{ "episodeId": "SLP30", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "bitcoin": { "name": "Bitcoin", "role": "guest", "tag": "BITCOIN" }, "guest_2": { "name": "Guest 2", "role": "guest", "tag": "GUEST" } }, "segments": [ { "speaker": "stephan", "time": "00:04", "start": 4.38, "text": "Welcome to the Stephan Livera podcast." }, { "speaker": "stephan", "time": "00:11", "start": 11.15, "text": "Welcome, podcast listeners. This is episode thirty, and my guest today is Zach Prince of BlockFi. Welcome, Zach. Thanks for having me. I've been following, some of the news around your company, and I thought it was really interesting this whole concept of Bitcoin-backed loans, where you can actually get US$ dollars. So maybe you wanna just give-- we can start with a bit of an introduction on yourself and a little bit about BlockFi." }, { "speaker": "bitcoin", "time": "00:36", "start": 36.26, "text": "Yeah, happy to. So, I've been in the venture-backed technology space my entire career. I was originally in ad tech, but most recently, prior to starting BlockFi, I was in the online lending sector. So coming out of two thousand eight, two thousand nine, the financial crisis, lots of new companies emerged that were offering different types of credit and debt products in parts of the economy where banks had stopped. Lending. so prior to starting BlockFi, I was working in that sector at two different companies, one that was heavily regulated, and we built a broker dealer and an RIA and an ATS while I was there, and another that was, was a consumer lender that, we did some interesting things with credit data to, enable us to lend to, people who weren't from the US and thus didn't have a FICO score or just had a really thin file, or a low FICO score. And along the way, I started investing in and About, Bitcoin and crypto, and at the beginning of twenty seventeen, I had started going to meetups, and I noticed the composition of the meetups changed and just a, a really, large amount of momentum and excitement around the space that, that hit me, and I decided that I just had to try and find a way to get involved, and after having a funny experience with a bank here in the US where they basically accused me of potentially being involved in some illicit activities because I'd listed- Listed Bitcoin on my financial statement that I submitted to them, I decided that, I was gonna build a company around this idea of bringing more debt and credit products to the crypto ecosystem." }, { "speaker": "stephan", "time": "02:12", "start": 131.68, "text": "Yeah, fantastic. Yeah, I think that's a big theme around Bitcoin in general that some people have spoken to over the years is this concept of banking the unbanked, but also just making it more accessible and digitizing things. One other way to think about it is also- FinTech versus FinUI, because there are many innovations that happen in finance that are really more kind of superficial, whereas I think this is a very base level innovation. so maybe we- let's talk a little bit about making finance more global and accessible. Do you have any thoughts on how Bitcoin could help, can help enable that kind of thing?" }, { "speaker": "bitcoin", "time": "02:53", "start": 172.74, "text": "Yeah, absolutely. I mean, I think it, I think it does that in a lot of ways by design. I mean, the fact that anyone around the world with, an internet connection and maybe some, custom hardware or, you know, soft-- built for the purpose software can mine this, this form of value digitally and then custody it themselves and, you know, not have to get approved to do any of that by anybody is revolutionary. and there's all sorts of, kind of implications Transactions that flow as a result of that kind of core functionality, around payments, around storing wealth, around not having exposure to fiat currency generally, and in BlockFi's use case, we actually kind of touch back into the fiat currency world, and what we're working on is making Bitcoin an asset that can be easily lented against and lented against at a very low cost. what's- What's interesting about that and what I didn't even know until after starting the company, just in terms of statistics, is that there's this massive market for borrowing dollars in places where the dollar isn't the, the local currency. it's actually over eleven trillion dollars now, and growing rapidly. So this is, international governments or companies that, that borrow dollars, and the reason they do that, is because either they don't have access to Large amounts of debt capital in their own market or they wanna borrow at a low rate. and that market has never been available to, individuals or, or smaller companies or, or just average people. and so what we've done is made that market available, being able to borrow USD at a low cost, and we've done it using Bitcoin as the core asset that enables that to happen. So we got really excited around the fact that there's now an asset that anyone in the- world, as we talked about the innovation with Bitcoin, that anyone in the world can create through mining or, or purchase and hold and own themselves, that we can now lend against at a low cost and provide access to USD, maybe even in places where, you weren't able to access USD in any form previously." }, { "speaker": "stephan", "time": "05:12", "start": 311.75, "text": "Exactly. And so, can you talk to us a little bit about the current structure of BlockFi then, in terms of where you're able to lend at the moment and then where you're planning to go in the future?" }, { "speaker": "bitcoin", "time": "05:24", "start": 323.84, "text": "Yeah, sure. So, to date, we've lent primarily in the United States. we went through a pretty heavy kind of regulatory setup process here with state lending licenses and, FinCEN registration and Uniform Commercial Code compliance, but we're active now in forty-six states in the US, and we also will be announcing, next week, that we're starting to open up to international markets. initially, we'll be available to corporations, in, in international markets outside the US, and then select countries to individuals in, in markets outside the US as well." }, { "speaker": "stephan", "time": "06:04", "start": 364.36, "text": "Oh, that's fantastic. That's a whole new, that's a whole new ballgame. Yeah. So, absolutely." }, { "speaker": "stephan", "time": "06:13", "start": 373.17, "text": "So, in order to make all this happen, it, I guess it's, it's all about, you know, as a financial service provider, it's a, as, you know, as a bank, you, the tr- the traditional ways to kind of borrow short and lend long. and I know that you recently did have a fifty-two million dollar fund- Funding raise from Galaxy Digital Ventures. So do you wanna talk a little bit about that process?" }, { "speaker": "bitcoin", "time": "06:40", "start": 400.35, "text": "yeah, sure. So, you know, in general, a lending business is very capital intensive, and what that means is that we have to raise a lot of money to deliver, to deliver our product. and so we