Preston Pysh (00:06:54):
So, let’s just talk through the product. For people that are just tuning in and maybe they’re just not completely sure what securitized loans even means, because there are people out there that they hear that is just… Doesn’t necessarily mean something to them. So let’s say I take to Bitcoin and I want to borrow against that. It’s approximately, let’s just say that’s $100,000 worth of value. If I do a loan to value ratio of 50%, I can then borrow $50,000 of I’m assuming it’s USD cash or some type of token, USDC token or something, as I lock up those two Bitcoin. Talk to us about the specifics of what I just described, if there was anything that was off.

Joe Kelly (00:07:35):
Roughly accurate, and we did indeed start for about the first three years of operating history about a 50% loan to value. One of our main focus from the beginning has always been on delivering actual dollars to people. That was really hard and often was hard for a while in Bitcoin and cryptocurrency because banking rails were hard to access for cryptocurrency companies, and the dollars are scarce, having the dollars in your checking account is the thing that usually people value and they’re trying to have at the end of the day. We just offer US dollar loans that we have to wire, disperse via ACH to the client. But the model is roughly correct. A client, they’ll ask us for a loan in dollar amount, or they’ll ask for, “Hey, I’m going to put this much collateral, how much can I take?”

Joe Kelly (00:08:14):
We actually reduced our LTV, our loan to value in February this year. It was really in response to the elevator prices and the volatility. Our motto here that you’ll read on the back of our T-shirts is, “Friends don’t let friends sell Bitcoin.” And so we really hate the idea that through margin calls or any risk management practices that… Honestly we have to comply with our policies like don’t want to our clients losing Bitcoin. And so making that change. I don’t know that any other lender did that or had the wherewithal or the desire to do that. I think they’re mostly hungry for volumes. But we take a more conservative approach. We bank early across all our product families, and it was actually really well received.

Joe Kelly (00:08:50):
And a lot of borrowers and clients mentioned, “Hey, appreciate that you guys did that.” It feels like that’s… The Bitcoiners that have been around the block and then there are a couple of these cycles, they know there can be a bear market around the corner. And so having a cautious and conservative approach with LTVs makes sense to people. But back to the product, essentially they post the collateral necessary for 100k loan or 100k collateral that we get a 40k loan right now. At Unchained we disperse that via wire or ACH and a monthly only interest payments. Our terms range from three months to three years or average term is about 12, sometimes last 18 months. And once the client pays, once they get to the end of term, they make a payment on the principal and then they get their Bitcoin back.

Preston Pysh (00:09:30):
So we’re not talking about low interest rates. When we talk typical finance, 10-year treasuries at 1.5%. You look at home loans, they’re really small. But when you look at the amount that people are putting up in an over collateralized way, and the interest rate that they have to pay, we’re talking 9% to 11% interest rate for something that’s over collateralized. So anybody who hears that it’s just like, “Who is doing this and why are they doing it?” So how would you quantify the different buckets of people that are taking out these loans and what are they using it for?

Parker Lewis (00:10:09):
Maybe I could explain the dynamic with interest rates. And I think that if I think about Bitcoin, one of the reasons it exists is because we started to get a little bit loose with our money and people started to print trillions of dollars, and those dollars in the traditional banking system can be lent out without you having to give your permission to it. Just inherent to fractional reserve banking. If I think about the Bitcoin world and Bitcoin with a fixed interest rate, that makes the most scarce asset and I think for all of us Bitcoiners, it’s the most valuable asset that exists in the world. It’s also volatile. But when I did a poll to try to make this clear for all the people on Twitter, I asked the question, at what rate would you lend your dollars to give somebody else the opportunity to hold Bitcoin rather than yourself?

Parker Lewis (00:11:04):
And and I put four options. zero to 5%, five to 10%, 10% Plus, or never, just buy bitcoin, as the fourth option. And the split was 1% zero to five, 4% five to 10. 24%, 10% Plus. And then 70%, never, just buy bitcoin. And that is really the dynamic that I think about in terms of why the interest rates are where they are. That one, we lend in the most conservative way possible. And that’s really important when people think about lending. The core of our business is custody, we’ve got a standalone custody business, but if Bitcoin is money, the natural financial services to pair with. Custody and money or financial services like lending. So when we think about our context, this is important when we are lending dollars against Bitcoin, we’re doing nothing with the Bitcoin.

