Episode 47: Bitcoin Banking with BlockFi

Ben: [00:00:00] Welcome to the alt asset allocation podcast, exploring alternative investment opportunities available to the everyday investor. Here’s your host Ben Lakoff.

Hello and welcome to the all to asset allocation podcast. Today’s interview is with Shane Mullin from block thigh. Block fi is redefining banking and for retailers, it offers four main business pillars, interests, account trading, crypto loans, crypto backed loans, and a credit card.

Being paid to huddle or to hold your crypto. Not selling your crypto and accessing those dollars to make a purchase at very low rates I might add. In this interview, we dive into the business model and really touch on a lot of the details, especially the potential risks. How can you give somebody your Bitcoin now, your keys, not your Bitcoin.

And be paid a little interest to do so, but going through the details on how the business operates and some of the things to look out for. I’ve been a happy block vie customer for actually quite a long time now. And I’ve dropped in a referral code that you can use to get up to $200 after you deposit.

BlockFiis really interesting and it has some great offerings and I definitely wouldn’t recommend it if I wasn’t using it myself. And didn’t think that it was a very good opportunity. And it’s really a great opportunity for folks trying to get a little bit more yield or do a little bit more with their crypto.

Before we jump into the episode, I wanted to take a second to thank you for all the great questions and feedback I’ve been getting you guys really rock. And if you’re getting some value from this podcast, please drop me a line or review these things really, really help. All right, here we go. Enjoy the episode with Shane Mullen of black fi Shane.

Welcome to the show. Happy to have you on today.

Shayne: [00:01:52] Yeah, thanks for having me.

Ben: [00:01:53] Yeah, I’m excited. Before we get started, I met I’m out here in LA freezing my butt off in a sweater and you’re walking around in shorts. You made me really jealous, but yeah, there’s a lot happening in the crypto market right now.

This is being recorded on the 24th of February everything’s kind of going wild and super fun, but we’ll stay away from all of that. And the topic today is jumping into block fi what it is you guys do and letting, letting my listeners know a bit more about your business. I’d like to kick it off just a little, little bit about you, your background and how you got started with block fi.

Shayne: [00:02:28] Yeah, a hundred percent. So I started my career in, you know, the early days of what I would consider kind of the financial technology ecosystem. Boom. I, you know, graduated college always wanted to be kind of on the convergence of finance and tech. I thought it was going to be the future. I thankfully was, you know, my, my thesis was accurate.

And so the best place back in, you know, 2012 when I graduated was Bloomberg, they are the biggest, still are probably the biggest financial technology company out there. Most people don’t think about it like that because they don’t think Bloomberg, but you know, multi-billion 30, 40, $50 billion privately held company.

They power most financial markets on institutional side. And so I started my career there really understood, like. Every asset class kind of in and out. Right. And from there I took a bit of a niche dive into mortgages and, and more specifically mortgage MBS. I did a bunch of work there for about three years on selling trading systems to effective hedge funds who were buying MDs a little bit of consumer abs as well.

And then ended up finding you know, my passion for large companies was kind of taken back when this whole kind of venture investment into the FinTech space started happening really predominantly in like 2013, 2014. So, you know, shortly after that my work at Bloomberg I found a startup in New York which was in the marketplace lending space.

So the time, the biggest, like, eh, I would say kind of evolution of FinTech was these companies taking these traditional banking products. Right. And then moving them online, creating a capital stack or technology stack that effectively reduces time to get the actual product into your hands and reduces costs.

Right? So one of the big ones was lending consumer lending, right? So back in the day, you’d have to go to a bank, sit down, talk to your banker, give them a bunch of paperwork, bring a bunch of files with you. They’d originate your loan and you’d get the, you get the money in 30 days. Right? Well, lending club prosper, avant funding circle.

All these companies emerged and were like, we can do this online and we can match you the borrower with retail who wants to earn yield on the actual on loan. Really cool concept. So the first startup that I joined was called orchard and that was, you know, venture backed startup Canaan A few other, like really big names.

And my boss, VP of sales was Zach Prince, who is the CEO of block fast. So Zach and I started an orchard. We ended up building a business that allowed institutional investors to actively buy loans on lending club, prosper funding circle, and some of these other platforms to create these consumer portfolios and earn significantly more yield than they could anywhere else in the consumer space.

That business grew pretty rapidly. The whole industry grew like crazy fast you know, for better or for worse. Back then, I think you see some of the stock prices now, and some of those businesses did not turn out, turn out too hot, but we were smacked out in the middle of it, right? We were seeing all different types of lenders.

We’re seeing all different types of institutions. We got a real good flavor for different investing preferences, different issuing originating preferences on the lending side. And we really built this marketplace, which was awesome. That was like my kickstart into like, Whoa, like FinTech is here to stay the picks and shovels kind of infrastructure.

Businesses are actually really important for this businesses for this world to succeed. And with that we ended up selling the company in 2018. And then I moved out to San Francisco and when I moved to San Francisco, I was like super interested in payments. That’s like, that was my next thing.

I’m like, lending is great. Payments is kind of the next kind of iteration. Stripe was just getting off the ground for the most part. And I’m like thinking to myself, all right. What part of payments are unique? And what part of payments, you know, can be effectively disrupted with. Different technology and different systems.

I found myself at a company called Quill, which is effectively a payments platform for contractors, right? If businesses want to play contractors anywhere in the world, easy onboard, pay the contractor. And then the contractor has the ability to take an early payment. It was like a cash advance product on the backend.

Pretty sweet. We, we actually grew the company pretty quickly had a bunch of big clients. Tri-Net was one of our biggest clients, but at the time I’m there and I’m thinking, well, this blockchain has to have some form right. Of, of positivity in terms of making this process more efficient. It’s like, I’m still sending wires through an API call to my bank.

I’m still like sending ACH, which land in like five days, depending on where you send them international effects could be nine days and like 10% fees like that. That to me, it was like addict. It was just outrageous based on kind of some of the evolution I saw in my previous role. With lending. And so, you know, I started looking into ripple, started looking into some other like distributed ledger technologies, Corta And I was saying, and I sit and stellar was like one of our partners at quilt at the time.

Cause we were thinking about building some of this stuff as I was exploring. And that’s like more or less kind of what got me the most hooked into the blockchain ecosystem was this concept that you could send money international almost in real time for a fraction of the cost. And that to me was going to change the way that like the world worked in the future a hundred percent, right.

