WBD214 Audio Transcription

Bitcoin Finance in a Black Swan Event with Zac Prince & Flori Marquez

Interview date: Wednesday 8th April 2020

Note: the following is a transcription of my interview with Zac Prince and Flori Marquez from BlockFi. 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.

In this interview, I talk to Zac Prince and Flori Marquez, the co-founders of BlockFi, a bitcoin financial services business. We discuss how they manage high volatility, operating as a custodian and the state of the Bitcoin market.

“We are more bullish on crypto than we ever have been. I mean, could there be a better macroeconomic backdrop for Bitcoin right now? I don’t think so.”

— Zac Prince

Interview Transcription

Peter McCormack: Hi Flori, hi Zac, how are you both?

Flori Marquez: Doing well!

Zac Prince: Just feels a bit like groundhog day every day, but other than that can't complain. We're smack-dab in the middle of our, what are we now? Fourth week of quarantine.

Peter McCormack: Yeah, I've actually got some questions for you about that as well. But first, we need to introduce Flori to everyone, because she's not been on the podcast before and she is the secret sauce behind BlockFi. Keeps the wheels turning while Zac's out there making business. Say hello, Flori, introduce yourself!

Flori Marquez: I do like to stay behind the scenes. I'm really excited to be here. I know we've known each other for a while and excited to finally be on the show. For those of you who don't know me, I am the other half of the founding team of BlockFi and I run everything from operations to sales marketing. Basically whatever we need to build!

Peter McCormack: That's true, yep. We've hung out in Uruguay, New York and... Where was that event we were at in the US last year?

Flori Marquez: Which one? Probably at Consensus at some point.

Peter McCormack: No, Crypto Springs?

Flori Marquez: Oh, Crypto Springs, yes. That was I think, my favorite event that I've been to in the States. But I do keep thinking about that steak we had in Uruguay and wishing I was there right now.

Peter McCormack: Well events are dead right now, it's all online. Well look, anyway, I've got a question for you. Quite an interesting one actually, before we even get into any Bitcoin stuff. Is your office completely closed down? Is everyone working from home right now?

Flori Marquez: Yeah, we've been closed down since the beginning of March. We actually did it the week before New York put in place the stay at home order and the nice thing about BlockFi is that we all work on our laptops anyway. So it was pretty seamless to just move everyone to work from home. We made sure everyone got a second screen, or whatever they needed to make themselves as comfortable as possible and it's been as seamless as it could be.

Peter McCormack: So the question I really have for you, because I think it's quite an interesting thing right now, is that, how have people responded? Are they liking the fact they get to work from home. I know myself I like a bit of both, right? But do you think this is actually going to change your business in a post-coronavirus world? Do you see you changing your structure at all, in that allowing people to work from home more? Is that something you're even thinking about? Because I think it's an interesting question right now.

Flori Marquez: Yeah, it is a really interesting question. We're lucky that 50% of... Because we have offices in Poland and Argentina, 50% of our workforce was already remote, so we already have a lot of people on the team that knew how to work remote and they're kind of teaching us how to do it now. In terms of the people out of the New York office, we work really closely together, and we really like working with each other. So I know a lot of people miss the camaraderie, and the energy of the office. I definitely miss walking in and just high-fiving people, which we can no longer do, for many reasons.

But we have moved over to doing a lot of things, like daily stand-ups, which is something that engineering typically does over video conference. So we do that for the business side now. We're trying to do fun things to keep ourselves close together. We did a trivia night, I know our director of people did a Pilates class today for people that wanted to join and so we're getting really creative with how we can try to stay connected. I do think that when this is all over, my guess is people will be sprinting back to the office just to able to hang out with each other again.

Peter McCormack: Yeah, because you miss that social aspect. But there are all these other side benefits. We haven't eaten takeout in three weeks and we would have usually, at least one night, possibly two a week, we're cooking fresh food everyday, we're spending more time together, we're exercising, we're hanging out and there are all these side-benefits that have been forced back upon us. I'm just in that place now, I wondered if we'd keep any of this in the post-coronavirus world.

Flori Marquez: Yeah, I've definitely been cooking way more and I've actually spoken to a lot of friends that I haven't talked to for a long time. I think everyone's making more of an effort to stay in touch, to fill our days, and I do love that I'm saving an hour and a half of my life everyday without commuting. So it is nice to know that we have this option, if we want it when things get back to normal.

Peter McCormack: Well I don't know if there is a, "back to normal", but it might be a new normal. All right, well listen, it's good to talk to you both, it's been a while since Zac's been on. So there's few things to talk about. Zac, you were on before because I took some criticism for having you as a sponsor, because there are people out there who... I'd say a small group, but who question BlockFi as a business and you've been on before and you've openly talked about it. There was a specific tweet thread at one point, from a guy called Alphazeta, who questioned the business and questioned what would happen in a serious market collapse, a black swan-type event. I think we've had it now, right?

You couldn't have had a bigger market crash! This is unprecedented. As I understand it, the crash was bigger than 1929, the Great Depression, although someone might tell me it's different. But this was the time to really test the fragility of BlockFi as a business and you've come through it. So do you want to talk about... And it depends, it might be a question actually for you Flori, but do you guys want to talk about what happened? How you are aware of what's happening? What the impact on the business has been? How you dealt with it all?

