Deputy Kevin Rose here, really excited about this. Episode is gonna be a good one but before that this is modern Finance, this is the show where we cover all of the latest Financial products. That means cryptocurrency in a tease defy Robo investing and even some traditional Financial hacks as well. If you've yet to sign up for our newsletter and you want to be the first to hear about all the new crypto projects and in ftes that I'm checking out head on over to Modern finance and you'll see the newsletter
an Uplink in the top header. So this episode is, it's a cool one because it is a very important question. The question is, if you're going to lend out your cryptocurrency, then you want to earn interest when you learn that out, how safe, is it like how safe is it when you hand it off to someone else? And could you lose everything for me? When I think about the crypto Holdings that I have, it's already super high risk. Like, you never know, if you're going to wake up in the markets, going to be down, 10, 15, 20 percent. So if I'm going to lend it out,
Kind of want to make sure I get it back. And so I think it's important that we cover the different ways in which you can earn interest. So I put them into three, different buckets. One is to provide liquidity to exchanges via code called smart contracts. The second is to do something called yield farming, which is also done through code in smart contracts. And the third is to use trusted centralized exchanges to lend out the cryptocurrency on your behalf to institutions hedge funds and traditional Borrowers.
Now, those first two liquidity to exchanges and yield farming, they both rely upon trusting the code of smart contracts and because that code is visible in the blockchain hackers can look for bugs to exploit it. And there's definitely been times when hackers have got in and were able to run away with some of the money. So I put those in extremely high risk. I'm not going to cover those first two in this show. For me, this is the, I want to lend it out, but I also want to sleep at night episode which means that we're going to cover number three.
Just trusted centralized exchanges that lend out our crypto. Now they don't pay as much yield as smart contracts but for me that's fine. I'd rather have that added safety of real humans being involved versus trusting that code on the blockchain. So there are few players in the space. I'm going to cover the two big ones in this episode today. We're talking to Zach Prince, CEO of block, Phi and Matt Barnes wag director of institutional lending at Genesis Capital. So how good is the interest? Just to give you a snapshot of
Today, I use block fi to earn 8.6% my USD stable coins and I use Genesis through the Gemini exchange to earn 2.0, 5% on bitcoin and 3.0 5% on ethereum. So the goal of this episode, here's what I want to know. If I give you my crypto, what are you gonna do with it? How safe is it? And then, of course, when I had Zack on from block Phi, I had to ask them about their new upcoming Bitcoin, cash back credit card as well. So, we get into that. And then lastly, at the
Very end of the episode. We're going to wrap things up by giving you my pic and tell you how I use each service. All right, so let's get into it. Will start the first interview with Zach, Prince, CEO block fi Kevin Rose in. His guests are not registered investment. Advisors all opinions are Kevin's and his guests alone. Nothing discussed. Today should be
relied upon for investment decisions. Nor is it investment advice? This show is solely for information and entertainment purposes. Only,
please work directly with an investment professional.
Zach, thank you so much for being on the show. Glad to have you on.
Thanks for having me. Kevin really pumped to be here.
Yeah, I'm a big fan of everything. You've created over the years and been a user for a long time. And I just wanted to have you on to really go in depth and walk people through what exactly is happening on the back end, once they send you money because obviously, you know, you hear about crazy things happening, where they'll be a smart contract, that is breached and the some users funds get liquidated and
All of a sudden they may get a portion of those back. If the hacker is like friendly enough, like it's just the wild west out there. And when you see like the rates that you all are offering, it's really attractive, but it's also super scary. Can you walk us through the back? End? What it looks like and how you think about risk?
Sure. It's definitely a topic that merits a full podcast episode, but maybe he'll spend just a minute or two on my background and kind of the Genesis of block fight in case. There's anyone
Who isn't familiar with us yet and they don't be great aunt. I've always worked at Venture back technology companies and I was most recently prior to starting block, 5 working in the online, lending sector. And I started personally investing in crypto and 2015 and in early 2017, just got really excited about everything that was happening in the space and felt that I had to get involved full-time. And so, the original idea for Block Phi was to build debt and credit markets for the crypto,
I had a light bulb moment when I was applying for a loan in the first quarter of 2017 with a bank, to buy an investment property and I put Bitcoin any theory on my financial statement that I gave to the bank and not only did they say these assets aren't worth anything in terms of our underwriting of your financial profile. But they also put me through a bunch of extra compliance checks and triple verified by income because they were worried, I was involved in illicit activities or something, and it was very clear that
The traditional lenders and the traditional Capital markets weren't going to quickly adopt this new asset class or quickly participate in it. And that theme is a theme that has created opportunities for all kinds of fintech companies throughout the years. And we started block find the third quarter of 2017. We were the first company to raise institutional Capital to make dollar loans secured by cryptocurrency as collateral. So the first use case we solved for was. Let's say you're someone that
Sit in Bitcoin early the price of Bitcoin has gone up tremendously or really happy with your investment and you're still bullish on the future price appreciation. Potential of the asset so you don't want to sell it, but you want some liquidity to buy a home or make a down payment on a house or make another investment or any of the things that people typically borrow for or that people typically spend money on. You should be able to borrow against the value of your Bitcoin just like you
Can borrow against a portfolio of stocks or a piece of real estate and we raise institutional capital for, we were the first company to get licenses in the u.s. explicitly for that purpose. And from that starting point, we steadily expanded our products and services for a retail and corporate facing client base on one side of our platform and then for an Institutional client base on another side of our platform and these two sides of block 5 work.
So today, if you're someone that goes to our website or download our mobile app, as an individual, you're able to access three products. You can earn a yield on your cryptocurrency Holdings at pretty attractive rates. 6% on bitcoin 8.6% unstable coins, you can buy and sell any of the assets that are supported on the platform and you can get a loan secured by the value of the assets that you hold a block 5 in the second quarter of this year, we are launching our fourth.
