount of liquidity. I think I heard on … was it Pomp’s who said or Stephan who said that it would have … you think there might be large holders who would want to liquidate in this, so you’re coin agnostic? Peter McCormack : We are coin agnostic as a company, yes. Personally, my crypto portfolio is dramatically weighted towards Bitcoin. Zac Prince : Actually, there was another thing I wanted to ask you about, because I was thinking of you when I was in the interview with Peter and we were talking about state versus federal laws and how, with money transmission licenses, you essentially have to apply for … I think he said there’s 52. Because one state, I can’t remember. Again, it came up twice, he said, “Montana,” It’s the one you don’t have to apply for. So, if you had to apply for licenses in every single state? Peter McCormack : Not every single state, but quite a few. So, we’re subject to a similar regime as exchanges where it’s a state by state regime and you’ve got to understand different laws and you have 52 different jurisdictions. But the licenses that we’re getting are lending licenses, so it’s the same type of information that the regulators want, you’re subject to the same or similar levels of scrutiny. But there are some states where, for example, the threshold for whether or not you need that lending license is determined based on what rate you’re charging. Zac Prince : And the idea is, basically, if you’re charging a high rate we want you to have a license, we want to know who you are because we don’t want you coming to the great state of x and ripping off our residents. So, there are some states where we’re able to operate without a license because we’re lending at rates that are below that cut-off. But yeah, I mean, we spent a lot of time in the first six months of the company explaining things to regulators, opening up our business plans and financial models and, kind of, full Kimono of information that regulators might want to know about us and getting the licenses that we needed. Zac Prince : One of the things I have been finding though is that regulators seem to be a little bit more open-minded and knowledgeable than I would have expected. I’ve been very impressed when I watched the CFTC hearing and when I watched the Senate testimony here and with Nouriel and Peter. People, they really know their stuff and they actually … there are some people who are very open minded, right? Peter McCormack : Yeah, absolutely. I think there’s good and bad. So there are certain regulatory bodies at the federal level that I think have done a great job. And I think, overall, the U.S. has done a pretty good job of not stiffening developments and innovation, but trying to weed out stuff that is definitively bad like scams or frauds. But state regulators is a different story entirely and we had some hilarious exchanges. I mean, we got the question one time, “What is a Fiat currency?” Zac Prince : Well, look, I’m going to defend them right, because I hadn’t heard of a fiat currency, until a good few months into learning about Bitcoin. I was like, “What do you mean a fiat currency? It’s like the thing I’ve been using my whole life.” So I didn’t know until … Should we give them the chance there? Peter McCormack : Maybe a little bit but to type that as a question to a licensing applicant versus just googling it is … Zac Prince : Yeah, I guess so. I mean, I guess there’s a difference and it all comes down to career and ambition and resources. Peter McCormack : Absolutely. Zac Prince : If you’re in congress you probably, got a team of researchers and you probably, want a successful career. And if crypto is to be successful you probably want to have been part of the people who were open minded to it. And I guess that statement was a just different, I would say, “Kettle of fish.” In England. Do you say kettle of fish? Peter McCormack : Yeah, we definitely say that, it’s just different. I’m complaining but, ultimately, that regulator gave us our license and everything worked out fine. It’s just … Zac Prince : Right. So, we know a bit about the product. I’m going to go in too huge about detail because you did cover it well with Stefan and Pomp and I’ll just share those out in my show notes. I’d want to focus on a couple of other things. So firstly, how has a bear market affected you guys? Peter McCormack : So, we’ve been growing despite the bear market which, I think, is primarily a function of just bringing a new product that didn’t exist before into this market. So, overall, our business has continued to grow, but it’s stressful. We’re lending against an asset that’s a declining in price. We want to deliver a great experience to our customers and a margin call is basically never a good experience. It’s just not something that we, or our customers, ever want. We’d prefer that that never happened. So, it creates an operational burden that we have to manage. Zac Prince : Is it a bit of a burden or a worry because you haven’t essentially, been through a process of a whole bunch of margin calls going out and you don’t know how people are going to react? Is it the unknown? Peter McCormack : It’s a little bit … It’s not the technological challenge. So, it’s not that our system isn’t capable of selling Bitcoin if we need to and notifying customers on an automated basis, it’s more the experience that we want to deliver and certain edge cases. So, let’s say we were really close to someone hitting a certain trigger but they’ve initiated a transaction that only has one confirmation. What do you do? Zac Prince : And it’s those types of things and our desire to provide a level of flexibility and customer service that meets what you