Zac Prince: Yeah, sure. So maybe I'll start and I think Flori can fill in some details. There were some pretty phenomenal stats in terms of increases in volume on our clients' service team and stuff like that. But just at a high level, we made our first loan in January of 2018 and we now have three products in market. The company has been very fortunate to grow ever since we launched our first product, so we're at larger scale than we've ever been before and we have more clients than we've ever had before.

So that was kind of the backdrop doing into this market event. We have, prior to this, managed through three periods of what, prior to this event, was the extreme end of Bitcoin downside volatility which was generally 30/35% in a single 24 hour period. This was 50% down in a single 24 hour period. I think it's important to note that we've also managed extreme volatility to the upside, so there was a 40% up day in Q4 of last year. So we don't look at this event in a silo, in terms of our risk-modeling. At the highest level we very successfully navigated the volatility, BlockFi did not sustain any leading losses whatsoever.

So our track record of performance, in terms of never losing any capital from the lending risk that we're taking, is intact and, additionally, pretty quickly, after that day, we were back in market lending and other folks who are participants in the institutional crypto lending market, didn't recover to that solid footing as quickly as we did. The net effect of that, for us, was that the supply in the market got constrained. We were one of the few folks standing, still lending crypto currency and dollars and we were able to charge higher rates. So this volatility happened in March, immediately started in April...

We update our interest-rates once a month. Immediately starting in April, we raised our interest-rates for both Bitcoin and Ether, which was great and the KPIs that we track, from a company perspective, are primarily revenue, funded accounts, and balances. Balances of Bitcoin, balances of Ether, balances of dollars, all those things were all up, month-over-month. We had a weird week where some of those metrics looked a little bit different and broke with the trend of rapid, sustained growth that we've seen. But month-over-month, they were all up. So we're in a great spot!

We're more bullish on crypto than we ever have been. I mean, could there be a better macro-economic backdrop for Bitcoin right now? I don't think so. Then to touch on some of the specifics, so anytime that the Bitcoin price goes up or down, especially dramatically, our risk-management system is taking automated actions and those automated actions could range from adjusting someone's dashboard, that they look at to monitor their loan, and flashing yellow warning signs.

It could be that we're issuing someone an official margin call, either a retail client or an institutional client and it goes all the way through to us liquidating collateral that a borrower posted for a loan. If they don't respond to the margin call, or if the price just moves so severely against them, then we're left with not other choice. Taking those actions is not something that we take lightly at all. Especially on the downside, it's not a good client experience. Nobody wants to get a margin call. We don't want the price of Bitcoin to go down. So there's been a lot of care and thought put into how that system is designed and the way the we manage in those scenarios.

We're now on the third version of our risk-management system and to put it very simply, in version one, a certain LTB trigger might have been hit, and we'd just instantly sell some collateral. In version three, that still happens some of the time, but we also gave ourselves the option to hedge in certain scenarios. So one of the things that we did on Thursday, towards the end of the day, was some of the things that we monitor were flashing warning signals.

Specifically, the health of liquidity available in the spot market. It was flashing warning signals, so we hedged a little bit to prior to Thursday evening, this was all on March 12th, which was the 50% down day and that enabled us to not need to sell client Bitcoin during the period of time where the price has reached their lowest point, which was around $3700, $3750 that evening.

The lowest price that any of our clients' Bitcoin was sold, was around $4700, $4650 maybe and we sold less of our clients collateral, we believe, than any other lending platform, on a percentage basis because of the sophistication of our risk-management system, and because of the way that we managed throughout that period. So yeah, those are some of the main points that are high level. I'm happy to go deeper into any of those or maybe, if you want, Flori could touch on some of what we saw in terms of metrics, which were incredibly different for a few days, than they are on our steady-state operations.

Peter McCormack: I've definitely got more questions, but Flori is there anything you want to add in there?

Flori Marquez: Yeah, I would say that there are two parts of the client experience that are really important in downward volatility. The first is, how are we going to manage our crypto when prices move down? And as Zac just recapped, which is basically, we're going as little as we can, at the best price possible and we believe that we have the better risk-management than anyone else, to be able to allow us to do that.

The second part is client service. So when things like this happen, it's scary. I think it's difficult for a lot of clients to know what's going on and understand what's going on in each company and Zac keeps mentioning metrics. Basically, that week, we had three times, a 300% increase in calls and emails and throughout that week, we were able to continue to pick up the phone every single hour of the day. We answered every single email that came in within our average of around five to seven hours and I think our clients really appreciated the fact that we're transparent.

That you can pick up the phone and ask us, "Oh hey, how's your business doing"? And even in the craziness of this market, we're going to do everything that we have to do to make sure that you can have that conversation with someone at BlockFi. Something that made me both extremely surprised and happy, was the fact that coming out of this, we saw really positive client testimonials, appreciating the fact that we were able to do that.

It went so far as some guy on Reddit who posted an entire thread about how, even though his loan did get liquidated, he appreciated the fact that we did everything in our power to not liquidate them and that he was just happy to be a part of our community and be able to pick up the phone, get transparency about what's going on. This was completely just unprompted positive feedback in, what we consider to be, one of the worst client experiences that can happen on our platform.