That was like light bulb. I’m like, that’s changed the world. The world works. And I’ve always been very like stable coin slash like the tokenization of like the ripple and XRP. Like those are going to be things that help with, with transactions. Those are the currencies. And then I started to get a more on a Bitcoin Ethereum, et cetera.

And I was like, those are the assets that are going to help power some of these things as well. Right? Those are, those are, those are assets that are not going to transform necessarily maybe payments. But they’re going to transform the way that people store value and the way that people earn. And, and, and appreciate their wealth over time.

So I got into Bitcoin, Ethereum Coinbase, like the whole nine yards was actually just looking at my Coinbase tax forum. Cause I was just like curious when I first bought a, I think I bought a theory in like 2000, like 16 or something like that. And I didn’t know what it was. I had no idea you know, it was like, it was maybe like early 2017.

You know, couldn’t take a plunge, couldn’t get comfortable, but like was in it. And whenever you buy something, in my opinion, I researched the heck out of it. I want to know what it is. And so fast forward, you know, this kind of evolution of my FinTech background too last year, Zack had called me and talked to me about kind of what he was building.

And we had been in discussions about block file a lot, actually from the beginning of kind of his evolution of, of the business model, to where they were at last year and our two worlds collided. And I, you know, I joined the company back in July of last year.

Ben: [00:09:05] That’s awesome. Actually little known fact is one of the first kind of FinTech startups.

I tried in Thailand when I was living there was a PTP peer to peer loan marketplace as well. I was very much in the thick of a, that whole revolution. I mean, I love the idea. I’m not sure how to build like a successful business model out of it. They think their credit risks

Shayne: [00:09:29] what’s happening. The, the model like is, sounds great.

Right? You connect retail customers with access to yield opportunities. They wouldn’t have otherwise, but when you start to work in the retail landscape, Hey, you’ve got a securities and regulation that you have to follow because it’s very important to do so, especially if you’re doing retail investors, but B that you have like a scale problem, right?

So like if you’re lending club and you’re a marketplace and you only make money on origination fees, meaning you only make money when loans are issued. Right. Well then the way that you make the most money and the way you make a lot of revenue is you get more loans. A lot of them. Yeah. If you need to listen to a lot of loans, guess what?

You need a lot of capital to issue the loan. So what lending club started do is Hey areas, Hey fortress, Hey you know, bank of America, like, why don’t you guys just sign $200 million forward flow agreements with us. And that will facilitate the next six months of our kind of revenue growth targets.

And then let’s just keep adding institutional investors. And then eventually they’re like, you know, now we have six facilities that are each, you know, 500 million each and the retail guys, like what the hell? Like I, now I can’t participate. Like I used to be able to. And that’s what happened in that industry.

It effectively just kinda started to disrupt and change kind of the way that, you know, retails, retail investors had access to capital. And then, you know, as institutions came in. It kind of compressed that the demander

Ben: [00:10:59] still good in theory. And hopefully there’ll be worked out, but today all about black fi

We were talking a bit about it and I I’ve been a fan for awhile recommended to a lot of friends. But I’d be curious how you describe block Phi to a non crypto person. Like what’s your one-liner or elevator speech for it. Yeah.

Shayne: [00:11:19] The best way I described the non crypto person, I say we’re a wealth management platform for crypto assets, right?

We allow you to manage your assets, crypto assets and garner wealth from it over time. So when you think of like a wealth manager, like what does a wealth manager do? Right? A wealth manager gives you access to yield. A wealth manager gives you access to financial products, right? And a wealth manager is safe, secure, and, and.

You would, you would assume trustworthy, right? Some wealth managers out there, you know, depends on who you’re talking to, but that’s, those are the things that I think about. Right. So why should somebody that owns cryptocurrency not have access to that network? Right. If I own Bitcoin, I can’t go to UBS and open an account and be like, Hey guys, can you manage my Bitcoin for me?

Oh, I’m looking to borrow off the Bitcoin too. Oh. And I’d love to invest it in, you know, or get paid, yield on it. Oh, I’d also like to buy something else with it or, you know, et cetera. So that, I would say at the end of the day is like our core right. Core infrastructure play for, for retail investors.

Ben: [00:12:24] That makes a lot of sense. You have a couple like divisions, I guess, or, or focuses of block fi, but just walk me through each of those divisions and kind of, then we’ll dive into how it works in a little bit more detail.

Shayne: [00:12:37] Sure. Yeah. So, I mean, we, the business, the best way to kind of think about it holistically from like a 10,000 foot view is we’ve got a retail business and an institutional business, right?

The retail business is you, we’ve got about 200 ish thousand clients today in the retail business, all over the world. And we offer kind of, I’ll call it four pillars right. Of, of value to help manage your wealth. The first I mentioned earlier, which is what we call our block fight interest account.

Flagship product. It is widely accepted. People love it. I love it personally. I’m sure you do too, as a, as a customer. But we allow you as a retail user to deposit your crypto and earn yield up to 8.6%. We pay at 0.6 on stable, 6% at Bitcoin five and a quarter in Ethereum. And the list goes on. We also offer, which is not as like publicly mentioned in our kind of advertising, but will be in the future.

But the second pillar, which is trading, so buying and selling, and we only we charge a lot less than the Coinbase or Geminis of the world. Like we don’t have a transaction fee, we just build a little bit of cushion into the spread of, of whatever the price is. Is that you buy? So that’s second. The third is the retail based lending product.

So what is that? That means that if you deposit crypto on the block, find you’re earning interest and you want to access liquidity off the position of your crypto, collateral or crypto in your, in your account. You can pledge some of that crypto to block vice collateral, and we’ll issue you a cash loan at, you know, 35 or 50% LTV, meaning that if you have $10,000 in Bitcoin, right, and you want a loan and USD off that Bitcoin will issue you.

We’ll give you a $5,000 loan, right? 50% LTV. It’s half of what your Bitcoin’s worth typically charge like 8%, 9% give or take annual. It’s an interest only loan as well. And lot of our customers use it for, you know, they don’t want to sell it because they don’t want to lose the appreciation of their crypto.

Maybe they’ve got like a, you know, some sort of other investment or thing that they want to use the cash for. And from a tax perspective, right? Like you can draw down off this and not have to worry about the cap gains of selling your actual crypto assets in this particular instance. So another pillar, great product are our it was actually the first thing we ever came out with which kind of spearheaded the growth.