T' on that side of our platform which is a Bitcoin rewards credit card. So you'll be able to spin dollars just like you do with other credit cards except instead of earning airline miles or hotel points or regular cash back. The rewards currency is Bitcoin and it will flow directly into your block by account. And then on the other side of Loch fyne on the institutional side of our platform. We're kind of like a prime broker for institutions that are active in the asset class which today are primarily
Market-making firms proprietary, trading, firms hedge funds and there's a few kind of crypto native use cases with a Bitcoin mining companies or crypto ATM businesses as well. So that's what we do today. Let's dive into risk management. We believe that fundamentally we're in the business of risk management at blocked by and we think that risk management falls into kind of Three core buckets. The first bucket is
Is fraud which could be like Ponzi scheme fraud, it could be fraud conducted by one of your employees and we think that our team and investors and the regulation and us being based in the u.s. is a pretty good mitigate against that. The u.s. is great at law enforcement. The second type of risk is cybersecurity risk, which is huge in the crypto market and we kind of group parts of operational risk alongside cybersecurity.
Terms of our risk management
framework. So we work with third-party custodians. We have a phenomenal
cybersecurity team.
We have a lot of things that we put in place in terms of how our system operates that are designed with security in mind. One of the things that folks often
complain about a little bit on our
platform is that withdrawals of cryptocurrency are slow in general? We don't send out a cryptocurrency withdrawal in less than
24 hours in any scenario. And the reason for that is once it's gone and you know, every day, we have clients who their Gmail gets hacked, or they didn't turn on to fa and that kind of slow withdrawal process, saves them money. So then, you know, those are the first two buckets, but third bucket, which I think is the one that folks are most interested in discussing and have the most questions about is Financial. Risk Management, how
are you doing the different types of lending?
How are you?
Creating yield on bitcoin and stable coins at attractive rates in a way that isn't going to lose money. And we have from making our first Loan in January of 2018, we have operated all of our lending activities with perfect performance throughout multiple Market Cycles. Now both down and up and with a increasingly large operation in terms of the amount of assets and
And loans that we're making, we're north of 20 billion dollars. Now, in total assets on our platform, we paid out over 60 million dollars in interest to our clients just last month. Wow. So within this
lending
activities that we do fundamentally there are two types of lending. There's lending that are loans where there's over
collateralization and then there's
lending where the loans are not over collateralized under
Lateralized or completely unsecured kind of traditional credit type loans. And then there are
two different types of borrowers. There are retail borrowers and institutional borrowers and then there are different types of loan
denominations. There's US dollar denominated loans and crypto denominated loans and for all of these things there's like a little Matrix of who can do what and in, What scenario. But generally speaking, the only asset we lend to
on the retail side of our platform is US Dollars
and we only make
over collateralized loans on that side of block Phi. So an example of that is, let's say someone has one Bitcoin and they want to borrow against it, they can borrow up to half the value but so Bitcoins 60k, you can borrow 30k. If the price of Bitcoin goes down at a certain point, you'll get warnings and then a margin call and then they'll be a partial
Your assets, if the Margin Call has not met that
process. Works the exact same
way for an over collateralized loan that's denominated in crypto. The assets are just flipped. So let's say, someone borrows Bitcoin, they give us dollars as collateral and the Bitcoin price goes up at a certain point, they'll get warnings and then a margin call and then a liquidation. And we have a risk management system that does those things, 24/7, it's connected to multiple price feed.
Ed's. It's connected to numerous liquidity
sources and that part of it is relatively
easy to you know, automate, but you do overtime start to create some portfolio overlays and hedging strategies that you can Implement and particularly volatile market conditions. And then you have the under collateralized part of our lending activity, which is well less than half, probably even less than 30% less than 20% the under
As lending exclusively happens on the institutional side of our platform and on the institutional side folks could be borrowing dollars
or they could be
borrowing crypto. And there are some institutions, let's say the small asset management firm with less than a hundred million dollars in a. Um, could we treat the same way? We would have retail borrower, would they have to pose a minimum 2x collateral or a hundred and fifty percent collateral to borrow it?
Anything. And then there are others who are much more well-capitalized who have long Trek, records of performance and who are doing certain Market activities that we be deemed to be sufficiently low risk, where we're
willing to lend to them under collateralized or with no collateral. So then the risk management is a little bit different. It's more like
institutional credit risk management. Meaning there's a lot of underwriting work that goes into
Understanding the borrower upfront, how much money they have, what the entity structure is of the of the company, what their
profitability levels are excetera. And then there's a lot of credit
covenants and scenario planning that comes out in these legal agreements. In terms of what happens if we're not getting paid back and it's kind of like a mix of institutional PB and corporate credit is a best way, I would describe it but that's
Basically, you know, a summary of The Lending that we do and, like I said, we've had perfect performance. We've never lost a penny cross, any of our lending activities and yeah, I think that's the best kind of short. Yeah, short overview that I can give a few
questions there to unpackage it a little bit further. If I come in and open up a block fight interest account. And I give you crypto to lend out on my behalf and I'm earning interest. How Diversified is that lending? Could that go out to one or two?
Parties, or does it just go into a big basket that gets lent out to hundreds of different parties? Meaning if there was a chance of someone defaulting how on the hook am I for my individual funds? A
couple really interesting points there. So first off your assets, that you've deposited are commingled with other assets that are on the platform in terms of how we're managing risk. So, we're not looking at the client level of deposit and matching that with a specific bar. We're looking at
The aggregate of facets available twinned and then on the borrowing side of the equation, we have a very diverse book of borrowers that includes retail with small loans, may be as low as five or ten thousand dollars and then institutional with larger loans. But still a healthy amount of diversification where no one lone makes up more than maybe one or two percent on the high end of our overall lending. It's very well Diversified on.
Both sides, and in order for any discrete customer at block, Phi to lose money blocked, by would have to lose all of our money first. So the way we've structured, the capital between block size equity, which is a really big number these days in our client funds is that if there were a loss on a loan
that would just come out of block, phi's
cash before whatever touch our clients Capital, so
you have more or less the kind of a slush fund.