Peter McCormack: Okay, so that's cool. But there must have been some people are pissed off?

Flori Marquez: Yeah, some people are as you don't want your crypto sold, right? And that's the unfortunate downside of lending product back by crypto. To Zac's point, we give people as much time as possible to try to get them to send us additional collateral, or send us wires to make payments.

Something that really frustrates people is just how slow the banking sector moves, so there's this concept of making payment through ACH and that takes three to five business days to get to us and that's so frustrating for people when you have crypto market that's moving down 30%, right? The fact that they can't just get us cash as quickly as the crypto price is moving.

Peter McCormack: I guess that's a good argument for holding digital dollars now and you've obviously added support for those. I was having a conversation with somebody about this recently, because while I'm mainly Bitcoin and focus entirely on Bitcoin, I've always felt like there is a solid argument for digital dollars, as long as the platform or the blockchain they're on is stable. But somebody said to me recently, I can't remember who it was, it might have been Raoul Pal in a recent interview, maybe it was somebody else.

But they said, "There's actually a solid argument for holding digital dollars now, because it saves having to keep it in the bank. It's quicker to move it around and you don't have as high a risk of it being seized." So it makes sense to be holding a part of your dollar savings in digital these days. So I guess if people started doing that, that would be quicker for them than having wait for a bank transfer.

Flori Marquez: Yes. I think the clients that had the best experience were those that were depositing with us because there's two upsides. One, anyone who has a savings account in the US right now, I'm not sure about interest-rates oversees, but right now... Ally used to give me 2% a year, and now it's down to 1.5%. So BlockFi clients... We maintained our interest-rate of 8%, which is nuts compared to what you can get in the banking sector and then the clients that did have stable coin on our platform, could meet the margin calls faster, because you can just sweep it from your interest account into the loan.

Peter McCormack: Okay. I've got some specific questions about the accounts. But you've been sponsoring the show, it's nearly two years now. I know that's mad! I think it's August 2018 you started. So by the time we come out of lockdown, it will have been a couple of years and I've obviously promoted you guys consistently, I'm obviously your best lead generator... No, I'm only kidding!

So I've always done it and I've always got a lot of people sliding into my DMs, and their like, "I'm thinking of signing up with BlockFi. I'm a little bit nervous, what do you think" and I always have to say, "Look, I can't give you advice" and the same with the ad, I'm always like, "Do your own research, I can't tell them what to do" and I consistently do that.

But one of the things is that I think there are many casual crypto holders who look at something like BlockFi and they think, "Okay, I can get some interest. I'm here, I'm interested". But then they'll see something like a thread on Twitter, and they'll be nervous. Yet, I think some of the people are probably like me, they don't really understand a lot of things that are being talked about, about these market collapses. So one of the things that came up is the talk of the gap-risk. Now I kind of understand what a gap-risk is, but I don't really. Can you explain what a gap-risk is and how relevant that is to what you're doing?

Zac Prince: Sure! So gap-risk, you can think of it as a cousin or a sibling of a flash-crash. So the market moves significantly in a direction, without a lot of liquidity in between, so Bitcoin goes from trading at $7200 to $10,000 or $7200 to $6000 and no trades happen in between, they're just gaps up or down. We have gap-risk with our lending positions and it's something that, like the other liquidity and volatility metrics that we're constantly monitoring, that we model to.

We think it's exceedingly unlikely that there would be a gap in Bitcoin price movement of a magnitude that would cause our positions to be under water, but we also have a plan for what we would do if that did happen. So I don't know if that fully answers the question, but gap-risk is just a big move in one direction, without liquidity in between.

Flori Marquez: And when Zac says that we model the risk, what that means is that on a daily basis, we're looking at, what if the market did this right now, would we have the ability to still make sure that we process all the withdrawals for the day? Would our lending portfolios still be healthy, both on the institutional, and the retail side? So we're looking at that on a daily basis and that's why, on the risk-management side, when the volatility happened in the middle of March, the best people have asked me is, "What was it like"? And the answer is, "It was just like another day for a crypto lender".

Peter McCormack: Right, okay. So what are the different challenges that you face with borrowing and lending with crypto that is different from traditional currency markets?

Zac Prince: Well from traditional currency markets, it's not much. They're actually quite an [Inaudible 00:25:07] to traditional currency markets. They're a bit different from traditional equity markets, in that the market operates 24/7 and relative to both currency and equity markets, the liquidity is more fragmented, in terms of the different venues where it exists. I would say that overall, there are more market participants that are new or start-up, where you're just given how nascent the crypto market is.

In the FX market, you're probably primarily dealing with folks who have been participating in the FX market for 10 plus years and nobody's been in the crypto market for 10 plus years, because it hasn't existed that long. So you have to be a lot more diligent about who you're working with, and selecting the platforms and institutions that you want to face, in terms of your counterparties, relative to traditional markets where there are certain platforms and counterparties where just based on their brand name, there can be an assumption that they're very, very legitimate and well-established etc.