And then lastly is the credit card. So that’s pillar number four. Credit card is a retail based product. In the U S only for today the same exact concept of your chase freedom or American express card, you apply, you get a limit. The beauty of it is that rather than getting cash back or travel rewards back, which nobody really uses today, you get Bitcoin back a 1.5% back in Bitcoin.

So that is going live in Q2, super excited about that product.

Ben: [00:15:30] I’m definitely one of the first signups, I think super excited about that as well. Interest account deposit, crypto earn yield important to note that that yield can be designated in any sort of currency.  You deposit Bitcoin, you’re paid yield 6.2% APY in Bitcoin, but I could also have that in dollars.

I can have that in light coin or, or Tax gold, whatever I would like, which is a cool little function as well. So that’s the first one trading buying and selling crypto, no fees. You build it into the price, retail based lending, crypto backed loans, 30 to 50% LTV. And this gives you us dollars direct to your bank account, really freaking fast and reasonable rates for that speed and ability.

And then the last pillar is the credit card, which is an actual credit card, not a debit card, paying you interest or rewards in Bitcoin. Super super-stoked Q2, definitely Mark in my calendar. That is the retail. Can you, and you said there are 200,000 retail users. Can you jump into the institutional side of the business as well?

Shayne: [00:16:36] Yeah, for sure. So on the institutional side we cater to top, top financial institutions in the world who are looking to do a few things. One is borrow, so borrow crypto in some capacity or borrow USD. The other is trade. So we have an OTC over the counter trading desk. So if you, as a corporation or as an institution want to come in and purchase crypto on our platform through our OTC desk, we’re hooked into all of the major exchanges and trading desks to get best price execution.

And then the last is we, you know, just launched last week or it might’ve been like 10 days ago, a Bitcoin trust it’s called the block fed Bitcoin trust, same, very similar structure to grayscale Bitcoin trust. You know, ours is custody with fidelity. The fees are a little bit less and you know, we’re seeing a lot of really interested parties come in to, to that particular product.

Ben: [00:17:27] Awesome. And then in terms of size of the business are you able to share like what percentage of the total business, profit revenue, whatever, whatever your metric is, retail versus institutional

Shayne: [00:17:39] today, it’s more 60, 40 institutional revenue versus retail, but we have $14 billion worth of assets on the platform right now.

And we’ve got, you know, 200 ish institutional clients, 200,000 ish retail, you know, we’re doing, you know, nine figures and more revenue per month. And what’s nice about our model is that we’re not succumbed to just one revenue stream based on one product. Right. We started the business with this construct where let’s take a niche.

You know, potential? Well, the business evolution obviously is a long story, but kind of more, more organically. It’s, let’s start with this kind of niche customer base, which is the crypto investor. And let’s build one product really, really good for that particular type of niche customer. That product was the retail loan product, right from there.

Once you get really good at that, that’s when you can then start to add, add additional products on right to your suite of tools, trading yield credit cards, trusts, et cetera. And then all of a sudden you see multiple different revenue streams. And if, you know, for whatever reason, a revenue stream, you know, took a hit or how to down, it doesn’t matter because we have so many these revenue streams available today that are all doing somewhat relative of, of a similar number.

It’s a really exciting thing to see, right? Because it makes you a lot more confident as a, as a leader of a business in the position that I’m in to, you know, help make decisions to scale in certain areas.

Ben: [00:19:10] Yeah, absolutely. No. And I think these they’re solving a real need. I mean, the kind of making these massive purchases a non-tax event and not, not able to touch your Bitcoin stack.

I think that alone you kind of, when I explain this to people, you know, you kind of see the light bulb moment that they’re like, Oh, well, I am incredibly bullish on Bitcoin and I don’t want to sell it, but I do want to unlock that cash. It’s like, yeah, it’s very similar to a hilar, like using your home as collateral.

It’s the same sort of thing. I think that makes a lot of sense. A lot of the discussion I have with investor friends, you know, it’s, you, you look at this and you say, okay, I give you my Bitcoin, you pay me 6% interest monthly. You know, How is this interest interest generated? I know how banks work, but like, perhaps walk me through like the business model of where’s the center interests being generated.

Yeah, just that paint me that picture a little bit.

Shayne: [00:20:08] Yeah, for sure. So, you know, let’s use like the hypothetical example that you deposit one Bitcoin, right. On a blog VI you know, first and foremost, we use a suite of custodians, so Gemini fidelity and Bitco to, to store that particular asset it’s commingled, right.

With, with with a handful of like call it like a, you know, a big, like a big, it was just like a co-mingled Bitcoin account within that whichever custody platform we’re using. And then what is typically happening is we have, you know, on the institutional side, Call it tier one, a tier one institutions who are borrowing in either USD for certain reasons, which we can talk about borrowing in Bitcoin for certain reasons that we can talk about as well.

And then over collateralizing each position, right? Either in cash or in cash equivalents or over collateralizing in Bitcoin or in Ethereum, if they’re borrowing USD. So what that does is that allows us to earn a specific yield from that counter party, right. That we can then pass on to our retail investors and cover ourselves and our investors on a risk perspective by enabling certain practices that allow us to make sure that if anything happens from a financial risk perspective, I E the price of Bitcoin or price of digital asset goes up or down.

We can make sure that, you know, everything clears in an effective way.

Ben: [00:21:39] So essentially the retail. A person is lending their Bitcoin to these institutional parties who then are over collateralizing that position in cash crypto or cash equivalents, right? Correct. Correct. Okay. And then so, so that makes sense.

So trying to think through the different pieces of the puzzle here me as a retailer retail person, it makes sense for me to put money at put my crypto in here. I’m marrying a yield, but on the reverse side Tell me, tell me a little bit more about the type of institution, why somebody would be borrowing crypto and paying, you know, presumably above 6% to borrow that Bitcoin, do you have any insight in what they’re doing?

Because they’re effectively, you know, short that, that Bitcoin position, just what does that look like? Paint pen, a little bit more context on the institutional borrower of crypto.

Shayne: [00:22:36] Yeah, for sure. So I’m on the Bitcoin side. There’s, there’s kind of two use cases that we see the most the, for, and like the, the call it credit profile of the institution or the counterparty is also kind of like bucketed into two different two different areas.

