WBD263 Audio Transcription

The World's First Crypto Bank with David Kinitsky & Marco Santori

Interview date: Friday 25th September

Note: the following is a transcription of my interview with David Kinitsky & Marco Santori. 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 Kraken Financial CEO David Kinitsky and Kraken's Chief Legal Officer Marco Santori. We discuss the creation of a crypto bank, what it will mean to both the industry and Kraken customers and why they chose Wyoming.

“The bottom line is that a bank is a big deal… banking is the granddaddy of it all, it’s the bottom of the financial services stack.”

— David Kinitsky

Interview Transcription

Peter McCormack: Right, hi.  David, how are you?

David Kinitsky: I'm doing well, Peter.  How are you doing?

Peter McCormack: I'm very good.  Thank you for coming on.  Marco, good to see you again, how are you?

Marco Santori: Great to see you again.  I'm doing really well.

Peter McCormack: It's great to get you both on the show, because obviously you had some big news just recently.  You've created, I'm just going to say it, you've created a fucking bank, a crypto bank!  This is really kind of interesting.  But, I don't really know fully what a crypto bank means, so we're going to have to work through it all so that everybody else understands it.  I'll start with you, David.  Tell me why you did this?

David Kinitsky: So, why Kraken did this, I bucket it in three reasons.  One, it's regulatory.  This provides us with a much stronger regulatory position, more certainty and a more consolidated approach across the US.  Most specifically, this is a carefully tailored framework that allows us to operate our digital asset business in a way that's much more streamlined, not just regulation for regulation sake.  But, it's the right size and it fits our business model much better.

The second reason would be infrastructure.  It gives us direct access to the federal payment system and banking infrastructure that we can then more seamlessly integrate into our products and customer experiences.  And then the third bucket would be, this is an entirely new product and distribution channel.  We can offer things and serve customer sets that we wouldn't otherwise be able to do as a non-bank; things like IRA or trust accounts; things like payments; things like investment products; things like qualified custody for institutions, all of that sort of stuff.  This is the best route that we've seen to date in terms of a regulatory approach for us. 

And the bottom line is a bank is a big deal.  There are a lot of different types of regulation in the US and across the world, but banking is the granddaddy of them all; it's the bottom of the financial services' stack and you're always beholden to that.

Peter McCormack: Right, okay, so we're going to need to go through that a little bit slowly, just so I fully understand what it is you're talking about.  So, hold on, did you do this first for Kraken in that Kraken would be a customer of the bank; it makes life easier for Kraken themselves?

David Kinitsky: Yeah.  This SPDI, or Special Purpose Deposit Institution is what the bank is actually called, is a wholly-owned subsidiary of Kraken.  That said, it's a bank so it needs independent governance operations, but we do anticipate that our first focus area will be existing and new Kraken customers in the United States.  And, it will build out the Kraken infrastructure that we'll be able to offer to our customers and product sets.  From there, we would expand, but yes, that's absolutely correct that the first phase we would see benefitting existing Kraken users.

Peter McCormack: Okay.  Can you talk about this relationship with, did you say the Federal Reserve?

David Kinitsky:  Yes, I did.

Peter McCormack: What does that actually mean for you as well?

David Kinitsky: So, when you get a bank charter, which is what happened last week, and you are then able to apply for a Federal Reserve Master Account, which is basically the direct access to being able to hold, issue treasuries or other types of cash at the Federal Reserve, and to access the federal payments infrastructure, the Fed wire system, and other mechanisms.  So, that direct access is what we're able to get by being a bank.

Peter McCormack: Wow.  That sounds like a really big deal?

David Kinitsky: I think it is.  Yeah, I think it definitely is, not just for digital assets or crypto industry; I think for the broader kind of fintech, neobank and financial services ecosystem.  What we're seeing is kind of a convergence of all of that and a playing field that you're looking to be competitors with all of them.  Kraken doesn't view ourselves as a competitor to just other digital asset or crypto companies; we're really playing in a broader space.  So I think for that reason, it's a big deal across that whole landscape.

Peter McCormack: And for you, Marco, I'm imaging the regulatory side of this was probably one of the biggest things you've worked on?

Marco Santori: Well, yes it was.  But first and foremost, I think it's important to recognise the contribution and the lead taken by the Kraken legal and compliance teams over the last couple of years.  I mean, this has been a lift on not only the legal side, but also the policy and compliance sides.  This is not something that gets done because one person is really good at his or her job; it's something that gets done because it's an interdisciplinary effort that is driven by a whole team feeding off of each other's talents.  And, I've got to say, you love to see it when that actually pays off, because there's so many times when people work so hard and you don't get to see the fruits of that labour.  So far, so good; we can see that really come to fruition here.

Peter McCormack: Was it one of those projects, when you started, that you didn't actually know whether you would reach the end goal of creating this SPDI, or did you know that you would always get there, it would just be like a process of jumping through certain hoops?

Marco Santori: I don't think, at any point, anything was certain.  We certainly didn't feel that way.  We didn't feel as if there was some destiny here before us.  We felt like at every step and every turn, we had to satisfy rigorous requirements, that we were the first people to even try to satisfy.  And at any point, the regulators, the legislators, the State Banking Board could have said, "Look, this is not the right candidate for us.  This is not who we want to be the first applicant", because it was tough because their standards were incredibly high.  At no point did this feel like softball, certainly not from the legal and regulatory side, nor from the policy side.

And I should say, it's still not going to be softball, right.  We still don't have a Fed Master Account; we still don't have all of the access that we think we can get.  There are enormous responsibilities coming up; there are enormous challenges ahead of us and we still have to work hard to meet them.

