BlockFi: Earning with Your Crypto (w/ Raoul Pal and Zac Prince)

RAOUL PAL: Zac, great to get you on Real Vision. Good to see you. ZAC PRINCE: I am so pumped to be here. Thanks for having me. RAOUL PAL: Look, before we start, I just want
to thank you for believing in our mission to democratize all this information and being
a part, a really important part of getting Real Vision Crypto into the hands of as many
people as possible.

It is fantastic what you have helped us do
here, so I really appreciate it. ZAC PRINCE: Look, the feeling is mutual. Thank you for putting out all of this fantastic
content and helping to elevate the conversation around what is happening with Bitcoin and
what is happening in this sector, versus where it was before you started talking about it,
frankly. I have been a Real Vision fan for a long time. There was not saying when we talked about
the original idea, there was no question on our end whether or not we wanted to be involved,
it was just a matter of working out the details. We are pumped to be a part of it. RAOUL PAL: I want to start with your crypto
journey. How did you get into this? Give us your background. Where did you start? ZAC PRINCE: Sure. I was always an entrepreneurial and finance
minded individual growing up. I put myself through college as a semiprofessional
poker player. I always anticipated that I would work in
the financial services industry, but I finished school in May of 2009.

I ended up working at a digital advertising
startup in New York City. There were some financial components to it. It was like an Ad Exchange. We ended up getting bought by Google about
three years after I started there. It was a fantastic experience. I was at Google for about six months and realized
that I really enjoyed smaller teams and building things. I only lasted six months at Google, I did
one more ad tech startup. Then I moved into FinTech, specifically, the
online lending side of FinTech. I was at a company called Orchard Platform
where we were at the hub of this online lending or peer to peer lending boom, as it was originally
called, that started to emerge back in 2011, 2012, 2013 coming out of the last financial
crisis. RAOUL PAL: The banks were not really functioning
at that point. ZAC PRINCE: Banks had pulled back on lending
to consumers to small businesses for all types of reasons. Technology companies emerged to make loans
on the internet, and some of them were powered with different types of marketplace models,
where potentially, consumers or non-bank financial institutions could be financing those on the
other side instead of banks, which was the traditional model.

I was working at a company where we aggregated
all of the data about what was happening in this ecosystem, and provided technology tools
to institutional investors, credit funds, family offices, RIAs that wanted to give their
clients exposure, or get some direct exposure to what was happening in this space. I became the FinTech guy amongst my friend
group. I started writing a small blog, talking about
not only what was happening in online lending, but also about robo advisors, the real estate
investing that was starting to come online and all these interesting things that happened
out of the JOBS Act, because of the JOBS Act, and also because of FinTech more broadly. That is what led me to Bitcoin.

End of 2014, I was screaming on this little
blog that I had to basically nobody, that you should download the Coinbase app and be
buying some Bitcoin, because one of the big learnings that I had in seeing all this exciting
stuff in FinTech is that it really was not truly disrupting anything. You are putting a mobile app, or a better
user experience on– NICHOLAS CORREA: Sorry for interrupting your video, but I have a
very important message to share. At Real Vision, we pride ourselves on providing
the very best in-depth, expert analysis available to help you understand the complex world of
finance, business, and the global economy.

So if you like what you see on the Real Vision
YouTube channel, that's just the tip of the iceberg. You should come to realvision.com and see
how we're not leaving any stone unturned. From publishing more in-depth videos, live
discussions, written reports, and our latest feature, The Exchange, where you get a chance
to engage with experts, fellow subscribers, and learn from everyone's experience, which
can't be wrapped in a video. It's an experience which you live and learn
from.

So if you go to the link in the description
or go to realvision.com, it costs you just $1 to get a month's access to this incredible
content. I don't think it's something you can afford
to be without. ZAC PRINCE: disrupting anything. You are putting a mobile app, or a better
user experience on top of the same old products, and most of the time, there was a bank, or
the securitization industry or some of the traditional infrastructure that was ultimately
powering these things. When I learned about Bitcoin, I thought, this
is a brand new asset. Never before seen, powered by this new disruptive
technology and it is built on top of a payment network and you go down the rabbit hole, and
so I was screaming that people should buy it at sub-$500. Then I stupidly in 2015, sold a fair amount
at $1000 and bought back at a higher price. Then I slowly and steadily just followed the
space. I learned about Ethereum pretty early, and
I made an analogy in my head that Ethereum was like an iPhone, and Bitcoin was like a
Blackberry, which I do not necessarily believe in anymore in terms of how I think about it,
but that was the analogy I made in my head.