The first kind of call it Bitcoin related borrowing activity is, you know, making markets. So you have this world that we live in, where there are dozens and dozens of exchanges that are dislocated, that do not have the same price on either exchange. We have companies like you know, large kind of prop trading market-making firms who are, you know, buying and selling in real time on these platforms and making spreads.

So say on one exchange, your Bitcoin is trading at 48,000 on another it’s trading at 48, seven. They’re effectively initiating a trade at the same time and they’re making that $700 spread. Now what’s important to know about market-making is that. You have to have actual collateral on these exchanges to actually make the position or make the purchase right.

In the equities market, you can borrow, right. You can borrow securities and then you can use those securities that you borrow and actually make markets in the crypto landscape. You actually have to have that Bitcoin on the platform itself. Right? So if the case is that you are entering into a buy sell, and you need Bitcoin on each platform.

Well, you have a working capital demand there, right? There’s working capital I E crypto that you need in those balances to actually make those markets. Therefore you can either go out and buy them directly and hold them yourself. Or you can come to a place like Blackfin borrow and pay the fee that we charge on, you know, X number, whatever the term of the, of the contract is.

And, you know, the, the idea is that your spread, that you’re making on the trading as much higher, which it is in almost every scenario. So that’s kind of one. So that’s one, market-making the other is gray scale and some of the, and, and, you know, just the public trust gray scale that exists today within the Bitcoin space.

So when you subscribe to the Bitcoin to the grayscale trust at nav, you earn right shares and you need to, you need Bitcoin, right to subscribe. You have to physically put Bitcoin into the trust. The subscribed shares it nav. A lot of companies are saying, well, if I can borrow crypto or Bitcoin at a specific price or a specific rate the, the premium of my shares when redeemed it nav to where they will be in six months, time is going to be higher than whatever the interest rate I’m paying.

Therefore I can borrow the Bitcoin, use it, and then earn the premium on the, on the tray. So you’re making this. Inherent spread on that trade as well. So those are two examples in which we’re lending Bitcoin or crypto and the types of institutions, right, are, you know, we kind of have two buckets.

One is tier one, a publicly traded prop tech firms who have literally been doing this for years, financials, credit, underwriting. They’ve got, you know, a history we’ve done business with them before, in some scenarios, those will require overcollateralization in some not because our credit underwriting is so strict and we see enough information for us to get comfortable that they’re not going to have, you know, or the risks associated with that particular transaction is lower.

That’s one. The other bucket is like most of our businesses in what we were talking about earlier is for that particular company to borrow crypto, they’re going to have to post cash collateral over collateralized and or cash equivalent. It could be shares in scale, could be cash, could be some of the form of equity type cash equivalent, but that needs to be over collateralized.

And so that’s how we help, you know, from a, from a downside risk perspective, protect kind of where, you know, our yields shake out if any sort of price risk were to happen on, on any of the currencies we support.

Ben: [00:26:23] No, that totally makes sense. I never thought about that. Great grayscale swap trade.

I mean, I bet that’s, that’s massive for this because the premium is. Well, North of 20%. Whatever you’re paying to borrow the Bitcoin to do this is probably a rounding error in that that spread until the spread decompresses, which is kind of odd that you guys have launched your own Bitcoin trust, because then presumably that would kind of lower the spread of the gray scale one, or at least allow your customers to stay within your own ecosystem.

Doing that spread arbitrage, I suppose. But I I’m curious, like, just thinking through these market makers, I mean, if they’re, if they’re borrowing Bitcoin, but they’re there it’s it’s to fulfill a working capital need, but they’re over collateralized to borrow this Bitcoin, is it just because, you know, they have a bunch of Ethan, they need Bitcoin, so they use the ether as collateral.

I mean, That would be the first question. And then the second question is more just going into more detail on a credit risk analysis of these borrowers, because, you know, it seems like to be able to pay that high of interest rate, you’re probably going pretty far out on the risk spectrum.  Making sure that you have product proper credit risk analysis, pretty key to this business, I would suppose suppose

Shayne: [00:27:48] a hundred percent. Look, I think like first and foremost, the crypto space from a banking and financing perspective in general is super nascent. You cannot, as an exchange go to, you know, bank of America, JP Morgan, and get, you know, a huge facility or line of credit, or even allow them to bank you like it is very, very nascent and therefore there is.

Room four, right? Whenever you’re in a nascent market there’s room for, for, you know, price discovery. That, that makes sense. From a, from a cost perspective, I liked some of the prices that we have in the market. So that’s kind of one, right. We’re very early. The kind of the second piece is we on our Bitcoin like Bitcoin lending it’s all cash collateralized, right?

It’s we’re not kind of mix and matching or things of that nature. It’s either cash or cash equivalent. I think that’s like good that you’re not like posting Bitcoin. Yeah.

Ben: [00:28:45] And this is, this was the worry, right. That they’re borrowing from someplace in defy, collateralizing it without, and they have smart contract risks, things like a smoke and mirrors, but the other, I mean, cash equivalent is a very, very broad category, right?

What do you mean when you say cash?

Shayne: [00:29:00] Cash or equity? Okay. Yeah. Or shares if, you know, depending on what we’re talking about. And then like, if we’re thinking about it, conversely, right, like we also do a tremendous amount of USD lending collateralized by crypto, right?

So that one is, is a little bit more self-explanatory where you deposit your crypto. You need work in capital USD, maybe you’re a mining company. You want to buy more mining operations, or maybe you want to, you know borrow USD for basis trading or whatever it may be. There are like very strict kind of margin call and release requirements that we have within that side of the house, too.

Right. Which we can, we can talk about in a bit. But that makes sense from a, what I was, what I was going to jump into on kind of the credit risk side of things. So that’s really important is, you know, we are our chief risk officer Rene. He comes from Bay bank of America and he was, he built the, you know, equity structured finance group there and ran it for a very long time.

What they did was effectively create a margin or lending off of securities lending collateralized by equity positions, private placement, whatever it may be. So his background is very, it’s like very diff it’s very similar to the world that we live in. The beauty of the world that we live in though, is that unlike security, which settle T plus two or two plus three, depending on where you are and only are, you know, Based ju they’re geographically kind of constrained to the areas that, that you live Bitcoin trades and settles 24, seven, 365 days a year in real time.

