WBD323 Audio Transcription

Bitcoin Borrowing & Lending Markets with Zac Prince

Interview date: Friday 19th March

Note: the following is a transcription of my interview with Zac Prince. 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.

To address the risk-reward of BlockFi and answer some of the questions & misconceptions, I talk to BlockFi CEO Zac Prince. We discuss building the present and future of Bitcoin capital markets, the demand for crypto-liquidity and BlockFi’s solutions to the challenges of managing risk in this growing financial frontier.

“If bitcoin gapped up 50% tomorrow with no liquidity in between BlockFi would be fine. We would be better than fine, we would be popping champagne alongside everyone else.”

— Zac Prince

Interview Transcription

Peter McCormack: Zac, how are you doing, man, good to see you?

Zac Prince: Good to see you too, Peter.  It always feels like it's been way too long when we talk to each other on a podcast every six months or so, because we used to hang out in person at least once a quarter.  It seems like we're almost on the other side though.  I don't know how things are in the UK, but it feels like we're a couple of months away now in the US from just all hell breaking loose and everybody being vaccinated and starting to party again?

Peter McCormack: Well at least, I think it's about a third of our country's been vaccinated now.  I'm due for a vaccination, if I want to take it, within the next month; and I'm going to take it, because I want to get on a plane and come out to New York.  As you know, I used to be there every two to three months; we'd always get to hang out and we haven't caught up properly in ages and I'm missing it and I'm missing the conferences and the events.  So hopefully soon, man.  I think we're way ahead of the rest of Europe, which is a bit of a shit show, so yeah, some of the bitcoiners won't like it, but I'm taking a vaccine; I'm going to take all the vaccines in every arm and limb.

Zac Prince: That's my strategy as well.  What do you think is the first event you're going to be able to get to; are you going to go to that Bitcoin Miami?

Peter McCormack: Worst case with that one, I will go -- because, the problem is the US letting people in from the UK, but they're letting people in from countries that we can travel to, or we will be able to travel to, should I say.  So, if I have to go somewhere for two weeks beforehand, I will.  But, I wanted to get out to Austin in April, but I don't think that's going to happen.  I think Miami would be the first one and I think we can all go mental.  Are you going to be there?

Zac Prince: I'm still on the fence.  It depends a little bit on the wife and kids' summer schedule, whether or not I'll be able to go, but there will definitely be a handful of people from the BlockFi team.  It's just a question of whether or not I'm able to make the trip.

Peter McCormack: Well, if not, I mean I'll try and follow the trip to come and see you, man.  It would be good to see you, grab a steak, catch up.  We've got a congratulations to you guys, right?  Well, we'll come to that; you can tell us about that towards the end, actually.

Let's start with, why does everybody hate BlockFi; well not everyone, I love BlockFi, but you split people dude?  I obviously get a load of people give me a lot of hassle and a lot of stress and shout at me for having BlockFi and I'm like, "Well, I've been with them for, what, 14 months as an actual customer", no issues, I trust you.  It seems to be there is this group of people who just want to come at you all the time; what do you think's going on there, dude?

Zac Prince: Yeah, I mean look, I think a lot of things that ultimately end up being very successful, and Bitcoin frankly is one of them, can be somewhat divisive in their early stages; and you have believers and advocates; and you have detractors and people who aren't a fan of whatever people are doing one way or another.

I had a Twitter account before BlockFiZac that only tweeted a few things, but one of the things it tweeted was, "If people aren't hating, it's because you aren't doing shit", and you can relate to this too.  I mean, you have a What Bitcoin Did podcast and people are throwing all kinds of shade at you at different times.

But look, the way I think about it is this.  The reality is we started BlockFi in the third quarter of 2017.  The original idea was to build debt and credit products for the crypto ecosystem, because that's our background.  And we've expanded quite a bit since then and today, we think that not only do we have an opportunity to become one of the leading crypto banks or crypto brokerages, but also that ultimately this crypto financial services ecosystem will start to compete head on with the traditional financial services ecosystem, and we hope to be a leader throughout both of those phases.

Currently, in our most popular product, which is the interest account, we're generating over $35 million a month in interest for our clients and we've had perfect performance since the first month that we paid interest to our clients.  And it's literally people that own Bitcoin and are bullish on Bitcoin as an asset, earning Bitcoin interest every month; and in general, the behaviour that we see is that they just hold on to it.  So, we're enabling folks that are advocates for the space to get their hands on more Bitcoin, which ultimately they hold on to, and we feel like we're still in the very early days of this.

We have a very exciting product pipeline, including products in the payment space that are going to make it easier, not only for the folks that we already work with who, in general, heard about Bitcoin before they heard about BlockFi; but, we're going to increasingly look to create products and marketing messages that are relevant to folks that are crypto curious, or maybe not interested in crypto yet and help convert them into becoming Bitcoin owners.

So I think hopefully, assuming BlockFi doesn't fail completely, which the odds of that happening were already low and they get lower and lower every single day; they're very slim at this point.  But hopefully people at a certain point, even if using BlockFi's products isn't for them for whatever reason, they don't trust us or they're worried about how lending works, they'll be able to look back and say, "Well, you can't argue that this wasn't a net positive for the ecosystem". 

I think the same thing can be said about a lot of big companies in crypto.  People might dislike Coinbase, or they might dislike Binance, or they might dislike whatever other platform that's out there.  But, once you reach a certain level of success, a certain level of adoption, it's hard to argue with the fact that you've been helpful to the mission of enabling consumers and institutions around the world to become part of this ecosystem, which ultimately enables the ecosystem to grow and the price to go up and the market cap to go up and adoption to go up.  And at the end of the day, we're all on the same team for that effort.

Peter McCormack: Well, I get a lot of emails about BlockFi.  So, for transparency, if someone's listening for the first time and they've skipped the ads, which you shouldn't do; but if you have, BlockFi is a sponsor, it's my oldest sponsor.  I've worked with Zac, known Zac, for -- in our third year at least of knowing you; so, I do have a bias, I have a bias as a customer because I like it. 

But at the same time, I said to Ben, who is new producer of What Bitcoin Did -- say hello, Ben?  I asked him to join us because I wanted him to cover some of the things where I want to give you a kind of like, put the questions that are out there into you.

But, there are -- I mean, I'm getting a lot of emails at the moment.  I would say at least a third of them are reference to BlockFi and it's a range of questions, "What percentage of your portfolio would you leave with BlockFi?  Do you trust BlockFi?  Why BlockFi over Celsius?", which is easy, by the way, and then something will happen in the market and it's a reaction. 

So, when that stupid website came out the other day, I must have had five emails on the day asking me about that.  So, I'm always been asked questions, so it's worth getting you on, it's worth getting you to talk through some of these things.  So, I'm going to cover the basics and then what I'm going to do is, I'm going to hand over to Ben to get into some of the more detailed stuff. 

But, I know we've done this before and I know you've done this 100 times, but I think we should just do the basics of what the BlockFi business is, so people understand how you work, how you operate.  So, shall we start on the lending side; or do you want to start on the interest side?  Which is the easiest side to start, the borrowing or lending?

Zac Prince: I think the easiest way to explain what BlockFi does is to talk about it sequentially from where we started, because where we started to where we are today was really all driven by customer and market demands.