Parker Lewis (00:12:02):
Bitcoin are sitting in segregated dedicated multisig vaults and our clients can hold one of three keys. And in those cases we only have one. Through that we ensure and clients, every single one of our clients can can guarantee on it without trusting that their Bitcoin is not being rehypothecated. And what the client is essentially getting in return for those dollars is essentially the right to continue to hold Bitcoin at the expense of somebody else. So I really think about our loans, given the nature of what we do and not rehypothecating collateral, is that our rates are the true rates for somebody that’s willing to commit dollars to somebody else, and in the nature of that person that’s willing to commit dollars knows enough about Bitcoin to know why they should like it as collateral, and then it becomes setting a market interest rate.

Parker Lewis (00:12:49):
Okay, what what dollars am I willing to provide to Unchained Capital clients and the benefit that they get there? And if you think, well, what the average annual rate of return on Bitcoin versus the dollars is 220%. And so if you were just to simply imply it. 10% to 12% rate of interest at a 40% discount, that that only implies an annualized 25%, breakeven price on Bitcoin. So I think about Bitcoin, its price appreciation is different in its medium than any other typical type of loan. Because if it’s a traditional bank and they’re lending against Real Estate, the bank doesn’t want to own the real estate. They’re specifically not in the business of owning the real estate. If it’s an investment bank they’re lending to corporates, high yield or IG, they don’t want to own the equity of the investment grade credit or the equity of the high yield credit, they just want to own the loan.

Parker Lewis (00:13:47):
In the case of Bitcoin it’s money. So we’re lending against another monetary asset. And that monetary asset is something that literally every company in the world is going to want, need to own. And it also happens to be the most scarce asset. So I just like to lay that as a framework for people that do think about it as a forward interest rate, or an implied forward interest rate on Bitcoin relative to the dollar, just at a level where they’re shielded from some level of volatility, approximately 40% [inaudible 00:14:17].

Preston Pysh (00:14:18):
I loved how you frame that. And if I was going to guess why somebody would be doing this. So somebody who’s borrowing has some type of USD denominated liability that they’ve got to pay off, they don’t want to sell their Bitcoin because they don’t want to have a capital gains event. And they probably don’t want to go and they can probably pay it back quickly. So let’s just use an example. Let’s say a person had a tax bill that they had to pay for the last quarter, and it’s 20 or $50,000. And they’re going to come up with that free cash flow in the next two months or whatever to pay it back.

Preston Pysh (00:14:56):
But they don’t want to go through all the hassle of the traditional loan system through traditional banking. And so they put up their Bitcoin, they immediately get the cash, they make the payment on the on the tax and then they just quickly pay it back. Is that the type of person that we’re talking about here that’s posting Bitcoin as collateral to borrow or is there other use cases that they’re using it for call it in the derivatives market for spreads and things like that?

Joe Kelly (00:15:23):
I’d say most of our borrowers are still individuals, our average loan sizes tend to be higher than that, usually in the six figures. And they’re usually longer term loans. And usually the principal purpose is something either around investment or real estate. So they’re either buying a new home, and this is a down payment, or the whole house, or they’re buying investment property, or we had a cabinet maker, can take out $200,000 to buy equipment for a shop [inaudible 00:15:47] business in a long term loan. So yeah, I think I mentioned loans have an average duration of over 12 months. So people tend to have these many, many clients renew or keep the balance rolling on to other loans.

Preston Pysh (00:16:00):
Is it because they’re having difficulties getting it through the traditional banking system? Because those rates are just such a drastic difference.

Parker Lewis (00:16:08):
Right. So there’s a few key characteristics for people to think about, that I’d say a cross section of which defines people that come to Unchained Capital. They are people that have held Bitcoin for a long time, such that they have a relatively low cost basis in their Bitcoin. So imagine somebody bought Bitcoin at $100. And the price of bitcoin is 50,000, that if they were to sell that, then as you described, they would have very high cap gain. Also though there’s somebody who is Bitcoin represents significant share of their net worth.