Right? So that like, as an EI enhanced, decreased risk of selling it right. Which is huge. From a counterparty perspective, like the conservativeness of our underwriting is pretty, pretty strong. Like it’s pretty high. Every single company that comes through the door, no matter what has to go through a rigorous process, we have a loan officer or not a loan officer, but a credit officer is what we call it for every single counterparty that comes on, where they’re doing the underwriting, looking at things like financials, balance sheet, looking at what assets they currently have looking at things of that nature.

And then looking at that updated right for the life of the loan which is, I think really important, even if something’s over collateralized, let’s say even if you’re putting, you know, 50 of 50 million of Bitcoin held at block five, you’ve got a $25 million loan, 50 LTV. If that Bitcoin drops, we’re going to ask this potential, this counterparty to.

Could like fill up more collateral,

Ben: [00:31:38] that’s more Bitcoin or we’re taking it seriously,

Shayne: [00:31:43] or we have to liquidate. Right. So that’s an easy piece, but even though we have that security, we’re still going the extra mile and going deeper into the actual financial Zuora. We’re not signing term sheets or even sharing any information.

Ben: [00:31:55] Yeah. And that, that makes sense. These borrowers, so if I deposit us dollars, it’s converted to G USD or USB-C, and that is earning 8.6%. So, I mean, For me when I talk to people, it’s like, how much are you earning in your bank account? Okay, well, this is not a bank account. It’s not FDAC insured  or all of the, you know, asterix that I love to throw in.

It. It’s a startup it’s not publicly traded to yada yada, yada, it, it would make you probably sad at how often I say these things, but, you know, it’s necessary. There is a risk. That means somebody is borrowing those dollars at a higher rate because presumably you’re making a little spread or any of these interest accounts that you’re paying out or they lost leaders.

And, you know, you’re kind of just eating that spread and making it up somewhere else. And using that as a way to entice more retailers to deposit their assets. You can keep this lending thing going.

Shayne: [00:32:52] Yeah, it’s a good question. I think, look at the end of the day, like, you know, we, we operate our business.

And our kind of net interest margin, right. At a positive. So that’s an important thing to keep in mind. 8.6% is high and it’s high anywhere. And I think part of the reason why we’re in the market for 8.68, add tremendous about its value, but be like adoption because 8.6% is a very good number. We are still making money on 8.6%.

We’re still doing well. That being said in over time, right. As you see more entrance coming into this space, as, as I mentioned earlier other like finance providers can come into the space and get comfortable with crypto. Yeah. There may be a world where rates on the borrowing side start to compress a little bit.

If that’s the case, then rates will still compress a little bit more. We’re we always joke, like, wonder if we, you know, if, if we, if we priced our stable coin deposits at 4% AP AP, why would that be better than 8.6? Because people would be like, Oh, this makes a little bit more sense. Like, I don’t, you know, it’s, it’s, it’s, it’s not that abstract outlier.

So look, I think we have a lot of room to, to kind of. Grow that side of the business. There’s things that will happen macro related that will allow, you know, force us to be compressed at some point in the future. But I really don’t see it happening anytime soon. And you know, we’re again, like first out of the first inning, right.

Of this space from a kind of like an infrastructure level that, you know, we see a lot of, a lot of runway still.

Ben: [00:34:29] I I’m a, I’m a big fan of all of your products. Don’t take these questions the wrong way. And another interesting one that You know, I didn’t see it until I actually a couple months ago is that you have a P a X, G, so PAX gold, which is a tokenized version of gold, but you’re actually paying like four and a half percent on it.

And me is a value investor. Took me forever to get over this whole store value investment thesis. Like I’ll put some of my net worth in gold and Bitcoin maybe makes sense as well. Well you guys just flip that on its head by like, I think, yeah, you can hold gold and actually we’ll pay a little bit of interest on it, like a, like a dividend sort of thing.

It kind of, it upsets that one. People are borrowing PAX gold on the other side of things as well.

Shayne: [00:35:14] Yeah. We do, we do have some institutions borrowing, PAX gold. You know, it’s interesting. The tokenization of kind of hard assets I think, is going to continue to be a trend we’ll see.

Right. And going forward. You know, we are, we’ve been like, this is not something that we’re doing today, but like we’ve had, I had a lot of conversations exploring, like allowing, you know, tokenization of art or tokenization of, you know, no real estate or commercial or things of that nature. I think you’re seeing obviously packs gee there’s demand in the market.

Therefore like we’re able to pay a good yield on it. I think people are starting to find a lot of value at a PAX gold because you’ve got a lot of these gold bugs that are thinking themselves, well, I can actually have the same allocation settles faster, and I get paid interest on it. That’s pretty cool.

Ben: [00:36:01] It’s like a Trojan horse for a crypto,

Shayne: [00:36:03] right? It’s like the gold packs G plus the credit card is like this, this like massive, like bigger adoption conversation, right. Where there’s very real bridges right. From the traditional world and the crypto world. And I think that’s really important, like for what block FI’s doing and like what kind of our ethos is on a kind of a go-forward basis.

It’s like, what avenues can we build bridges into traditional markets where people can understand that the the value that they’re getting out of the crypto form of that particular product is the same value. If not way better and cheaper, or in our case, you’re making more money than the traditional route.

That’s kinda like. That’s an ethos. I think we’re going to see for, you know, as long as we were, we were around and we’re, we’re killing it. And you know, with every product that we come out with, there’s an element of, you know, how do we kind of create that bridge?

Ben: [00:36:57] Awesome. So I think we, we went into quite a bit of a detail about the interest account.

From the retail side, it’s me putting in crypto earning interests in the crypto or, or coin of my choice and on the opposite side, it’s the institutional borrowing that’s able to pay that yield. The next one that I’d like to jump on, I mean, trading, it’s a great product, but I don’t really want to cover that.

Too much here would be kind of your flagship or the initial first product, the retail based lending product. We talked a bit about this, but I, I’d be curious to hear more about the types of use cases that you’ve seen the most common type of use case and where you see this product going in the future.

Shayne: [00:37:42] Yeah. So the, you know, the lending product is interesting because what it does, it gives you a couple of different advantages than, you know, kind of traditional unsecured lending a is you’ve got collateral and it’s all secured, right? Therefore the rates that you’re going to be paying on that particular loan are going to be a lot lower.