Defaults should one ever occur? Your balance sheet is your insurance. Is that right?
The block faiz Equity is its insurance. And within that Equity, we've started from an accounting perspective, moving towards a, a banking like model where you have things like loan loss reserves from an accounting perspective, and different types of risk treatments for Lending activities, which has an output
Put of a presumed sighs that's required for your overall balance sheet and specifically for your loan loss reserve line item.
Gotcha. And then just double. Check your, never taking these funds and put in the minute into any type of smart, contracts, or decentralized like ethereum based urine or any of the others that are out
there. Correct. We actually as big of a fan as I am personally about some of the things that are happening in defy and the incredible work.
The teams are doing there and the exciting Innovation that's happening block, Phi is not using defy at all today for yield generation. Or any other purpose. We haven't been able to get comfortable with it yet from a regulatory
perspective, catch ya. And you mentioned earlier, that one of the pieces that you take seriously, is that the custody side, but you said the you also Outsource the custody do disclose who's holding custody of the crypto assets once there.
Transferred
in. Yeah, there's three custodians that we work with today. Jim and I is our primary custodian but we also work with Fidelity and bit. Go
gotcha. Yeah, I want to chat also about the block by credit card because you guys have about that thing where you can there's a wait list and people can jump up it. Is that correct? Yeah, there is a wait list. Yeah, so my editor, put his name on the waitlist, on an episode where we mentioned, you all on a think he's now number four, three or four and
And to receive the credit card, which is fantastic. So, yeah,
he'll probably be getting his card. Then either in the back, half of May, or first half of June, I think I'm getting my card next week. That's awesome. So it's been just a ton of work. We started working on this product idea over a year ago, and the credit card world is pretty complex. You have to have a lot of Partners to get something done. You also have to have a lot of capital to launch a credit card because while the
Experience of a credit card is that you don't have to put any money up, and you can just go spend and then you pay your bill. And as long as you pay it on time, you don't even get charged interest. Someone is putting that money up and so it's a lot easier to launch and debit card. But most most consumers with good credit scores in the u.s. spin credit cards because there's a higher interchange cut provided with credit cards. And as a result, there's generally higher reward rates that credit card. Consumers are able to access versus debit cards and
That's why we really wanted to do a credit card so that we could offer the highest possible Bitcoin back rate. And we're finally there we're weeks away from actually shipping the first cards if I'm so thrilled to be at that point and I think it's going to be hopefully just a massive ongoing amount of buying pressure on the Bitcoin Market. It's going to be a great product for anyone like myself, who loves to just passively
Accrue more Bitcoin over time. Yeah. And we think it's going to be a great product for Bitcoin, curious or crypto curious consumers to start getting exposure and start having some Bitcoin in a way that they're already familiar with, from using cards and earning points in other categories.
Yeah, this is is really cool. How do you think about all the other cards that are out there that are not like this? But traditional credit cards, they typically say,
Or times points on travel and like all these little buckets that you have to mentally say, Okay, alcohol on. This is a travel expense, okay? Then pull out this card. Is it just flat 1.5 percent across the board no matter what you purchase?
Yeah. The the rewards rate is a flat 1.5% back on bitcoin on every purchase. They'll be iterations of the card over time where I think we'll probably be able to get that up a little bit higher, maybe in the back half of the first year, of cards being Market or the first
Half of the second tier of cards being in Market, but is 1.5% cash back initially on every transaction, we automatically convert that into Bitcoin and then we attached a few other benefits to the card. So you get $250 in Bitcoin after spending your first three thousand on the card, you get a 3.5 percent Bitcoin back rate in your second quarter of having the card, you earn an extra 2% on stable coins that are held in your block, my account. If you're a card holder, oh wow. And you get a
$50, refer a friend bonus, instead of our standard $20, refer-a-friend bonus. If you are a card holder, and I think there's one more. There's a rebate of .25%. 25 basis points on any trading that you do on the Block five platform. If you are a card holder,
this is really compelling. This is going to be awesome. It's going to be huge product for
y'all. We're also going to start one thing. I'm also really excited about what the card is that where there's card linked offers, you know, if you have an American Express and you get a little email
and it's hey, if you, you know, by a large coffee at Starbucks, you get a free pink lemonade with it or whatever. You know, there's these promotions that come through the cards and I'm really excited to tell the story to the world. And to Big Brands about, who these consumers are, that want to earn Bitcoin. Because in my mind, they're like, literally the most valuable consumer segment out there. It's, you know, generally young people who are really smart and inclined to use new
Use and make investments in alternative asset classes and by the way, they've chosen to invest in literally the alternative asset class that has had the best performance of any asset class over the last decade. So it's just this incredibly compelling consumer base to Target. If you're a brand and as a result, I think we're going to have some really compelling card. Linked offers coming out. The one that I'm most excited about and I'm not saying this is going to happen but hopefully we can make
It happen is, if you use the Bitcoin rewards credit card to purchase anything in the Tesla App Store, you'll get 10% back in Bitcoin instead of 1.5, or we'll see what other Partnerships we can knock down. But there's going to be a lot of exciting stuff there as well in terms of cardholder benefits. Yeah, that is
just so awesome. When does when someone swipes the card and makes a purchase one? Does that cryptocurrency actually get registered, do bundle them all together and make a purchase of the end of month? Or do you do it in real time? And then what type of
These are they paying on that purchase of the crypto.
So we bundle them all together and make the purchase once a month. We might offer a feature for folks to switch that to daily or real time. If we get comfortable, that the tax reporting infrastructure can handle it or if the tax rules change and we thought about just making it instant on day one. But the reality is that in the u.s. right now, that would just be a complete nightmare. Oh my God perspective. If you ever wanted to
L it. So starting off it's once a month and there's no, you know, particular, fees charged on it. It just flows through the block five platform trading product at the time of conversion, once a month.