So, the first product that BlockFi launched, in early 2018, was the ability for folks to borrow dollars secured by their Bitcoin as collateral.  We launched that product right at the top of the market, so around Bitcoin $20,000.  Then, the second product that we launched was the Bitcoin interest account, which is the ability for folks to earn a yield on Bitcoin and other crypto assets, in an account with BlockFi.  The reason that we launched that was as follows. 

So, we had this US dollar loans, secured by Bitcoin as collateral, product in the market and our phones started ringing and it was institutional firms saying, "Hey, we'd be really interested in borrowing cryptocurrency.  Right now, there's only one game in town where we can borrow cryptocurrency", and it was our friends at Genesis capital, "and they're price-gouging everyone and we think the market should have a few more participants and we think that BlockFi is a good candidate for that.  Would you be interested in doing this type of activity?" 

Of course we were, because we always knew that we didn't want to be just a monoline lending business.  The online lending world, where Flori and I came from, that was one of the biggest lessons.  You want to be someone like SoFi, that diversifies your product suite and adds more value for your clients, through launching multiple products over time, versus a one-trick pony like a lending club.

Once we decided that we were interested in starting to lend Bitcoin to institutions, it became very clear that the demand that these institutions had to borrow Bitcoin was a lot larger than the amount of Bitcoin we had access to, with just that Bitcoin-backed loan product.  So, those two ideas together combined for the launch of the BlockFi interest account, which came out in the March 2019.

The idea is pretty simple.  You can hold assets in an account with BlockFi and earn a yield on them at pretty attractive rates.  So, the base rate for Bitcoin is 6%; for Ether, it's a little over 5%; and for stablecoins, which are one-to-one interchangeable with dollars in a bank account, it's 8.6%.  These rates are high when compared to the traditional financial market rates; and the reason for that is that this is still an emerging asset class.  It's an asset class with a ton of growth built into it, a ton of volatility built into it; a ton of inefficiency still exists today in terms of liquidity venues and how connected and unconnected they are from each other; credit isn't very widely available.  So, in general, we're able to offer much higher rates, which is really attractive to folks that are participating as lenders; and that product took off. 

So, I'm really excited that Ben is working with you now.  I've actually known Ben for a while.  Ben was creating videos around the time that we launched the BlockFi interest account, dissecting what this meant.  And there was one of them, I forget the name of it, Ben, you might remember, but there four people on it, I think all pretty hardcore bitcoiners and it was like two hours of, "What does this mean?  Is it good; is it bad; is it going to fail?  Do we like it; do we hate it?  Is it Bitcoin banks, which is ultimately a good thing; or, is it a scam; or, is it something in between?" 

It was a really exciting time for our business because, love us or hate us, we got a ton of attention and ultimately, the way it's played out is that people, in fact, do love getting a yield on their Bitcoin.  So, we've grown assets held in BlockFi interest accounts from zero, when we launched it in March 2019, to over $15 billion worth of assets today; and generated hundreds of millions of dollars in interest that has gone to our clients.

So, fast-forward about six months from that point and the biggest complaint we were getting from our clients was, "It's really cool that I can earn interest, but it sucks that I have to take my assets off of BlockFi if I want to trade them and then bring them back to earn interest again".  So, we took that feedback and we said, "Okay, you should be able to buy and sell assets directly on our platform".  And we launched our trading product in December 2019.

So today, those are the three things you can do in our mobile app or our web app.  You can buy or sell crypto; you can earn a yield on your crypto, actually by default you're earning a yield on every asset that you hold on our platform today; and you can get a loan secured by the value of your cryptocurrency holdings.

In the second quarter of this year, we're launching our fourth product on the retail-facing side of our platform, which is a Bitcoin rewards credit card.  I don't know if we're doing video for this or it's just audio, but I sit here spinning the card in my hands all day, every day, because I'm so freaking excited about it!

Peter McCormack: Dude, I want my card!

Zac Prince: Me too.  I think we'll have cards for folks that are either employees or influencers or good friends of BlockFi, in their hands in April/May and then we'll start shipping them more broadly in the back half of May and early June.  So, we're really excited about that, because it's great for our clients; but it's also going to be great for people who, for whatever reason, have been interested in getting some Bitcoin, but they haven't crossed the chasm yet and actually created an account on Coinbase or BlockFi, or wherever; or, it's just a little too much to think of spinning their own money to buy the Bitcoin.  But, if they could just earn it, well, that's a completely different proposition and maybe that is something that they would be excited about.  So, we're really excited about that.

So, that's the retail-facing side of BlockFi.  We also have this part of BlockFi which is the institutional-facing side of BlockFi.  Also on the institutional side of BlockFi, we manage the risk, all the financial risk.  So, risk management is a big undertaking.  We believe fundamentally that we're in the business of risk management at BlockFi.  The institutional services side of our platform is responsible for our institutional client relationships, our market activities, our risk management; and they're responsible for the activities that generate the yield that we're paying the folks who are holding assets on the retail side of our platform.

So we are, today, the largest lender, through our institutional services product, of cryptocurrencies to market making firms, proprietary trading firms, hedge funds and also, we're a very large financing provider to crypto-native businesses, like miners, ATMs, exchanges, etc.  And then on the institutional side of BlockFi, we've really been a big lender historically, but now we're in the process of also adding trading functionality.

So today, our institutional clients can trade over the counter the spot market and throughout the course of this year, our functionality there will be expanding to include derivatives, both futures and options.  And from a tech perspective, our institutional clients will be able to trade onscreen and via API with us as well.

Last point, and then I'll pause, because I know I've gone a little long here: over the short to medium term, we believe that we still have a ton of wood to chop on just adding as much value as we can by creating new products and features for these two client segments that we have today; crypto market participants on the retail and institutional side of the equation.  But, medium to long term, we think that crypto financial services is going to compete head on, and ultimately disrupt, traditional Fintech and traditional banking, because there are things that you can do better, faster, cheaper from a starting position, like what BlockFi's had, than from a traditional Fintech or a traditional banking starting point.

So, we see a world where folks like Coinbase or Binance or BlockFi or others are competing with JP Morgan Chase, or PayPal.  You could honestly say that's already starting to happen in the case of PayPal and other Fintech companies.  So, that's what we're working towards long term.  We think there's going to be a world where financial services are a lot more available globally and at much less fragmented rates and constructs; and we think that that evolution is going to be powered by Bitcoin and what's happening in the broader crypto ecosystem.

Peter McCormack: It's just a sort of crypto business you've built up there then?

Zac Prince: Yeah.  That soap box I just stood on for a minute, that was basically the opening pitch to investors for our Series D round of funding, which we just closed.

Peter McCormack: Congratulations on that.

Zac Prince: Thanks.  And, Peter, you were the first person, going back a while now, you said that, "You're going to build a unicorn".  And I remember the first time you said that, I think it was after our Series A, and I didn't really believe you.  I was like, "Holy shit, no way.  I mean, maybe, but I don't know".

So, we're really excited.  We raised $350 million from a great group of investors.  You can check out the press release, but world-class investors, and it was at a $3 billion valuation and we're going to use the money to keep growing our team, keep building new products for our clients and I think we'll --

Peter McCormack: Keep sponsoring podcasts.