So if you think of like traditional consumer or unsecured markets where you’re not securing, you’re paying like 20, like maybe like 15 to like 20% APRs, some States are pay up to 36% and higher, depending on kind of your credit profile. If your credit profile is not great but you have crypto, you can actually still get meaningful rates because it’s fully collateralized, which is really important to understand.

I think the other is that like use cases or. Kind of pretty like all over the place in terms of how people use the product today. The product is built in an interest only capacity. So it’s a 12 month product where you pay interest only for the first 11 months. And then that 12 month you pay back the remaining principal.

We I’ve seen people use it for investment properties. I’ve seen people use it for down payments and things of that nature. I’ve seen some folks use it to buy more crypto. Although I don’t like encourage that personally. I’ve seen it for just general kind of like debt refinance, right?

Let’s say you have like five credit cards and, you know, $10,000 balance and the fees on those credit cards is 25%. You can refi, right. Or, you know consolidate and use it, this loan to do that. So I think there’s a lot of really cool use cases. And I, and I, it’s funny, I see different use cases kind of every day when I talk to current clients where do we go?

Right with this product, I think is a few different directions, but one is like creating a different loan product backed or secured by your crypto collateral. Right. So right now you have this interest only construct with, for some people works, but for somebody who’s like, wait, I gotta pay this whole balloon back, you know, at the 12 month, yes.

You can refi and continue out the interest only. But you know, for some people that might not be normal or they’ve never seen a loan like that the world I come from is more installment based, right. Or credit based like credit line based. So I think there’ll be a world where we issue, you know, lines of credit collateralized by your crypto.

Or something along those lines which also kind of helps with the, you know, expansion of our total kind of addressable market of who’s going to get the credit card, because in the beginning of time for the credit card, it’ll definitely be more of a prime type borrower. Right. But then as you start to build other products, like a collateralized line of credit that people can have access to, right?

You can start to open up the doors to different types of credit profiles which just allows, you know, more people, more customers to gain access to credit, which is important right. At rates that make a lot of sense. So, you know, I would say like getting into crypto and getting into digital assets, being able to buy Bitcoin and Ethereum or whatever it may be anywhere in the world, a kind of democratizes your ability to own assets.

That’s one, right? Not everyone owns a house and everyone can buy stocks. But everyone can buy crypto. Theoretically, if you, if you get on right the right platform, theoretically, right. Depending on where you are, but then not everybody. If I go to Robin hood today and I have $5,000 of Apple shares, probably not, is not issuing me alone backed by my $5,000 of Apple shares, it does not exist.

So that is where I think we’re going to start to see a pretty cool, right. Initial entrance of folks who are wanting to use crypto bankable, like assets to do things, but can’t, and now that they will, you know, with, with, with our products. So that’s exciting to me personally,

Ben: [00:41:28] very, very exciting indeed. I think it’s also important to note because I, I sent in a customer service ticket a while ago that the crypto that you’re using for collateral.

Cannot be the crypto that’s earning yield. These are two separate products. You put in your crypto, use it as collateral. It’s not like it’s earning 6% and growing over time. That’s completely segmented, which makes sense. Yeah. Well, that’d

Shayne: [00:41:50] be a very, very cheap interest rate.

Ben: [00:41:54] Yeah. You know, after I like got the response back, I was like, ah, yeah, that makes sense.

But yeah, I was being greeted. Yeah. I’m curious, this crypto that’s being used as collateral. I send in a one Bitcoin, which is $50,000. And then you send me $25,000 in dollars to my bank account as a loan that one Bitcoin, that $50,000. Is it just sitting there and a custody account or are you lending that out?

And doing something with it,

Shayne: [00:42:21] sitting there in a custody account going up or going down? Yeah, appreciate it. Appreciate it.

Ben: [00:42:27] Yep. Easy enough. And then.

Shayne: [00:42:31] It’s it’s in an account where we have access to, you know, call it if need be liquidated, if need be. Or, you know, there’s some like re margin release type activities.

If you know, all of a sudden your LTV goes up to, or it goes down to, you know, 20%, then you can refi.

Ben: [00:42:49] Right. Okay. So I can pull out more money. This means if that one Bitcoin suddenly goes to a a hundred thousand dollars, so it doubles well, if I only have a $25,000 loan, that means my loan to value is only 25% because I have $25,000 in my bank account collateralized by a hundred thousand dollars worth of Bitcoin.

I can go to you. And I say, Hey, black fi I’ve huddled. And this thing is on its way to the moon. Give me another $25,000. So I’m at 50, 50% loan to value and you guys will do that. That’s correct. That’s awesome. And then the the interest rate is determined. I mean, are you doing Pulling in my credit score or just based on collateral

Shayne: [00:43:30] damage collateral.

Yeah, because, you know, because we kind of have two options at 35% collateral or a 50, so 35% or 50% LTV, your rates are just going to change depending on either one. I think it’s not, I’ll have to, I can send you the links over to share with your audience,

Ben: [00:43:46] but I mean, that’s, that’s easy. It’s very easy to, to to calculate that makes it, that makes it nice.

So I’d be curious. Oh, and then the, so that’s the retail based lending. That was very helpful. Let’s round this thing off and talk about a credit card, which we’re all excited about. How does that work?

Shayne: [00:44:08] Oh man. Credit card is exciting stuff. We’re actually launching today some additional.

No benefits to the card, which I can talk about in a bit, but yeah.

Ben: [00:44:17] And announced it yesterday. You teased it on your Twitter a couple of days ago saying the next day I was looking at it before I was like, Ooh, let me see the full disclosure. My, my fold card is in the mail, so it should be here any day.

I do have a Bitcoin rewards card that has been a long time coming, but,

Shayne: [00:44:37] Love to hear that look, I mean, we are our cards different than any, than any other card in this space. It’s a credit card, right. Which is very important to our user base because our users don’t want to spend any of their crypto.

That’s just an ethos of wealth management. Like, do you want to spend your shares of Tesla and nobody wants to do that, right? You don’t want to spend. Yeah. I, I would never want to spend, you know, $5 of Tesla shares or any sort of stock that I think is going to go up in the future at Starbucks for a coffee.

It’s just

Ben: [00:45:05] not, it’s not, it’s all the Bitcoin that I spent. I was friends with a crazy Bitcoin bull and we were in like a place like Prague, where Bitcoin’s actually accepted a lot of the retailers. There’s more, ATM’s per capita than any other place in the world, which a lot of people don’t know.