Peter McCormack: And, does it create ongoing kind of burdensome requirements to actually operate the business, or is most of the work in the initial setup and structure?

Marco Santori: No.  This is much more of a commencement than a conclusion, right.  This is at best a milestone along a very long path.  I don't think anybody at Kraken feels like, "Oh, we're over the hump, we've finally got it done!"  I don't think anybody feels that way at all, in fact.  I think we all feel as though we've opened the spray to a fire hose and there's a tremendous amount of effort that we still need to undertake, and quite a bit of it is uncertain.  

There's no guarantee that we'll be able to do all the things that we say that we hope that we can do, particularly with regard to interaction with central banks and other banks.  This is a long-established world with deep relationships and Kraken is trying to get invited to the party without being a bull in a china shop.  I mean, I could mix metaphors all day, but we want to do good with this licence.  Sometimes that's easier said than done in a space with so much of a regulatory history.

David Kinitsky: Yeah, and I would add to that that threading that needle, right, I think Kraken is particularly well suited for this type of endeavour.  On the one hand, you need a company that is open and has an appetite for innovation and pushing the boundaries forward into the future.  And at the same time, as Marco noted, in some ways we were picked to break the ceiling here, be a test case for this type of regulation, and you need to be buttoned up and have the resources to be able to do that.  So, that kind of pairing, Kraken was particularly well suited for that.

I'd also say, man, I'm going to have to go down an octave, Marco; you've got that deep baritone.  It sounds like you're hosting a late-night radio show.  I'm going to have to go an octave or two deeper!

Marco Santori: That's the courtroom voice.  I will say, look, I will leave the bravado to other lawyers and maybe, in fact, courtroom lawyers, but I do think that we are the best people to meet these challenges.  I think that the State of Wyoming chose wisely; I know that I'm partial to my client; but, I think that if anybody can do it, we can.

Peter McCormack: Have you ordered your pens on chains yet?

Marco Santori: I'm so looking forward to those, can I tell you!  I don't even need to have a bank branch; we don't need to have cash management; we don't need deposit slips; I just want a little pen with a little chain attached to my desk!  I feel that is my deal tchotchke, that's my deal toy that lawyers get at the end of the deal.  That's the one I want.  I want a whole box of them so I can hand them out to people that I really like.

David Kinitsky: Little known fact; Marco has one of those bikers' wallets with the chain with a pen on the end of it, and he carries it around in a three-piece suit.  It's wild to see!

Peter McCormack: Listen, that was the bit that really interested me.  I knew this was big for Bitcoin and the wider crypto industry, but when I read about the pens on chains, this is a fucking game-changer!  But, I don't want to get given one, I want to steal one.

Marco Santori: I think that really the only true way of obtaining such a pen is by putting on some JNCO jeans and arm tats and whatever else you need to really get in the mood, and then find Kraken Bank, wherever it is, break in and take only the pens.  You're referring of course to a tweetstorm to which I am quite partial.

Peter McCormack: A fantastic tweetstorm, I have to say.  It was the perfect combination of serious business, achievement and humour, and I chuckled through most of it.

Marco Santori: Thank you so much.  I'm going to use that in my defence next time my CEO or client says, "Hey, why do you tweet so much?"  But, yeah, you can check it out @msantoriESQ.

Peter McCormack: Dude, keep it up.  I think I saw Jill Carlson have a gushing comment in it?

Marco Santori: I had gushing comments for her; I have deep respect for that woman.  She's done a great job in crypto and she's always told it like it is, which I appreciate.

Peter McCormack: All right.  So, what is the position you are at right now?  You have the licence and now is it like, "Oh, shit, we have to really get to work on this next phase now in actually building the bank"?

Marco Santori: Well, I'll be hyper-technical about the law and then I'll let our CEO, who's the boss, talk.  So, the Banking Board has approved the issuance of our charter.  Then, once we are ready to launch, the charter will be issued and the bank will be in business.

Peter McCormack: Marco, you should probably just, because some people listening won't know, you should probably even explain what a charter is.

Marco Santori: So, a lot of companies, in fact if you've been in crypto for very long, you'll know that crypto companies in the United States at least have to go out there and get a money transmitter licence that is to say there is company that you form; and you go to the Secretary of State, or wherever you are in the world, some notary public or some division of the government, that creates a company at your request, and it's put on government record.  Then, that company exists and it can do business.  But, if it wants to do a special kind of business, it gets a licence to do a special kind of business.  That's pretty straightforward; most people understand that process.

The process of banking is different.  The charter itself for a bank gives the bank its corporate existence.  The charter for the bank is not only permission to do the business, but it is in fact evidence of existence of the business.  It sounds like an arcane legal element, but you don't see us with our little chained-up pens right now yet, right.  We could do that if it didn't require a charter, but it does.

Peter McCormack: Right.  So, David, what are the next steps then?

David Kinitsky: So, as Marco alluded to there, the charter was granted by the State Banking Board in Wyoming, and the process there was we had to prepare a ton of materials and present in a public hearing format in front of them.  And, you know, there's a binder that's thousands of pages long.

Peter McCormack: I've seen it.

David Kinitsky: Yeah, some folks saw it in the tweetstorm that Marco did; others saw it in the live stream. 

Peter McCormack: The binder wasn't even big enough.

David Kinitsky: Yeah, and there's more coming.  But, that's how you know we're qualified, is the number of pages.  That means we're good.  It's a real world proof of work.  But basically, we wrote all this stuff and we had to say what we're going to do and obviously we have to be credible that we can accomplish that.  But then, we actually have to do it.