were, you know, with the investment from Galaxy Digital, we were the first company to raise institutional capital that is specifically going towards making- loans against Bitcoin. so we were really excited to partner with them. There's some, things that we're, you know, able to do with Galaxy that add strategic value to the, to the company and our clients outside of just, the capital. but it's structured in a, in a very similar way to how, credit facilities are structured in, in more traditional asset classes. So, basically we created a specialty purpose vehicle with them that's partially owned by them and partially owned by us. BlockFi originates loans, we then sell them into this specialty purpose vehicle, and there's a, you know, split of the economics associated with that agreement." }, { "speaker": "stephan", "time": "07:44", "start": 463.78, "text": "Fantastic. And then," }, { "speaker": "stephan", "time": "07:48", "start": 467.65, "text": "What is the approach then from a, you know, if, if, if one company were to go bankrupt, what, what does that, how does that impact?" }, { "speaker": "bitcoin", "time": "07:59", "start": 479.42, "text": "If either BlockFi or Galaxy were to go bankrupt?" }, { "speaker": "stephan", "time": "08:03", "start": 483.49, "text": "Yeah. So, yeah, you were just mentioning around, I think you were mentioning around how there's, you know, that entity, that's kind of in the middle" }, { "speaker": "bitcoin", "time": "08:12", "start": 491.97, "text": "Yeah, yeah, the, a great question. So, and, and it's an important thing for anyone who's considering, borrowing against their, crypto assets to think about who they're borrowing from. And so when I said that, we've created a specialty purpose vehicle, the reason that you do that in these types of structures is to make it bankruptcy remote. And what bankruptcy remote means is basically that if one of the parties to that vehicle, BlockFi or Galaxy- For example, were to, cease to be in business, there are third parties and procedures in place to protect investor capital and also protect, borrowers, and make sure that all of the terms of each agreement are stuck to, and in this scenario, make sure that all of the crypto that's been posted as collateral, is delivered back to our, to our clients, and that's, that's something that really, that's really important and that we, kind of differentiate on it." }, { "speaker": "stephan", "time": "09:15", "start": 555.24, "text": "Right, yeah. Because obviously as a borrower, you might be concerned that you won't get your crypto back, and I suppose this is one way to help provide a little bit more comfort or a little level, a little stronger level of assurance that, yeah, it's safe and you're gonna get it back okay, so let's talk through the, the product then. So can you walk us through just the basics on, you know, how, how does a crypto loan work?" }, { "speaker": "bitcoin", "time": "09:44", "start": 584.32, "text": "Sure. So, basically the way it works at Blockfi is, people come to our site, and it could be individuals or companies, we have a very short application where we collect the same type of information, related to KYC that, you know, creating an account at an exchange that touches fiat would have. we then approve someone so long as they're not on any of the, you know, like sanctions types list that we check, they receive their, their loan offer, which I'm- outlines the length of the loan, the interest rate that we'll charge, the loan to value ratio that we're lending at, and then they, you know, accept or sign that loan document, transfer collateral to the secure storage facility, and then we either wire funds to them or we transfer funds to them via a dollar backed, token if, if they'd like to receive the funds that way. a couple terms that are important, so loan to value ratio, interest rate And payment schedule. so we lend at a, up to fifty percent LTV, but the bulk of our loans to date have been made at a thirty-five percent LTV. So to make that math easy to understand, if you have ten thousand dollars worth of Bitcoin and you borrow at a fifty percent LTV, you would be borrowing five thousand USD. If you borrow at a thirty-five percent LTV, you would, you would be borrowing three thousand five hundred USD. we then charge interest on the amount that It has been borrowed, and the structure of the loan is that we charge interest-only payments throughout the duration of the loan with a full repayment of principal at the end of the loan term. So you pay a percentage of interest, on the amount that you borrowed every month, and then at the end, you pay back the loan and you get the amount of collateral that you posted back. You can also use value that's in the collateral to make the interest payments or the principal payment at the end of the term, but most of our clients are individuals that don't want to sell their Bitcoin, and as a result, they're making the payments back in, in fiat in addition to having borrowed" }, { "speaker": "guest_2", "time": "11:53", "start": 713.32, "text": "the fiat. Yep. So The question then is," }, { "speaker": "stephan", "time": "11:56", "start": 716.34, "text": "what's the typical customer profile? Is it somebody who is Bitcoin or Ethereum asset rich and cash flow poor, or what's like, what's the profile there?" }, { "speaker": "bitcoin", "time": "12:05", "start": 725.18, "text": "Yeah, sure. So we've, you know, we have clients that are individuals and also clients that are companies. So on the individual side, the profile is a bit different depending on the loan size. So for loan sizes that range from, you know, two thousand up to maybe twenty-five thousand, they're generally younger, they're generally I wouldn't say crypto rich, but they have more crypto assets than maybe traditional assets. And frequently the use case that we see there is that they're paying down some other type of higher cost debt. So they actually have a balance on a credit card or, a student loan that's at an interest rate that's higher than what we would charge for the crypto backed loan. and then if you get into larger loan amounts, it's generally a wealth management product, so people are using the proceeds from the loan to make other investments. Investments. Frequently, real estate, is the investment use case, so someone will, you know, take this value that they have in their Bitcoin, collateralize it, receive a loan, buy an investment property, and then take advantage of all the, you know, cash flow benefits from owning investment property and also tax benefits of funding that purchase with debt. and on the corporate side, the loans are frequently used to cover, any type of, You know, expense that is denominated in fiat, so payroll expenses, paying third-party vendors, in some scenarios, generating, extra capital to purchase more mining equipment. so the profile, you know, there's a pretty big range of, you know, profiles from individuals all the way up to corporate borrowers." }, { "speaker": "stephan", "time": "13:46", "start": 