That's yeah, I never thought about that because you're basically setting a new like micro cost basis for every little swipe you got it. And then those IRS forms would just be like, they would be like dictionaries. Like they would be hundreds of
pages and look, it's completely ridiculous, that that's the world we live in, like, in my mind.
And there should be exclusions for things. Give the transaction is really small or if it's a credit card reward or whatever but there's just not right now. In the last thing we would want to do is put folks in a weird spot. This has happened to me before where you go to do your taxes, how my God and figuring out the crypto side of it is such a nightmare that it ends up costing. You an extra couple thousand dollars because of how much work are accountants have to do. Yeah, that doesn't sound fun and that's not a scenario. We want to put our
clients in. It's not fun for anybody.
The counts don't like it, like using individual, like, I've had to go through this and they've been like, what's this transaction here. I'm like, I don't know. I ran it through like, you know, Swap and three other things. Like, I don't know how many, like, where did it go? I don't know. It's impossible to track this stuff. Yeah.
So we try and keep all that really clean for folks. We actually did a and integration towards the end of last year with a company called tax bit. So you know unblock fast platform. Now everything is synced up with tax bit. You can export stuff. We're going to be making more connections to other tax form.
Attack script attack software providers right now tax, but is like fully integrated. And we're actually also going to be launching later this year, a tax loss harvesting feature. The folks can turn on if they want as crypto investors. We've really dealt with the downside of the tax code which is just how much of a pain in the ass. It is to figure out your taxes and report them every year. There's also an upside to the tax code, which is that if you're using a platform, that's smart enough to do it for you to automate it.
You can Harvest losses throughout the year when you have volatile assets. And so, we'll be turning that on later this year.
That's brilliant. Yeah, I don't know why anyone hasn't done that yet. Obviously, that happens on the robo side with the save my wealthfront account, and, and traditional stocks and bonds. But I've never seen it applied to crypto
and it's awesome, right? You don't do anything. And then all of a sudden, I see a little report when you login, it's like you saved $5,000 on your taxes because we harvested some losses for you automatically. It's like that. It's great.
That's the cool Zach. What a fantastic company you've built. It's been fun to watch the
Me from the early days being a user and being like, what's this startup all about? I mean, your startup no longer. How big is the company these
days over 600 people block by now, which is crazy. And I'm, you know, really looking forward to the day that the more of us are back in the office because a lot of the growth has happened post covid, you know, while we've been working remotely. I think going into covid we're about a hundred and fifty people. We've grown for X in the year and change since things kind of got locked down.
Crazy what's happening?
I met these people, either that must be so odd. It makes it harder to touch
and feel, right? Like, it's 400 participants and assume call that's just not the same as being in a room with, with all of the people in person. So I'm looking forward to that. But yeah, we're over 600 people. Now we just did our series deep round of funding which was a 350 million at a 3 billion dollar valuation. So we're officially a unicorn as a Pez of that round but we're just staying, really humble. We still feel like we have so many things that we want to build.
And so much kind of value that we want to try and add for our clients and that we're still really early in the the realization of doing all of the things that we want to
do. That's fantastic. Yeah and I love how thoughtful you've built the product over time as a product person. I've really respected the changes and things that you've added even at the layer of just like making the tax forms, like, easy. I was shocked when I got a form from because most exchanges that are out there and people that you're working with, they don't provide anything and you're like sitting there with an Excel spreadsheet.
Eat or not like a CSV file or something and just to see how far you've come on that front as well as been great.
Yeah. Thanks man we really appreciate you being a client. I know I was on another show with you before so it's great to kind of like stay in touch with people as things progress and we're just feeling really fortunate and like we're in an awesome position to keep building. Cool
Stuff. Great Zack, thanks for your time. Thanks for having me. Kevin. So that was awesome. Huge! Thanks to Zach for being on the show. Now let's chat with Matt from.
Genesis capital, I guess, the best way, Matt to start off would be just I love to know what is your role at Genesis? And it just hear about your background. Yeah, definitely. So my
role at Genesis I run the
institutional Landing desk for Genesis, and actually helped
spearhead and start the desk when we launched it back in March of 2018. So, we've been engaged in the institutional lending space in crypto. Really from the
time I joined a, my background is actually a more in the traditional Finance side. So I worked at
a hedge fund called Bridgewater Associates for about three years prior to coming into crypto. And actually, it was one of my colleagues that went to go start grayscale with their current CEO, Michael Sunshine, who I worked with at Bridgewater, that got me to come into the
space. So he talked my ear off about a year about crypto and Bitcoin. This was
back in the 27th early 2017, maybe the late 2016 and then ultimately got me to chat with Barry at digital currency group. Michael Moore. Oh he's the CEO Genesis to basically. Come on and help them think through
Is the evolution of their trading business. So Genesis of started off really on the OTC
trading side and then when I joined it was really to help us experience The Lending and financing efforts. So that's the business that I oversee today but Genesis holistically is about 75 people or so. We're about maybe 25 or 30 or so
focused on lending and yeah, it's a wildly successful business. We
are currently at around eight billion, in terms
of active loans, outstanding to the, to the
ecosystem. And we're probably the one of the largest institutional lenders.
In crypto and I think we were the first. Yeah, that's exactly why I wanted to have you on the show because I feel like you guys have been so good at being this under the radar, stealthy, but massive company, because if you're in the day-to-day, you're like, oh, I know the coin basis of the world and of the Gemini's of the world, maybe a few other exchanges. But when I first heard of Genesis, I was like, oh, who are these players? And then I found out underneath once I pull back, the covers a little bit, I thought I'd how massive you all are. Is that by Design like, why aren't you? Because you only work with an accredited investor
Is that right? Yes. So I think part of it is by, you know, design. And the fact that we're really like the back end yield provider for a lot of different firms. So we engage with platforms like Gemini and square in circle, but work the backend, almost like treating Prime brokerage Capital markets firm. That actually goes out like underwrites, the risk faces faces, the institutional borrowing, participants in really feel like we grew up as a trading firm first. So we feel like we can actually deploy Capital to the best risk-adjusted fashion out there.