Zac Prince: Keep sponsoring podcasts!  And we'll also potentially get active in the M&A market; make some acquisitions over the next 3 to 18 months.

Peter McCormack: That's interesting.

Zac Prince: We'll probably keep making acquisitions forever, but I think we'll start being active in the market for the first time this year.

Peter McCormack: That's a big deal.  Okay, well listen, we'll get into that later.  So, let's dissect some of the parts of this business, the bits that people always ask about, and I know you covered this with Preston Pysh; I listened to that; it was a great interview.  So, these institutional borrowers, let's get into it.  I know you've told this 100 times, it must bore you to do it, but who are they; what are they borrowing it for; why are they borrowing it from you; why don't they just hold it themselves; how are they generating essentially their own yield so they can pay back you guys with interest; how does that all work?

Zac Prince: Sure.  So, most of them are doing market making, proprietary trading, arbitrage-type activities; and then there's a pinch of shorting and a pinch of crypto-native businesses borrowing for inventory.  So, I'll give you an example of each one of these things.

So, let's say, Peter, Ben, you work at Susquehanna.  Susquehanna is one of the most successful market making firms in the world.  What does a market maker do?  They buy things for 99.9 cents and sell them for $1.01 in all sorts of asset classes.  Market makers get paid for providing liquidity into certain markets and they get paid by the delta between those two prices that they're making a market at.

So, if you're someone at Susquehanna who's convinced your boss that they should take your market making capabilities and bring them to the crypto ecosystem and your boss says, "Okay, go do it, Peter.  Here's $10 million".  And you take the $10 million and you go load it up on a few exchanges and you start market making.  Things go really well, because it turns out that crypto is very volatile, liquidity is very fragmented, and so it's a very ripe market in terms of opportunities for market making firms.

So, a month or two goes by, you're using the $10 million, you come back and you say, "It's worked phenomenally.  We've made a lot of money, the returns are great, the risk is low; I'd like to increase our activity by a factor of 5X or 10X or 20X.  We should be doing this with $100 million or $200 million".  But then what your boss says is, "Okay, great.  I don't want to put up the $100 million all from Susquehanna's equity capital; go find a prime broker who will finance our market activities".

That's the point at which they end up calling someone like BlockFi or Genesis, because the traditional prime brokers are not active in this asset class.  So, they call us, we underwrite them, understand what they're doing and then offer them financing.  And a lot of that financing is denominated in Bitcoin.  Why is it denominated in Bitcoin?  Because, Bitcoin is the inventory that you need to trade this asset class, and so these market making firms need to have some Bitcoin on hand; the same way that someone who's market making for an ETF holds some of the underlying shares that represent the make-up of that ETF, because it's helpful for them to stay neutral in the market making activities.  So, that's number one; proprietary trading.

Peter McCormack: Can I jump in there?

Zac Prince: Yeah.

Peter McCormack: Let me just ask you a couple of questions there.  So essentially, through all of this, Bitcoin is the unit of account; it's the unit of account for what I deposit with you; it's the unit of account of interest I get paid; it's the unit of account for what they borrow; and, is it the unit of account of interest they pay to you?

Zac Prince: Yes.

Peter McCormack: And it's the unit of account they use for market making.  So, what am I guessing; at the end of a period when they have to repay a loan to you guys, they will pay back the Bitcoin they borrowed, plus the interest and they themselves will have accrued some Bitcoin themselves, and that will have a dollar value at the time?

Zac Prince: That's correct.  So, all the way through, it's denominated in Bitcoin.  So, you hold 1 Bitcoin in your BlockFi interest account.  BlockFi takes your 1 Bitcoin plus 99 other folks' 1 Bitcoin, lends 100 Bitcoin to Susquehanna.  We're paying you 6% so at the end of the year, you're all going to have 1.06 Bitcoin, regardless of what happens to the price of Bitcoin.  We lend 100 Bitcoin to Susquehanna and at the end of the year; they're going to pay us back 107 Bitcoin.  That's kind of a representative example.

So then, in that example, BlockFi makes 1 Bitcoin, our clients all made 0.06 Bitcoin, because they're all just holding 1 Bitcoin on our platform, but it's denominated in Bitcoin all the way through.

Peter McCormack: And that 7 Bitcoin comes from essentially liquidated traders?

Zac Prince: It's liquidated traders; it's helping tighten the market.  So, you know you see things all the time where the price of Bitcoin on different exchanges, or in different markets, diverges.  It's that exact scenario where market making firms are just printing money because they say, "Okay, we've got a ton of money, we have money in all these places; our system sees that Bitcoin is going for $57,000 at Kraken and $56,800 at Coinbase", and they buy it at one and sell it at the other.

Peter McCormack: Okay, so it's just efficiency, okay.  And, with these clients, are they having to collateralise the loans with you; are they having to provide guarantees; what's the due diligence?   What's your risk exposure to them of a market collapse and a business going under, because I'm sure you only work with the best, but there was a time where nobody thought Lehman Brothers would go under; so, what is the -- this is the reason it's not a zero risk, right?

Zac Prince: Yes.  So, I'd encourage folks to watch any of the podcasts or videos with Rene van Kesteren; he's our Chief Risk Officer and he generally only talks about this type of stuff when he's on shows.  But, the simple answer is, for firms like Susquehanna where they have billions of dollars in equity capital, they've operated profitably for a long period of time, less than 5% of their business is in the crypto market; BlockFi can generally get comfortable taking some credit exposure to them.

What does credit exposure mean in this context?  It means, with their $10 million that they're using to trade crypto, we would give them financing so that they could trade $50 million or $100,000.  So, we've lent them $40 million or we've lent them $90 million, ultimately with $10 million of their own equity that they've put up to do these market making activities. 

But importantly, one of the things, one of the many things that we look at during the underwriting is, where is this entity in the corporate structure of Susquehanna?  If this entity were to blow up, does it pass through to the parent where all of the money sits?  So, we make sure that all of those things are true before we give anyone credit.  To date, there have been less than 50 out of 250 institutional firms that have qualified for that type of credit exposure lending and generally, they all need a similar profile as Susquehanna. 

Then, let's say there's Peter and Ben's market making firm and you made a ton of money from the What Bitcoin Did podcast and so, you're taking $5 million and you're going to start making markets in crypto.  The maximum you would be able to borrow from BlockFi, because you don't have billions in equity and all of your business is in crypto and you don't have a long track record of making money by doing these activities in an incredibly low-risk way, is maybe $5 million of equity; $3.5 million or $4 million secured by year 5 --

Peter McCormack: Shows how much our friendship fucking means!

Zac Prince: And so, in that case, if you start to get off sides in terms of your positions, BlockFi has sufficient capital from you to close out your positions before we've ever been put at risk of losing a penny. 

There's a separate, but similar, kind of way that risk management works for our retail loan book, but we've done these things since January 2018, through multiple periods of volatility, including the most significant down day of volatility that we've ever had, back on 11 March.  There are some interesting kinds of learnings from that market event that I'd be happy to share.  But also, from 12 March to day, we're up, what, 11X-ish?

Peter McCormack: I know, dude!