826.27, "text": "Yeah, that's an interesting insight there, just around the different, kind of types of customers. And then as part of the- The loan application, typically lenders do some sort of serviceability assessment. They might, you know, in the traditional world, they might ask for a payslip or some evidence of your income. What sort of serviceability do you do at BlockFi?" }, { "speaker": "bitcoin", "time": "14:10", "start": 850.39, "text": "So we're checking that, in some scenarios we'll ask for documentation related to, how the crypto was acquired, but we, we aren't doing, you know, too many checks on the- The ability to repay, because the ability to repay is really proven by the fact that our clients are posting collateral that's at a minimum two X above the value of the loan that we're giving to them. So we're also not checking, FICO scores, we're not doing a soft or hard credit pull, which is really important, here in the US, so it has no effect on individuals' credit scores or their ability to, you know, take out a mortgage and how a bank will view them as a credit risk. So it's pretty light from a, from a credit check perspective." }, { "speaker": "stephan", "time": "14:58", "start": 898.32, "text": "Oh, okay, that's interesting because it's actually a bit lighter than what I would have anticipated, just comparing back to, you know, traditional banks and lenders. So are there any restrictions on the loan purpose f-uh, from the customer point of view? Can they only use it for certain things, or are they just-- It's just you have the USD and you can use it for whatever you want?" }, { "speaker": "bitcoin", "time": "15:21", "start": 921.05, "text": "So we ask what the, proceeds of the loan will be used for, partially 'cause we, you know, need to ask that as part of our KYC and AML policies, but there aren't really any restrictions on what you can use the proceeds for, other than if you respond to that question and say that you're going to do something illegal, we wouldn't approve, the loan application. And believe it or not, we have had, maybe one or two people say that they're gonna use the money to, buy drugs or something if we had to decline their" }, { "speaker": "guest_2", "time": "15:49", "start": 949.41, "text": "application." }, { "speaker": "stephan", "time": "15:52", "start": 951.95, "text": "Wow, okay. Yeah. Alright. and then in terms of the loan rates, so what are the, what's the kind of interest rate range that we're working with here?" }, { "speaker": "bitcoin", "time": "16:01", "start": 961.03, "text": "So the range that we're working with currently is between eight and twelve percent annually, and the variables that determine, you know, what that rate is for any specific borrower are a few things. Two things, one, the loan size. So as the loan sizes get large, the loan sizes get larger, the interest rate comes down. two, where they're based geographically, and three, what collateral, they're using, and Bitcoin is, is the cheapest to borrow against currently." }, { "speaker": "stephan", "time": "16:27", "start": 986.7, "text": "I see. Yeah. And then Is there any-- Do you have any thoughts on how that might change over time? Like, do you see this being a market where maybe it's a little younger and more nascent now, but over, let's say, a few years down the line, there might be more competition amongst, you know, crypto lenders? So do you see any impacts there in terms of what interest rates will be offered?" }, { "speaker": "bitcoin", "time": "16:50", "start": 1009.73, "text": "I think it's gonna come down quickly, and I could even, you know, foresee a point in time in the future where it's cheaper to borrow against- Bitcoin than most other major assets, and Bitcoin, borrowing against Bitcoin could even become cheaper than LIBOR, in a scenario where the funders in that market are so excited about even the small chance of a default happening and them getting to, capture Bitcoin that was posted as collateral, that they're willing to fund it at a rate that's, below LIBOR. Maybe there's some type of post-LIBOR world at some point. but we started, initially when we started lending in January with The, a fourteen percent interest rate, and that's come down, you know, to as low as eight percent, as I mentioned earlier, in a period of less than a year. So rates are dropping pretty dramatically. It's really just a function of more capital coming into the sector, companies like BlockFi being around longer and having more of a track record that funders can look at, when they're thinking about, you know, making these type of fixed income investments, so I think the rate is gonna continue to, to go down." }, { "speaker": "stephan", "time": "18:00", "start": 1079.9, "text": "That's fantastic. Could you expand a little bit on this concept of cheaper than LIBOR or just interest rates coming down? Can you maybe walk through the listeners who maybe aren't as familiar with capital markets and funding, just how that process might work to lower the interest" }, { "speaker": "guest_2", "time": "18:17", "start": 1096.95, "text": "rate? Sure. So, right" }, { "speaker": "bitcoin", "time": "18:19", "start": 1099.11, "text": "now it's" }, { "speaker": "guest_2", "time": "18:20", "start": 1099.75, "text": "really" }, { "speaker": "bitcoin", "time": "18:21", "start": 1100.73, "text": "just a function of how much it costs BlockFi to borrow money, which we then use to fund the loans. and the way that we borrow money, is and will probably continue to be for the foreseeable future from institutional debt markets. there are a number of different participants in the institutional debt markets ranging from family offices to credit funds to banks, to governments. and so as we kind of, work through that cycle and diversify the different sources that we're able- able to raise capital from, the cost of capital for BlockFi will come down and in turn that will flow through to, our borrowers. in terms of like global debt markets, LIBOR is the-- I might, I might not even know the exact, the exact acronym, the London Interbank Offered Rate maybe, but it's basically, how much it costs banks to borrow money, and they're borrowing that money from central banks. and the reason that I- I think that it could be cheaper to borrow against Bitcoin at some point in the future than it is for banks to borrow from central banks, is because you've seen some funny quirks in, in markets that look like Bitcoin, specifically the gold market, and in the gold market, there have been periods of time where it's cheaper to borrow money against gold than, than LIBOR. and the reason for that was that the funders of these loans secured by gold were basically gold investors that were very interested in acquiring more gold. and I think you could see the same thing happen in the, in the Bitcoin borrowing market over time, where the funders are, are very motivated by the opportunity to potentially acquire some Bitcoin if there's a default. and as a result, they're willing to lend, fiat at a rate that's below the risk-free rate