So, in addition with proceeding with the Fed and trying to secure a Fed Master Account and other domestic correspondent banking relationships, we have to operationalise all the programmes, policies, procedures and product that we set forth in our application in our business plan.  And so, that's the task of the day, well, task of the next few quarters until we're targeting a launch in Q1 of next year.

Peter McCormack: So, this must be a quite significant financial investment to get yourself to the point where the bank itself is operationally profitable with enough customers doing enough business?  You've got to do a huge amount of work upfront, right?

David Kinitsky: Yeah, no doubt.  It's not easy to become a bank and that's unfortunate for various reasons.  But, there are good reasons for that.  If you are going to have access to the federal payments' infrastructure, you need to be able to be good stewards of it and ensure that you have enough capital and resources to ensure the safety and soundness of the institution and ultimately, the protection of the customer.  So in many ways, those rules and those requirements are there for a really good reason.

That said, it's not ideal that not everyone who wants to get a bank charter who's qualified can do it, and that's another reason that Kraken was in a pretty unique position, is that it was capitalised enough, had the resources, the personality, the experience in order to dedicate to this project even though, as Marco said, it was never certain and even though we still have a longer way to go.  There's a lot that went into it, so no doubt it's been a big financial and operational commitment by Kraken, but there's no doubt that in our view, it will be worth it for our own business and our customers' sakes, but then also for the broader ecosystem and regulatory landscape.

Peter McCormack: Right, so listen, let me explain a little bit about how my little, small media company works and what I've always wanted from a bank.  So, I obviously had these two podcasts, I have three staff who work for me, I have a few suppliers and a few sponsors and right now, I operate the business a mixture of pounds and Bitcoin.  So, some of my sponsors pay me actually in dollars, which gets converted in my bank account; some pay me in Bitcoin.

In my ideal world, I kind of want a bank account that has the ability to have a dollar account, a pound account and a Bitcoin account.  And the reason I want all three is, when the dollars get paid and then converted into pounds, I have to pay an exchange rate.  And then sometimes, I'm paying people back in dollars and paying an exchange rate back.  So ideally, I don't want to convert it all over and pay those exchange rates.  I do though want a pound account, because I do want to make withdrawals myself to pay myself and pay certain people who work for me.

But I also get paid sometimes in Bitcoin and have to pay people in Bitcoin and I am always having to jump between hardware wallets, bank accounts and different providers to manage that for me.  So selfishly, I kind of want something that does all of that.  Is that going to be a possibility with Kraken Financial?

David Kinitsky: In some ways yes, in some ways we're still subject to the same type of infrastructure constraints that cause that situation.  I mean, the way that banking works globally, right, is you need all these correspondent relationships in each local jurisdiction who, you know, you have a US bank who has access to the Federal Reserve; you've got a UK bank, who has access there; and one in all these different countries and jurisdictions across the world; and then you need to link them up all on the back end.  That's a lot of infrastructure to require. 

Obviously, this is not changing that infrastructure setup across the world.  That said, we do anticipate that we'll be able to service those needs and in many ways, what you're seeing in the crypto ecosystem with stablecoins or crypto dollars or crypto assets, sometimes you may be able to, or in the near future you may be able to, abstract away some of that so then it's easier to hold those assets in a single account, and yet still have the representation of value at the local level, and then more seamlessly transact.  So, it's kind of an over-the-top; just like VOIP was like over-the-top telephone over the internet, this is kind of over-the-top banking that we'll be able to support in a more global fashion.

Now, we're also subject to different types of regulatory requirements on a jurisdictional level, and so some of it will not change here.  However, some of it I would expect to improve.

Peter McCormack: I guess, what I'm more interested in, less so than having the pound and the dollar accounts, is the ability to have a Bitcoin account next to a whatever.  Just imagine I was in the US; a dollar account.  Is that something that might be possible?

David Kinitsky: Yeah, definitely, and that's one of the primary reasons here.  I mean, Kraken's mission has always been to promote the adoption of digital assets in order to enable more individual financial freedom across the world.  This bank is a key tool en route to that, because we're able to, and serving a mission, to more seamlessly integrate the traditional financial system with digital assets.  And so, that does mean, hey, we can directly connect to the Bitcoin network just like other people can.

We can now also directly connect to the Federal Reserve and federal payment system.  And so, we'll be able to offer both side by side and be able to seamlessly convert and interact between the two.

Peter McCormack: Okay.  So, why didn't you do this in New York?

Marco Santori: Yeah, I'm happy to address that.

Peter McCormack: New York's more of a joke, but maybe, say, Delaware?

Marco Santori: Yeah, I've got to say, and this was in my opening statement and my closing argument at the hearing to those intrepid journalists who care to dive deep, but there've been a lot of jurisdictions, not just in the US but around the world, who have talked a big game about fostering innovation and talked about carefully tailored regulation.  I have heard a lot of that, but I have seen very little of it.  I have seen very little of the actual evidence of that desire.

I think that this industry has been paid a lot of lip service, in particular over the last five years.  It's been around longer, but the last five years have been just a tsunami of niceties about crypto, or digital assets more broadly, sometimes blockchain technologies or even abstracted further, digital ledger technologies, or distributed ledged technologies; though, I have heard the former before.  There have been very few jurisdictions who have actually built a foundation, who have actually laid a path to fostering that innovation to which everyone else has paid lip service.  Wyoming is that jurisdiction. 