Peter McCormack: And I guess the risks here are different between the loans market and the interest accounts? So on the loans market, the risk is that someone does get liquidated and it sounds like you try and give a bit of flexibility to people? You don't want them to get liquidated. I guess there are just certain scenarios that you can't do anything about that, like you touched on earlier.

Flori Marquez: Yeah in general the way that it works is people start receiving emails that their loan is close to being liquidated, earlier in the week and in general, by the time that someone has been liquidated, so that's the 80% LTB ratio, which can happen at any point in time, those clients have received at least three days worth of emails letting them know.

Peter McCormack: Right, okay. With the interest accounts, one of the things that also came up is that people are fearful of the people that you're linked into, in a massive market crash, if the number of the people you're lending to couldn't pay back their loans, then that would put your business at risk, and therefore their funds at risk. Can you talk about that side of things?

Zac Prince: Yeah, sure. So the risk there is actually in the opposite direction. So when we're lending Bitcoin to someone, in Bitcoin denominated transaction if the price of Bitcoin goes down, they actually owe us less, on a dollar denominated basis. So the risk is more to the upside. So when there's a 40% single day up Bitcoin move, or just sustained price rallies for crypto currency, is when we would see the same risk from that type of lending that we see from the USD lending, when the prices move down.

So who are we lending to and what are they doing with the crypto currency? The vast majority of our institutional crypto currency lending business is done to market makers and proprietary trading firms. The profile of these firms is that they typically look like a Susquehanna, who's also an equity investor in BlockFi. Not saying that they're a client specifically, but that's the profile. So what are some of the important things about that profile? They've got over $100 million in equity in their business and less than 5% of their business is in the crypto markets.

They have a track record as a regulated, US domiciled, financial services company that's been profitable for a long time and 80 to 90% of the lending, depending on the day that we do on the institutional side, is to counterparties that fit that kind of profile. So what are they doing with it? We give Susquehanna Bitcoin, they give us collateral. What are they doing with the Bitcoin? I mentioned earlier that one of the differences in this market versus FX, is the fragmentation of liquidity.

So if you're a market maker, you fundamentally get paid... To use the simplest example, you buy something for 99 cents on one exchange and you sell it for a dollar on another and to do that in crypto, you need to trade in a lot of difference venues. You've got futures on the CME, you've got spot on Coinbase and Binance and Kraken and Gemini, you've got options on Deribit and then you've got derivatives platforms like BitMEX and FTX and OKX, all that do substantial volumes, and there's opportunities to make markets across those different channels.

So the implications of that are two things. One, it's not particularly capital-efficient to trade the crypto market because one, liquidity is so fragmented and you have to go pre-fund your accounts at all these different venues, but two, in the same way that a bank won't give us a loan secured by our Bitcoin, the prime brokers that Susquehanna and others work with for their traditional businesses and their financing needs, won't give them financing for the cryptocurrency trading that they're doing. Then lastly, some of these venues are Bitcoin in and out only, you can't go trade on BitMEX with any currency other than Bitcoin.

So they need inventory in the underlying asset that they're making a market in. So those are the reasons that they're borrowing from us, we're helping make them more capital-efficient. We're giving them inventory, which they're willing to pay for, in terms of the interest-rate that we charge them to borrow cryptocurrency and their risk-profile is very low. These are well-capitalized, established businesses that have been around and made a lot of money for a long time. What are they not doing? What they're not doing is borrowing Bitcoin from us, and selling it into the spot market so that they can have a short position.

They're doing stuff that's way more sophisticated than that and actually, also way less risky than that. That would be too risky of a bet for them to make, because they don't make directional bets on which way the markets going to move. They just want to buy something for 99 cents and sell it for a dollar and then, we also do a little bit of lending to other types of crypto currency specific counterparties; exchanges, miners and we haven't touched ATM businesses yet, but we might in the future. But that's small, relative to the overall size of our activities.

Peter McCormack: Right, okay.

Flori Marquez: But yeah, going to the original question, which is for listeners that are out there thinking, "What is the risk on the interest account and how should I think about this"? I would think about it the same way that you manage an entire portfolio, which is look at the BlockFi interest account, look at what the interest rate is, understand what we're doing to generate that yield and then figure out for you as an individual, what percentage of your assets do you think are worth earning 6% on an annual basis?

And that could be 5% of your portfolio, it could be 50% of your portfolio. Everyone is different. But there are risks associated with it, and that's basically what the interest rate is worth.

Peter McCormack: And I would say, the other key criticism that comes out, which is in some ways I would say, is fair, even though you’re my sponsor, I will say it's fair. It's not an actual direct criticism of your business, but it's the asking somebody else to custody your Bitcoin, right? There is a risk there. There is a risk that we've had in the industry ever since Mt Gox, where people have always been worried about something happening and look, if something ever did happen to BlockFi, people would be like, "I fucking told you so".

But that is something that people will highlight as a risk. Now the payoff is worth it, for me. I've got skin in the game, I'm a customer, I threw some Bitcoin in with you and I've left them there. I'm happy with the risk. But other people point to that and you can't get away from the fact that people have that opinion, but what have you done in terms of how it's custodied? Is it insured?