Before Ethereum was even on Coinbase, I was
buying some of that. I was down on that investment for a while,
because the DAO got hacked, and all this weird stuff was going on, but then the prices started
going up. Late 2016, the prices started going up, I
got even more interested, started trying to talk about it to my wife at home, it was just
always on my mind.

She was like, hey, every Tuesday, you should
just leave, go find some people to talk to about cryptocurrency, and you can have that
one night a week. I started doing that. The meetups shifted pretty quickly. When I started in 2016, it would be 12 folks
at a bar in Union Square, some random hole in the wall bar, just nerding out about Bitcoin. Then by the first quarter of 2017, so much
stuff had happened, and there were 200-person-sized rooms at law firms offices, or Microsoft's
office filled with hundreds of people waiting outside to get in, and I was like, holy cow,
this is starting to become a really big deal.

These things that led me to make a flyer of
an investment are starting to actually happen. I figured I had to get involved, I had to
get involved full time. I was passionate about it. I believed in it. I had this relevant FinTech experience, specifically
in the online lending world. The first place my head went was this asset
class is going to need debt and credit products.

RAOUL PAL: Quite a leap at that point to realize
that because at the time, people were still exchanges, wallets, and the basic functionality. ZAC PRINCE: Well, it was obvious that the
same thing was going to be true that created the opportunity for online lending, which
is that banks were not going to be active or were not as active as they should be. At the time, I tested, I was getting a loan
for an investment property and I tested the bank just by including Bitcoin and Ethereum
on my financial statement that I submitted to them. Of course, they were like, this is worth nothing,
we are not valuing it in terms of your assets. By the way, we are going to put you through
some additional compliance checks, because we are worried you might be involved in illicit
activities, or something, which is what I suspected they would do.

I was like, okay, so banks are not going to
touch this for a long time. I see the use case, as an individual who was
fortunate to buy Bitcoin pretty early, that there could be a world where I want to use
this asset as collateral. It might become a pretty substantial part
of my net worth if it stays on the trajectory that it is on, and I am not going to want
to sell it and pay taxes on a really big gain, but I might want some liquidity to make other
investments for other reasons. That was our original idea at BlockFi, and
we started the company in the third quarter of 2017. Then it has expanded quite a bit since then,
and we can talk about that journey and other stuff, but today, we really think that our
opportunity is to build a global banking, like financial services company that not only
helps folks interact with the cryptocurrency ecosystem more effectively, but also, that
we think can do some things better than our traditional financial system, because we,
from day one, have been leveraging blockchain based assets, and the networks that they run
on to power our infrastructure.

What are those things? Well, it is things like being able to operate
24/7, being able to move across borders much more frictionlessly than in the traditional
system. If you really boil that down, it is just doing
things faster and cheaper with the movement of money than the traditional system does. That is where we see ourselves going long
term, but today, we are a diversified financial services provider to both retail and institutional
participants in the cryptocurrency ecosystem. RAOUL PAL: What assumptions did you make when
you started BlockFi that now are completely wrong? What things did you not see coming but now
you are like, oh, my God, I did not see this coming? ZAC PRINCE: Well, the first thing was that
we assumed that investors would see the opportunity like we did, and Flori and I were so amped
up in bringing this PowerPoint deck that we had about how big debt and credit as an opportunity
was going to be in the cryptocurrency ecosystem to folks and cryptocurrency investors were
laughing at us because we had no plans to do an ICO and we basically looked at it.

This is smack dab in the middle of the ICO
boom. We had no plans to do an ICO. We thought that not only would it not really
add value for the clients that we wanted to have, but also that it was going to come with
a whole host of regulatory risks. One of the learnings from the online lending
world is that access to scalable institutional capital in the financial services business
is in and of itself a competitive advantage. We knew we needed to be on that path, and
we felt that doing an ICO would slow or inhibit that path. The crypto investors were like, you guys are
idiots. You all are total morons, this ICO fundraising,
this is the way of the future, you are so wrong and needs to have a token. Get out of here, we are not interested. Then the traditional FinTech focused venture
capital investors just could not even comprehend that cryptocurrency was a thing, much less
that debt and credit was going to be a big enough thing for this new asset class to actually
build a company around.

The first round of capital that we had to
raise was far and away the hardest, and we did not expect that whatsoever. The other thing we did not expect is that
the market would be as dramatic as it was. In terms of the price up and down right around
that time, when we started the business, in hindsight, that was a good thing for a few
reasons. When we started, Bitcoin was around 5K, went
up to 20K and back down, it was flailing around. We never anticipated that.

We also did not anticipate at the outset how
big of a market there would be for lending Bitcoin. The original idea was really, let us help
bring dollar financing to this ecosystem, and help facilitate all of the use cases that
will emerge for that. Then within a year and a half, lending Bitcoin
had become a bigger part of our business than the dollar lending. I would say the other thing we underestimated
was just how quickly the business model would evolve and diversify. Fortunately, today, we have done a really
good job of being open to listening to the market then developing what the market is
asking for us, is asking from us in terms of products and services.