We aren't highly political at Kraken.  I lead up our policy efforts and I am not highly political; I am not a highly political person.  There is reality and then there is talk and Wyoming has been heavy on reality.  They have built, they have laid a path.  Kraken is just the first company to walk that path; we think there's going to be many more.  But, we have a strong suspicion that if the current trend of lots of talk and little building continues, many other companies will be walking the path that Wyoming built.

David Kinitsky: Yeah, and I would add to that, zooming out from just the digital asset industry, or crypto industry and more broadly, the fintech and financial services industry, certainly in the US you are starting to see some jostling between different state and federal jurisdictions and agencies to kind of compete for these new types of companies.  And I think it's worth noting that it's not just companies and incumbent corporations that have an innovator's dilemma; jurisdictions do too.

And so for someone like in New York, where a lot of the banking activity in the United States takes place, that's their primary business so to speak, or their primary interest.  And so, when you have that built-up legacy focus, it's difficult for you to make the choice and invest the necessary resources and time to build a new framework to say, "Hey, we're going to go over here and maybe cannibalise the existing business".  States and jurisdictions and agencies face that same challenge.  And so Wyoming again, like Kraken, is in a unique position to pursue this type of charter. 

Wyoming was in a pretty unique position to be able to pursue this type of regulatory framework, and they've spent a ton of time, not just with them, but in a public-private consortium with Marco and the Kraken team, Caitlin Long and others across the ecosystem, to figure this out, get smart on digital assets, do things like build a framework from the ground up, harmonise it with the commercial code and underlying legal concepts like Balint; there's a lot that they invested too.  So, for that reason, a lot of the existing jurisdictions that are the most notable today weren't in a position to do that.

Marco Santori: You know, I'm sorry to interrupt, but I have to say that if I was a betting man and I had to put money on whether it was Dave or me that was going to articulate the concept of regulatory capture so politically and so politely as an innovator's dilemma, I don't think I would have bet on you, Dave.  That was very impressive.

David Kinitsky: Hey, I'm glad I can still surprise you!

Peter McCormack: So, do you have to have some form of relationship with other banks, and how does that tend to work in that, you know, if I'm transferring money between, say, a Chase account and a Kraken Financial; do you have to therefore have a relationship with every other bank and do they have to work with you; how does that all work?

David Kinitsky: So, the way that it will work, or the way that it does work, again this is bank, right, so it works, certainly within the US dollar-dominated ecosystem, it works in many of the same ways.  And so, by being able to have direct access to a Fed Master Account in the federal payment system and associated clearing mechanisms, it allows us to more seamlessly conduct that underlying receipt and transfer of funds between different banks. 

So, when you or I send money to one another from bank account to bank account, or via some "P2P payments app" or something, what happens is there are layers underneath the surface there; and it always goes all the way down to what is equivalent to the Fed, or another jurisdiction, whatever the analogous institution is.  By being able to have that direct access, we're able to kind of play ball at that base layer settlement system.  We have the ability to do that.

That said, you generally do maintain relationships with other banks as a bank, other correspondents, whether it's for redundant infrastructure, whether it's for internal operations versus customer operations, or internationally to get access to the different jurisdictions, we do expect to have relationships with other correspondent partners as well.

Peter McCormack: Except in the case if you're transferring Bitcoin, I guess.  If other banks follow suit, are there other crypto institutions that want to create a bank like Kraken, or other banks start bringing in Bitcoin accounts, say, you won't need to go via a Fed account because it will just, I guess, be a wallet to wallet address, so that part kind of circumvents that part of the system?

David Kinitsky: Yeah, I mean that's definitely one of the beauties of Bitcoin and these other systems is the open infrastructure that everyone can connect to to be sure.  So, that's lovely, and there may be different advantages to having "off-chain transactions" for speed or cost purposes, but you're absolutely right; there's a lot less connectivity needed to operate on the Bitcoin network.

Marco Santori: Also for commercial privacy purposes.  We can't forget that we live in a world of commerce and on-chain transactions are the very core of this technology; it's the reason for it existing.  But at the same time, there are a lot of people out there who cannot use on-chain transactions because of the business realities around what they're trying to achieve.  Centralised services are by no means waving the same flag as the decentralised providers of non-custodial software.  I worked in that business for many years; I'm still partial to it.  I think it underpins the entire ecosystem, not just in terms of functionality, but in terms of purpose.  It's why we're here.

But, in the world of business, where not everybody is waving the pirate flag, off-chain transactions are crucial and if you really want to be sort of real politic about it and you're driving towards mass adoption, those are the kinds of users that you need to say that this is a big tent.  Those are the kinds of users that push us into the mainstream and we want to be able to service those users too.

Peter McCormack: Okay, so the other thing I think about with regard to banking is my use of a bank, right, whether it's my personal bank account or my business bank account.  Is that the first step, where you create an environment where people can open accounts with you, or is there a whole other part of this that I'm just like fully not aware of?

David Kinitsky: So, I think the first phase will be, as I said, the focus will be on existing and new Kraken users in the United States, and so the bank will serve those customers and be able to take deposits in USD; be able to transfer and conduct payments in USD; same thing on the digital asset or crypto side; and then, connect back into the existing Kraken exchange and other services we offer today.  Going forward, this bank we expect to be the customer interface in the United States and we would expect that many people will come in and utilise this bank in the future without wanting the exchange services, or the types of products that Kraken offers today, and use it much more like you use your bank today than people use the Kraken exchange today. 