Flori Marquez: Yes, so our primary custodian is Gemini. We think that they are one of the safest, most regulated custodians in the space. We have a very close relationship with them. The Winkelvoss, who started Gemini, also are investors in BlockFi, so we basically think that we have... We work with best-in-class partners. But kind of going back to the point I just made, we don't want all of your crypto, right?

We don't want you to give us 100% of everything that you own. What I want clients to do is to think about, "Is it worth having everything that you own, earning zero? Or is it worth having a small percentage of your assets growing over time? And is that opportunity cost worth it to you?"

Peter McCormack: And it's definitely a personal choice. I understand people who don't want to do it and it's up to them and I think there are a lot of people who will stand by that. Like I say, I've got skin in the game with you guys and I don't have any... You can confirm, do I have any preferential treatment?

Zac Prince: No, zero preferential treatment!

Flori Marquez: The only thing that I like to remind people of, and this is with cash and with Bitcoin and with everything, which is, every single day that you're not earning money, you're technically losing money, because other people aren't earning money.

Peter McCormack: The other question I'd put to you is actually, if you weren't providing this liquidity to the market makers, what would they be doing instead? I guess what I'm getting at is, are a company like BlockFi and the other lenders in the market actually important for the exchanges, right?

Zac Prince: It's for liquidity, right? So the ability to borrow assets. The ability to finance activities where you're participating in a marketplace, is kind of critical to the healthy functioning of a capital market and without that function, you would expect that the market size would be capped at a lower size than if the market did have that function. So we're not the only ones doing this. So if BlockFi went away, what would actually happen is that someone else would fill our spot and provide the need that the market has. But yeah, it helps grow the market overall and helps create more liquidity for the space.

Flori Marquez: And one thing to keep in mind is the fact that the value of an assets, or technology, goes up as its utility goes up. So what we're doing is allowing people to do more things with Bitcoin, and more things with Ethereum and what that means is that over time, it'll drive the value of those underlying assets.

Zac Prince: Yeah, and just to add to Flori's point, there's all different types of people, and I had Trezor for a while and I kept it at home and I told my sister my secret recovery phrase and the whole thing made me very uncomfortable. I'm the type of person that loses my apartment keys twice a year, I don't want the responsibility. I don't know if there's more people like me, or more people who want to self-custody, but it's definitely the reality that there are multiple types of people, in terms of wanting that responsibility, or not wanting it.

One thing that I've advocated for, for folks in the Bitcoin space who believe in self-custody, is just keep in mind that it doesn't have to be a one size fits all solution. Other people have different preferences and it's actually quite jarring for someone who comes from the traditional investing world, where you don't custody anything, to start researching Bitcoin and then hear that you're a total moron if you don't self-custody.

It's a pretty extreme view, and you might scare somebody who has no idea what that means. So try and educate folks and we certainly try to do that at BlockFi, and are big supporters of self-custody. We think it's one of the fantastic qualities that Bitcoin has, that's very unique. It's just not necessarily for everyone.

Peter McCormack: Yeah, well it wouldn't be for my dad. Don't know if you saw my tweet the other day, but I had to teach my dad copy and paste. He didn't know what copy and paste was and then today he phoned me up and he didn't know how to print from his computer. Bare in mind, this guy was an aircraft engineer for 30 years, he kept planes in the skies and today I had to show him how to print. But he didn't know the difference between printing an email or whether it was an attachment or PDF.

So yeah, trying to explain it all to him! If he wanted Bitcoin, there is zero chance he could custody himself. But I would still recommend most people. They've got to find out about custody and they should look into it. Also looks at things like Casa as well and I agree with you, I think it's important that people will find out how to custody as well. All right, so that's cool! Well listen you guys, big couple of years, another massive year and you've just raised a shitload more money. What was it? $30 million you've announced? You've announced that, right?

Flori Marquez: Yeah, $30 million, we announced it!

Peter McCormack: Can you tell me any of the numbers behind the business? Any patterns you're seeing? Are dollar markets becoming more important for you? Can you tell me any more stuff going on there?

Zac Prince: Yeah, sure. So we're fortunate to be relative to other high growth, venture backed companies, in the upper echelon in terms of our metrics right now, indexed against other companies. So what does that mean? Our key KPIs of revenue and funded accounts that I touched on earlier, are growing at month-over-month rates of 25% to 40%.

The business is generating millions of dollars per month in revenue now, profitably, as of Q1 this year and it shows no signs of slowing down. We're growing the team to support the growth of the platform, we've got over 100 people working full-time at BlockFi now and over 100,000 accounts on the platform and from over 100 countries.

Peter McCormack: Wow, nice!

Zac Prince: Flori might have the exact number, it might be 120, I'm not sure. But clients from over 100 countries. So the breakdown of our business, by asset, Bitcoin is roughly 60% today, dollars is 30% and then Ether and Litecoin together, make up about 10%. So Bitcoin is still the biggest part of our business. We hold some Bitcoin on our balance sheet, because we think it's a good thing to hold.

Peter McCormack: Well that's an interesting point. Do you want to talk about that? Because I do the same, even for my little podcast. I reckon about 30% of my invoices are in Bitcoin and I keep 25% of that actually on the balance sheet.