would expect from the type of company that people envy for their customer service, whether that’s Amazon or someone else, in this highly volatile bear market, new ecosystem. And so it’s more of that stuff that’s the challenge and not necessarily the technological side of it or the liquidity side of it. Zac Prince : Because it makes me, kind of, think of when you’re at the airport and somebody has got there too late and they can’t get on the flight and they’re losing it, they’re absolutely losing it. But everybody knows the rules. Everyone knows you’ve got to be there 40 minutes beforehand. They know and they’re not there and they get angry. I guess you got potentially one of those same scenarios that they know the rules, sadly they’ve broken rules, they’ve not added funds to their account and you’ve had to sell their Bitcoin and they might, from that, be annoyed and might leave you a bad review on, I don’t know, some kind of review website even though you followed the exact rules. That’s the kind of scenario you’re talking about, right? Peter McCormack : Yeah. And we’ve basically taken an approach of; “Let the person on the plane. We’re not-” Zac Prince : For now. Peter McCormack : Correct. But I think we’ll always take that approach. We’ve designed the system in such a way that there’s room there. We’re not charging penalties when we liquidate people so we’re not motivated in any way, shape or form. It’s actually bad for us too so we’re, kind of, properly incentivised to make exceptions to let that person onto the plan versus stand hard and fast by every line we drew in the sand. Zac Prince : Have you found any use cases that you did not expect when you created BlockFi? Peter McCormack : I think we were surprised by the level of demand we received outside the U.S. with very limited marketing. So, surprised to the upside there, so one of the things that we adjusted on our roadmap was making the product available outside the U.S. faster than we had originally anticipated. I probably thought that people would be using this primarily for like a wealth management type of purpose and when we look at the use cases for the loans that our clients provide to us, we’ve seen a higher rate of paying down higher cost debt and also just funding leisure activities that, maybe, I would’ve expected. But, for the most part, it’s been … our assumptions have largely been validated about who the types of people are that would want to use the product, what they’re primarily going to use it for et cetera. Zac Prince : And, I guess, right now some people might be looking at the market thinking, “Wow, these prices are low. I could take out BlockFi loan and then buy more Bitcoin.” Peter McCormack : Yeah. I mean, we’re not the best option if your primary motivation is to buy more crypto and you want to get a lot of exposure to more crypto. There’re companies like Bitmex and others where you can get a lot more leverage than the amount of leverage that someone like BlockFi would provide for. But if you want to do that and you’re looking for a long term, low cost, conservative form of leverage. If those words aren’t too contradictory, then we are a good option. We have seen that as well. Zac Prince : Okay. All right, so the area I really want to explore with you, I think, might be most interesting is if we, kind of, look at the evolution of banks, let’s go pre-internet, high street bank … I don’t know if you call them, but we call them high street banks in the UK. Peter McCormack : So, like an investment bank or like a big diversified bank? Zac Prince : No, no, no. Just like a bank where you and I would go and have a bank account. Peter McCormack : Retail bank. Zac Prince : All right. So, we called that high street bank and if you need a cheque book or a card, you go into the branch, you queue up and you get what you requested. 20 years ago we started to get, or maybe 15 years ago, some form of internet banking where you can transfer some money, but you’ll still have the same bank. And then with those bank accounts, say they moved to mobile phone so I can transfer money on my mobile phone also. We had all that and then we started to get the banks which are mobile only, they’ve got no branches. You sign up, it’s mobile only a relationship and they’re growing. What is the next phase of bank, which is, what are you seeing as the next phase of the banking? Peter McCormack : I think its companies that come without the regulatory burden of actually being a bank and you’re seeing this in some markets like China, with Alibaba and Alipay and Ant Financial, delivering banking-like services. Amazon is moving into payments, there’s a lot of different FinTech companies that are disrupting different parts of the banking infrastructure. And now, with the crypto market, you have the opportunity to, kind of, rebuild it really from square one without as much of a reliance on centrally issued fiat currency. Zac Prince : And the implication of that is that you can have, in my opinion, a more globally connected financial system than what we have today, which is very fragmented and where there’s, kind of, winners and losers selected on day one depending on what country you were born in. Zac Prince : Right? So, could you envisage a scenario whereby I would open a bank account with BlockFi and have an account where I could get paid by my employer and that gets converted into some kind of stable coin and that I can pay my bills from there? Can you see that? Peter McCormack : Yeah, absolutely. I also think you could earn interest on your Bitcoin in that account at some point in the future and you could get access to different types of lending products, whether it’s