Parker Lewis (00:16:44):
Now when they bought Bitcoin it might have been 1% or 5% position, but they held it through cycles, and now it’s maybe 95% of their wealth. And there are also so people that have a high amount of Bitcoin relative to net worth, high amount of Bitcoin relative as implicitly to the number of dollars that they hold, and a high net worth relative to potentially W2 two income. That would make them eligible for borrowing from a traditional bank, currently banks doesn’t take Bitcoin as collateral. And so if they fit all those criteria, but also more those people exist as the price of bitcoin goes up, so when Bitcoin goes from 10,000 to 50,000, that unlocks a new universe of people. But also, if you think about it, whether you’re somebody who bought Bitcoin at $10, or $100, or $1,000, if you’re still holding it at 50,000, you also expect that it’s going to a million dollars.

Parker Lewis (00:17:40):
When you’re thinking about the opportunity cost of 10% to 12% a year, relative that you’re thinking about both the cost as well as the potential upside forgone should you sell Bitcoin today to buy some other asset that you need. Because there’s a lot of Bitcoiners out there that might have $10 million worth of Bitcoin, or $5 million worth of Bitcoin, but they couldn’t afford a million dollar house. And they don’t want to sell their Bitcoin, as an example. And also my clients that have exercise stock options, where again, they still hold the Bitcoin, they’ve held it through cycles for a reason they’re not about to give up that future optionality and future asymmetry. It does require people hit a few different boxes, but those people become greater and greater on a number and net worth perspective with each passing cycle in Bitcoin as knowledge distributes.

Preston Pysh (00:18:31):
So let’s talk a little bit about the direction of interest rates. And this is just more out of curiosity, because it’s a supply and demand thing, like you guys are saying the market is making these interest rates that you’re seeing. So talk to us about the trend over the last 12 months, what you’ve seen, and then what you expect if this bull market that we’re all expecting to go into the end of this 2021 bull market that we’re seeing right now, if it would go up in a dramatic way and we start getting six figure Bitcoin prices, what do you think that would mean for the direction of interest rates?

Joe Kelly (00:19:04):
There has been some compression, but not a lot. And I think I naively thought early on that because it’s such good collateral that of course in a couple of years people don’t [inaudible 00:19:15] this like like they would other traditional assets or securities. But we haven’t seen that. And I think Parker outlined real case why. There are other market participants coming in like banks, Silvergate and others have announced lending against taking Bitcoin as collateral. So I think that’s had some effect, but honestly, not a lot. If anything our rates are slightly higher than when we started out. And part of that’s just because of our model where we don’t really hypothecate and we have a much different security model that clients prefer.

Parker Lewis (00:19:43):
Yeah, and I would just add, I think naturally as allocators come into the space on the supply side, that will be willing to take that Bitcoin… I think we all look at Bitcoin and we say, yeah, it’s volatile, but it’s also the upside and so it accrues to our benefit. But if you start to think about the type of people with the type of allocators that say, are very happy with a 4% to 5% return, those are some of the most conservative allocators that exists, and we look at them like, “Bitcoin is conservative,” and they look at us and say, “In my 40 years of credit investing.” And so I think that interest rates will come down as the pension funds and endowments and insurance companies really look at this space and the banks. The banks have a high regulatory burden to potentially even look at this space.

Parker Lewis (00:20:35):
There’s a lot of I’d say regulatory clarity that would need to exist more at a state by state level, more so than at the federal level. But that it will be a function of knowledge distributing and getting more of the large insurance companies, pensions, endowments to allocate the space to really bring the cost of capital down materially. I think that we’re never going to live in a world where somebody can go… It’s like some wealthy dude gets a 30-year mortgage for two and a half percent, you’re like, “Hey, who are all these poor people that are lending to the wealthy guy for two and a half percent.” That only exists because of the market structure which is broken, which Bitcoin is fixing.

Parker Lewis (00:21:13):
But then there’s also if people think about it, when we work with our investors and Capital partners, that there’s a time continuum that as they start to understand Bitcoin, they start to really like our loans. But then as they start to really like our loans, they start to really like Bitcoin. That knowledge, it goes both ways. And so that the thing that will buoy the interest rates that will prevent it from from going down to 1% to 2% is that it’s like, until banks are truly able to tap the Federal Reserve and basically borrow at the discount window and just plow them into bitcoin loans, which I don’t think is anytime soon, that is going to be whether it’s public companies, or private companies, it’s going to be people that are making direct allocation decisions to Bitcoin. And those people whether it’s the MassMutuals when they announced that they buy $100 million worth of Bitcoin, they’re going to be thinking, “Okay, how much do I want directly exposed to Bitcoin? And then how much do I want in a Bitcoin-backed loan?”