Zac Prince: And, look, we've had perfect performance the whole way through and perfect performance not only in the sense of, of course, our client's capital and BlockFi's capital has been protected and we've delivered the interest rates that our product delivers; but also, in some more qualitative areas.  And, one of the biggest things you learn being in this business is, sometimes the maths part of the risk management can be relatively easy, but there's a people component to it in terms of BlockFi's operations and training of employees; but also, in terms of how we interact with our clients in our desire to have a very long-term relationship with our clients.  They're important as well.

Those things don't exist.  That second stuff, the long-term client relationship, they don't exist in other areas of this ecosystem; in particular, DeFi.  I love DeFi, I'm a personal fan of it, but it's just very different.  There's no one to call on to say, "Hey, the blockchain was a little congested when I tried to send you more margins, so can we work something out here, because you liquidated my loan?"  It's just no; the answer's no on DeFi.  It's a little bit different at BlockFi.

Peter McCormack: Okay, so that's part of the institutional customers; but you said there were others?

Zac Prince: Yeah, so I'll give you examples from each bucket.  So, that was market making; then there's proprietary trading; there's kind of long-short, which would be shorting; and then there's crypto-native. 

So, proprietary trading, and we'll probably talk about this somewhere else in the show, so let's use it as an example; The Grayscale Bitcoin Trust.  Up until about two weeks ago, The Grayscale Bitcoin Trust traded at a premium to NAV, meaning there were 100 Bitcoins sitting in the box and a fair market value of those today is $5.6 million, but actually the shares were trading at an implied valuation of $7 million. 

What arbitrage and proprietary trading firms will do in that scenario is borrow Bitcoin, subscribe to create new shares of the Trust; when those shares became liquid and freely tradable, sell them and pay back the Bitcoin.  So, they borrowed $5,600 worth of Bitcoin; ultimate, they sell it, they make $7,000; they pay back $5,600 and they keep the difference.  That's how the trade works when it was at a premium.

Now, it's at a discount.  So, the way the trade works now, for folks that are doing it is, they borrow Bitcoin, sell it, take the cash from selling that Bitcoin, buy shares of GBTC, which are trading right now -- they closed yesterday at just under a 5% discount; I think it was like 4.75% or maybe 4.5% discount -- buy shares of GBTC.  When that discount comes back to closer to NAV, they sell it, pay back the loan and make the difference.

Peter McCormack: Why does it trade at a premium and at a discount; what are the reasons?

Zac Prince: It's really a function of supply and demand, intersecting with the fact that this is a trust product, which does not have the same creation and redemption mechanisms that an ETF does.  So, going in reverse order, an ETF, you can constantly and effectively, in daily or sometimes, real-time cycles, be buying more assets for the ETF or settling assets out of the ETF to keep the price of the ETF in line with its underlying holdings and the activity in the market.

With these trust products, which is what we have in the US, because the SEC hasn't been willing to approve an ETF for Bitcoin yet, that subscription and redemption mechanism works very differently.  Basically, to create new shares of these trusts, you have to subscribe and then wait for somewhere between 6 and 12 months, depending on the product.  And there is currently, for the Grayscale Trusts at least, no redemption mechanism.  So, things can go in, but they can't come out.

So historically, these things traded at a premium.  Why?  Because, GBTC was really the only thing you could buy in your retirement account at Fidelity or Schwab or somewhere else and get Bitcoin exposure, in a traditional kind of brokerage construct, where you already have your IRA money, or your 401(k) money, or whatever it is.  And, the reason I think they're starting to trade at a discount now is a function of a few things.

There are more products available in the marketplace today, both in terms of other trusts and in terms of ETFs in Canada getting approved and ETNs in Europe.  There was, maybe a week and a half ago now, because long-term Fed rates are rising, you've seen the beginnings of, or at least a short period of, a rotation out of tech and into more cyclical value oriented stuff; and I think Bitcoin gets caught up in that a little bit, in the traditional equities market at least.  And you have some actively managed ETFs, most notably the ARK ETFs and specifically ARKW, which hold GBTC and which are ETFs, meaning when ARKW experiences outflows, they're a forced seller of GBTC, because that's one of the underlying holdings of ARKW.

So, we think all of those factors together came about and now GBTC's trading at a discount.  And, we could talk about how long that might last and what things you're going to see happen in the interim.  You know, Digital Currency Group already announced that they're getting set up to buy up to $0.25 billion of GBTC and they'll do other things; because, it's really bad for Grayscale to have GBTC trading at a discount, because you'd have to be a complete moron to subscribe to create new shares of GBTC while the liquid shares are trading at a discount.

So, Grayscale has a tremendous incentive to get the liquid shares back to NAV, or a premium, because otherwise their spigot of new subscriptions is completely shut down.  You, Peter, would never say, "Oh, yeah, I'm going to subscribe to create new shares of this trust and wait six months before the shares are freely tradable.  And, I'm going to pay Net Asset Value for that", when you could buy the same shares for a 5% discount on the open market today and they would be completely liquid.

So, we'll see how these things play out.  I think ultimately, the question in my mind isn't whether we get closer to NAV; I think that's a given.  The questions are, how long it takes for that to happen; why that happens, which could potentially be because the Grayscale Bitcoin Trust gets converted into an ETF.  So, it's a question of the duration, the why and whether it goes back to trading at a premium again in the interim, which I think there's a reasonable chance of that happening.

So, that's your arbitrage one.  And the biggest things that these arbitrage funds have done are either Grayscale and other products like it arbitraging the inefficiencies in capturing that premium, or now capturing that discount; and then, they've traded the futures basis.  So, the futures basis is when the future price on CME futures, or offshore futures, is higher or lower than the spot price; it's either in contango or backwardation.  Generally, when the market is bullish, it's in contango; when the market is bearish, it's in backwardation.

What you can do with that is, when we're in contango, so the March Bitcoin future is trading at $58,000 but the spot market is trading at $57,000, you can sell the future, buy spot, wait until future's expiry, which is the point in time at which those two prices will converge, and you make the delta; so, you make $1,000 over that period of time.  Then, you can annualise that to get an implied yield.  The implied yields on futures basis have been insanely high recently.  You've been able to make 15%, 20%, 25%, 30% taking basically CME and crypto spot exchange risk, which is pretty de minimis in my view.  So, those are the two biggest things that arbitrages do.

You're starting to see some activity in the options market, which is becoming increasingly liquid, so there are other strategies that you can do in options where, similarly to the other two, you're generally market neutral, but you're making some implied yield.  And for all of those things too, there's a need to borrow.  And why do you want to borrow?  Well, let's say that implied yield on the futures basis was 15%.  Let's go back to the example that's just gone where you've got $10 million.

Okay, I've got $10 million; I'm going to do the future basis, I'm going to make 15%; I'm going to make $1.5 million.  Well what if you did it with $20 million?  Okay, well then you're going to make $3 million instead of $1.5 million.  What if, out of that $20 million, only $10 million of it was your money and the other $10 million was money that you're borrowing at a 7% interest rate?  Okay, well now you're making 15% on your equity, plus another 15% minus 7%, which is the return on the $10 million, plus your cost of borrowing.  So, you've just increased your net return and you haven't taken on incremental risk, because the structure of the trade is market neutral.