RAOUL PAL: You have this crazy idea about
lending in this market, and there is no price of money. How did you think about, okay, well, we need
to now start thinking about this? How did you go from the concept to building
out something that actually has some functionality and works accruing interest and stuff? ZAC PRINCE: Well, on the dollar lending side,
there is a market there. There is a market of private credit investors,
that both Flori and I were very familiar with, because that is the world we came from. Defining how we would spin up a lending product,
get the necessary regulatory licenses, structure that lending product in a way that worked
for not only the borrowers, but also for institutional investors. That was objective number one, and we were
the first company in the world to raise institutional capital to finance loans to folks secured
by the value of their Bitcoin. Then it happened organically. We launched that institutional financing. We started growing this US dollar loan book,
and our phone started to ring. It was market making firms.

It was trading firms. They basically said to us, there is one game
in town right now to borrow Bitcoin. We think that the market would be healthier
if there were multiple folks where we could borrow Bitcoin and we also think that obviously,
competition would not generate better prices for us as borrowers in this market. Have you ever thought about that? Would you be open to doing it? Fortunately, we had started building out a
risk management team that primarily came from prime brokerage equity financing backgrounds. The step there for us was really simple once
we saw the market demand and then we started lending out a little bit of Bitcoin This is
back half of 2018, and we quickly realized that the demand to borrow Bitcoin was way
bigger than the Bitcoin we were going to have on hand to lend safely from just lending dollars
secured by Bitcoin. We said, okay, what if we pay folks interest
on their Bitcoin? What if we make a market there specifically
for Bitcoin denominated interest rates? We launched that in March of 2019 with our
interest account product, and we underestimated how excited the market would get about that
product.

We had 15 people on our team at the time. It was one of those perfect product market
fit at startup scenarios where people were sleeping at the office, there was this flood
of clients and interest, and there were kinks in the product that we had not worked out
yet when there are thousands of people trying to sign up for it. That was really our breakout moment as a company.

The success of that product enabled us to
raise our Series A round of financing. From there, our clients just started asking
for things. They are saying, hey, it is great that I am
earning interest on my Bitcoin and my Ethereum. What sucks is that I have to withdraw it from
your platform, bring it over somewhere else if I ever want to trade it, and then bring
it back to you, because I want to earn interest again, can you just enable me to trade it
on your platform? We were like, wow, that seems like a no-brainer.

We built that, and now, we are working on
this credit card product on the retail facing side of our platform, which is just going
to be so much fun. I am so excited about it. RAOUL PAL: Explain it. ZAC PRINCE: There is a lot of debit cards
in the crypto space today. First off, it is going to be a credit card
where you are spending dollars, just like how most of the folks I assume watching this
spend dollars on a credit card is their primary spending mechanism, and they earn rewards
for that either airline miles or hotel points or cashback. What we are doing is we are just making the
rewards currency Bitcoin. It is a dollar-denominated credit card, you
pay dollars. RAOUL PAL: How does it work? ZAC PRINCE: You get 1.5% cashback in Bitcoin
on every purchase you make on the card, and then that Bitcoin will flow directly into
your BlockFi account where you can do all of the things with it that are available on
our platform, earn interest rate, get a loan secured by it, but it has been a big, massive
lift, and you cannot just launch credit cards.

You need a number of different partners and
some of these partners that you need are a bit old school, and they get a bit weary when
you say, yes, we want to put a Bitcoin logo, just on the front of the credit card. It is going to be a fantastic product for
folks who are already clients of BlockFi, and they love earning Bitcoin. It is also going to be a fantastic product,
hopefully, for folks that are crypto curious, but have not taken the leap yet.

Because it is really familiar. Everyone knows how credit card spending works
and earning cashback or rewards on your credit card works. It is a very low risk way to start getting
some Bitcoin. There are probably a lot of people who they
have their savings automated through their 401k or something else. They are maybe not taking too much discretionary
capital in taxable accounts and investing it in things. Right now, they know that their travel points
really are not worth anything, because we are not allowed to travel anywhere. Based on the trajectory we are on in the Bitcoin
market, I believe that we are going to start getting more and more attention over the next
three to six months as we stay on this trajectory that we are on in terms of [?].