Zac Prince: Partially we do it for our risk-management purposes, but we also partially do it because we believe it's a smart position to have and we believe it aligns with the ethos of doing what we're doing in this market. So the risk-management part of it is that people hold Bitcoin with BlockFi and we have a liability to those people to pay them an interest rate in Bitcoin.

It's possible that one day some of our institutional Bitcoin borrowing clients might all pay us back early and in one month we might not generate enough Bitcoin from the interest that we charge those folks to make the payments to our clients. We would still make the payments, our margin would just be negative for a certain period of time. But we'd rather have Bitcoin just available to do that. So that's the risk-management side of it.

Peter McCormack: Is any part of it, do you do because... Part of it I do because I think it's smart. But part of it I do it because I feel like it helps contribute towards it. It's showing faith in the industry I'm part of.

Zac Prince: Exactly, That's the ethos part, right? Look, at the end of the day, the single best thing in my mind, that could happen for the cryptocurrency industry, is for the Bitcoin price to go up and for the market cap of Bitcoin to get larger. So if us having a low seven-figure Bitcoin position at all times, helps that a little bit, then that's just one other way that we're helping contribute to the cause that we're all, ultimately, contributing to.

Peter McCormack: Did you say you're in... How many countries are you in?

Flori Marquez: Over 120, I think it's close to 126 right now.

Peter McCormack: I've got listeners in 180!

Flori Marquez: Oh, nice. So maybe we can move that number up after this podcast.

Peter McCormack: Yeah, I've got one guy in Iraq! All right, so another thing I need to ask about, because I got a couple of DMs recently, from people who have said their deposits were rejected because they were CoinJoin coins and yeah, they were a bit pissed off about that. What's going on there?

Zac Prince: Yeah, so we are a heavily regulated business at BlockFi, at the Federal and State level in the US and increasingly in countries outside the US as well. So as part of those regulations, we're MSB at the Federal level and we have money transmission and lending licenses at the State level in the US.

As part of those regulatory requirements, we have to do things like Know Our Customer, we have to monitor for money laundering and not financing terrorism and whole bunch of stuff. We have a compliance team of almost 10 people full-time now and we have to respond to requests from the government.

We have to constantly update our policies and procedures and we have to work with third-parties, like Chainalysis and others, who provide tools to regulated financial companies operating crypto markets, to help flag a certain blockchain based screens on coins. One of the things that was developed into these policies is that we do not accept coins from mixing services and that's basically the policy that comes up when we send a note to someone saying, "Hey, we saw that your funds came from CoinJoin and we have a policy of not being able to accept those". We don't like the policy. I actually fundamentally...

Peter McCormack: Good, I'm glad you said that, because I was about to go, "Fucking hell, Zac, that's bullshit!"

Zac Prince: I don't like it and we don't like it and I actually fundamentally believe that it's not rational and it's unfair, to hold Bitcoin to a different standard than we hold cash. The concept that any Bitcoin could be a dirty, or tainted Bitcoin I think is complete bullshit. Yeah, I just don't like it at all and we've gone round and round on it internally. The reality is that for a company like us who is releasing innovative products, we're always having to explain these to the regulators.

We're constantly making efforts to get new approvals and licenses and then we're constantly responding to, probably way more inquiries than a traditional, vanilla financial services company has to respond to, which puts a big burden on us in terms of time and resources. It's just not a battle that we're in a position to fight and it's not something that we're in a position to go against the grain on, in terms of what has become...

From anyone that we ask, whether it's a regulator or a compliance advisor or our board, we ultimately have to make smart decisions and explain why we made certain decisions. It's just not a fight that we're in a position to fight, in terms of saying, "We don't think that governments should shine a better light on companies who are using blockchain monitoring services, and having policies like the one we have." I wish it weren't that way, but that's where we've landed on it so far.

Flori Marquez: And it's going to take regulators a little bit of time to catch up to being able to understand that there are fundamental differences between Bitcoin and cash, right? So there's two steps to how we fix this. The first is, what we're doing now, which is be a best-in-class operator within the space, work with regulators to get licenses and slowly get them to understand how Bitcoin, and other assets, work.

Then once they can get over that hump, phase two is then trying to explain to them, "Okay, well there are key differences between how you think about these assets, and this is really how they should be regulated".

Peter McCormack: Wow, so 10% of your team is compliance? You said 10 people, where you've got a team of 100, 10% is compliance?

Flori Marquez: Yeah and that's one of the reasons why we've been able to grow. So the institutions that pay us interest, which is then what we pay the retail depositors, would never trade with us if we didn't have such a high standard of compliance and if we weren't able to guarantee that the crypto that they were borrowing was clean.

Peter McCormack: Damn! All right Flori, you've answered all those things, all these tough questions and concerns people have. But what are the things that keep you up a night? What are the things that you worry about? And of you as well Zac? But what are the things that you two worry about?

Flori Marquez: I think now is a time for, outside of BlockFi, people are just worried in general and I think one of the things that I'm really focused on now is... You asked a while back, or in the beginning of the podcast, what are the differences between working from home and one thing that's been really worrying me, about our team, is I've seen people actually do a bad job of stopping work. So I think it's because there's no commute home and people are bored, it's Saturday, maybe you got through your Netflix show and they're like, "All right, well maybe I'll just answer all these emails when it's the weekend".