So, that's arbitrage; and then the third thing is shorting.  This is probably the tiniest, especially recently.

Peter McCormack: For a long time, people have thought it's the main use, right?

Zac Prince: No, I mean this is tiny.  It's probably never been more than 5% of our activity.  So, the example for shorting is, let's say you're a long-short hedge fund.  So, your job is to look at some universe of assets and say, "I think this one's going to go up over whatever period of time and I think this one's going to go down; and I'm going to be long this one and short this one".  Whatever assets you want to go short, you need the ability to borrow and then sell, because that's how you put on a short position.  And, BlockFi does facilitate that.

I mean, today, it's probably close to zero, what part of our lending book is shorting.  But look, if we have another cycle where, let's say, we're shooting up to somewhere between $100,000 and $400,000 over the next 12 months and then we pull back down to $75,000 or $100,000 from $200,000, some of that shorting activity will pick up in there.  But, it will still be small relatively to the overall book.

Then the last one is crypto-native businesses.  So, let's imagine you're a Bitcoin ATM operator and you're basically in the business of selling Bitcoin to people.  And, because of some of the nuance in terms of when you show a price on the screen and deliver the Bitcoin to the client, it can be really valuable to have some inventory available that you don't necessarily just have long exposure to on your balance sheet, so you can borrow some Bitcoin, make some income in Bitcoin by then selling the Bitcoin. 

Or, let's say you're an exchange running a fully-funded margin trading platform and the margin trading demand keeps increasing.  You can't finance all of that activity with your equity capital; you could raise more equity, or you could use debt the same way when you're running any business.  You think about equity and debt as options for financing; we're a provider of financing there.  So, across these things, the activities directionally, 80% market making and proprietary trading firms; 10% to 15%, maybe 10% to 20% crypto-native businesses; and then, 5% or less shorting.

Peter McCormack: And, would you just say that the majority of it is using Bitcoin as the unit of account all the way through?

Zac Prince: Well Bitcoin is by far the biggest part of BlockFi's asset make-up; so, out of a little north of $15 billion now of total assets on our platform, around 60% of it is Bitcoin and the rest -- 60% of it is Bitcoin; 20% to 25% is dollars in the form of stablecoins; and the remainder is the other cryptos on our platform, which are Ether, Litecoin and LINK.  And then, there's a tiny, little pinch of PAXG, which is gold.

Peter McCormack: Just a casual $15 billion!

Zac Prince: Casual when we're on a podcast like this, but you know, we don't treat it casually in any regard.  I mean, there have been some incredible developments in terms of BlockFi's systems and team since last time I was here.  I mean, we're over 500 people now.

Peter McCormack: What?!

Zac Prince: We're over 500 people.  We've got a very, very robust not only financial risk management operation, but also cybersecurity risk management, operational risk management, legal and compliance operation.

Peter McCormack: But that's insane, Zac, because I remember that first place I came to, it was like 15 people, 20 people?

Zac Prince: Yeah.  I mean, the first time we met, you were at our office in Tribeca.

Peter McCormack: Yeah.

Zac Prince: It was a 15-person office with 2 conference rooms; and "conference rooms" is a strong word.  More like closets with a couple of desks!

Peter McCormack: Yeah, and then I got the Uber-copter to your next one and that was, what, maybe 50, 60 people?

Zac Prince: Yeah.  And we were sharing that one.  It was maybe 60 for BlockFi and there was another company in there with 15 desks.  That's still the one we have, but we're in the process of starting to look now for a new office that we'll go to once we're allowed to go to the office again, when everybody's properly juiced up on the vaccines.

Peter McCormack: That's pretty insane; 500 people.  Okay, so I think that's a kind of clear understanding of that side of the business.  Ben, is there anything you want to ask about that side?

Ben Prentice: Yeah, so I definitely have a bunch of questions.  I think that the thing that you touched on, Peter, that I want to just get a little bit of clarification from Zac was, are the loans that you're giving out collateralised?  You mention that you're talking about the equity of these firms and how a larger entity with a larger reputation, it gets a little bit more leeway than maybe a smaller entity, like Peter's and my bucket shop example that you gave there; but, I was curious.  Are you actually physically collateralising; are you taking some fiat to give out Bitcoin; or are you just looking at their equity overall?

Zac Prince: The answer is, it's a spectrum.  So, we're doing both.  On one end of the spectrum, we're taking liquid collateral, which could be dollars or euros or crypto assets, and holding that to cover something that someone has borrowed in margin calling and liquidating it the same way we would do a retail loan, where folks are exclusively borrowing dollars secured by their crypto.

Then, there are scenarios where we take something that might be illiquid as collateral; so for example, shares of the Grayscale products, or other products, while they're still in the seasoning window.  And then, there are scenarios where it's really effectively corporate credit-type risk, where we're not receiving any exclusive collateral for a particular loan, but it is guaranteed by the company.  So, we're doing all of those things.

The majority of the book is collateralised with something, excluding the corporate loan part.  Probably 70% to 80% of it isn't that; this is basically a corporate loan where they're not sending us any assets whatsoever as collateral.  And the remainder is secured by fully liquid assets, like fiat currency and other crypto currencies, or assets like shares in a trust, that might be illiquid for a period of time, but will ultimately become liquid.

Ben Prentice: All right, that definitely makes a lot of sense.  So, I definitely want to dig in to a few things.  One, I wanted to actually say that you mentioned that video that we did a long time ago.  It was called, The Mystery of BlockFi, with my buddies Max and Zane and Thib.  It's funny, because when you guys first kind of came on the scene, I don't want to go on a huge monologue here, but we were just finishing Murray Rothbard's The Mystery of Central Banking, and here comes this Bitcoin bank kind of emerging onto the scene. 

So, I found it fascinating and we kind of dug in there, and we were ready to kind of tear you apart and say, "These guys are, you know, it's systemic risk" and all this stuff; and we learned a lot in that.  And, one of the most interesting things I learnt about what you're doing is avoiding maturity transformation, which is a really fancy word that basically means that in the traditional banking world, even if the loans the banks are making are good, that if everybody shows up at the bank at the same time and tries to withdraw their money, even if all the loans are solvent, the bank becomes insolvent and you get a bank holiday where they just say, "We don't have the money".

What BlockFi's doing is avoiding that situation by saying there's a withdrawal window on both sides, meaning if I'm depositing my Bitcoin in BlockFi and I need to take it out, you might give me up to seven days, at least when you first launched; and then the same is true on the side that you're lending, where the people you are lending to, the institutions, you can call that loan back essentially within a seven-day window.

I found that really interesting, because I think that's the biggest part of this evil world, Fractional-Reserve Banking, that bitcoiners just absolutely detest and are kind of scared of, when they really should be mad at the Fed; the lender of last resort, who distorts the risk.  I was wondering if you just wanted to briefly talk through how, is this preventing that systemic risk that we're kind of touching on here?

Zac Prince: Yeah, I mean look, I think there's a few things that are fundamentally different about the way BlockFi operates, versus the traditional banking sector, starting with the fact that there is no ability of anyone to just print a bunch more Bitcoin if things go haywire for some type of Bitcoin bank; that's not a thing, right.  So, there is no backstop in the same way that there is for the traditional system.