RAOUL PAL:
I just love the idea because what you are encouraging people to do by using a credit
card, which people do, you pay quite a lot of interest for that benefit, but what you
are actually doing is accumulating an investment asset that has intrinsic value. It is just a good thing to do. It is a good thing for people. In a highly indebted society, if you are offsetting
some of the debt activity by increasing the asset side of that balance sheet, that is
good. ZAC PRINCE: Yes, and this is a card that will
be targeted towards prime consumers, who are the least likely to carry a balance. I hope that nobody carries a balance because
it is not going to be a good product. Credit cards, in general, are not good products
for actually carrying debt. What they are good for is spending so that
you earn the rewards and you benefit from consumer protections that are embedded into
all credit cards that do not exist for debit cards, specifically around fraud or if you
purchase something that is defective, like with a credit card, you can undo that pretty
easily, a lot easier than with a debit card and without having actually drained your liquidity.

Then so long as you pay off your statement
balance on the 30-day billing cycle, you are never charged interest. I hope that everyone uses it that way, not
as a vehicle to actually carry a balance and as a result, get charged interest. Then you are really just, instead of earning
airline miles, which I do not even know what the numbers are on this, but they are worth
some ridiculous amount less every year. RAOUL PAL: Yes, because [?] are inflationary. ZAC PRINCE: Which are also inflationary, but
maybe to a lower extent, the higher extent than Bitcoin but a lower extent than airline
miles.

It is going to be a lot of fun, and I think
having a physical product that folks who are passionate about Bitcoin and cryptocurrency,
that looks great, that is branded with major reputable names in the traditional financial
world, that they are able to show their friends, or their family, or use to buy something and
then the person at the coffee shop is like, what credit card is that? I think it will help on the margins to create
conversation in folks' everyday lives around something that is fully digital, but we are
going to slap the Bitcoin logo on the front of the card which is awesome. RAOUL PAL: Hey, listen, I want to go back
before we go forward. A lot of people do not truly understand the
defi or the lending market, how it works, can you give people a 101 of how it works,
or certainly how it works at BlockFi? ZAC PRINCE: Sure.

There are two types of lending that we do. We lend to retail folks on our platform, which
is exclusively borrowing dollars secured by the value of your cryptocurrency portfolio. Then we lend to institutions where we lend
both cryptocurrency and dollars. The use case on the retail side is really,
hey, I have got this asset, I am still bullish on it, I am borrowing because I do not want
to sell it and lose the potential future upside. I am also maybe being pretty conscious around
the tax implications of realizing a gain on the asset than having to pay that tax bill,
or I am just trying to be efficient in terms of leveraging debt to make other investments.

On the institutional side, there are a number
of different use cases. Imagine that you are Susquehanna, you are
a portfolio manager at Susquehanna. You make your living conducting market neutral
trading strategies where the P&L is positive. On one end of the spectrum that can be buying
something for 99 cents at a certain trading venue and selling it for $1 at another, you
might do that really quickly. Another example would be buying something
in the spot market while simultaneously selling the future, the prices there are different.

In order to conduct these trading activities,
you need an ability to borrow the underlying asset that you are trading in. Because sometimes that is important for one
leg of a transaction, and you also need the ability to finance your activities. You might start with $5 million or $10 million
to run some trials in a new market and prove that there is capacity there, but if you are
going to scale that up to $100 million, or $200 million, or $300 billion, you would rather
not have that all be equity, you would like to finance some of it. This is what prime brokers do– RAOUL PAL:
Basically prime breaking. ZAC PRINCE: Exactly, but in the same way that
retail folks cannot borrow dollars from banks who value their Bitcoin as collateral, prime
brokers will not finance Susquehanna's cryptocurrency trading activity. On the institutional side, we really help
facilitate that market need. That lending is what enables us to pay the
interest of folks who are holding assets on our platform, and the loans are denominated
in cryptocurrency so we are not like selling Bitcoin and doing something else and then
creating a yield from that other thing and then converting it back to Bitcoin, this is
Bitcoin denominated transactions.

RAOUL PAL: How much does that lending yield
curve go out for? Is most of it lending activity week to week,
day to day, or do you get longer term lending? Are you getting a seeing a yield curve developed
from it? ZAC PRINCE: It is still really early days. The best thing to look at in terms of the
yield curve is the spot and futures market. There is a couple different spot and futures
markets, frankly. You have got the CME which represents the
highest tier of counterparty risk and institutional participation and right now, the Bitcoin futures
curve is in contango on the CME meaning there is no implied yield on Bitcoin. There have been periods of time where the
market's bearish and it moves to backwardation in those periods. That is probably your best representation
of a Bitcoin yield curve, and most of the volume is concentrated in the front month
contract. There is not a lot of term there. You also have the crypto native derivatives
venues. Places like Deribit, OKEx, BitMEX, that is
another good place to look in terms of implied yields. It is really an over the counter market that
is still nascent and dominated by two firms, maybe three, with the third being a distant
third to the first and second.