And then go out and allow these kind of more retail facing platforms the ability to generate yield for their kind of end users. So yeah that's like how we positioned ourselves and you know similarly on the trading side to where the back end liquidity provider to square, right? The huge payments company. So all of their flow comes to Genesis and we go out to the market and actually do the execution for them. So we positioned ourselves as like this back-end kind of service provider more along the lines of what traditional Prime brokerage firm, but that's really like playing this middle. Intermediary Middle Ground Road between large Institution,
Borrowers lenders Traders and then retail facing applications and platforms. But that also have a high-touch model as well where we can face pools of capital ourselves
without going through our
retail channels. Now, of course, everyone's heard of square use the square cash app but Bitcoin directly on there. When you say, you're the liquidity provider for square. What does that look like? And what would that mean to the average consumer? What exactly are you doing Foursquare? Yeah. So anytime someone makes a purchase of Bitcoin or say I won't Bitcoin on the Square a
App like the cash job then that flow immediately gets channeled to Genesis. So if it's a purchase, then Square goes out and purchases
Bitcoin to correspond to the user through the Genesis trading desk and we'll go out to the market. Next
you got you the so you're actually getting there but then where does the actual custody take place for Foursquare users? Yep. So Square will actually custody themselves so we're actually directly settling that
transaction with square. I see
Perry up and then similarly like the Gemini
It's anybody that uses you know Gemini earn now can basically transfer assets from their regular Gemini wallet to their Gemini, earn wallet, and then Gemini on a daily basis will come to Genesis basically deposit. Those assets with us, we go out to the market when those assets out to our, you know, network of borrowers,
generate the yield and then pay Gemini back so that
it can pay its users. That's exactly what I wanted to dig into today, because one of the things that, you know, a lot of friends of mine, have accounts that Jim and I, it's a very trusted platform.
Or my sock, one sec to compliant. Super secure.
Winklevoss twins behind
it. They, they offer this new product that came out, I guess. What has it been? Like? Maybe three months now. So I'm like, yeah, it's been about. It's been about three months. I think
January was the first one we started with that.
Yeah, exactly. They have a button on there, and it says earned. And then when you tap on it, you're presented with what currencies do you have and it could be Bitcoin, ethereum maker, you know, swap one inch like list goes on and on and there's buttons there that just say earn and if you click on that they're off.
Bring you different annual yield on these. So right now Bitcoins 2.0 five percent as of this podcast, ethers 3.0 5% but what pulls up on the interface it's actually very clean. It doesn't actually take you to create a new account at Genesis. It doesn't do anything like that. It's like a couple Taps but it says in the fine print that Genesis is responsible for going out, taking custody of these assets and then letting them out on your behalf. The thing that is scary for most people is obviously crypto. In general is a very
Very scary thing. Like I have crypto, I want to protect it and then lending that out to someone else is some for, some is a pretty big leap. Do I trust where this is going because we've all heard about when you're doing some of the defy smart contract. Lending on aetherium, there can be smart contracts that are hacked assets are then drained. I would just love to hear from you and just fit in and learn about when I am earning 2% on my Bitcoin or 3% of mine aetherium, what are you all doing with that cryptocurrency? When I
That button and send it over to you. It's a great question and one that's
super obviously important for kind of
the ecosystem to understand. So the way the model works is that deposits like you said we'll get aggregated in
batched and swept over to Genesis from Gemini and our other Partnerships as well. So we're
facing platforms like leadon and Luna which is an Asia Base Exchange. We're partnering with circle as well to offer similar concept and so the way it works is when we Face our
partners, they basically
sweep over the assets. We now you know have
Access to this working capital, you have to step back we're facing about 250 or so unique, kind of institutional borrowers on the other side. So these are some of your leading hedge funds. Quan trading firms in a market neutral firms, other exchanges, other dealers, other lending, portals and platforms. And so we'll
go out and lend the
capital that we borrow from our depositors out to the market. And we're obviously the ones that are underwriting the risk with who those borrowers are, we're taking collateral in the form of both cash and crypto to
The notional value of those loans,
one weird thing, real quick there. When you see your underwriting the risk, there isn't the risk back on the consumer like if one of those you said 250 different borrowers, let's just say one of them, default something horrible happens. That one goes away, you lose some crypto, there does that get passed back to just the yield? Just then go down because there are so many unique borrowers or what happens to the consumer that is lending you that cryptocurrency?
Yes. A Genesis will always bear the risk, right?
So like we're
Facing the end, depositors were facing the platform like Gemini itself, and then we're
also facing the hedge fund on the
other side. So we're in the middle of
taking kind of principal risk to the borrower.
If the loss happens and knock on wood, we've actually had no default. Since we've been set up at the business in March, if a default were to happen from a borrower, we would eat that loss. Kind of are on
our own balance sheet and not
socialize that loss out to lenders. That's why we obviously have a fair amount of equity capitalization in our entity, we manage a loan loss reserve. And then obviously, we're really smart about how we
Take risks to the borrower as well. And so the process that I was fat lining, it's really multifaceted, right? It's one is collateral management. So actually taking collateral on behalf of our borrowers, holding that to back the notional loans, we give
them to is underwriting the
counterparty so that's where our risk team comes in and takes a look at financial statements. So your balance sheet, your statement of cash flows, your income statement and then also tries to get a sense of what is this firm? What's the, what is the management team look like? How are they going to deploy the capital on which exchanges are they did trading? What is the use of proceeds?
Is it is it speculation to go levered? Longer short is it more Market neutral where they're basically just utilizing that is treating working capital but not taking any Market risk? Or is it just like miscellaneous kind of non treating financing? And so what? Look at this, look at the who the kind of pre is those three buckets and go through that more formal underwriting, process and diligence to where we ultimately can make you know that decision about how much Capital we want to lend them what kind of transparency we need and then how much collateral we might need to come back that loan gun. And from there, it's really managing that collateral through time as markets.