But you know, you walk into these cafes and you see Bitcoin accepted here and you’re so excited because you can actually spend it. And I’m like, Oh my gosh, let’s buy coffee with Bitcoin. And he’s like, I’m not paying $300 for a cup of coffee. Yeah. And you’re like, yeah. I mean, hindsight guy, I spent a shit send him money on coffee because Bitcoin was probably at like four or 5,000 bucks when I was buying this coffees everyday thinking it was super cool to spend my money or the

Shayne: [00:45:48] $50 cup of coffee.

It’s like, you don’t wanna be the guy who spent 10,000 Bitcoin on us, you know, a pizza. Right. You know what I mean?

Ben: [00:45:55] Like it doesn’t, it doesn’t spend your Bitcoin, but dive into it. Cause I’m interested in all seriousness

Shayne: [00:45:59] though. It’s, you know, look, we, we want to preserve that wealth, right. Compass back to the wealth management kind of does that.

We have as a business and it’s a credit card. No different from your chase reserve or your freedom card, Citi, double cash, whatever it is you apply for the card, you get a credit limit. The car gets issued to you. You have access to the card chip visa backed Apple pay. I believe don’t quote me on that, but it should be supported.

And as you spend, you earn 1.5% back in Bitcoin, and that Bitcoin actually is deposited into your block by interest account. And it earns interest really cool reward that earns interest. I think in the history of rewards, if I’ve never heard of that before, and it’ll be the first block fi or sorry, first Bitcoin rewards card that exists in the market.

We’re also going to be launching four block by customers. For additional benefits that will total, you know, I think up to between 750 and a thousand dollars in bonus over the two-year period, and those will be bucketed in, you know, Bitcoin rewards, 1.5 being bumped up to 3.5. We have a stable coin boost.

If you hold a certain amount in the account, we have a trading boosts, we refer a friend boost, all that’ll be on our website. You can dive in. There’s a video. It’s great. But we have a lot of people on this wait list and we think it’s going to be a huge success. We think it’s going to drive tremendous amount of, you know, non, we call them crypto neutral, crypto neutral crypto native adoption.

And you know, we’re going to also come out with some pretty cool offers. So, you know, being able to spend it other places like Harry’s and Uber eats and all that, and earn Bitcoin back for, for those purchases on the cards. So I’m really excited. It’s been a lot of work. The team has been working really hard on it.

But yeah, the The hype is real and M and the clink factor of the metal card is also real.

Ben: [00:47:57] You love that chase Sapphire, but the reserve one is a real thick card. And I, I do get a little bit of satisfaction. I saw the Apple card the other day. That one is a

Shayne: [00:48:06] seriously thing. The Apple card, actually, that thing is crazy.

It’s made out of like titanium. I would love to make it to the name card one day. But for now we’re sticking with metal and then we’ll move from there. I like

Ben: [00:48:17] it. Well, I’m super excited to I’ll link up everything in the show notes, but I’m very excited to see this thing come out. One thing I didn’t touch on, on any of these actually was fees, fees for retail.

What kind of costs to do these different products? Are, is the average user looking at?

Shayne: [00:48:37] Yeah, so on the card it’s a $200 annual fee, but we pay $250 back in Bitcoin. If you spend three K in the first. Three months, which and then we’re also probably going to be paying, as I mentioned earlier, up to seven to $900 in rewards.

So that field be covered quickly. On the account side, we do have withdrawal fees, but your first and drawl is free, which is great. And then we do have trading fees built into the spread or the price. Well you have an origination fee as well, which is associated with taking out a loan. I think it’s 2%, which is standard across the board.

But other than that, those are our fees. Keep it, keep it.

Ben: [00:49:15] Yeah. And then kind of the last question about all of these would be. I mean SIS systemic risks to the business. In theory and I don’t think this is even possible, probably everything’s possible. It’s highly improbable at this point.

But if Bitcoin were to go to zero completely, I mean, the fact that, like, what would, what would happen to every, all, all of these things that are moving, do you guys think about that?

Shayne: [00:49:49] Well, let’s hope Bitcoin never goes to zero, but look, I mean, as, as Bitcoin price, as the price of Bitcoin starts to fall, we have automated margin call and liquidation triggers in place.

So we will just, we would theoretically consistently be co liquidating until the point of, you know, where we have this huge drum of cash. And that would be, you know, Used to cover any outstanding balances. We also have $300 million or $200 million of equity that would be first lost as well. So, you know, I would hate for that to be the black Swan event that ruins the entire crypto industry.

I don’t think that’ll ever happen based on, you know, where some of the downside buying pressure is on the institutional side. But you know, we, we would be able to, you know, Get out of it without, you know, everyone being in a, in a really bad position

Ben: [00:50:46] feels like a very terrible dooms day sort of scenario.

If somebody would gain this and put enough downside, sell pressure on Bitcoin to kind of kick off this, these mass liquidation events that would spiral it further, down, down more quickly. Yeah.

Shayne: [00:51:05] You can’t print enough cell pressure down on you. Can’t we can’t do it when you have Tesla at square and Michael Saylor and Paul Tudor Jones and pension funds.

Ben: [00:51:14] It’s being de-risked every day. But I mean, you give me $10 trillion. I could probably do

Shayne: [00:51:19] it. Correct? Yeah, correct. Or like there’s like a global blackout and all like our phones and like computer stopped working forever. That’s like apocalypse dooms day and that’s probably not gonna happen either.

Yeah. I will say when the price didn’t drop 50%, I think it was two, three in March to, you know, $3,400. Our liquidation automatic automated liquidation triggers and rich American system actually did not lose a single dollar. Everything worked as planned.

Ben: [00:51:46] And when you say did not lose a single dollar, that means I had my one Bitcoin $25,000 loan and Bitcoin went to.

Whatever it starts liquidating 20% loan to value. It went ahead and did that paid off that $25,000 loan plus a fee or whatever, and you guys were made whole, right?

Shayne: [00:52:07] Correct. And like you as the, you, if you had a loan, let’s say at 50% of BV you either were able to put more money in, or you just, the, just

Ben: [00:52:19] keep that 25 K and transactions done

Shayne: [00:52:22] transactions done.