of the turn, below the risk-free rate of return in the market at the time." }, { "speaker": "stephan", "time": "20:30", "start": 1229.54, "text": "Yeah, that's a fantastic insight, Zach. I think, many people in the Bitcoin community wouldn't have heard that or know of that idea." }, { "speaker": "bitcoin", "time": "20:36", "start": 1236.2, "text": "And by the way, that's what we get really excited about here, is bringing the cost to borrow against Bitcoin down. and in developed markets like the United States and Australia, if you have good credit scores, you can probably already- access, debt at a, at a pretty low rate, but in emerging markets that, in a lot of cases, you know, has never been possible before to borrow money at sub ten percent interest rates, and Bitcoin making that possible, we think, is an incredible, utility value, for, for the asset to have." }, { "speaker": "stephan", "time": "21:09", "start": 1269.02, "text": "Let's talk about a little bit the challenges of lending in an emerging market and how Bitcoin changes the game there." }, { "speaker": "bitcoin", "time": "21:18", "start": 1277.5, "text": "Yeah, so some of the challenges are, Regulatory, you know, in some places it's pretty clear as a, you know, non bank that wants to lend money to consumers, what licenses you need to receive and how you need to structure yourself to comply with the local rules. in other markets, it's not as clear. another thing that's challenging is, sure, maybe we can lend at a low rate, but if we're lending in dollars, how are our borrowers going to be able to- To use those dollars. So we're thinking through how we can create ways that, people can, for example, receive this loan in dollars, hold that value of the loan, in dollars, but at times dip into it and convert it at the moment of a purchase into, you know, pesos, for example. and then there's an awareness challenge, a language challenge. So right now we are able to, you know, support Spanish and Cantonese, At, at Blockfi, there's a lot of other languages in the world, and so, you know, we have to work on keeping our marketing materials up to date and, you know, translatable into other languages, and then having a support team that can, communicate with individuals from, from different countries where English isn't the primary language." }, { "speaker": "stephan", "time": "22:42", "start": 1361.88, "text": "Yeah, that's a fantastic insight as well. So just coming back to the funding question, what is the typical instrument that is used for this funding? Is it that BlockFi issues a corporate bond and the, debt market, the institutional debt markets purchase that, or is there another structure there?" }, { "speaker": "bitcoin", "time": "23:00", "start": 1379.89, "text": "No, it's ba-it's basically private, you know, kind of private market transactions right now. so, you know, we're not tapping into like, the secure- Securitization market or the corporate bond market, where we're, you know, working with an investment bank to interest, to issue something that will get exposed to lots of different investors and potentially be liquid and tradable, after the issuance. we're conducting kind of one-off transactions, with, with institutional investors and, you know, structuring private credit agreements." }, { "speaker": "stephan", "time": "23:42", "start": 1421.85, "text": "I see, very interesting. Okay. And then, let's talk about the collateral and the loan-to-value ratios, and how, you know, let's talk about that process of, say, a margin call. So Let's say I've, you know, I've borrowed, you know, using Bitcoin or Ethereum as my collateral, and then the price of Bitcoin or Ethereum starts to fall. Can you outline the process there?" }, { "speaker": "bitcoin", "time": "24:09", "start": 1448.97, "text": "Sure. So, let's, let's use some numbers to, to make it easy to understand. So let's say someone has ten thousand dollars worth of Bitcoin, and they borrowed a loan, they borrowed from us at that thirty-five percent LTV that we mentioned earlier. if that ten thousand dollars in Bitcoin declines in value by fifty percent, and it's now worth five thousand, dollars, we would issue a margin call. And the way the margin call works is our clients have seventy-two hours to either- Post more Bitcoin as collateral, pay down some of the loan, using USD, or take no action. And if they take no action, and at the end of the seventy-two hours, the price of Bitcoin hasn't rebounded, we will initiate a partial collateral sale. And what happens when we initiate a partial collateral sale is we take some of the Bitcoin, not all of it, but some of it, and we sell it to pay down the, loan amount and rebalance the loan-to-value ratio, back to a healthy level. And one of the things that we've built out on our side that's part of our, you know, proprietary technology is a risk management system that has fully automated the communication with customers, and the ability to, you know, issue these margin call notifications and if needed, partial collateral sales. we've been lending since January of this year, so pretty much perpetually in a kind of down to flat market, and what we've seen in terms of, behavior from our clients is that The vast majority, over ninety percent, have chosen to take action rather than no action, oftentimes before they even hit that margin call level. So They'll add some collateral or pay down the loan. we've, we've almost never had to, we've only had to sell Bitcoin like one time, and we've lent, you know, tens of millions of dollars." }, { "speaker": "stephan", "time": "26:05", "start": 1564.79, "text": "Yeah, that's very impressive. And I think that is where it's, it's, it can be very difficult in the crypto market for anyone who has Bitcoin or any of these other cryptocurrencies that it is so, so volatile. And anyone who's been around for a longer period of time can remember days when, say, you know, the price was fluctuating from, you know, a thousand dollars down to, you know, four hundred dollars in one day and just crazy volatility. perhaps that has, you know- Reduce, that has reduced slightly, but it is still a very volatile game. So I, I suppose that's why you really need an automated risk management system to be able to quickly send out notifications. So are there any other systems that you've, you guys have had to implement to deal with the, you know, just the incredible level of volatility that we see in cryptocurrency?" }, { "speaker": "bitcoin", "time": "26:58", "start": 1617.61, "text": "Not really, but I would say we, you know, we did have to be really thoughtful about determining that, initial loan-to-value ratio. and a month ago, the highest we would go is a thirty-five percent loan-to-value ratio at loan initiation, and now for Bitcoin specifically, we'll go up to fifty percent, but we, we- I think it's kind of the responsibility of us as the lender, to be really thoughtful there and not lend at loan-to-value ratios where, you know, the odds of a margin call are really, really high. so and the way you do