Parker Lewis (00:22:14):
And as that aggregate pool expands, and I do expect our interest rates to come down, but they’ll also wants to increasingly increase their exposure to Bitcoin, it will become, “Hey, maybe it’s today,” they have a very small position to Bitcoin and a non Bitcoin-backed loans, but maybe they start to increase that exposure. And so it’s just where’s the equilibrium? Is it 50-50, 60-40, 40-60? So directionally they should come down, but don’t expect them to be at your rates of 30-year mortgages anytime soon.

Preston Pysh (00:22:46):
So the thread that, I don’t know if it was with you Parker or just the Unchained Capital account, that sparked a big discussion between myself and you guys, who started with the deposits? Of when and how in the world can I start making deposits with Bitcoin and start collecting interest on my Bitcoin deposit? Because right now, you guys are just operating on a borrowing basis? Do you guys have something in the works? Something that… My understanding is that you do. But do you guys have something that you can talk about that talks to this idea of a person like myself or whoever taking their Bitcoin, making a deposit, still holding one of the keys and then collecting interest in some type of denomination? I’m curious what your thoughts are on this.

Parker Lewis (00:23:34):
Yeah, as you’ve researched, there’s quite a few programs out there that offer these deposit account features. All of them are risk and all uncouple a bunch of risks together, around how the coin is custody, where it moves, who the counterparties are for where it goes. So it’s this risky black box. And it’s not something we’ve been comfortable with, just philosophically. And so our model and our approach, our foundation is the secure approach to custody using multisig. And that’s what leads and guides the kinds of products we develop and where we want to take them. And so we had been working on how to crack this problem of developing some yield for clients where the Bitcoin can live in multisig, and we do have some strong leads or some promising developments in there.

Parker Lewis (00:24:16):
So we are working on a pilot with some partners to have that offering for folks where a client could hold a key. At least initially it wouldn’t be the client holds a key, but there would still be a transparent multisig address and then when all the Bitcoin is on loan it’s in there. It’s a loan and lending product that couples with exchanges and trading venues. And so that’s that’s the kind of activity that would kick off the interest and yield for the coin that’s on that type of deposit account. But ultimately, it’s the only structure we think is most sound for doing these kinds of loans and giving someone even the kind of interest rates that are in the market we just don’t think are the right kind of risk return ratio.

Preston Pysh (00:24:54):
Now are you using stable coins to do this? I would imagine it’d be the only way you could do something like this with deposits.

Parker Lewis (00:25:02):
So maybe just to take a step back. So when we think about the business, the core of our business is a custody business built on multisig, and specifically collaborative custody. That is really the foundation and the whole reason why I’m at Unchained is because when Joe and Druv launched Unchained and decided that they were going to lend dollars, they recognize that the most important piece of the linear equation of the dollar side they were going to use Bitcoin as collateral was how that Bitcoin was secured. And there was nothing in the market that that solved the problem that they had to their satisfaction. And so that was the course that they set off on, and then I stumble upon them and I’m like, “Hey guys, you should really carve out this custody piece,” because this will become the foundation of the business. 100% of people need better Bitcoin security, and better custody, and over time those people will need loans but it will always be some subset.”

Parker Lewis (00:25:57):
Joe and drew decided that they wanted to pursue that and they asked me to come on board and help build out that vision. That was September 2018, October of 2018. There have been a number of Bitcoin lending products that are in the market. There’s a reason why Unchained Capital has not started lending Bitcoin in the traditional model of rehypothecation collateral. We think of ourselves as a Bitcoin custody security business, and that is our core assets, our core expertise. Our core asset and expertise is not underwriting the balance sheets of large market makers. We think about the service that we’re offering to our clients is a integrated financial services platform built on that foundation.

Parker Lewis (00:26:37):
The thing that defines us is if you just want custody, you can have your Bitcoin you can have your keys. That same collaborative custody foundation where we our clients have two keys and we have one and two are required to spend, aligns all incentives with our clients. If we have other clients that want to borrow dollars, and take that risk in the in the reward or return that they get for not selling Bitcoin today, and that benefit that that provides them, something happens to that client or they don’t find a margin call, or other clients that are in collaborative custody and have their own keys totally unaffected. There’s no financial exposure to that. We think about the same as we think about lending Bitcoin. The analogy that I like to use is, think about the New York Stock Exchange.