Being around making sure we're topping up and getting more margin from the counterparty refunding margin, if the market moves in their favor. So we're managing that full risk process, but even if there were to be a default after those processes, we're still not then socializing
that out to lenders. We basically meet
that loss ourself against our own balance sheet and Equity, or on the loss Reserve. So that the lenders risk is really Genesis, basically going out of business, in our business, ceasing to exist because
of some kind of catastrophic loss bright.
And even then, there would be tokens to be distributed as you couldn't touch those
As as to pay off like you, you can't move these assets into payoff. They say there were any debt that you had those would be considered still third-party assets. Is that right? Yeah.
So the way it would work is the first kind of
wave of protection would be us. Liquidating the collateral from our borrowers. If they were in default and we were holding what's a BTC against it? You SDC loan, we would go out to the market and sell that BTC, and then try and basically pair pay ourselves back. The u.s. DC loan and close out that borrower. In the case, where the
You know,
collateral doesn't cover the loan then that's where the Lost comes in where Genesis would take on its own balance sheet and then if we took enough losses, that wiped out our entire equity loan loss reserves and our parent company. Dcg didn't want to come in and back, stop us. That's women. Basically, our creditors and lenders would be in a bankruptcy suit with Genesis. So that's like the ultimate way it would play out. But as I kind of mentioned, there's a lot of kind of waves of protection in front of that. And then our ability to kind of risk manage that their time as allowed us to kind of build
this reputation for being able to really
Durst and the market structure and risk. We're taking on the lending
side. Yeah, I mean you definitely have a stellar reputation. There's no doubt about that. I'm curious on when you're thinking about how you'll end up these funds and these different buckets. If you're lending out to someone that is a say on the speculation side, obviously you're gonna be able to charge a little bit more interest there versus say just exchange that need some liquidity. So I take it. You're just looking at those buckets and saying, where, if we are going to end up someone on the speculation side, you know, obviously we have to do our proper due diligence there and make sure that they're
Sediment. But we might take on a little chunk of that increase yield, but it's doing it in more of a bucketed kind of, Diversified way, is that a right way of thinking of it? Yeah, I think that's a decent way to think about it and I would say like the biggest variable or biggest kind of lever. We can pull is more on the collateral side versus the rate side. So like the rate is more of a function of like our cost of capital on that. So where do where we borrowing the Bitcoin or where are we borrowing the cash and what is our weighted average cost of capital look like on our balance sheet and that's how we determine that.
How much pain can be lend us out for based on what the market can bear, and what our borrowers are willing to pay. The other lever is okay, and how much collateral do you want to take to predict protect against the risk in this case? And so in that case, yes, you can look at the three buckets, right? So there's speculation. So, this is hedge funds really that are like, hey, Genesis, we want to borrow cash to get long Bitcoin. And so, we're going to put place, a buy order through your desk and borrow the cash to fund. That purchase will then take the purchase BTC as collateral in addition to some sort of excess collateral from the
Are you a big one? So if they're buying, let's say, 10 million dollars a Bitcoin and on borrowed cash, we would then, you know, say take anywhere from kind of 25% to, you know, a hundred percent excess on top of that, depending, on, kind of, who the borrower is, what the acid is that they're purchasing. And so, any speculative loan, whether it's, like on borrowed dollars or borrowed coin, which is the opposite side where they're like, hey, let me borrow some ether so I can get short will, then hold the purchased asset or the proceeds from the sale in addition to excess collateral and then manage that.
I kind of live time as the markets moving around. So we definitely are take you being a bit more conservative in terms of always being over secured on those loans anyway. Really from 125 to 200 percent collateral at all times, so that's like the speculation bucket, and then if you want, I can talk a little bit about the other two buckets as well, and how we think about if your greatest, they're
cool. So the other bucket is like more
is, is non-speculative but still trading working capital. So a really good example of this is a market maker that wants to basically are like
Even
if markets versus spot markets. Hmm, so if you look right now the coins trading at roughly 58 thousand, five hundred dollars, but the Bitcoin June future is treating about $4,500 above that price. And so what a market maker could do is say, hey, how much could I make by basically going long, the spot market and then shorting that near dated future that June future. And basically, capturing that $4,500 spread waiting for time to basically play out where it becomes,
June 25th, which is the expert 8. And right before expiration, those two instruments should basically be trading in kind of locks that, right? Because if pick one spot Market on June 25th, isn't creating where the June 25th future is, something's out of whack there, right? So what they do is they basically put that position on, they hold it until X burry and then they unwind the trade. And so there's a very predictable rate of return that a market maker can make on that and so if they can borrow cash from Genesis below that rate, then it's a profitable trade for them. And so that's like an example of a market neutral trading strategy that we Finance.
Well where we take some sort of transparency and Veuve into the exchange, their trading on, maybe they're doing both legs through Genesis right. They've bought the spot through us and also so the future threat derivatives desk. Maybe they're doing it on Exchange and providing us transparency and so you don't have to take hundred and twenty percent collateral on that trade because they're not exposed to the price of Bitcoin. Their only exposed really to the spread between those two combine, those two contracts. So that's like an example of Market neutral trade, that we finance and if you look at like that spread today, it's actually yielding about 22%.
An right now. And so that's why we're actually able to lend cash really high rates and borrow cash at high
rates and stable point from the market because of
this like kind of widespread between those eyes. See.
So that's an interesting Dynamic that we can get more
into two. And then the third bucket is like non-trading working capital. So you know this isn't trading firm is not hedge funds. It might just be corporations or platforms that need some sort of liquidity or working capital for a temporary period of time. Cool example would be I'm sure you've heard of like Dapper Labs which is the
Copy that. Founded in be a top shots but
sure. So the way that platform works is that if you're a seller of an MBA
moment you actually get USD. See the kind of minute you sell your ft but if you're a buyer that you might be using some credit
card, you may be using another payment rail where the settlement time is like t plus 3 and so if you're Dapper you need to make that cash available to your two-year buyer immediately and so you have this funding Gap and so that's where that's another example where Genesis might come in and say, oh yeah, this makes a lot of sense from a business
Model perspective. This counterparty really just needs working capital float for this short period of time will charge interest rate on that. But we're not really taking any risk outside of just like the platform in the company and so will underwrite it a bit differently. And so, that's an example of, like, the quiddity and financing that's, like, separate from Trading. Do you finance minors at all? Because, I know that's also a thing that in this world has happened in the past. Yeah, definitely. So mining Finance is interesting. We actually, so, for those that don't know, digital currency group is the
parent company.