RAOUL PAL: Let us say I want to get some return
on my Bitcoin. I come to you guys. Firstly, there is two things that I worry
about being a financial market guy who is slightly concerned by the world generally
is, okay, what risk am I running with it getting hacked, because I have to take it off my cold
storage? Then what risks am I running to get a yield? Talk people through a bit of that, because
people do not understand the ratio. There is a bunch of different stuff because
there is a bunch of different tokens and stuff that run wildly different risks than what
you guys are doing. I think just explaining some of this would
help people. ZAC PRINCE: Sure. I think you can break the wrist down into
three high level buckets.

I am happy to go as deep on this as you would
like over time, including making folks from our risk management team available. RAOUL PAL: We will definitely do that on Real
Vision over time. ZAC PRINCE: At a high level, you have three
buckets. You got your BlockFi counterparty risk, you
got the operational custody risk, and then you got the aggregate activities of what BlockFi
is doing to generate a yield that they are paying to you. Let us just knock out those three at a high
level. Who are you facing when you are facing BlockFi? You are facing a high growth Series C hundred
million plus in equity capital on its balance sheet, liquid on its balance sheet that is
backed by institutional investors who do a lot of diligence, Fidelity, Susquehanna, Volare
Ventures, Morgan Creek Digital and many others and domiciled and regulated in the US with
a team that comes from backgrounds that makes sense for doing the type of thing that we
are doing.

On the second piece, operational custody risk,
we decided really early on that building our own custody product was not the value that
we wanted to add to the market. We work with three custodians. We primarily leverage Gemini's custody infrastructure,
which has insurance coverage, which has gone through SOC 2 audits and has a long track
record of never having any issues whatsoever. We also work with BitGo for assets that are
not supported on Gemini, and now additionally with Fidelity in their custody platform. Anytime assets are not actually actively being
used in the third bucket, they are at one of those three places which are three of the
most reputable and highest quality places to store your cryptocurrency in the industry. Then there is the third bucket, the aggregate
lending activities that we are doing to generate a yield. Every Bitcoin that is held on our platform
is not just sitting in custody. A material percentage of it is always sitting
in custody to be available for things like withdrawals and trading on our platform. The bulk of it, more than 50% of it on any
given day on average is being utilized. The number one thing that happens in terms
of that utilization is we are lending to institutional firms who are conducting the activities that
we talked about before.

Now, depending on the caliber of that institutional
firm, we have different criteria for them in terms of how much they can borrow, and
what collateralization ratio we require. To use examples on extreme ends of the spectrum,
let us say you are Susquehanna, we can probably get pretty comfortable taking some credit,
like exposure to you, so long as we know that the entities that we are facing rolls up to
the mothership of Susquehanna. We set a limit on that, but we can get pretty
comfortable there.

Let us say you are XYZ capital that raised
$5 million from your friends and family, and you are going to go run a long, short strategy
for the crypto market. We are not going to get comfortable taking
a penny of unsecured credit risk to you. If you want to borrow Bitcoin from BlockFi,
you will be posting, call it 140% collateral in either dollars or another asset. Then, for all of the positions that are over
collateralized both on the retail and the institutional side of our lending, we have
a risk management system that we built and developed specifically for this asset class
that monitors the positions and takes actions in real time to protect them.

That starts with notifications, proceeds the
margin calls, and ends with liquidations. The best thing I can point to around how that
system works is the performance of it. We made our first loans at the end of 2018. We have been lending through obviously some
pretty dramatic periods of volatility in both directions, and we have had perfect performance
the whole way through. RAOUL PAL: Have you had a counterparty go
bust yet? One of the people you are lending to of a
reasonable size, have you had that bad experience, that joy yet? ZAC PRINCE: No, we have not.

We have been pretty selective. To go back to that example of a Susquehanna
quality firm, and startup crypto asset management firm, probably 90% of our activity is with
firms on the Susquehanna side of that equation. We made a very conscious decision to prioritize
working with borrowers who come from the traditional financial markets that are very well-capitalized,
have very long track records.

We prefer to work with folks that are market
neutral in terms of their strategies, and that crypto is not the majority of their business. It might be 5% of what they are doing. I think partially because of that underwriting
criteria that we have, we have never had a counterparty go bust to date. RAOUL PAL: It will happen, and if you build
it into your risk model, then it is just part of doing business, because essentially, it
sounds a very traditional style, even though it is in crypto, but prime broking. You are doing pretty much what all the big
prime brokers do, which is all of that.