Parker Lewis (00:27:20):
New York Stock Exchange doesn’t have a bunch of stock sitting in New York Stock Exchange. New York Stock Exchange trade stocks and then there’s custodians in different ways that stocks are passing out, most stocks are custody the DTCC. But point being is that how the stocks, a custody is not where they trade on the exchange. There’s a reality that virtually all Bitcoin denominated yield is generated by somebody that’s producing or pursuing some trading activity, if that makes sense. That people aren’t lending Bitcoin and going having a plant being built and then that plant kicks off Bitcoin cash flows to pay the one. That if you’re lending Bitcoin into a black box, that the person that someone on the other side of the counter party that’s on another side that you don’t know is pursuing some trading activity. What that means is that Bitcoin that’s on loan is somehow some way finding its way to an exchange.

Parker Lewis (00:28:17):
And so when we think about it, it’s working with exchange partners to say, “Hey, if the Bitcoin that’s on loan is finding its way to the exchange, let’s find some exchange partners that understand that we can carve out custody that will be creditable or tradable on exchange, beyond loan, where the borrower, the lender, Unchained, an independent third party in our pilot program, would each have a key, but that Bitcoin that’s sitting identifiably in a multisig will then be available to trade on exchange and be on loan and generate yield. And through that we effectively solve for three things. We solve for how our Bitcoin is custody, we solve for transparency around who the counterparty is, and then we solve for transparency in terms of the type of risk that is being taken [inaudible 00:29:05].

Parker Lewis (00:29:06):
We also like to think about it because we’re a Bitcoin company, that Bitcoin is most scarce asset in the world. It’s the greatest asymmetry that’s ever existed. And if you can’t quantify the risk that you’re taking, which you by definition can’t if you’re lending into a black box, then you shouldn’t take that risk. Today into this point that has been the market structure and has been why we’re unwilling and have been unwilling to pursue, and that we’re only pursuing it based on the architecture where we can use our core asset, which is collaborative custody to be able to offer a solution that no one else can offer. Because no one else has the architecture that we do and has the platform that’s built on financial services like we do.

Parker Lewis (00:29:47):
So it’s that core idea of staying true to our principles but ultimately building on that foundation of security and transparency to deliver to clients on either side of that, whether it’s a borrower, a larger pool of capital at a lower cost of capital, and if it’s to somebody that’s contributing on the lending side, might be a lower nominal rate, but a way a higher risk adjusted return because we’ve isolated and de-risk the equation at three different levels.

Preston Pysh (00:30:16):
For the person who’s making this deposit in your pilot program, they’re depositing BTC, are they receiving interest payments in BTC? Or… Yes, okay.

Parker Lewis (00:30:26):
So yeah, that is the idea. The pilot program that we’re working on is still in implementation phase, integration and planning. But it is something that we’re in the process of operationalizing. So I want to be clear that the pilot itself is not [inaudible 00:30:43] so we’re integrating with partners and working on testing, we expect it to be in market later this year.

Preston Pysh (00:30:51):
The pilot later this year or you guys have completed the pilot?

Parker Lewis (00:30:55):
No, we’re in the final stages of launching the pilot.

Preston Pysh (00:31:01):
Okay, how long do you guys expect it to run? A year or six months or…

Parker Lewis (00:31:06):
Pilot will be a few months, and then it’s a matter of sizing where we can go from there and how we want to launch that publicly.

Preston Pysh (00:31:13):
I think you guys are going to have a hot item on your hands when you guys do the launch.

Joe Kelly (00:31:18):
It’s really about solving for the market structure that is healthy for the Bitcoin ecosystem.

Preston Pysh (00:31:25):
Yes.

Parker Lewis (00:31:26):
Again, coming back I’ll just reiterate it once because I do think it’s the most important part that you have a lot of people, there is a legacy world where everyone is used to just putting… They believe their money is in a bank and they believe that money is supposed to magically make interest without any risk being taken, that it just shows up. I think people that are in tune to Bitcoin realize couple things. One, the money is not actually there. Two, the banks aren’t really actually paying interest rates anymore. And so when we think about the core value proposition of Bitcoin, it is if you truly understand how precious of an asset that thing is, that if you are going to take risk with it, basically take it from, I’m sitting here holding the greatest asymmetry that’s ever existed in the world and I can do without counterparty risk.