Then, in terms of how that is implemented practically on BlockFi, there are a couple of big differences.  I would say number one is the maturity transformation aspect.  So, in general, you can think of a bank as taking overnight deposits and making a lot of 30-year mortgage loans, for example.  So, you've got this tremendous amount of maturity transformation.  And at BlockFi, we're not doing that.  Technically in the interest account, we have up to seven days to process withdrawals when someone withdraws.  We've never actually used that; we process withdrawals in one business day; but, technically we do.  Then, when we're making those loans to institutions on the other side, we can close them out on shorter duration than that seven-day window. 

The other thing I would say just goes to reserve ratios, so I don't think they've changed it, but I don't think banks are required to have any reserves, at least the biggest ones, because of the liquidity risk in the system coming out of COVID.  So, they have a 0% reserve ratio.  Now, we don't necessarily have a regulator at BlockFi telling us, "Here's your required reserve ratio", but we're very aware of that and we're very aware of the unique properties of Bitcoin and what implications that has for our business.  So, we don't ever lend out more than 20% of the assets on our platform.  So, we've got 20% just sitting around at all times; and then, we're not doing maturity transformation.

Then the last thing I would call out is that structurally, our equity capital sits ahead of our client's capital in a loss scenario.  So, we're always looking to raise more equity capital and strength in our balance sheet, because that's another one of the protections that's kind of embedded in how we've designed the BlockFi system.

Peter McCormack: Is that almost like an insurance against any kind of partial failure of part of the business?

Zac Prince: Yeah, I mean look, it's just a capital buffer, right; so, one part of it would protect against a loss scenario, where the bigger equity capital base you have -- and we actually book loan loss reserves now.  We started doing this at the end of last year for accounting purposes, not even because we think we're going to encounter losses necessarily, we've actually never encountered a loss to date; but because we felt it was prudent.

The other thing that we do is we set up lines of credit, which could be either secured by BlockFi as a company, or secured by collateral, which would enable us to draw on liquidity, you know, to bring more liquidity into our system if we ever needed to.  So, we're always thinking about fortification of the balance sheet and risk management in the context of the type of risk management that we need to do, which is unique given that we're operating primarily with Bitcoin.

Ben Prentice: And I wonder on that point that we were talking about, about the maturity transformation, Peter mentioned a website that was relatively scathing, that came out and was talking about you all may be taking advantage of those GBTC premium swings.  What I was really interested in was the idea that, if you're taking advantage of these GBTC things, if there's any truth, essentially, to what the website was saying at all; because it sounded like to me, they were inferring a lot of their numbers and they claimed to have a bunch of information about what you're doing with your capital, which I found surprising.

But, what I'm really interested in is that, if you're locking money up in the GBTC premium trade, is that possibly taking apart that maturity transformation avoidance?  Does that make sense; I'm not saying it articulately?

Zac Prince: Yeah, absolutely.  No, I understand the question.  So, to say it another way, the question would be, if Bitcoin is going in to create new shares of the Grayscale Bitcoin Trust, is the maturity on that necessarily six months, or whatever the seasoning window before the shares become liquid is?

Actually, BlockFi's view is that while shares of GBTC don't trade freely on the open securities market until after that seasoning window, there's a very liquid market for them, even before they're freely tradable in the traditional securities market.  We know that because we're very active in that market and we know all the other folks who are active in that market as well.

So, to give you an example, if you'd been subscribed to create shares with the Grayscale Bitcoin Trust, you would have to wait six months before they show up in your brokerage account.  But, if something happens two months after you subscribe to create those shares and you just wanted to get out, there are a lot of people you could call who would buy them from you.  You might not get the same price that you would get if you waited six months, but there's a price; and it's a very liquid market.

Ultimately, this thing is a derivative of Bitcoin and Bitcoin is incredibly liquid.  And then, just on the point of that website, since you brought it up, there've been all kinds of forms of mudslinging at BlockFi throughout our existence and most of the time, you can tell whether someone is looking to have a thoughtful dialogue about risk management or, you know, providing feedback for constructive criticism; or, if it's just trying to slander you.  I think the website that you're referencing was definitely the latter, so it comes from a place of -- I saw rumours that it was a specific competitive firm, you know; who knows?

But, our position at BlockFi is, if we keep being successful, there are inevitable going to be people who are trying to take us down, or spread FUD, or whatever we want to call it.  We're going to stay focussed on what we think we do best, which is adding value for our clients, helping to promote the ecosystem and deliver more value to our clients by launching new products; and you really can't engage with it. 

People are always, "Why don't you issue a formal response?"  Well, if you issue a formal response to something like that, then literally the people lobbying these defamatory accusations, then they win because they're getting attention on all this stuff and maybe people find out who they are.  So, you can't go -- there's an expression someone told me, "If you get in the mud with a pig, you'll get dirty and they'll have a great time".

So, I think our approach is, we're not going to go and play in the mud with pigs.  We're happy to have thoughtful conversations about our risk management or what we're doing anytime, but we're not going to get into the mudslinging; we don't think it's good for the industry in general.  We want to be promoters of the industry and so, we're not going to stoop to that level.

Peter McCormack: Yeah, I know that; I just drew it up.  It's that, "Never wrestle with a pig; you both get dirty and pigs like getting dirty"!

Zac Prince: Yeah, there is it!  So, "Never wrestle with a pig; you'll get dirty and the pig will have fun"!

Ben Prentice: Zac, I wanted to ask you about gaps, right.  I know one of the things that identified earlier on is there's this idea of gap risk and I know you guys do all sorts of interesting things to try to avoid that and have things that are watching the market all the time.  There was that market bloodbath in March last year obviously.  It sounds like you guys did really well. 

I'm curious, one, it was a really scary time; and two, because that was a big gap down and we have seen gaps up in price recently.  Possibly, this is just the beginning of a huge bull run.  We could see million-dollar prices maybe, some of the higher calls have said.  If that happened extremely quickly, I wonder is that a harder situation to deal with than a gap down?  Does it just depend on which section of the business you're looking at?

I think these big moves are one of the things that I've identified as the largest risk, and I could be wrong there, especially because you've eliminated that shorting is not as large a part of the business, I think, as a lot of people think it is.  So, I'm just curious how you think.

Peter McCormack: Just to add to Ben's thing there as well, Zac; so, I was chatting to somebody and they said, most of the people who have concerns over BlockFi just don't understand the business.  But, if we started to see big moves up, if you started to see like 30,000 moves up in a day, that would be something that he would have concerns over.  Obviously you're going to have risk-planned this, so…?

Zac Prince: Look, in general, let's take in periods of time.  Let's take 2018 and let's take the last 12 months.  So 2018, generally speaking, volatile but in a downwards spiral, ultimately ending in a capitulation puke from $6,000 down to $3,000; and it wasn't 50% in a single day, but it was close, back in October 2018, I think it was.

Then the last 12 months where, let's exclude 11 March; we're past that now.  So, starting on 12 or 13 March through to today, where we're up 11X, BlockFi is thrilled and our business does phenomenally well in periods like the last 12 months.  We do well, and it's not like we're at risk of losing money in the periods like 2018, but it's not nearly as fun.  At the end of the day, we're a crypto financial services company and we want the size of the Bitcoin market to grow.