So, that's what I was saying earlier when one of the objectives here is not only a new product, but also a new distribution platform.  This enables us to target customer sets and offer things in different ways that may be more -- I'm loathe to use the term "mainstream", but appeal to different interests and objectives and some familiarity levels in terms of our customer set.  So, you're absolutely right that going forward, we would expect to be able to offer a traditional, or more traditional, mobile and online banking experience.

Peter McCormack: What's the timeline for it?

David Kinitsky: So, as I mentioned earlier, we're targeting a Q1 launch but as I said, we'll focus primarily on existing US Kraken customers and connecting into the existing exchange.  I would say that in the second half of next year, you will start to see the growth or development of what I'm talking about in terms of the new products and channels.  So, that's how I would think about it, as like a phased approach.

Peter McCormack: And Marco, what are the really key and specific regulations you've had to follow?  I mean, I know you're operating with 100% reserves; is that a regulatory requirement, or is that a choice of Kraken Financial?

Marco Santori: It sounds cheesy, but it's both.  I mean yes, it is absolutely a regulatory requirement; it's part of the DNA of this charter that the State of Wyoming created.  But, Kraken has been proud of its security history, not just in terms of outside breaches, but in terms of keeping the chest locked and all the gold inside.  That's been a pretty important component of Kraken's history and keeping full reserves is something that we do now, right, and it's something that we plan to do in the future.  Fractional reserve banking creates a number of risks that aren't necessarily bad, that aren't necessarily something that people shouldn't get involved in; it just then requires risk mitigators and different kinds of businesses and different kinds of products and different kinds of regulators.  It's not the business that we're in.

David Kinitsky: I think it gets lost in the bureaucratic regulatory frameworks oftentimes.  Look, the end goals, this is all trying to accomplish something, and that's to protect end user customers and safeguard their national infrastructure and institutions, right.  We're not a fan of regulation for regulation's sake and so this does align with our interest in protecting those interests.  And, Kraken has a great track record in doing so.  I think our metal will really be shown, can we really secure those pens on chains?  It's an entirely different thing than securing Bitcoin on chain.

Peter McCormack: Well, yeah, I guess, yeah, it's an entirely different environment securing Bitcoin as it is to securing dollars but again, I don't know how -- I know a little bit about how Bitcoin is secured, I know about hot wallets and cold wallets.  I've no idea how that works in terms of securing dollars.  It's a kind of different environment.  And I guess there's a potential for a little bit of confusion with customers.  So, help me understand this.

I know in the UK, for example, if somebody steals my credit card or my debit card and spends some money from my bank account, I can phone up my bank, Lloyds; they immediately credit back my account while they do the research to find out if it was my fault or not.  If it turns out in their investigation that it was my fault and I'd spent the money, then they take it back; and if it turns out that it was stolen, I get to keep it.  In this environment, I don't know what it's like in the US; do you have something similar in the US?

David Kinitsky: Yeah.

Marco Santori: Certainly, the regulatory environment is similar in which the banks in the US have similar obligations to their users.  But these things, at the end of the day, are different.  Some are bearer assets, some are not bearer assets, and so there's a pretty fundamental difference in product there, which I can let David talk about.

David Kinitsky: So, what you're referencing there, right, in a fraudulent credit card transaction where someone gets the number of your card somehow and then uses it without your authorisation at a merchant, and that gets flagged somehow, or you see a receipt and you say, "Hey, this wasn't me" and you've got to find out a way to unravel that.  And, credit card companies and banks generally, as you're referencing, have programmes; it's one of the things they market and one of the features where they say, "Hey, you're not at risk".  But, that risk goes somewhere, right; that risk goes somewhere.  And so, it always has somewhere to go where someone's going to lose out and then normally you would insure that, and there's an insurance market around it.

Similarly, when you have direct access to the Fed, when you're talking about institutional transfers at that base layer, that's why it's critical to be good stewards of that infrastructure because, though some might say, "Well, you can just print more money and cancel the transaction and issue new", stuff like that, it's not as easy because by the time it gets caught, a number of subsequent transactions are likely to have happened and been able to unroll or roll back.  All of those things is not easy to do; you can't just magically snap your fingers.  It's a risk and it goes somewhere and it gets financialised and paid in the form of insurance or fees somewhere.

So, the reserve requirements and things that mitigate those risks aren't just again, the benefit isn't just, "Hey look, your stuff is secure because we have mechanisms to secure it", but there's overhead costs and cost efficiencies when you do that, that you don't need to pay for that elsewhere, that risk.  And so, I think that's a key thing here is it's not just like, yes, that will be secure; it's that, look, because that risk doesn't exist, we don't have to pay for it and as a result, we don't have to pass it on to you in the form of fees or otherwise.

Peter McCormack: But, you will have that risk if you issue debit cards or credit cards, right?

David Kinitsky: Someone will, right, like there are different setups, right, whether it's the bank or the card issuer or the processing bank or something; someone does, to be sure.  Now, there are different setups of doing it, right.  With the debit card, that is backed by money in the account, almost like a prepaid thing.  It's a little easier when you're not floating credit because there's less to unroll.  So, we're looking more at the debit than the credit side.  We're always looking to right-size the risk.

Peter McCormack: And, will you be offering traditional products, you know, loans, mortgages, etc?

David Kinitsky: Some, but not all.  As part of that both statutory, regulatory and business decision restriction around we can't conduct fractional reserve, we can't re-hypothecate assets on the back end, things like that, so that does take us out of some of the traditional banking offerings in terms of lending products and others.  But, there are other areas that we can offer very similar products.