Parker Lewis (00:32:16):
That if I’m going to put it into any arrangement to generate yield, I’m fundamentally changing my value proposition. I’m not just taking counterparty risk, but I’m taking credit risk. And what I’m potentially losing in that equation is if there’s a loss event there’s the upside of my Bitcoin. So I can’t take that risk, or you shouldn’t take that risk, unless you can quantify and truly understand all the moving pieces. And it’s a complex equation, it’s all bringing partners together, that can understand the vision and the benefits to them and why it would be healthy for the Bitcoin ecosystem as a whole. And that’s why, again, it’s something we’ve been working on for two years. So it’s hard to say whether it’ll be one month or three months before it’s truly operationalized. But we won’t stop till we get it done.

Preston Pysh (00:33:09):
There’s a lot of us cheering you guys on. So we’re pretty excited to see what you guys come up with. Hey, so when I’m looking at your site, and I’m looking at under the services, and I look at the lending of all the various states, I’m just immediately thinking the regulation that you guys have had to deal with over the last since 2015 really. Talk to us about just in really broad strokes, how this has changed or your vantage point now in 2021, how it’s evolving, the direction it’s moving. Because from my vantage point, so I participated in the bull market in 2017.

Preston Pysh (00:33:45):
And I just remember back then there being so much unknowns about the regulatory side of things. If anybody was going to raise a risk, that was at the top of the list. Now in 2021, it really feels like you don’t see anybody really bringing that argument up. And if they are, it’s because they’re really not intimately involved in the space and they’re just throwing something out to defend their their non-position. So talk to us a little bit about your opinions on how that’s evolved through the years and where you see it now and moving forward.

Parker Lewis (00:34:16):
Yes, and that was one of the things that I think helped us launch with the secured lending model first is online lending had been around for a long time. Bitcoin exchanges, crypto exchanges were something new and that did have a lot more uncertainty around that. So starting as a lender was actually a little more straightforward because it been a solved thing and does involve state by state licenses and a lot of registrations and things like that. But we just happen to be… One of our early framings and we got bank accounts early on was we’re a lender that happens to take Bitcoin as collateral. And that is its own I think area.

Parker Lewis (00:34:46):
One personal interest of mine has been around when you take Bitcoin as collateral, something that governs secure transactions and loans as the uniform commercial code, which is a every state has its own form of this. They try to keep it uniform, but that’s where the law says if you get a mortgage, there’s a title registry and that’s where the lien goes. Or if you borrow someone’s or you lend against the chainsaw, here’s how the bond broker says your chainsaw is custody kind of thing. So Bitcoin always fell into a really awkward category in that uniform commercial code, which does create contract risk, and what’s the risk that does affect institutional participants if they decide to come in and lend a Bitcoin.

Parker Lewis (00:35:25):
So something that the Wyoming bill and that legislation they passed, solves that for Wyoming and people in Wyoming. A company gets really clear what happens if you’re a lender and you decide to take Bitcoin as collateral, how you have secured, how you feel like you’re in any worst case scenarios, you’re fully protected. In Texas there’s a bill that we hope will pass, it’s gone through some committees in the house and things like that, that will also do that here. And so that’s one way you’re starting to see that effect snowball, it’s like there’s enough of a commercial market around Bitcoin and there are real participants like ourselves, I get to lobby and educate people that, “Hey, there are some things that really need to change.” So Bitcoin becomes defined in these state statutes and this activity can…

Parker Lewis (00:36:09):
We’re not all going to end up in messy court scenarios later on when people are trying to figure out after the fact. So [inaudible 00:36:14] really promising development and just the thing that’s going to come full circle for me is like four years ago I just knew, man, someday be really fun to just ensure we get this right we get some laws passed that affect this. I do think overall there it’s been a much healthier regulatory environment to operate. Banks are more open to banking Bitcoin companies. And there are still things like money transmitter licenses in certain states if you’re going to custody Bitcoin for people, we have to pay attention to, but there’s not a ton that we have to worry about.

Parker Lewis (00:36:47):
I think the greatest 180 or I don’t even know, it might be a 360 slam was Jamie Diamond, 2015, Bitcoin is a fraud to 2017 regret calling Bitcoin a fraud, then 2018 they’re banking Coinbase. 2021, Bitcoin products. And so it’s one of those things that Bitcoin becomes de-risked as the network grows, through network grows as more people adopt it. And now we’re seeing corporations adopted, now we’re seeing US senators being Bitcoin advocates, that the mainstream adoption of Bitcoin, not only de-risk it from a store of wealth perspective, but also de-risk it if you have a bunch of wealthy people that have exposure to Bitcoin and that want to monetize it themselves, that that provides a lot of cover.