Many of Genesis they are one of the
largest and most prolific investors in crypto and they're also the parent to a host of different kind of operating companies underneath. So Genesis is one of those companies grayscale,
Asset Management. The sponsor, the
Bitcoin Investment Trust is another one coin desk, the Media Group, and then one of their most recent new operating companies, is a company called Foundry digital. So Foundry, digital was actually created for the sole purpose of one. Like, obviously bringing more hash power to North America but to like being able to
To actually work with other miners in finance, their ability to go out purchase new machines and then paid and basically paid interest rate The Foundry for the loan
used to acquire those
machines. So Foundry The Entity was created really
to do mining
finance. And then Genesis, our business is actually lending Capital to that Foundry business to basically allow them the capital to go out and underwrite these miners. Gotcha. That makes me a lot more comfortable than some of the stories I've heard about lending. Going out to some foreign government minors.
They may not have a lot of transparency and do so yeah, it is definitely like, we're very selective with the mining firms. We work with and right now we're really only working with North America based firm. So we did a deal with Hut 8, which is a big canadian-based mining firm. We've done deals with some other folks as well and then we're working with kind of Select manufacturers like mikrobitti but actually be able to purchase the machines on behalf of the counterparty. So and then what will happen is Foundry. We wrecked will actually take like a security interest.
In Pledge on those machines. So that if the loan wasn't paid back Foundry would basically then just absorb that mining company. And so that's like why having that vertical and being in the mining space themselves and actually, like self mining. It would be very easy to just go out and then accumulate more machines if that loan were to go south. So that's how they're protected is, like being over secured by the actual real asset, in the mining rig itself. That's so cool. So you're not doing anything in terms of taking these currencies and putting them into smart contracts.
We are not right
now. So
This like you can view us as the bridge between traditional capital and big kind of pools of dollars and now crypto as well. And then folks that need that right? And so we're not taking that Capital like we're not borrowing Bitcoin from Gemini and then going to deploy that on decentralized protocols right now our self. But what we can do is like start to underwrite really Innovative hedge funds that really get those markets. But we still are then getting protected in the fact that we're facing a real entity with the balance sheet in capital that wants to go out and trade on.
Those platforms where we're not directly taking the risk of that former self. Yeah. So we do deploy, you know, assets to funds that are trading on the compound rather you're doing crew cross protocol treating. We're like automated market-making. So we definitely Finance like firms. That will go out and do that. And we have close relationships with the actual protocol teams themselves but we're currently not set up from like a risk and also compliance. And Regulatory perspective to trade on D5 platforms right now. Ourselves, gotcha, this gives me a lot more comfortable knowing that you have 250 ish, kind of different borrowers out.
That's such a big pool of Diversified borrowers. The the call, I was scared for and having with you would be like, hey, we're just putting it all in smart contracts. I be like, oh shit, you know, just like because it's scary. It's these little lazy. I applaud my friends that have the guts to take all of their crypto and put them in a smart contracts. I don't have applauded the right word. I I worry for them but I also yeah, they're getting healed and they had this so far so good and right, you know, it's more yield that I'm getting but I can sleep at night.
Night it, which I like totally, you know, it's always, it's always a risk return trade-off, right? Every time you're deploying Capital. It's always, what is my expected return on this versus? What's the expected risk? And then, how do I like dig in and drill into that risk? Is it counterparty risk? Is it platform? Smart contract risk. Is it Market risk? And then how do you mitigate against It? Ultimately derive. What is my risk-adjusted return here? So I get it, right? There's always going to be different risk premiums and there's going to be different is like there's obviously like a risk curve or like an indifferent people of different appetites to
that.
So we took totally get it, but I think it's interesting, right?
Because these platforms are certainly, like sure to stay. We know D Phi is like a real. There's a lot of yield out there. It's a lot of money to be made, but you have to be selective with which platforms, you're comfortable with, and doing your diligence not only from a technical perspective, but from like a kyc compliance perspective as well. And yeah, I think like overtime, right now. We're kind of, we're one kind of entity, right? And so we'll take in capital and deploy them to these various opportunities and counterparties. But maybe every time we offer something that's
a multitude of different products where if you're a lender and you want to face the trusted counterparty in Genesis but get exposure to defy yields, maybe we'll do that for you and kind of do some sort of as a service, right? If you're an investor and you want to access to this basis, you'll that I was talking about earlier, maybe we'll offer faces capture as a service where he's lenders can still get access to crypto yield markets. But face it really trusted theme that has a big balance sheet behind it. Yeah, that would be amazing. So in terms of ways that individual consumers can interact with you going in the front door,
It's accredited investors, much larger entities getting involved on that side. On the Gemini side, it could be pretty much anyone that has a Gemini account and then you pay that interest back to Gemini's at Daily hourly. How does that work? Yeah. So that's right. So basically if you're an individual and you wanted a phase Genesis directly either on the treating or kind of lending or borrowing side, not only do you have to be an accredited investor, but we're actually only really facing like eligible contract participants which is even greater kind of threshold for like sophistication and net worth. So we're definitely not your
Retail plat, right? I like we're much more white glove high-touch, bespoke. And then, like you said, we're partnering with these big platforms that their expertise, is in the retail space, and they have great products and services and then giving them a way to generate yield and overlay other creative services on top of their platform. But if you're an individual and you want to go through Gemini, then you're basically signing up there or you're depositing assets and that's right. So every day the assets that Gemini is getting from its depositors, they'll batch
sweep over
Genesis so if there is, let's say 10 people like, hey, we want one Bitcoin back today and actually need to withdraw it and then five people or like, 15 people are like, hey we want to deposit Bitcoin, Bill actually knit, their withdrawals and deposits and basically say hey Genesis, we have a next, all four of five Bitcoin for you today. We would then take all the assets rights not just Bitcoin,
it's really a 20, or so different assets that they
support. And then they would start accruing interest that day and so interest accrues on a daily basis,
but we don't actually pay Genesis
Burr Gemini out until the the kind of first day of the next month Eileen, we settle the interest, bill on a monthly basis displays near the county. Yeah. It's always your account today lie. So you can see it go up and then does it. So if it's accruing daily, is it also compounding daily? It's compounding on a monthly basis or sorry. No, it is combating on a daily basis because because it's my balance sheet, then and gets automatically reinvested and then that interest is earning interest at that point. Exactly. Exactly. That's so cool. Yeah, it's a really good product and the fact that they offer 25,
Port 20 or 25 different assets is really cool. It's basically like anything listed on the Gemini exchange is also support for yield because Genesis like we think that we can go make a mark there and there's far Adam and in those names and we obviously want to support a wide range of different assets. Especially it has pockets of demand come and go
awesome. This has been
super helpful. Thank you mad. I really appreciate the explanation here. That gives me a lot more peace and comfort. I was always curious we're all this stuff's going. Would you be open to sharing any of your favorite cryptocurrencies that you like out there?