What about when you leave assets on the exchange,
I presume then it is segregated, or it is not segregated is it I guess? ZAC PRINCE: It is not segregated. RAOUL PAL: It is not segregated, because you
use it to drive yield. In return, you get paid a return, essentially? ZAC PRINCE: Exactly. RAOUL PAL: You take the risk that you guys
with the capital base that you got, the customers you have, your risk management tools, the
custodians that you use, that is secure enough to receive the yields that you get. ZAC PRINCE: That is right. It is fundamentally different than a bank
account, and that there is no federal backstop here. A somewhat proper analogy might be banking
before that existed, I think what is not perfect about that analogy is that we are really specifically
conducting activities that are on the lowest end of the lending risk spectrum, so even
in 2008-2009, the prime brokerage equity financing divisions at banks were not the ones having
issues.

It was the asset-backed lending and securitization
sides, they got overlevered. We believe that so long as we continue to
manage this, well, it will be a zero– it can be a zero loss type of lending activity
for the long term. Now just because we believe that, it does
not mean we do not take every precaution in terms of portfolio diversification relative
to the size of our equity capital base, which acts as a buffer in terms of the counterparty
underwriting and the collateralization requirements. In terms of steadily doing things over time
to de-risk, even while we are growing, to de-risk the overall activity. One of the things we have done recently on
that front is there is a pretty an emergingly liquid market for lending GBTC. There was a public disclosure maybe two or
three weeks ago that we crossed the threshold for filing a 13G form which lets everybody
know that BlockFi has a position in the Grayscale Bitcoin Trust that is greater than 5% of the
total trust.

We are very active in that market as well. We actually view that type of lending as risk
reducing relative to even the lending that we are doing to Susquehanna in the first example,
because then, you are just on the SEC lending infrastructure of traditional securities markets,
which is incredibly secure, and has federal backstops built into it. As this market evolves, we think there will
be opportunities like that to continue generating a yield on Bitcoin, but do it in safer and
safer ways over time, in addition to the benefits that you get from scale on our capital base
and diversification over overall book of lending. RAOUL PAL: Have you guys not considered getting
a banking license? ZAC PRINCE: We have. Today, we are regulated like a FinTech company. We have MSB registration at the federal level.

Then at the state level, we have lending licenses
and money transmission licenses, depending on the state. Some states, we have both. Some, we just have one. FinTech companies like Square, like SoFi,
like a lot of the neo banks, go through this evolution, where they start there. Then the biggest and most successful ones,
at least recently, have found a path to becoming a bank. We are evaluating those paths, and I think
it is very likely that at some point over the next, call it one to five years, there
will be an evolution of our regulatory construct, whether that is closer to the one-year or
fiveyear side, I could not really say with competence right now, but it is something
we spend a ton of time on. Just our legal and compliance team is 25 people,
and they stay busy responding to regulatory inquiries, doing the things we are required
to do for all of our licenses and thinking about the future.

It is a big part of our operation. RAOUL PAL: I just want to pick your brains
about the custody side. I am starting to think that the market narrative
of not your keys, not your wallet, and that you should keep it offline, everything else
might be behind the reality of where custody is now. Where do you think of where custody is now
amongst these major participants now seems to be solving custody much better than it
was in the past, what do you think? ZAC PRINCE: Look, I think custody, there are
many great custody options in the market today where you can, like I personally, would sleep
way better at night knowing that my assets are custodied there, versus being self-custodied
by me, and I think there is an analogy. One of the things you and I have talked about
is moving to more data-oriented and more institutional quality talking points, instead of philosophical
talking points about the asset class.

I think you can put custody in a similar bucket. It is fantastic that one of the qualities
of these assets is that you can self-custody them. That is great for people who are interested
in doing that. It aligns with some of the philosophical beliefs
that a lot of early adopters have in this asset class, and it is a very valuable quality. It is not for everyone. Institutions are not used to it. I got so scared. I am like, calling my sister. I did it and I am calling my sister in Florida
and telling her to write down these 12 words, because in case something happens to me, the
whole thing was stress inducing, like, I lose my car keys once a quarter. I am not trying to hold on to a bunch of money. RAOUL PAL: [?] bear assets. As you say, I lose everything. All day. My assistant spends the whole day finding
when we are flying around the world, finding my iPad, my wallet, my phone.

I lose everything. Bearing assets is difficult. I had one of the big family offices I advised,
they are like, look, we love this Bitcoin idea, but we have no idea. We do not want to mess around trying to transfer
it offline. What happens if we lose it? ZAC PRINCE: [?], Coinbase, Gemini, BitGo. I am sure I am missing people on that list,
but there are great custody options. There are also ways for institutions to get
exposure without even having to deal with custody.