that is you have to look back and do some data science around historic volatility, and you're basically able to, you know, predict based on historic volatility what percentage of your customers will experience a margin call if volatility stays at the same levels based on What initial LTV that you set. And we decided that we wanted that number to be really, really low, and that's how we got to the initial, thirty-five percent LTV. But, you know, I don't know if you say the dates at the beginning of the podcast, but I think that the volatility profile of Bitcoin right now is really, really interesting. here in the US, public equities have been, I think a few, you know, a few multiples more volatile than Bitcoin at least for the last, like thirty days or so. Volatility comes back, it's just to the" }, { "speaker": "guest_2", "time": "28:19", "start": 1699.16, "text": "upside." }, { "speaker": "stephan", "time": "28:21", "start": 1700.56, "text": "Yeah, well, that'd be fantastic. And I do like that you've taken a very conservative approach there, and that, you know, you have considered, you know, this concept of trying to, you know, set the LTV such that there's less need or chance that the margin call will have to come through. Let's talk a little bit about the crypto loans and tax calculations. So typically, you know, historically, debt is cheaper than equity, and one of the reasons for that is usually interest expense is tax deductible. Now that Creates an interesting incentive, or maybe not incentive, but just an a, a gain or a help to using debt. Can you talk a little bit about that and what the impact that is for after-tax costs?" }, { "speaker": "bitcoin", "time": "29:07", "start": 1747.11, "text": "Yeah, absolutely. And, and first off, I think it's great that you, you know, recognize that incentive. it, it's, you know, very much alive and well in the US, tax structure. but simply, if you have some Bitcoin and you sell it, and this is true in the US Maybe it's a little bit different in Australia, but if you have some Bitcoin and you sell it, you've created a taxable event, and if you sell that Bitcoin for more than the price that you purchased it for, you're gonna be taxed on the gain that you have. if you rather than sell, borrow against the value of that Bitcoin, you haven't created a taxable event and you don't owe any taxes, but you've still generated some liquidity for yourself that you can use to go and make additional investments. And if you do use that liquidity, That you generated in the form of a loan to make additional investments, then not only did you not trigger a taxable event by holding onto your Bitcoin instead of selling it, you are also able to deduct the interest that's charged on the loan from other investment income and capital gains in subsequent tax years. So it's kind of this double whammy tax benefit that happens when you borrow against an asset and then use the proceeds for some, you know, productive use case versus Selling" }, { "speaker": "stephan", "time": "30:25", "start": 1825.34, "text": "it. Yeah, that's a fantastic explanation, Zach. I think many listeners who aren't into accounting and tax wouldn't, you know, appreciate that from a tax planning point of view. but I suppose if you've got, you know, say you're sitting on some crypto riches and if you sell, and the rule is similar here in Australia as well, this, capital gains tax would apply for most people, and it's, it means you avoid spending or- You, sorry, you avoid recognizing a capital gain and therefore being taxed on that, and at the same time you could gain from an interest point, interest deduction point of view. So I think there are some, great potential benefits there, and, and that can sort of- Help, help incentivize more crypto lending." }, { "speaker": "bitcoin", "time": "31:17", "start": 1876.87, "text": "Yeah, it's one of the oldest, kind of wealth management tricks in the book. so if you talk to, you know, wealth management groups or private bankers and learn about the different structures that they implement to try and not only preserve wealth, but generate more wealth for their clients, debt and, and different types of debt instruments is one of the primary strategies. and what we've been describing is kind of the first and most basic strategy That almost everyone implements. you know, this past February, March, April, prices were coming down pretty quickly and there was at least a suspicion in the market that a lot of that was due to tax selling. So people realized and calculated what their liability was going to be and they sold crypto to, you know, pay for that liability. And our hope is that next tax season, that activity happens, a little bit less because people are aware- aware of and taking advantage of solutions like blockbys." }, { "speaker": "stephan", "time": "32:17", "start": 1936.61, "text": "fascinating. Yeah, that's a good idea as well. So basically, instead of selling for the tax, they could get a crypto-backed loan and not incur the capital gain? And in that way, save some money. So do you see that, in terms of some of your cut- your clients and the customers are kind of like a family office or a private wealth manager trying to help their customer save money?" }, { "speaker": "bitcoin", "time": "32:39", "start": 1959.46, "text": "Yeah, absolutely. It's re- you know, we've actually received calls from, you know, wealth managers, at major banks here in the US who say that they have clients that own- Crypto. And one of the things they would typically do with any other asset to help this client strategize on, you know, how to minimize taxes and optimize future upside is tell them to borrow against it instead of sell it if they still believe that it will be worth more in the future. but they're not able to do that with Bitcoin because the bank won't lend against Bitcoin. And so we've received, referrals in some cases completely off the record, from some of these individuals that work In, you know, the wealth management side of major banks here in the United States. So it's absolutely, a use case." }, { "speaker": "stephan", "time": "33:32", "start": 2012.31, "text": "Fantastic. Okay. Now, let's talk a little bit about how things might evolve in the future. Do you have any thoughts on how Bitcoin and crypto financial services evolve over the next, you know, five, ten years?" }, { "speaker": "bitcoin", "time": "33:46", "start": 2025.74, "text": "Yeah. I mean, I, I, I have a lot of thoughts. I think, I think one of the major implications will be that we're going to see con-currency consolidation So I'm actually not quite over the hump yet that Bitcoin will overtake some of the major currencies around the world, but I do think that we'll see con-currency consolidation, you know, so if there's maybe around eighty or sixty currencies in the world right now, the bottom fifty percent of those might not exist ten or twenty years from now. And I think in the same way that, with the internet, you saw some, uprisings and, political, structure As being overthrown