Certainly on the digital asset side, we have more flexibility around customer-instructed lending.  So, if a customer says, "Hey look, I want to lend my money to this person and I'm assuming the risk myself"; we can facilitate that.  But then outside of lending, there's a host of other traditional banking products that we would expect to offer; things like, as I mentioned, debit cards; things like IRA or trust accounts or escrow accounts; things like qualified custody for institutions; wealth management; investment products.  And interestingly enough, we can also, in this format, handle other types of assets, securities; commodities; things like that, just as another bank could.

Peter McCormack: Sorry, help me understand, just because I'm from the UK.  An IRA account; is that like a pension account?

David Kinitsky: Yeah, right.  So, it's a tax-advantaged retirement account; that's what it is.

Peter McCormack: Right.  So, what, like a long-term saving, you can't access the money once it's in there?  How does that tend to work?

David Kinitsky: Yeah, you've got the basics right.  You contribute money; it has to stay in there until a certain retirement age, otherwise you get hit with a penalty for withdrawing it.  It's meant to encourage savings by the population.

Peter McCormack: A higher interest rate?

David Kinitsky: Well, you can put it into different assets, right, so you get the money in there and you can deploy those assets into, depending on what type of retirement account you have, you can invest it into equities or other things, and you get whatever the rates of return on those assets are.

Peter McCormack: I mean, I'm leading you somewhere here to say, will people be able to deposit Bitcoin into their IRA account?

David Kinitsky: Yeah, I'd love to be able to offer that.  There are more steps to go there.  There are some companies that enable you to do it in a pretty clunky way today in the United States, but certainly not within a bank context; but yeah, that's the objective, we would love to do that.  I mean, certainly I would love to put my Bitcoin in an account that is somewhat tax-advantaged, that also forces me to hold it for longer terms and not get itchy trigger finger when big moves happen, because you're going to get smacked with the withdrawal fee.  So, from my own personal reasons, I'm very much looking forward to bringing that part to market.

Peter McCormack: And, Marco, you've opened this up in Wyoming, which is great, but people will be able to open accounts who are in other states?

Marco Santori: Yeah, that's right.  It is a bank and it will be subject to branching rules and privileges.  Not all states right off the back; we expect that there are still quite a few more conversations to have with a number of states.  And it's not just states, right; it's countries around the world.  There are branching rules that we'll have to comply with.  There are going to be additional regulations and additional comfort we'll have to give to regulators and, you know, that's something that we're setup to do.

At first, you'll see that we'll service some states and territories and then more and then more.  Look, we know that the crypto is a global phenomenon and it's been in our DNA since the beginning.  We operate globally now, so it's just going to be a question of how many products we can offer to more users in more jurisdictions.  But, that's all going to be happening under the hood, right.  For the user, the experience will be seamless and that's the key to all this.

David Kinitsky: Yeah, I think the international piece is an interesting one to look at.  As I mentioned, our initial focus is US Kraken customers, but expanding to other jurisdictions.  One of the reasons you see in the crypto space today some fragmentation and no truly global exchange, or other services, is one, there are regulatory reasons and overhead cost reasons why folks can't go globally.  But, another one is banking, and that is it's challenging to secure banking industry relationships for digital asset companies.  Now, Kraken is very fortunate and in the position to have a good slate of third-party banking partners in various jurisdictions, but they're hard to get and it's a slow process, and you need to prove your metal to each of these folks and convince them that you're worth it. 

By having a banking infrastructure and an actual bank in the US, it does enable us to secure correspondent international relationships a little bit easier.  So, that kind of seamless global banking infrastructure, I think, is a key competitive advantage to a company operating in the States who to date, you see these companies rolling out jurisdiction by jurisdiction and having to do all of this repeatedly.  This allows us to have, hopefully, an easier route on that path.  But as Marco said, there's no doubt still a number of hoops and hurdles to jump through on that.

Peter McCormack: All right, cool.  Can we talk a little bit more then about the primary products and services?  Like, what are the things you're most excited about bringing to market, David?

David Kinitsky: I think there are a couple of them.  One, I think just again the actual infrastructure that we're building on the back end will matriculate benefits to customers pretty quickly in terms of being able to have easier funding and withdrawal mechanisms, payment mechanisms and have that be conducted a lot more seamlessly into our product and customer experiences.  That's a little boring, but they're nice improvements.

In terms of net new products that I'm excited about, one of them would be things like tax advantaged, or special accounts.  We talked about the retirement one that I am excited about.  Other ones are trust or escrow accounts that have very specific purposes in terms of transactional value.  Other ones are Bitcoin or crypto asset-collateralised stuff, so if I hold Bitcoin and I don't want to sell it, but I need liquidity or cash, we're looking at mechanisms to be able to enable that so someone can say, "Hey, I hold all this Bitcoin and I'm looking to be able to spend dollars without selling my Bitcoin.  Is there some sort of way that you can enable that?"  That's something that we're looking at doing as well.

And then, I think the last one would be getting into other asset classes, things like securities, commodities.  You're seeing this kind of convergence, as I've mentioned a couple of times now, between the digital asset industry, fintech, neobanks, financial services, and lots of bundling and unbundling.  So, being able to offer that slate of services, like a lot of fintechs and neobanks do now, but we're coming at it from a crypto-centric, or digital asset native approach.  We're not just bolting on crypto as like a customer acquisition strategy of a neobank, right; we're coming at it from a very different angle.  So, being able to offer the fuller suite of services as a digital asset first company I think will be pretty exciting, and you'll see some key differentiation there.

Peter McCormack: Sorry, can you just give me some examples of that so I can understand it?