Bitcoin futures. GBTC. Folks have to, it is great that we have this
menu. It is challenging that we have the menu in
the sense that folks might show up, and they hear if you are not self-custodying, then
you are not even doing Bitcoin right and you are a moron, I think we have got to tone down
some of the aggressive tactics that we have in terms of that messaging, and just talk
about it positively. This is an option, if you want to do it. It is one of the phenomenal qualities that
this asset has. There are also other options that are very,
very safe, and it depends on what is best for you. RAOUL PAL: Yes, and the narratives are always
behind in this space, generally, because everything is moving forward so fast. I do not know what the world is going to look
like now. Caitlin Long has got a banking license. What is she going to do with that? Where does that move things? Where are you guys going? What is Coinbase developing? There is so much going on here and it is not
like people are not aware of some of the things in the industry that make it clunky for others
to use.

Everyone is highly focused on getting that
solved. ZAC PRINCE: It is phenomenal. The number of things that are happening with
crypto native businesses, with traditional FinTech businesses, with traditional institutional
businesses in terms of supporting the asset class, and then layer on top of that, that
this is global. Once you get outside of developed markets,
there are real compelling promises to things like defi, to go back to an earlier point
that you made. The most fundamental– when people say defi
what they really mean, if you unpack that is it is an open application with some type
of financial service that is built on a smart contract blockchain network. There is no KYC, no KYC whatsoever. Now, for folks that live in developed markets,
that no KYC thing is not necessarily a selling point whatsoever. If you are an institution, it is risky, and
you cannot touch it with a 10-foot stick, because you are regulated.

The last thing you want to do is have to explain
to one of your regulators that you do not know who was on the other side of a transaction,
or that you are operating on a platform that has no idea who is using it. If you are in China, or Russia, or any number
of places where there are currency controls, or you are on sanctions list from the US or
the EU, this is pretty powerful stuff. That is also happening. That is outside the purview of a lot of the
stuff that that that you focus on, and that we focus on at BlockFi, because we do not
really view ourselves as defi. We view ourselves as more operating in the
bridge between cryptocurrency markets and traditional financial services. RAOUL PAL: That whole world is going to clash
as well, because it is same thing. You are creating lending markets around new
technologies and tokens and cryptocurrencies. All of this world is going to mix. ZAC PRINCE: It is so fun. The one thing that keeps me up at night is
how we make sure that as we keep scaling as a business, and as a team, we are over 300
people now, we cannot lose for a second, our hunger to keep building more products and
functionality that add value for our clients.

Because if we take our foot off the gas pedal
for a second in this industry, the fastest moving industry in the world, then we have
lost. RAOUL PAL: It is exhausting. ZAC PRINCE: Yes, but it is fun, man. I love this stuff. There is nothing I would rather be doing. What else am I going to do? We are only here one time. I have just had such a fantastic time building
this company, seeing the impact that we have had on our clients, on folks who have joined
the team and are kind enough to share feedback with the company that they are excited to
wake up on Monday morning and do what they are doing. I believe in this asset class. If you are going to be working and you can
pick what industry or what area to work in, I cannot think of a better one for my interests
and my personality.

It does not feel like work. RAOUL PAL: I think over the course of the
year, we will bring people up on many of the stories and developments that is going on
at BlockFi. What is the big thing that is exciting outside
of the credit card? Credit card idea in a killer idea? It is a no-brainer. You were talking about something on the institutional
side. What is the next phase you are looking at
there? ZAC PRINCE: Yes, there is a couple things.

The credit card is our big next product launch
on the retail side of the platform. On the institutional side of the platform,
we are going to be connecting a really strong trading capability with our lending capability. We think that will be really valuable for
a lot of our institutional clients. We also, this year on the institutional team,
started expanding globally. Next year, we will incorporate retail marketing
and retail client service into that global expansion. We have teams and offices in London, Singapore,
Hong Kong, Poland, and Argentina now. Three out of those five offices are focused
exclusively today on institutional and corporate client service. We will be adding retail to that. We are really excited about all of those things. There is a laundry list. If you actually look at our product development
roadmap.

If you were a client, on the institutional
side of our platform, I could say, oh, and then a month from now, this feature is coming. Then this feature is coming. There is always stuff happening, but those
are the big ticket high level things that I am really excited. RAOUL PAL: When you are seeing the institutional
side, like everyone is really interested in this, and I have been talking about this wall
of money, what are you seeing? Are you seeing Treasury? I know, I think we did it with you guys. We bought Bitcoin for Real Vision's own Treasury
account. Are you seeing more corporate Treasury asset
management firms, family, who you are seeing involved in this space outside of your core
original customer base of the market makers and the trading firms and all of those? ZAC PRINCE: I would say, thematically, we
started with market makers and trading firms. This year, a big theme has been macro, macro
hedge funds coming into the space and getting involved. There has been a steady drumbeat of family
offices the whole way through, it just depends on what your family office focuses on.