as a result of information now being more freely available and accessible, I think we'll see similar types of, you know, disruption, enabled by this digital economic advancement, which is, you know, Bitcoin and other, and other cryptocurrencies. So I think we'll see currency consolidation. I think the gold market over time is, going to, decline in value, because people are gonna shift into, Bitcoin, and I think that banks' margins are gonna go down over time. I think you're gonna see, Bitcoin and other cryptocurrencies eat into the margins from services, related to remittances, and payments, and I think we'll also probably see some business models that are successful in more fairly distributing the value that's created from, a service. obviously there haven't been too many that are, you know, or any that have really done that successfully today, but I do think there will be some, you know, new models of organization where instead of just the equity value accruing entirely to a centralized entity, it will accrue to- Through to, a more diverse, base of both owners and users, so I think all of those things will happen, and it's, it's really just a question of how, how long it takes and what things look like along the way." }, { "speaker": "stephan", "time": "35:59", "start": 2158.72, "text": "Fantastic. Yeah, and I think also tying back to one of the earlier points you made is just one of, one of the benefits might just be that you can get loans much, much cheaper, if the lender, if the funders of those loans also want to acquire bitcoins." }, { "speaker": "bitcoin", "time": "36:14", "start": 2173.71, "text": "Yeah, absolutely. I mean, even before we drop to, you know, sub LIBOR prices, and regardless of whether or not that ever happens, we will absolutely be lending money at sub ten percent interest rates to individuals in countries where Where you've never been able to borrow money at that low of a rate, before the end of this year. I mean, that, that is happening now. We're doing that, now. So that, that's really, really exciting." }, { "speaker": "stephan", "time": "36:41", "start": 2200.8, "text": "Okay. And do you have any thoughts on the typical model? So let me set the context a little bit. So some large banks, and some, some of this is just my knowledge in Australia, is that really some large banks are home loan banks. They make a lot of their money out of home loans. So do you- You see some kind of similar model, but transposed into the Bitcoin world. So maybe, you know, customers would join a company because they want, you know, a Bitcoin bank to provide them some kind of wallet services, but then, you know, where they kind of really make the money is lending. Do you see any kind of similarities there, or do you think it'll just be a totally different?" }, { "speaker": "bitcoin", "time": "37:18", "start": 2238.13, "text": "No, I absolutely see similarities. I mean, we, we talk a lot about how we are, we intend to emulate the strategy of some of the successful fintech companies Companies that we've seen here in the US market at BlockFi, where basically the strategy is, lead with lending, but then diversify your product base and also be able to offer, you know, a suite of relevant, of relevant products and services to customers that have, you know, started, started using, your services. so we'll diversify into other things like, credit cards, debit cards, interest-bearing- Accounts for deposits, maybe some different types of wealth management products over time at BlockFi if we're successful, and I think, you know, that model doesn't look that different, but the products and services are probably a little bit different, the delivery mechanism is a little bit different, and certainly the global nature is a lot different. So, I don't know of any fintech companies that have gone from being just focused on the US to being focused on a global market in under a year like BlockFi has. So that's definitely something That's, that's different." }, { "speaker": "stephan", "time": "38:30", "start": 2310.36, "text": "Yeah, really exciting stuff to think about and to really, you know, it'll just be exciting to see all of that play out. okay, now I wanted to talk a little bit about, you know, with cryptocurrency, there's many, many different ones. I know at the moment you have Bitcoin and Ethereum, so how do you make that trade-off between wanting to accept more cryptocurrencies for the broader market that it allows, while at the same time considering the trade-offs in terms of security and additional- costs to service that cryptocurrency." }, { "speaker": "bitcoin", "time": "39:01", "start": 2341.18, "text": "Sure. So we look at risk really, you know, based on the liquidity profile, of the asset and also the observed volatility of the asset. we started lending, or offering to lend also against Litecoin about a week ago now, and so, you know, the inputs to our model are kind of how much liquidity is available against USD pairs, how volatile has the asset been? are there, you know, likely holders that have large embedded capital gains because we know that that's one of the primary use cases for taking out a loan rather than selling an asset? And, and do we think there will be, demand? So, we do intend to expand, right now in this environment with, liquidity, availability declining, we're not expanding aggressively, but I do think that if we fast forward six months, we'll- We'll probably be lending against at least, you know, five or six, different crypto assets." }, { "speaker": "stephan", "time": "40:05", "start": 2404.66, "text": "If there were to be sustained bear markets in, you know, it could be a few years or, you know, or, or we could all be totally wrong and this whole thing could, you know, go to zero. But if there were a sustained bear market Could that make it more difficult for, say, an Ethereum or a, or even a Bitcoin loan customer to make that collateral requirement?" }, { "speaker": "bitcoin", "time": "40:27", "start": 2426.52, "text": "Yeah, absolutely. there's, you know, I mean, I think it's a question of How sustained and how deep is the bear market? but, but absolutely, I mean, for BlockFi, we're kind of bulls by design of our business. the bigger the market cap of cryptocurrencies is, the bigger our addressable market is. So we certainly don't want that to, to happen. But yes, our addressable market gets smaller and it, it gets harder for people to one, feel motivated to borrow against an asset, because if you think an asset is going to- So decline in price, or especially decline in price significantly, you probably don't wanna borrow against it, you just wanna sell it. and additionally, it's, you know, we have to deal with, the margin call scenarios, and if those kept happening, at a certain point, someone might say, you know, I don't wanna post collateral, just sell it." }, { "speaker": "stephan", "time": "41:22", "start": 2482.34, "text": "I see, yeah. Now, let's talk about the converse. In a bull market scenario, so let's say Bitcoin is, you know, rapidly