And so. It actually. So that was one scenario where we, you know, actually came out of it in a really good shape because it was all not good shape because of what happened. But we were able to enter the market and continue to lend because our risk management system operated in the way it was supposed to.

And a lot of these companies did not have the balance sheet to be able to lend because they were underwater on a lot of their assets. So we actually gained a tremendous amount of institutional market share in that like two quarter period after that March incident. And it’s helped get us where we are today.

So resilience is important.

Ben: [00:53:01] That’s awesome. No, it’s good. It’s good that we had that crazy draw down where everybody thought the whole world was on fire for a few months. But, but really to like battle test these things a little bit because it’s not out of the question for the crypto markets to sharply, correct.

By 30, 40%, which people forget right now, especially. But yeah, so I I’d be curious. Like biggest threat to block fi as a business. I know that there’s always murmurs of traditional banks entering the space of Coinbase moving closer to this sort of business model, issuing a credit card. Like maybe they’re borrowing lending gets a little bit more robust.

All of these things that like Caitlin long out in Wyoming is doing. I’d be curious, like from a, from a business perspective where do you see kind of the business, the biggest risks happening? Yeah,

Shayne: [00:53:51] I mean all the competition out there, I’m a huge fan of personally. It just helps with this crypto adoption narrative.

And you know, whether Gemini comes out with an interest account and, you know you know, Avanti or whatever they’re doing out there does it’s all going to be positive for the space. Cause it brings more users in to the, to the ecosystem from like a risk like business risk perspective. I mean, we covered financial risk and kind of how we handle that.

I think another risk that you got to keep in mind is just regulatory risks. So were offense in licensed business on the federal level, we have lending licenses in all States that we operate in and we have money transmitter licenses in all States that we operate in. Right? So we are from a regulatory perspective you know, completely up to date on everything that that’s, that need be.

I think there might be, you know, if there’s instances where, you know, STC comes out and says Bitcoins and security, which they have not, and I don’t think they will still under the sec or the CFTC is property, but look, I will be, we’ll be positioned well for it because we got our licenses or treating this like the financial institution that we are.

The other is like security risks. Right. Which is like, you know, attacks, hacks, things of that nature to prevent that, right. We’ve got a huge security team. Adam, Adam, Healey’s our CSO comes from back in the CIA, et cetera. And you know, those guys are building out really, really important and, and, and solid kind of security metrics from a custodial perspective from like a kind of front end security perspective, kind of the, you know, the whole nine yards to make sure that, you know, that’s not a risk that we have to deal with.

So I mean, I think, look like in my position, if those three risks, financial regulatory and security can be kind of de-risked with investment personnel process, you know, scale, which all the things we’re doing right now. And then we have other entrance into the space that, you know, start to do things that we do.

I really think that we can actually outpace and beat everyone. Like, I really think we could get to the size where we’re bigger than everyone like, and we’re, and we’re the winner or there’s three of us or whatever, the amount. And they all, you know, work. There’s four big companies that are kind of dominating the entire space.

But we’ll see.

Ben: [00:56:05] I mean, I’m, I’m team crypto, so I love all of the innovation and everything that’s happening and it’s all net positive for the space in general. But I do know that it’s probably a bit of a bloodbath between the, the, the contenders and like there’s a lot happening and it’s gotta be really, really exciting.

I last question is Like who now, who do you view as your biggest competitor? Actually today, oddly enough I try to schedule my podcasts on like Tuesday and Wednesday. And today I’m interviewing viewing you and Celsius on the same day, which is crazy. And yeah, so I I’d be curious, you know, how you view somebody like Celsius and then also something like defy as a competitor and how black fits in and differentiates from these.

Shayne: [00:56:56] Yeah. I mean, look Celsius. Nexo like those. Yeah. Like. I don’t really consider them a competitor in my eyes. We’re just different business models. They have their own utility token, right. They operate outside of the U S I don’t know, kind of what their kind of regulatory regime looks like either. So I wouldn’t, I just wouldn’t classify us as the same business model as them really at all.

I definitely think like some of the bigger players out there, you know, could create products that would compete with us, but again I’m open to that competition, spurs innovation you know, you might be like, you might start to see like banks figure out or try to get, get, get familiarized with the space you’re going to, like, you saw kind of MasterCard and visa moving into it.

So like, you know, there might be a world where some of these bigger companies start to take action, you know, square comes out with, you know, cash out and you can buy Bitcoin and PayPal. And, you know, some of the major kind of fintechs, I would keep my eye on them more than I would keep my eye on kind of the crypto native incumbents.

You know, someone like. PayPal, you know, doing something a little bit more you know, deep within their suite of products that that would be like, that’d be something that would be a little bit more concerned about. But look, that being said, like we built a really nice moat. We’ve got great defensibility all across the org.

I think we’ve built the business in a sustainable function. You know, and built it for like really massive scale, which is important. And yeah, from like a race perspective, you know, there’ll be, there’ll be some news on, on new, new you know, financing rounds and things of that nature, hopefully pretty soon.

And and then you know, the world will understand how big we’re worrying. We’re going to be able to be.

Ben: [00:58:32] Oh yeah. And I purposely left a lot of those rumors out of this discussion. I know you can’t talk about them, right? Yeah. Not quite yet. Yeah. Yeah. I know. You’d like to, but Shane it’s been lovely chatting.

I think this has been incredibly educational and helpful walking through the different risks of the different benefits and kind of the value prop that block fi is offering. Just to close it off, where would you like to send my listeners? Where can they find out more about you about block fi where would you like to send them.

Shayne: [00:59:03] Yeah. I mean, look our website personally has a ton of good information. I can also you know, share a link with Ben we’re doing right now for partners like Ben, anyone in their audience that sign up through the link can earn up to $250 in free Bitcoin which is an awesome, awesome perk.

You know, our customers love it. Other than that YouTube or Twitter, you know, the whole nine yards, you probably see us all over the place. We, we try to do a good job doing that, but also me, my LinkedIn and my email, if anybody has questions, feel free to ping me directly.

Ben: [00:59:36] Awesome. And I’ll link all of those things in the show notes and definitely the black five partner program.

I wouldn’t put that in the show notes. If I didn’t feel strongly about it. And a $250 in Bitcoin today might be worth, you know, a lot more one day. You never know. We’re a lot less either way. It’s totally Shane. Great to meet you. Thanks for coming on. Really appreciate it. There you have it. Thank you for listening.

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