You don't need to answer those emails right then and there. So I'm worried about burnout, I'm worried about people not adjusting to this new normal well and one thing that I'm really focused on, is making sure that people are still taking vacations. You still need a vacation from work, even though it's just a boring vacation in your own apartment.

Peter McCormack: Who's that guy in the US, the famous guy who wrote the book "Who Runs the Energy Company"? I've got the book in the house here somewhere, a really famous guy in the US, can't remember who it was! I'm sure it was him, but you couldn't get your bonus if you didn't take all your holiday. He had radical policies like that.

Flori Marquez: We do that. So we track how many vacation days people have taken and we will force people to go on vacation. I will get on a video chat with someone and say, "Hey, this Friday, you're off" or "You need to take a week off". Because people need it. It's the only way to stay fresh and sane.

Peter McCormack: What about you Zac? What keeps you up at night?

Zac Prince: We're in a really good spot. So over the last two and a half years that BlockFi's been going, I think I've increasingly slept better and better at night, if we want to use that analogy. But I think Flori's point is a good one, you always have to strike this balance.

There's so much that we've accomplished but an even bigger plate of things that we have yet to accomplish, but that we know that we want to do and so making sure that we have the right people in place to help us do those things and making sure that those people are happy and healthy and highly functioning in their roles with the company, which includes taking vacation occasionally, is always on my mind.

Peter McCormack: Are you taking your vacation?

Zac Prince: I'm off on Friday! I'm not working this Friday. I was one of the people that got the call from Flori, I was supposed to be on a week-long vacation actually, starting this morning, to the Caribbean for the kids Spring Break, but they now don't have Spring Break, and the resort we were supposed to go to is not open at all right now. .

Peter McCormack: Of course!

Zac Prince: But, yeah, other than that, we're going through a transition as a company this year and we're transitioning from being a company where, if you didn't already own crypto, we didn't really have a product for you. You're not going to earn interest on your crypto, get a loan secured by your crypto, if you don't already have some. This year, for the first time ever, we have products for people who might be onboarding into owning Bitcoin for the first time.

To nail that transition, which comes with a massive ramp-up in terms of our marketing efforts, a massive ramp-up in terms of our communication, and how it's structured and flipping it to being a lot more educational and a lot less just, "Hey, here's the value prop. You can earn interest on your Bitcoin, isn't that great"? We need to even be a little more fundamental than that with our communication, this year as we grow and onboard new people and just explain to them why Bitcoin is something they should consider owning in the first place. Then get into how you do it, and the unique things you can do with it on BlockFi's platform.

So making sure we get that right for BlockFi, but also I hope we get that right as an industry. At the end of the day, as I said earlier, there couldn't be a better time for Bitcoin right now and I feel a little bit like we're in position, it's ours to lose and this should go well. The price should be higher and I just want to do everything in our power to help support that happening.

Peter McCormack: Has this whole corona situation... Obviously it's devastating and terrible in many ways, but has it shifted your world-view at all? I know it has for me and I know about the changes I want to make in life, or the ones that I have that I want to keep and what I want from business, and life, and all those kind of things. But has it shifted your world-view? And, even your Bitcoin world-view?

Zac Prince: Not really. I was always a bit of a contrarian in the cryptocurrency sense of things. I think the first podcast I went on, before you had even had me on your show, was a much shittier, horrible podcast, nobody even probably listened to it. But the first one I went on, somebody was like, "What's something you believe in that other people don't"? And my answer was, "Dollars moving around on blockchain payment rails is going to be a really big deal. Maybe bigger on a transaction or market-gap basis than Bitcoin and I think that's good for Bitcoin".

So I've always had this view that Bitcoin's not going to disrupt the dollar anytime soon. If it does get on a path to doing that at some point, it's going to be after it's knocked out currencies that are in positions 100 to 150 on the currency market cap side of things. So I think we have a long ways to go there and I'm somewhat liberal in terms of my world-views. I think that things like social safety nets and monetary policy, situationally, can be used very intelligently and I also think those are good things for Bitcoin.

I think you get caught in this kind of cycle of crash, stimulus, crash, stimulus and you're kind of walking a tight rope a little bit. But yeah, I don't think my world-view has shifted. If anything, I'm on the opposite end of the spectrum. I'm learning how much I really loved my fast-paced lifestyle of going into the office, commuting on the train, flying once or twice a month and there's a reason I constructed that life for myself, and it's because I actually like that life. So I'm just ready to get back to normal.

Peter McCormack: I agree with you on the travel. I miss the flying! I think this is the longest I've gone without a flight... God, it must be since I started this. Since I started all this, because I flew a lot last year and yeah, I agree with you on that. But there's different things, for me, it's more the kind of content I want to create and how I want to introduce people into Bitcoin.

I'm desperately trying to get some of my friends to think about it and they are and I'm opening some little cracks there and I want them to think about it more. What about you Flori? Has your world-view been shifted at all with all of this?

Flori Marquez: Yeah, I think it does put things a little bit in perspective. I'm jealous of other governments that have handled this crisis really well. So I'm jealous of South Korea, I'm jealous that I don't live in South Korea right now and I'm also thankful that I live in country with a lot of resources. So I was talking to someone on our team that works in Argentina, and Argentina took really early measures of just keeping everyone indoors really early on.