R. Yeah, for sure. I think there's a few, right? So we have a great relationship with the Alameda research team who is also the founder of FTX exchange. They obviously are involved in the their own decentralized exchange called project. Serum whistle on on token. This is exactly it's going to be supported on the Solana blockchain so I think like serum which is SRM and then Salon obviously the blockchain that kind of powers that decentralized exchange or both really interesting one just because there's a lot of
Pent-up kind of demand for a really successful decentralized exchange to like the blockchain salon is really fast and there's a great kind of team building on it, right? Like see him Bank when freed and his team at FTX are super talented. They move really fast. They build products in a really Innovative way and so having them be the fuel behind those assets. I think makes me pretty Posh. And then what else? In addition. Yeah they're also exams. Also the de facto kind of leader of sushi swap which is another decentralized protocol.
All similar to Eunice swap that allows for just a lot of
cool ways for users to kind of interact or yield steak, LP tokens State, the actual sushi for sushi bar. There's just a lot of
really cool things you can do on the platform, the best brand lighting Community, run organizations? It's amazing. It really is. Yeah. And they, it was so cool, like, they just pay just bought, like, the domain rights to Sushi.com. So, that's actually, Sushi.com, is literally like the landing page for sushi swap. So it's just a really cool. It's like if you're a
new kind of participant,
Indy,
Like want to go play around on a protocol. I think
it's a really good platform to go to go
try out and just see all the different ways you can turn yield and the different assets
you can, you know, pledge and host. The quiddity two different pools and understand the concept of posting a quitter t22 and amm
and earning kind of yield and and then
extracting that and just
grappling with those Concepts. It's a really good platform to do that. So those are a few names that I like, and then, obviously Bitcoin, right?
Yeah, so I'm a big coin
believer. It's also just like
The easiest one to understand from like a
valuation perspective in terms of
looking at goals Market in market cap and market. Share and saying like, how is this going to play out over time? If inflation
resistant assets are always going to have a place in critical institutional portfolios and the best version of that is digital now and there's a fixed Supply then to me it's just like a no-brainer that gold marketers really just gonna
be taken by Bitcoin
especially as you have folks that kind of grew up with Bitcoins. You
have to take seats at these big alligators in a way where
like they,
Actually control the treasury or the fund or the endowment where the or the pension and really say, hey, you know what, we're going to make the transition from this inflation resistant asset, to this digital one Bitcoin. So I think that is is obviously a clear Trend that's going to play out, but maybe there's less juice to be squeezed at this point in a lot of the, the kind of Roi and buying Bitcoin has been squeezed. But I do think they're still pretty good amount of growth left there. Yeah. Awesome. Matt, thank you for your time on this. Really appreciate it. Yeah, for sure. It was my pleasure. Thanks so much for having me.
Huh. Alright, so there you have it. So both of these companies in my opinion, they seem really rock solid for me at this point. It's less about security, it's more about yield now these rates can change but just to give you a sense, here's where they stand today. If you have Bitcoin block, fi offers five percent on up to half a Bitcoin and then if you have more than half a Bitcoin anywhere from point five to twenty Bitcoin, they offer two percent and then on anything over 20 Bitcoin.
4.5%. So the Gemini exchange which is the one that's powered by Genesis they offer you a flat two point. Oh five percent no matter how much you're holding. So in this example here if you're holding half a Bitcoin or less block 5 wins, if not jimin iron is going to win. But again these rates can change from day to day. Now, unstable coins and this is where the interest really gets nuts. Jim and iron only has the die stable coin which is this
U.s. dollar pegged, algorithmically driven stable coin. It's we could do a whole episode about diets really crazy. They'll give you seven point four percent, whereas block Phi has access to a whole slew of different stable coins, G USD USD, see be USD and those all earn a point six percent and then you SD T which is tether which earns 9.3%? And there are no minimum or maximum is here. So if you're looking for a stable coin earnings then it's a no brainer in my opinion, just use block fi
Then again Jim and iron supports other cryptocurrencies that block Phi currently doesn't support. That list is pretty long. So I guess what I'm saying is you really need to check the rate cards and it really depends on which cryptocurrencies you want to lend out. I'll link all this stuff up in the show notes. Alright, I hope you enjoyed the episode. It certainly helps me sleep a little better at night knowing exactly where my money is going and I hope it does the same for you as always if you're looking for any of the links discussed in today's episode head on over to Modern dot Finance, you'll find them right there. If you
Enjoyed the episode, send it on to a few friends. We would very much appreciate it. That's it for now. Take care.