rising in price, would cust- Customers have an option to" }, { "speaker": "guest_2", "time": "41:34", "start": 2493.65, "text": "take some of their collateral back." }, { "speaker": "bitcoin", "time": "41:36", "start": 2495.73, "text": "Yes." }, { "speaker": "guest_2", "time": "41:36", "start": 2496.19, "text": "So customers have an option to" }, { "speaker": "bitcoin", "time": "41:38", "start": 2498.34, "text": "both take some of their collateral back or take out, more capital, as a loan. and just in case it isn't clear to anyone that's listening, the value that, accrues when prices are going up is always our customers and not ours. we don't make any of, that money if Bitcoin goes from sixty-five hundred, back to twenty thousand or north of twenty thousand. All that value is our, is our customers' value." }, { "speaker": "stephan", "time": "42:10", "start": 2530.0, "text": "Right, yeah. Okay, and I think you earlier you touched on this, you touched on this idea of getting, you know, funded the USD, not just in direct wires, but also, it sounded like a token backed by USD. So am I correct in saying it's a stablecoin? Or can you talk us, talk to us a little bit about that? Yeah," }, { "speaker": "bitcoin", "time": "42:30", "start": 2549.6, "text": "absolutely. we, you know, internally use the term dollar-backed coin more than, more than, stablecoin, but yes, we're using, GUSD, which is Gemini's, USD token, and also USDC, which is supported by Circle and Coinbase, and those are funding options on our platform. So, individuals or companies that take out a loan from us can select whether they want us to fund them via a bank wire, or, via GUSD or USDC." }, { "speaker": "stephan", "time": "43:06", "start": 2585.99, "text": "I see. And so what would be the typical use cases there?" }, { "speaker": "bitcoin", "time": "43:12", "start": 2591.78, "text": "Yeah, I think we're, you know, we're just starting to learn. So, we just started, you know, GUSD and USDC just came out in the last month. we just made it an option in the last, couple of weeks. so I, I think we're, you know, learning what those use cases are. One would certainly be that, they want to, get leverage and trade more crypto. and- Another would be they have, you know, some form of business that they're conducting where they're able to make payments, or, you know, otherwise, put that tokenized US dollar, to good use, in their business, But those are the only two I can think of so far. So, so we're kind of learning, what those use cases are. But I think it's interesting that there are some countries where when we wire USD there, our customers have bank accounts that can hold USD in them, and there are other countries where that's not an option. So when we wire USD, it can't show up in our customer's bank account as USD, it can only show up as, you know, the local currency. and so we think that in those places where- Where you're not able to hold USD in your bank account, we'll probably see a higher utilization rate of the tokenized dollars. Right, I see." }, { "speaker": "stephan", "time": "44:37", "start": 2677.13, "text": "Yeah, it's interesting because it's like, I'm trying to imagine why would they need it, but I suppose there could be customers who, I don't know, for whatever reason, want to pay their employees in stable coins, and then those customers could then, that customer's employee maybe could then translate it back into whatever they want, whether that's, you know, their local fiat money or- Or into Bitcoin, let's say. a-and I suppose for the leverage trading case, there's already, you know, people can obviously, you know, famously they can go to, you know, BitMEX or Bitfinex and trade leverage, but I suppose if you're a US customer, BitMEX doesn't allow-- technically, they don't allow US, customers, so that's potentially, a reason there as well. Yeah," }, { "speaker": "bitcoin", "time": "45:22", "start": 2722.1, "text": "it's also, also a, a cheaper and, longer term form. Of leverage, so I think, you know, I think the funding rate on BitMEX ranges anywhere from like twenty to, as high as like sixty percent. So if you just wanted to have a levered long Bitcoin position, you know, long term at a low leverage ratio, that's a pretty big cost to bear, so our option might be cheaper, albeit you're only able to get, you know, up to point five x leverage instead of a hundred x leverage like you can on BitMEX And we're, you know, big fans of their platform, and the use case for the company would be, you know, imagine there's a Argentinian producer of some good, and they buy some parts for that good that they produce from Australia. obviously the Argentinian peso is collapsing in value, so, w- every time they're buying this part, they have to spend more and more pesos, but if they also own Bitcoin and they can get access to- Debt by owning Bitcoin at eight percent in USD, and then they know that that USD that they have is gonna have a much more stable exchange rate between the Australian dollar, then that probably helps their business a little bit." }, { "speaker": "stephan", "time": "46:39", "start": 2799.23, "text": "fantastic. Yeah, that makes sense as well. So it just enables a lot more of a globally connected world where people can use the US dollar." }, { "speaker": "bitcoin", "time": "46:48", "start": 2807.88, "text": "That's right, which is a, which is a huge market. you know, I mentioned earlier, like eleven, it's, it's over eleven trillion dollars of USD are borrowed by international- By governments and companies outside the US market, and the reason they do that is for use cases like what I just described. this just enables it at a kind of smaller scale. you know, you don't have that access to that market unless you're borrowing, probably minimum tens, maybe minimum hundreds of millions of dollars." }, { "speaker": "stephan", "time": "47:15", "start": 2835.02, "text": "Alright, let's talk about service offerings that are coming next with BlockFi. Can you tell us a little bit about that?" }, { "speaker": "bitcoin", "time": "47:21", "start": 2841.48, "text": "Yeah, sure. So, we'll be looking to, you know, add some increased- Flexibility to, the loan product, so things like extending the term, reducing the rate, making more collateral types available to borrow against, expanding to more geographies, but then we'll also be adding, a credit card where you're able to earn rewards, in the cryptocurrency of your choice instead of cash back. we'll be adding a, a debit card, and we'll be adding, some type of, we're still working Through the legal implications of this, but some type of, you know, interest-bearing account construct, where people can send GUSD or USDC or down the road even probably Bitcoin to BlockFi, hold it with us for a period of time and earn interest on that." }, { "speaker": "stephan", "time": "48:13", "start": 2892.91, "text": "Okay. So in terms of countries, what are some of the other countries that you guys are looking at?" }, { "speaker": "bitcoin", "time": "48:19", "start": 2898.92, "text": "Sure. So