But it's measures that we would never take here in the US. So for example, he lives in a building and he hasn't been allowed to have any visitors for the last four weeks. You're only allowed to exit to go to the Grocery store, or to walk your dog. He made the joke that he was going to put a leash on his son and pretend that he needed to go for a walk! But the reason that they're doing that is because they don't have the same level of ventilators that we have in the US, so they have no other option other than severely locking everyone down.

So I live in New York and we had a floating hospital just come up to Manhattan and park here, just in case we need an extra hospital. That's a thing that many countries and most countries in the world, or even most cities in the US, won't have access to. So on one end, I'm jealous, but on the other end, I'm thankful. In terms of Bitcoin, one thing that I've loved to see throughout this is the break in correlation with equity markets.

So while you did see the price of Bitcoin fall with the equity markets, after that it stopped moving in line with equity markets which kind of proves out its lack of correlation, and I think that that's something that makes Bitcoin really valuable. I'll be interested to see if there'll be more people that are willing to move into a global asset, in times where the future of each country is so uncertain.

Peter McCormack: All right, cool! Well, listen, look, I always say in my ads that BlockFi is the future of Bitcoin and financial services, but what is the future stuff coming? I know you've got your SatsBack credit card coming, I really want one, as soon as bloody possible, because the amount I have to spend, that would be a great service for me! I love SatsBack. So when does that come out? But also, what else is the future? What's coming in that I'm not aware of?

Zac Prince: Yeah, so we're launching our mobile app very soon, in the next month or so. So we're excited to have that live and in-market. The SatsBack credit card is a big initiative and a lot of work is going into it. It's definitely coming out, we're really excited to launch it.

Peter McCormack: Everyone wants it!

Zac Prince: We might be coming out a couple months later than we originally hoped, just because some of the partners that are involved in bringing it to market are disrupted in terms of their business operations because of the situation that we're in right now. But that's coming out, and we're really pumped about it and we're going to be making improvements to the product in terms of features.

So we're adding more security stuff, we're probably going to be adding things like beneficiary accounts and enabling people to name a beneficiary in their account, potentially productising, offering higher interest rates for longer-term commitments, if folks want to see that and added more supported aspects onto the platform, like PAXG, or other stable coins. So yeah, there's some other stuff that we're going to, but those are the big ones.

Oh and ACH payments, so people can just set up a recurring buy from their bank account, that would be coming out towards the end of Q2. Every month, if you want a dollar-cost average, into buying more Bitcoin, you'll be able to connect your bank account and just do that seamlessly on BlockFi. Those are the big things, but Flori, anything I missed?

Flori Marquez: Re-doing our entire website, that's a big one!

Zac Prince: We're going to have a brand new website soon.

Peter McCormack: Well listen guys, it's awesome to catch up with you, you know how much I love you. Thank you for everything you've done for the last two years supporting the show, I couldn't have done a lot of it without you. You're my first proper sponsor, and you've stuck with me, so I appreciate you guys so much. Tell people how to find out more about BlockFi, how to follow you and especially you, Flori, because you have a pitiful amount of followers!

Flori Marquez: Because I'm not a big social media person. I'm usually working. But, I'm @founderflori, I love a good alliteration on Twitter, definitely love to see questions and for people that have tough questions on Twitter, I would definitely recommend emailing them to support@blockfi.com. Our sales team loves a tough question, so don't just live on Twitter. Just hit us directly with them.

Peter McCormack: And you Zac?

Zac Prince: I assume almost everybody has heard, but our website is blockfi.com, I'm on Twitter @blockfizac. So yeah, we love hearing from you and I think we might be the only company in crypto that also has a phone number that you can just call during New York business hours and talk to one of the smart people on the team that Flori was referencing. So don't be shy!

Peter McCormack: All right, wicked. Well, listen guys, take care, keep doing what you're doing, keep crushing it and hopefully I'll see you soon. It's a weird one because, I mean Flori I've hung out with you three times in the last year, but Zac, every couple of months I would see you right? And now we don't know when that will happen again, it's kind of weird.

Zac Prince: I don't think we've ever recorded together remotely?

Peter McCormack: We haven't, it's always been in person. But every couple of months we'd see each other in New York, or San Fran or Uruguay or somewhere and I honestly don't know when that will come back, or how that will come back, actually. It's one of the things on my mind, whether it'll be allowed.

Zac Prince: Are we going to hug each other when we see each other again or is it going to be some weird elbow tap, foot tap thing?

Peter McCormack: It's a serious problem. I'm making a show for my other one, Defiance, about social interactions in a post-lockdown, pre-vaccine world, because it is a lot to think about, right? You might be able to get a flight, but do you want to get on it? But yeah, I don't know. That's a sombre end! Let's go back to BlockFi being badass. Anyway, listen, all the best, hopefully I will see you soon enough. I don't want it to be a year and half until I get to New York, because I love that city. So all the best guys, take care, love you both, peace out!

Zac Prince: Thanks Peter, likewise man. Keep up the great work!

Flori Marquez: Thanks for having us on Peter. I'm glad that at least I'm getting to see your face virtually once a week! So always a pleasure.