that credit card or a larger longer term loan, like the ones we do now or different types of loans; and you could send money around the world for a lot lower cost and a lot faster than you can with other services today. Zac Prince : So, I guess when you stop to think about it in that way, this is where you’re, probably, a bit more bullish because you can see just a much better banking system. Right? Peter McCormack : Yeah, absolutely. I think the term bank won’t be used as much when we’re talking about banking services 20 years from now. I think it will just be the name of a company, kind of like what Amazon did for online shopping or what Uber did for ride hailing services. I think that same thing will happen to finance. I think crypto will be a part of that and I think there will be a few winners. And you’ll say that name and there will just be the assumption that, obviously, that’s where I’m doing my financial transactions. Zac Prince : BlockFi. Peter McCormack : Maybe. Zac Prince : Maybe. Peter McCormack : Some people have told me that we’re going to have to change the name if we have a shot at becoming that big. Zac Prince : Why? Because it’s not … I don’t know. Peter McCormack : It’s not like a single word. Zac Prince : Or something like Chase? Peter McCormack : Yeah. It’s … Zac Prince : What do we ever need? We have Lloyd’s. Yeah but we have some … Well, we have like Royal Bank of Scotland. So, we have some bigger names. Who knows? Who knows? So, what’s the timeline and what … Well, can you tell me about new products and what is the timeline for rolling out of these products and what’s coming up for BlockFi? Peter McCormack : Yeah, sure. So, within the next six months we’ll be introducing a couple of things. One, interest bearing accounts, at least for fiat back stable coins and Bitcoin. We will also be introducing a lending product that takes your fico score into account. So, if you’re, for example, someone that has an 800 fico score in the U.S., we will have a slightly different product in terms of margin levels and interest rates that is available to you. And then longer term we’ll be doing things with credit cards, whether that’s in the U.S., Bitcoin as your cash back or airline miles; or internationally, just having a piece of plastic that acts as the delivery mechanism for the loans that we’re funding now either via wire or stable coin. Zac Prince : Right. Okay. So looking at some of the traditional banks, the retail banks, do you think that you are a threat to them? Peter McCormack : Not today. We’re still small. But, absolutely, I mean you could see a world where younger people don’t think of having a bank account. They think of having that relationship with an app or an online technology company that provides them the financial services. And in that sense you could go through your entire life without having an account at an actual bank. Maybe a bank does some things on the back end for that company, that’s the front end that owns that customer relationship, but you could do all of the things that you need a bank for now without actually having a bank account in the future, I believe. Zac Prince : Well, I guess it’s just a natural progression where money seems to have been the last thing that’s become digitised with the internet. I don’t know where you’re from, but I’m from just a small town called Bedford, a very small town, and our high street now is very, very different from where it was 20 years ago. I very rarely go there. I’ll go there after I get a birthday card, or I meet someone for coffee? But I don’t buy any clothes there; I don’t buy any books there. The high street’s become a lot of low cost shops or charity shops and there’s a lot of empty shops these days. But we still have … Every bank has a branch. Peter McCormack : So, I guess that future scenario is where the banks don’t have branches because they don’t need them. And, therefore, if the bank doesn’t need a branch it’s an online bank so where is it competitive? Peter McCormack : I think we’ll go full circle. I think in the same way that you’re now seeing companies like Amazon who were online only, kind of, purchased whole foods and start to open some Amazon stores. Whoever that FinTech Company, or a handful of FinTech companies, are that provide the banking-like services will come full circle as well and say, “You know what? We were online and we deliver our product very successfully in a purely digital format but, actually, our customers would probably love it if, in select locations, they could show up and talk to somebody or maybe some of our customers want that. And we’ve built a large successful business, so why not do it?” Zac Prince : So, a BlockFi branch. Peter McCormack : Yeah. I mean, we’ve thought about just having kind of office hours here. Zac Prince : I guess it’s educational, right? Peter McCormack : Yeah. If somebody wanted to come by and ask us questions in person or meet people on the team, they could. We actually had our first client appreciation event a couple of weeks ago. We just hosted a pizza and beer happy hour type of thing here at the office and like 150 people showed up. Zac Prince : Wow. Peter McCormack : We were like, “Wow, Tuesday night in New York.” Zac Prince : You offered beer and pizza. Peter McCormack : That’s true. Zac Prince : So, in terms of what you’ve got coming up, and what you’re working on and the sector as a whole, what are the things that most excite you? Peter McCormack : I actually get really excited about the transition away from tether and into more reputable tokenised fiat in the crypto ecosystem. I get excited whenever we hit that point where people are able to say, “Yep, the