In terms of gaps, is it a risk?  Yes, absolutely.  Do I think it's realistic at this point with Bitcoin to expect a 50% gap up or down with no liquidity in between?  I don't; and the reason I don't think that's realistic is because, if you analysed the structure of the market, in terms of where the liquidity is, in terms of the derivatives that you have in addition to the spot market now; and if you just track volatility over time relative to liquidity and also, if you think about the constituents in the marketplace where, increasingly now, we've had institutions come in, the reality is they'll take profits more frequently than maybe a highly convicted retail Bitcoin owner, who sees this purely as a long-term bet and isn't necessarily thinking of it in the context of needing to deliver a realised return every year to their LPs.

So fundamentally, we're Bitcoin bulls.  What we're trying to help support, alongside yourselves and everyone else in this industry, is growth of the Bitcoin market cap.  We would much rather see that happen than see things the other direction.  We monitor gap risks.  There are a lot of things that we have in place in terms of access to liquidity, the ability to hedge these things, the construct of the portfolio that mitigate the risk. 

If Bitcoin gapped up 50% tomorrow with no liquidity in between, BlockFi would be fine; we would be better than fine; we would be popping Champagne alongside everyone else that owns.  It would be phenomenal for our business.  But it is something that we very actively track and monitor and one of the most important things is that you've got access to a bunch of different avenues where liquidity is available and you have sophisticated risk managers who, when markets get volatile, they can hedge things.

Going back to 11 March, which was our last kind of -- I don't even know that too much of that was a gap.  I mean, you had gaps on 11 March, but it would be a 5% or 10% gap; it wasn't like a 50% gap down.  We were the only institutional lender that was open for business; and retail lender, we were also open for new retail loans.  But, we were the only institutional lender that was open for business on 12 March. 

I think we were unique in terms of how we handled things on the retail side of our loan book, in that we did work with clients for a period of time after 11 March in exactly the scenario that I described earlier, where you have someone who's saying maybe, "I sent you more collateral.  You can see that I sent you more collateral because it was pending on the blockchain, but I wasn't using a wallet [or] I'm not a sophisticated enough Bitcoin user to have input a high enough transaction fee to have had that transaction processed fast enough relative to the price moving", because that was a big part of what happened on 11 March.

It was hard to move money around, because the fees increased dramatically, because everyone was trying to move money around and get it to different points to capture arbitrage opportunities, or buy more or sell some, or whatever; and we worked with our clients on that stuff.

Ben Prentice: Right, because people had to recapitalise those loans.  Listen, I have two main questions left, if you still have time, Zac.  The first one is about this commingling idea; the idea that the Bitcoin-backed loans make a lot of sense to me.  I take my Bitcoin, I give it to you; I get fiat out of it.  You just hold the Bitcoin.  The way you're making money is I'm paying you more fiat back, right, and obviously that same LTV stuff applies, but it makes a lot of sense to me.

The lending side of it, I'm very risk-averse obviously.  I've learned a lot about your company.  I think it is really cool what you guys are doing, but I personally would kind of -- I'm less likely to use that product, because it seems like there's a little bit more risk in it, because of the lending and all that stuff.  I'm wondering, there's a potential for commingling between these two products; and I'm wondering what can an investor think about when they're thinking about that risk?

Zac Prince: This is really easy one to answer.  Today, they're absolutely commingled.  We are likely, later this year, going to introduce an account where you don't earn a yield on Bitcoin, but it is just held safely on the BlockFi platform, where you can trade it and get a loan.  Once that comes out, it won't be commingled in the way that you're thinking, Ben, but today it absolutely is.  So, folks have to keep that in mind and be comfortable with it when considering our loan product on the BlockFi platform versus maybe some of the other products in the marketplace.

My guess is that you're going to pay for it with some of the other -- if you want a non-commingled option, the rate that you're paying to borrow the dollars is probably a little bit higher.  I could be wrong, I haven't looked; but, if the market was relatively efficient, that would be the case.  But, they're definitely commingled today at BlockFi.

Ben Prentice: Okay, appreciate that.  My last main question, listen, we've got to ask, Zac.  This isn't the What Shitcoin Did podcast, right, but you guys are adding all these other altcoins and stuff.  I'm guessing, based on what you've talked about so far, is it's based on market demand.

Peter McCormack: Ben, Ben, do you know how far back me and Zac go?!  You can't throw this one in without telling me to -- I had no idea; I didn't know this was coming!  Fair enough, go on; do it, Ben.

Ben Prentice: Is it additional risk adding altcoins and DeFi and PAX and LINK, man; LINK is the big one that surprised me.  Zac, what's the deal, brother?

Zac Prince: Well, it's capitalism, man.  I mean ultimately, it's capitalism and client demand.  I mean, look, I've said publicly multiple times that I'm, depending on the day, 90% to 95% Bitcoin, but I hold a little bit of Eth, and that's about it; that is it for me personally in crypto.  But, these things are small.  Between Bitcoin and dollars, it's 80% to 85% of our platform; but, clients do use them and they trade them and we definitely don't have the plethora of shitcoins, to use your terminology, that other places do. 

Part of the reason for that is specifically our risk tolerance and in particular, liquidity is incredibly important.  You don't have to go too far down the market cap list to find things that are incredibly illiquid relative to their market cap and that's an area where we don't intend to go.

Peter McCormack: And in fairness to Zac, from day one, in the sponsorship and the ads, we're never going to talk about altcoins, shitcoins, whatever and Zac's been cool with that and we've only ever promoted Bitcoin, which was part of what we originally agreed.  I've got a few other questions, Zac.

Zac Prince: Yeah, go ahead, Pete.

Peter McCormack: Just considering the wider market, there are some competitors out there and it seems to be growing, other companies moving into this.  Firstly, is there almost unlimited demand right now to borrow Bitcoin?  Does there ever come a time when it tops out and you have to say, "Look, we can't take any more on, because we've hit the demand cap"?

Zac Prince: There's definitely not unlimited demand to borrow Bitcoin, but there are two important variables there.  So, one is that the demand to borrow Bitcoin, that BlockFi wants to capture, comes with an asterisk of, at what level of risk?  And, we don't have a very high risk tolerance.  Yes, if you're looking at not lending Bitcoin at all, that's a lot less risky than lending it; but, once you go into lending it, our risk tolerance is very low. 

So, there are a lot of Bitcoin lending opportunities that we wouldn't touch with a ten-foot stick, because they're simply too risky.  We like stuff where it's really hard for us to make a case that we could ever lose a penny; that's the type of lending that we like to do at BlockFi.  So, that's one side.

The other side is, you can adjust rates.  So, depending on how much Bitcoin lending you're able to do relative to how much Bitcoin you have, you can reduce rates that you're paying to depositors, if you aren't keeping up on the borrowing demand side of things with the supply that you have of Bitcoin to lend.  Or, you could increase rates, which actually the last time we changed rates on Bitcoin, we increased them and it was in April of last year.  You can increase rates if you want more Bitcoin to lend. 

So, I think the growth that you're seeing is a reflection of market demand and the success of companies like BlockFi and so, a lot of people are saying, "We have to get into this too".  But, it will be interesting to see what happens to Bitcoin lending markets, you know.  I think, if I had to guess today, I would say dollar rates go up, Bitcoin rates go down, in terms of what you're paid as a lender over the next three to nine months; that would be my informed view.  But, we might see something different.