David Kinitsky: Look, you see a lot of these fintech neobanks that are high-growth, VC-backed companies.  A lot of them are diving into the digital asset industry and a lot of them are doing it just because it's like, "All right, we have a neobank, we are now allowed brokerage into equities, we're going to tap on access to buy/sell/trade crypto"; but, it's more of a customer acquisition in my view, more than anything else.  They're not actually looking to facilitate actual interaction with those assets, or engagement in what they can enable.  They're just like, this is another asset that you can speculate on and whatever, which is great; I think there is value in that and it's worth doing. 

But, coming at it from Kraken's perspective, we're going to be able to enable it as a bank-dedicated crypto asset account using payments, using other sorts of actual financial transactions, more than just trading and speculation.  So, I think that's a key differentiator.  And, looking at it from the angle of folks who want to hold Bitcoin or other crypto assets over the long term and then use those as collateral to access other investments or payments.  That's a little bit of a different strategy than you're seeing like a Robin Hood, or other companies like that, pursue.

Peter McCormack: So, were you really here talking about being able to invest in stocks as well?

David Kinitsky: Yeah, potentially; that's what I'm saying.  As a bank, we can conduct transactions in securities or equities and other types of asset classes and so that kind of unified platform is pretty powerful, especially you talked about earlier, you need to have a bank account and a hardware wallet and a mobile wallet and a this and a that.  The same thing; I have to have a bank account and a brokerage account for equities and all the other digital asset accounts.  Here, we can pursue a more consolidated approach.

Peter McCormack: Will there therefore be a direct relationship between your Kraken Financial account and your, say, Kraken.com account, or will it all eventually be merged into one?

David Kinitsky: I think it will be very similar to how financial services conglomerates operate today.  My reference point, having worked there, is Fidelity Investments or some other big brokerage house.  They have a broad suite of services that are offered by a host of underlying entities; but from the consumer perspective, it looks unified and they see their accounts that can do a bunch of different things. 

That's how it will work here.  You'll have a Kraken account and you'll be able to access the whole suite, I mean subject to jurisdiction and regulatory restrictions, the whole suite of services.  And, what's happening on the back end is something else.  One may be serviced by our banking entity; one may be serviced by another entity; or so on and so forth.  But, from the consumer perspective, it will be consolidated.

Peter McCormack: So, Nick Percoco must have a plateful will all this?

David Kinitsky: Yeah.  I mean, he's great, he's a rock star and for those that don't know, he's referencing someone who leads some of our security, technical and engineering efforts.  And, Kraken has dedicated a lot of time and resources; he manages a very big team there.

Peter McCormack: I had him on the show.  I met up with him last year before we all went on lockdown.

David Kinitsky: It's amazing.  Coming onto Kraken about five or six months ago, the onboarding experience and the installation of security practices and tools from day one to every single employee across the Kraken franchise is something that I've never experienced at any other company before.  Security really is baked into the DNA here.

Peter McCormack: And, Marco, is security tied into the regulatory side?

Marco Santori: It's actually a good question and Wyoming itself has some technology-specific requirements that usually you'd hear me pounding the table and stomping my feet about the evils of technology-specific regulation and who knows, you may hear that in ten years.  But, so far, the requirements have been actually really well-tailored.  So, there are technology-specific requirements around crypto custody, about proving reserves, and the kinds of things that banks might do based on trust. 

SPDIs are -- I should say, as traditional banks would do on trust, SPDIs would do on the basis of maths.  We can provide cryptographic proof of reserves which, if you're listening to this podcast, you probably know is better than just trusting us, trusting some treasurer's signature.  But, there are operational elements to that on the Kraken side too.  When we work with outside counsel, as a legal team, we have very strict operational requirements around not only how we exchange information, but also on advertising your status as our outside counsel.  There is a very small list of lawyers who are allowed to tell anybody that we're their client.

Peter McCormack: I'll tell you, another really interesting thing is that it feels like, I know you've talked about this being a bridge between the traditional and, I mean you guys say crypto, I'm more Bitcoin; but let's just say that world, is that I read and I don't know if either of you have read, the ARK Invest two pieces they've released over the last fortnight; have either of you read them?

David Kinitsky: I have, yeah.

Peter McCormack: So, what was really interesting with that is where they talked about essentially those four assurances.  For a trust-based model, they tend to fail because of coming short of those four predictable economic assurances, and talk about how Bitcoin is great for them.  I don't know if you've seen it, Marco, but the four of them are, the first one is that value should be exchanged globally and freely; the second is that wealth should be owned and wholly protected; the third one is that the rules should be enforced reliably and predictably; and fourth, the integrity of the system should be verifiable.  They're four amazing rules and obviously, I'm a big fan of Bitcoin and Bitcoin passes on all of those.

But, we're in this kind of trust-based model now and then they're talking about this trustless model, and that transition from one to the other is a very hard thing to envisage; it's a very hard thing to just understand how you get to that point.  But actually, what's really kind of interesting here is that, I could see with what you're doing, it is that bridge between, it's a kind of middle ground where you're essentially providing the old trust-based model, whilst in parallel supporting this future trustless model.  I don't know if you've thought about that, but that's what really stuck out to me?

David Kinitsky: It's interesting.  It's persuasive.  I think it's important, at least from my perspective, to note how I view it is, the first point is it's a spectrum.  And, similar to things like "decentralisation", whatever that means, the two key points about that and that I think relates here is one, it's always a spectrum, it's not like a binary flip-a-switch kind of thing; and two, these are things that are not necessarily valuable for their own sake.  It's like, what can you do with them, in terms of an insurance, right?