bottoms in and we’ve made it to the other side and we can just focus on all of the cool things that have been built instead of the price going down.” And I’m just really excited about seeing what all the smart people, who have been drawn into the sector over the last year and a half, are able to achieve and bring to the market. Zac Prince : How do you feel about the whole stable coin blacklist versus Bitcoin censorship resistance? Peter McCormack : I don’t have super strong preferences or opinions on that. My understanding in having conversations with some of the issuers is that well yes, that is a functionality that is there, and was critical to be put there in terms of getting the approvals that they needed, the likelihood that it’s actually something that has triggered is incredibly low and effectively zero. Because the costs that one of these stable coin issuers would incur by triggering that would be devastating to the business that they’re trying to build of issuing these fiat back stable coins. Zac Prince : Do you think there’s too many stable coins? Peter McCormack : Yeah, absolutely. Zac Prince : So, which is-? Peter McCormack : Somewhere, somebody’s got to win. Eventually, there’ll be one or two that are the standard. Zac Prince : Remind me, which are the ones that you were working with? Peter McCormack : We’re kind of … we’re working with, I think, what are the biggest four, Paxos, true USD, USDC, and Gemini USD, GUSD. Zac Prince : Okay. I’m conscious of time, thanksgiving, and I know your wife wants you home soon. So thank you for doing this. Before I end, I’ve got two questions for you. Peter McCormack : Sure. Zac Prince : Okay. Firstly, what is thanksgiving, because I’ve got no idea? So, basically, when I had this trip booked, I thought I’d do two days in Washington and two days in New York. And when I said to the people I know in New York that I’m going to be here, everyone was like, “No, I’m away for thanksgiving.” I’ve heard of it before but I really don’t understand why such a big deal. Peter McCormack : I don’t know why it’s a big deal either. I just know it’s a day that’s a holiday. You get the family together, you eat turkey, ham and the objective is to stuff your face as much as you possibly can. And then, maybe, take a nap while you’re watching some football. Zac Prince : It sounds like Christmas without presents. Peter McCormack : It’s like Christmas without presents. Zac Prince : Christmas without presents. Peter McCormack : Decent analogy. Zac Prince : Okay, fine. And what’s going to come up for BlockFi in the next, kind of, few weeks, few months and then years and what should we be looking out for? Peter McCormack : We’ll be announcing some new various strategic investors to the platform and some partnerships that will be making BlockFi products more easily accessible from other parts of the crypto ecosystem. So, think about, I have my crypto in XYZ type of storage, what if without moving it off of that I was able to access a loan, or other products, from BlockFi in a really seamless and integrated fashion? So, those are things you’ll be hearing from us before the end of the year; and then first half of next year launch some new products, like some of the ones I talked about on the show. Zac Prince : Fantastic. Well listen … Look, firstly, thank you for being a sponsor because it’s great, it keeps the show going. I do truly really appreciate that. Thanks to Brad as well who I spoke to a lot and then yourself. Let’s just close out by letting people know how they can find out about BlockFi, how they can stay in touch with you guys, who you want to hear from and you’re good from there. Peter McCormack : Yeah, sure. We’d love to hear from everybody. Our website is blockfi.com. I can’t imagine that people need to hear this. We’re advertising on the show every week. Zac Prince : I know. Well, no, because I was thinking like, “The week we have the show, do I do an advert? And I was thinking, “Well you’ve paid for it and I should.” I was thinking about two things, that’s and then how do I explain it to people?” And there are going to be people who are going to accuse me of only allowing you on the show because you’re advertising, just because … You know how negative and cynical crypto people are? Peter McCormack : Yeah, sure. Zac Prince : I was thinking, “How do I handle that? Do I do an advert that week?” And I said, “I don’t know.” Well, we’ll just roll with it anyway, but they know to go to blockfi.com/whatBitcoindid. Peter McCormack : Well, see, you know it better than me. Zac Prince : Well, I could probably repeat the script now, but they know that. But how do they find you Zac and how should they stay in touch with what’s going on with the product? Peter McCormack : Yeah, you can find me on twitter. My handle is . You’re free to email me anytime, its . We have telegram channels and all of the, all normal kind of communication avenues and, I think, we’re generally really responsive, so don’t be shy. If you have questions, comments, thoughts, reach out to us. Zac Prince : @blockfizac zac@blockfi.com Brilliant. Well, thanks for coming on and thanks again for being a sponsor and thank you you for getting me beer and I’ll let you get home your wife. Peter McCormack : Yeah, thanks for having me and thanks everybody who’s a regular listener for hearing our name so many times and not harbouring any bad feelings about it. Zac Prince : Okay, great. Look, have a great thanksgiving. Peter McCormack : Yeah, thanks. Zac Prince : Connect with What Bitcoin Did:Listen: | | | | | Follow: | | | | | | iTunes Spotify Stitcher SoundCloud YouTube TuneIn Website Email Blog Twitter Medium Instagram YouTube