Peter McCormack: Okay.  Another thing, a question, because I'm obviously based out of the UK, a 15% UK audience, I've got quite a few people asking, when can they borrow against their Bitcoin?  There was a point you could borrow, I think it was large amounts you were doing; and now, you're not doing any UK loans.  I know the UK is a particular pain point for Bitcoin companies.  Do you know what's going on there?

Zac Prince: Yeah, I absolutely know what's going on.  So, we used to make loans to folks in the UK that were above a certain size.  I think it was £55,000, but now it's kind of a level in which the government said, "Okay, these are basically rich people, so it's fine".  Now, BlockFi's in the process of getting set up as a regulated licenced company in the UK, in addition to licences that we already hold in the US.  So, our legal team made a decision that while we're in the process of getting that official licence set up, probably not make any more loans than we've already made; but, we're coming.

I want to be up and running in the UK like we are in the US, which goes all the way to folks being able to easily send us money to and from their bank account.

Peter McCormack: Okay, awesome.  And another thing that's on my mind at the moment, having had my bank accounts closed down by Lloyds Bank recently, it feels to me like a company like BlockFi is half of the way there to what somebody like I need.  Okay, I can hold Bitcoin in an account and get interest; I can hold dollars and get interest; ideally, I could hold pounds and get interest; you're going to have a credit card coming soon, which I can use. 

If you had something like direct debits, like TransferWise has, that almost closes the loop of all the things I would need from a bank account.  Is that a direction you're heading in; is that a possibility?  I always talk about you as the future of banking, but do you see that as a possibility, that companies like BlockFi end up providing the services that banks aren't willing to provide?

Zac Prince: Yeah, I mean look, you basically just laid out a big part of our roadmap!  So, that's exactly where we see it going.  I mean look, I think that two years from now, someone in the UK and a lot of other countries in the world should be able to do all of the following things on BlockFi: earn a yield on Bitcoin and traditional currencies, or just safely hold it and not earn a yield; send money to and from that account using every traditional payment rail that they're familiar with, direct deposit or SEPA or whatever payment mechanism, and take it off using those same payment mechanisms; and all the crypto currency payment rails, which are already kind of integrated.

They should be able to spend, using a credit or a debit card, ideally one that gives them crypto rewards, Bitcoin rewards, for that spending instead of traditional points.  And I would add one thing to the roadmap, which is you should also be able to make peer-to-peer payments in any currency that you choose.  So, if you're splitting a dinner bill with Ben, you could just instantly, using each of your BlockFi accounts, send him pounds, Bitcoin, euros, dollars, whatever and it would be done.

That's what I was kind of alluding to earlier.  I think these things are going to converge and they're going to converge in two ways: one way is you're going to see folks like PayPal and Square and others coming into the crypto ecosystem; the other thing that you're going to see is companies like Coinbase and Binance and BlockFi and others going after parts of the traditional Fintech company business.  And then ultimately, you're going to have banks, maybe, one day getting involved somehow.

But, banks get their butts kicked by payment companies and Fintech companies anyway.  Visa is larger than any bank, in terms of their market capitalisation.  And interestingly, Visa is heavily leaning into what's happening in crypto.  So, we'll see what happens with banks, but I think all these worlds are going to converge and I think the crypto side's going to win.  So, I think you're probably going to have that account where you can do all of those things you said, Peter; and I think it's more likely that that account is somewhere like BlockFi, certainly than a traditional bank.  But also, I think it's more likely that it's with a company like BlockFi than with a traditional company like TransferWise.

Peter McCormack: Yeah, it certainly feels like banks are having their Blockbuster moment.  When I got my letter from Lloyds saying they were closing my account in 65 days, I phoned them up and said, "Look, I just need to know why.  I've been with you for 25 years", and they said, "You have to come in for an appointment".  So, I had to go to a branch and I walked in and I just thought, "God, this is the first time I've been in one --", I couldn't remember; maybe three years, because I have no need.

Then I waited half an hour for an appointment; and in that appointment I was told, "Well we can't tell you why, because the department who closes accounts down never gives a reason.  But you have essentially 50 days left".  And I was like, "Oh, okay".  Well, I can see where your business model's going and the asset of having something on the High Street in every town is now a liability and your customers will migrate away.

But the one thing, the one advantage they have; like out in the US, you have the FDIC insurance; our accounts here in the UK, I think they're assured up to £75,000 by the government.  Are insurance services coming to companies that custody Bitcoin?  I know Gemini had some form of insurance.  I'm pretty sure you told me you looked at it before, but it was way too expensive before.  Is this stuff coming?

Zac Prince: Yeah, it's definitely coming.  I think it's coming for the custody side of things.  It's already here in some capacity for the custody side of things.  There'll probably be eventually, maybe, some kind of insurance for the earning interest side of things; but definitely for the custody of things.

One thing I like is that, look, FDIC insurance and the insurance you have, Peter, is cool; but, bitcoiners are going to be so rich, it's an insignificant amount of money for them, man.  Like, what did you say it was; £75,000 in the UK?  You're going to make so much money off your Bitcoin that you're not going to give a flip about £75,000 worth of insurance; you're going to want to use whatever's best for your life as long as -- I mean, how frequently has the UK had to use this insurance scheme recently?

Peter McCormack: 2008 was when -- I think it was born out of 2008, the risk in 2008.  But, yeah, I think it's just one of the things some people think about when, so for example, say you were paying 6% interest, but you could pay 4% interest and be insured; it might be one of those things that people will take that trade-off.

Zac Prince: Yeah, absolutely.  And right now, we're always looking at that.  Right now, the price of insurance for a custody account, there are a couple of companies doing this, is north of 2%.  I saw a pricing sheet recently and it was 3% a year to insure your crypto against cyber theft, if it was just sitting in a normal custody account at Gemini; so forgetting even earning yield.

So, the underwriting cost when you say, "I want you to not only underwrite the custody but also the lending activities", now the cost is going to go up.  And ultimately, every time we've looked into it with anyone legitimate that could actually support billions of dollars in insurance coverage, they either say, "We can't do it", or, "Oh, golly, it's going to cost you 25% a year" and then it's like, well, that ruins the economics for it!

Peter McCormack: Yeah.  Well listen, Zac, appreciate you doing all this.  I was going to cover one last section with regards to how I think the market is changing, like people don't need to sell their Bitcoin because of companies like you, but let's do that next time; let's talk about the future of banking next time; hopefully in person, hopefully in New York, hopefully we'll grab a steak somewhere and have a proper catch-up.

Ben, appreciate you coming on and helping with this one.  Appreciate all the work you've done supporting the show, Zac.  I'm glad to see the company flying.  Say hello to Flori for me and yeah, just hope I see you soon.

Zac Prince: Great to see you.  I'm still a huge fan of What Bitcoin Did.  We're so pumped to have the opportunity to continue to be sponsors and I miss you, Peter, and Ben, congrats on joining the team, man.  We'll talk again soon, guys.

Ben Prentice: Thanks.

Peter McCormack: All right, bro, take care.