we're, we're actively working on Canada and we'll probably be, lending to individuals there before the end of the year Of the year, and then after that, we're focused on, UK, EU, Latin America, and then after those, the APAC region" }, { "speaker": "guest_2", "time": "48:38", "start": 2918.48, "text": "I see." }, { "speaker": "stephan", "time": "48:39", "start": 2919.42, "text": "Yeah, that's, that's really interesting that, you know, you're able to kind of leverage crypto to become a global financial services company." }, { "speaker": "bitcoin", "time": "48:49", "start": 2928.54, "text": "Yeah, absolutely. And, you know, for companies, we're able to, already support companies from any jurisdiction that's not on a, a sanctions list, which is, you know, almost every country in the world except for maybe five or six." }, { "speaker": "stephan", "time": "49:02", "start": 2942.17, "text": "Oh, I see. So those countries you were mentioning before is more for the individuals, whereas for, you know, if you're, if you're If your customer is a business, then you actually can support, you know, probably ninety percent of the world's businesses already, something like that. Yeah, that's" }, { "speaker": "bitcoin", "time": "49:14", "start": 2953.84, "text": "right. And the, the reason for that is just that, the rules are a little bit funky. Basically, businesses have what's called choice of law, so you can kind of, if two businesses are transacting with each other, you can decide which country's laws you want to govern the transaction. but retail, you know, individual people don't necessarily have those same rights in a lot of places. So we have to" }, { "speaker": "bitcoin", "time": "49:38", "start": 2977.64, "text": "Licenses and, you know, get set up, kind of in a very heavily regulated way similar to what we've already done in the US." }, { "speaker": "stephan", "time": "49:46", "start": 2985.84, "text": "fascinating. Okay. Alright, so what about some of these other products like the debit card? Would that be basically like having a BlockFi bank account that you spend out of? Or can you talk a little, talk to us a little bit about how that product might work? Yeah, I mean," }, { "speaker": "bitcoin", "time": "50:01", "start": 3000.97, "text": "it's, it's, it's still very much in the idea phase, not implementation phase, so it's hard to share too many specific details. Yeah, sure. But think back to that, you know, that question around what's the use case for someone, in a different country to borrow dollars Well, what if they had a, a debit card where they could hold crypto assets and then spend money in their local currency, either in the form of a line of credit, that's secured by the value of those crypto assets or by, you know, converting select crypto assets, at the, at the time of the transaction on the debit card?" }, { "speaker": "stephan", "time": "50:42", "start": 3042.4, "text": "I see, yeah, so it's kind of leveraging that, that similar idea of not recognizing the- Capital gain to, you know, to do, to use the debt me-mechanism rather than recognizing the gain, but done kind of by everyone. Yeah, that's" }, { "speaker": "bitcoin", "time": "50:57", "start": 3056.97, "text": "exactly right, that's exactly right." }, { "speaker": "stephan", "time": "50:59", "start": 3058.65, "text": "Can you tell the listeners where they should go if they want to find out more about your products and BlockFi?" }, { "speaker": "bitcoin", "time": "51:04", "start": 3064.07, "text": "Sure, so, you know, the best place to go is our website. It's, blockfi dot com, b l o c k f i dot com. We have a ton of great information on there. We've got a resource center where we go in depth on the Different use cases and have articles about taxes and, loan structures, and we try to be really, really informational and educational in terms of, letting people know how everything works. we've also got all of our social media links on there. You can follow me on Twitter, my handle is blockfi zack, and our company handle is at the real blockfi. So, blockfi dot com." }, { "speaker": "stephan", "time": "51:42", "start": 3101.9, "text": "Fantastic. Alright, well, I think it's, it's been a really interesting episode, and hopefully the listeners have got something, Educational out of it. So thanks for coming on, Zach. Yeah, I" }, { "speaker": "bitcoin", "time": "51:50", "start": 3110.26, "text": "hope so. Thanks so much for having me." }, { "speaker": "stephan", "time": "51:53", "start": 3112.98, "text": "The concept of crypto-backed loans is a fascinating one that promises to globally increase access to debt financing, and as Zach mentioned, there may even be a possibility of Bitcoin finance loans being cheaper than traditionally financed loans. If this scenario should occur, it's yet another long-term bullish scenario for Bitcoin. The ability to use a Bitcoin-backed loan to get financing and the double whammy benefit of not incurring a capital gain and the associated taxes, while potentially getting an interest tax deduction can also be very beneficial. Also, as I was reflecting on the conversation, I thought back to my friend Pierre Rochard's article, \"Speculative Attack, \"from two thousand and fourteen. Now, in that article, Pierre presciently pointed out that people would come to leverage their balance sheet to hold more Bitcoin. Now, sure, some gambler types might want to go one hundred x long Bitcoin over at BitMEX, and others may choose a more light level Of leverage at lower cost with options like BlockFi. Ultimately, Pierre points out that while everyone admonishes people to not borrow in order to buy bitcoins, if money is fungible and you have, say, a mortgage or a car loan, and you own bitcoin, in some sense, you are a leveraged bitcoin investor, and that many do this as it makes economic sense within reason. Now, I'm not saying go out and leverage up, I'm just pointing out some interesting corollaries based on earlier bitcoin articles and how this may come to form overarching trends that we see over the coming decades as the world Bitcoinizes. So go back and have a read of Speculative Attack, which I will list in the show notes. Show notes are on my site stephanlivera dot com, and if you're not already subscribed, please make sure you subscribe by searching Stephan Livera podcast. Now, just a few quick shout outs to the many people who left me a five star review. There's Oskie S J J from Sweden who gave me a five star and commented, \"One of the best Bitcoin pods out there,\" and Tico six hundred ten who gave five stars and said, \"Love it, huddle.\" And Kryptomias from Germany, who gave five stars and said, \"Stephan is crushing it. He manages to get super interesting people from the space. You realize that he really prepares for the interviews. Well done, looking forward to see more content from you. So, thank you guys, big thanks, I really appreciate all the support you guys give me with the five star reviews and sharing it out with your friends. Thanks guys, see you next time.\"" } ] }