What we are starting to see now is different
types of long only investors. The ones that are on the front end of the
curve, and whatever section of the asset management world they are in, are starting to pay attention
and think about how they can get involved. I will give you a few examples. We had two university endowments participate
in our Series C financing. One Ivy League, one non-Ivy League. We have started to think about, for BlockFi,
public market viability as a theme, because we think that there could be a point in time
where we would like to be a publicly traded company. Some of the conversations we have had there
have been with long only public equity investors.

They have numerous folks in that camp have
mentioned to us, oh, we are trying to decide whether there is room in one of our existing
funds for GBTC, or if we need to set up a new vehicle. If we set up the new vehicle, should that
be getting long in the spot market or some other way? We hold these Bitcoin 101 education sessions
for them, like two or three folks from our institutional team go in and just educate
organizations around what is happening? How does it work? What are the ways you can get involved? Why should you not be scared of it, et cetera?. Banks. You know that there was news from the OCC
a few months back.

I think that the prime brokerage sides of
banks, and especially for their high value clients, there are a couple who are very actively
planning the first thing that they are going to do and that might happen faster than I
expected six months ago. Then corporates, that is another one. I would say, for us at BlockFi, that has been
a little bit slower than the segments I mentioned before. That is coming too.

Look, MicroStrategy and Square look really
smart today. If you were publicly reporting Real Vision's
financials, you would look really smart too, because there is 100% chance that the Bitcoin
price is higher right now than it was when you decided to take some of your Treasury
into Bitcoin. People are going to notice, people are going
to notice. RAOUL PAL: Final question for you, Zac.

Is the interest that you earn on Bitcoin,
what drives it? What is it currently? What is the market and the interest that you
get? What drives it up and down? ZAC PRINCE: Sure. Right now, for Bitcoin, there are tiers. On your first 2.5 Bitcoin, you earn a 6% annual
yield on your balance. Above 2.5 Bitcoin, you earn a 3% annual yield. We also offer 8.6% on stablecoins, which are
one to one with cash in a bank account. I forget the Ether and Litecoin interest rate,
but blockfi.com/rates, and I think Ether and Litecoin are both between 4% and 5% today. What drives it is this market that is still
nascent and somewhat inefficient and shorter term in terms of lending these assets safely. Then supply and demand within our ecosystem,
are the two biggest drivers. RAOUL PAL: Does it, at your level, not at
customer level, because you have to set some rate otherwise, you keep moving it, but do
you see these rates moving up and down with market activity? Have you got a sense of what is really driving
the spreads in it, or? ZAC PRINCE: If you look at it from like a
first principle's point of view, the biggest drivers are adoption, and size of the asset
class, and market sentiment.

On the market sentiment side, when the market
is bearish, then there is a higher demand to borrow bitcoins, because shorting while
not being all of the borrowing demand is a component of the overall borrowing demand
and so the market is bearish, there is more shorting, there is a higher borrow demand,
we can offer generally speaking, higher rates. If you go back to March, when sentiment was
bearish everywhere, we increased our rates pretty substantially for cryptocurrencies
between March and April. We only change our rates once a month. That is the operating practice that we have
with our clients. If we change our rates, we give you a heads
up before the first of the month, and we only change them maximum once a month.

RAOUL PAL: There is not term structure yet,
i.e. I can cycle and lend it to you for three months,
that is not developed yet. ZAC PRINCE: Well, from time to time, for our
higher net worth clients, or our corporate or our institutional clients that are holding
assets with us, there are opportunities there. It is not an efficient market, so sometimes
there are opportunities, sometimes there are not but there are cases where our team will
reach out to folks that have above some threshold of assets on the platform and say, hey, if
you are interested, we can pay a bit more for Bitcoin that you are willing to lock up
for three, six or 12 months.

RAOUL PAL: Zac, fascinating. It is such a fascinating world, there is so
much going on. I cannot get my head around it, but look,
really good for you, guys, and look forward to being with you as part of this journey. ZAC PRINCE: We are excited to be here with
you too and excited to share as much as we possibly can about our model. I really think of this as an opportunity for
us to become great allies. RAOUL PAL: I am going to write for you and
to interview some people as well, because it is just going to be interesting. ZAC PRINCE: Absolutely. Thanks so much, Raoul. RAOUL PAL: Yes, take care, my friend and we
will speak soon. ZAC PRINCE: Sounds good. See you. NICK CORREA: I hope you enjoyed this special
episode of the Interview, the premier business and finance series in the world.

However, this is just the tip of the iceberg. For more in-depth content and expert analysis,
visit the membership link in the description to unlock a week’s access for only one dollar. This dollar can change your life..

You May Also Like