One example might be, okay, why do you want to know the verifiability or automobility of something?  It's because you want to know that you have your money there.  It's for a particular reason.  It's not some abstract, conceptual thing.  And so I think that what this bank enables is us to move farther along that path of, hey, we're going to get closer to more trustless, closer to more customer control, closer to P2P which, up until now, P2P, you see like PayPal, or something like that, it's always funny they use P2P; it's absolutely not.  And we're going to get closer down that spectrum.

And two, in terms of what our customers are actually looking for, they're going to be able to by and large choose more.  It's just like how privacy does not equal anonymity.  Privacy is the ability for someone to choose what is public or shared with others and when and how, and so we're pursuing that path to empower customers to kind of choose what they want.  I think it's an important distinction here in that it's between the Bitcoin system and the way that customers or users experience it.

Peter McCormack: Yeah, I kind of agree with you there because, whilst I'm a big supporter and proponent of Bitcoin and like the trustless model, I do believe some things actually do work better centralised, which I know is heresy in the world of Bitcoin and I'm not a complete anarchist, and there are parts of my business that operate better on a centralised model, and there are certain bits that operate better on a decentralised model.  I also just think there are many people who aren't ready or skilled, and maybe it's generational, but aren't prepared for a completely trustless model.  So, having this option to have both is great.

Having the option to have the two mixed together is really compelling and I really just want to know when the hell I can get my Kraken account; I want a Kraken Financial account.  Do I have to move to Wyoming?

David Kinitsky: No, you don't.  We'll be, as Marco said, bringing it to a jurisdiction near you over the coming quarters.  But yeah, as I said, focus initially on existing Kraken in the US and then in other jurisdictions and for those who are not currently not Kraken customers, sign up on Kraken.com today to get the earliest access possible.

Peter McCormack: Have you moved out to Wyoming?

David Kinitsky: I have.  I'm speaking to you from Wyoming today.  I'm loving it out here.  We're building a footprint.  The bank will have a headquarters and physical location, not customer facing, but back office in Wyoming, and we're going to be bringing more of the executives and employees out to Wyoming and supporting the ecosystem pretty broadly in terms of building a financial and technology centre out here, and the ecosystems to support our efforts and the state more broadly.  It's an exciting time.

Peter McCormack: I was in Wyoming this exact time last time with Caitlin Long, with Tyler Lindholm, Jesse was there as well; we were all out there.  I really fell in love with the place, I thought it was amazing.  I definitely feel a lot of warmth in those red states.

David Kinitsky: Yeah, whether or not it's lovely out here, coming from -- I've lived all over the US, but most of these last 15 years or so, with a couple of brief hiatuses, in New York City.  So people are always like, "Wow, how is it moving to Wyoming?" and I guess I would say I'm a freedom-chaser.  I fell in love with New York because you could be who you wanted and do whatever you wanted whenever you wanted, and we'll see how that is going forward.  But, Wyoming has a pretty compelling case for a similar kind of freedom framework.  So, super excited out here.

I have a question for you.  We're tentatively calling this thing "Kraken Financial".  Do you like Kraken Financial or Kraken Bank better?

Peter McCormack: Ooh, that's a good question.  Do I like Kraken Financial or Kraken Bank?  I wish I'd had a chance to think about it.  I mean, I think I like Kraken Bank because when I think of Kraken Financial, I just think of financial services, and I just think Kraken Bank is going to be a better bank, and I need a bank.  Like, I don't operate just with a node financially; I operate with a bank account.  So, I like Kraken Bank.  It feels solid; it feels like I know exactly what it is.  Yeah, I like it.

David Kinitsky: Yeah, it's interesting.  Kraken Financial is elegant, it's symphonic, it's musical, but it is a little generic.  Kraken Bank is strong, staccato, harsh, almost sounds like Game of Thrones, you know, the Iron Bank or something.

Peter McCormack: Yeah, it just feels like it's got its foundations there.  Yeah, I'd definitely go for Kraken Bank.  Right, okay.  So look, before we close out, how do people find out more about this if they are interested in finding out more about Kraken Bank, Kraken Financial; how do they do that?

David Kinitsky: Go to Kraken.com.  On our blog, we have an announcement about this last week.  We'll expect to be sharing more news soon.  And, existing Kraken customers will obviously get the earliest access so for those who are not, sign up on Kraken.com.

Peter McCormack: And I also imagine there are some people out there going to be listening to this thinking, "I want to work for this".  Are you recruiting for Kraken Bank?

David Kinitsky: Yeah, we're recruiting across the Kraken organisation still.  Go to Kraken.com.  At the little footer of our web page, where you usually find the careers link, go there, click on it and absolutely, roles available at the bank; but also, more broadly across the entire Kraken organisation.  I know Marco's been hiring like crazy over there.

Marco Santori: That's certainly the case if you have any lawyers listening or paralegals or legal assistants listening.  We are growing a legal team and we would love to see your resume.  You can see my job descriptions, actually, on Twitter.  So far, they've been pretty accurate.

Peter McCormack: Nice.  And, if people want to follow you on Twitter, Marco, how do they follow you?

Marco Santori: It's @msantoriESQ.

Peter McCormack: And for you, David, if people want to follow you?

David Kinitsky: It's just @kinitsky, my last name.

Peter McCormack: Brilliant.  Well listen, best of luck with this.  Obviously I'm a massive fan of Kraken, big fan of Jesse, so great to talk to you and I wish you all the best with this; I think it's going to be pretty cool what you're going to do.

David Kinitsky: Thanks, Peter.

Marco Santori: Thanks, Peter.