Parker Lewis (00:37:37):
There is a reality that as a startup financial services company that’s innovating around Bitcoin, you also start to very much appreciate how heavy handed regulation advantages incumbents. And so we do have to be better, which we are, because we think in ways that a large financial institution like JP Morgan or Goldman Sachs with all their liabilities would never think about. And so we will still outcompete them despite the friction imposed by a lot of regulation that favors incumbents because they’re set up to be able to manage large compliance departments. So yeah, we deal with it, it’s certainly getting easier. And I think as more and more states begin to lead on this to create greater regulatory clarity, just as more capital comes in the space, it helps all the infrastructure companies in the Bitcoin space grow.

Preston Pysh (00:38:30):
Talk to us a little bit about a bank charter, are you guys pursuing a bank charter at Unchained?

Joe Kelly (00:38:35):
Not at this time.

Preston Pysh (00:38:37):
No. What kind of advantages? I know Caitlin Long secured a bank charter out in Wyoming for Avanti that she’s going after, is this something that you think you could evolve into? What would be the benefit to do that? Just help people understand what advantages that having a bank charter brings?

Joe Kelly (00:38:55):
It depends. I think in the Wyoming charter, the special purpose depository institution charter. It’s important, it’s nuanced. I think [inaudible 00:39:04] important access rights to the Federal Reserve System and how you interface with other banks, but they can’t do lending. And it’s just purely a custody and moving client funds regulatory license for them. So I think it’s so really important, so good cornerstone for any business, but the revenue is not going to come from lending plenty of client assets, for better or worse, depending on the business model.

Parker Lewis (00:39:27):
The principal benefit would be access to the banking system, right? Being able to connect into the fiat rails. And so to us in the way I think we think about it is, if that has so sufficiently become debris, that there are cracking, has become a bank in Wyoming. There’s Avanti then also just the reality that JP Morgan is now banking Bitcoin companies and every mega bank in the world/every bank is going to now need to do it to be competitive. That if one of the principal benefits is access to the fiat rails that us in the banks that we work with or the potential that we lose a banking relationship is significantly de-risked than where it was four years ago.

Parker Lewis (00:40:12):
I think ultimately when we think about our business, the most interesting thing about it is Bitcoin. And that keep coming back to that core asset of what we excel at is Bitcoin and Bitcoin custody. And if we look toward a future world that is Bitcoin denominated and our vision is Bitcoin ubiquity, that it’s a matter of connecting into those rails, but always be building products and services with a Bitcoin first, not in the sense of other cryptocurrencies, but in terms of everyone is a little like Bitcoin is going to power the global economy in the future.

Parker Lewis (00:40:48):
So building an architecture, are we ever going to be a better bank than JP Morgan in terms of the dollar world? Probably not. But are we going to be better at Bitcoin than them? 100x. And so its focus on the core of what we’re good at, and then figure out how we can work with banks like Silvergates of the world or Signature bank or any bank that wants to bank companies like Unchained, because what we have they don’t have, and what they have we can use at least the interim period of time during bitcoin’s monetization.

Preston Pysh (00:41:19):
I think one of the frustrations that a lot of investors have over the last few years is in their IRA account, one of the only ways they can get access to Bitcoin in it without going to lawyers and everything else is through GBTC. And as we’ve seen the premium on GBTC has just got crushed over the last six months. Not only that, when you look at the direction that this is all going in the next five years, If you actually custody Bitcoin, now you have the opportunity to be earning interest on that. It’s an interest bearing asset which smashes the arguments we heard in 2017, “Oh, it doesn’t kick off any cash flow.” Now it does, right? And I think people are starting to wise up to how important it is to actually take possession, physical possession of your Bitcoin.

Preston Pysh (00:42:11):
And so I’m curious if you guys plan on stepping into this space for IRAs to assist people with getting a self directed IRA, so that they can take physical custody of Bitcoin. And as your deposit and earning interest product eventually gets stood up, that maybe you give people a turnkey solution for IRAs. Is this something you guys are thinking about? I think the market for this is very ripe and everyone’s looking for something that’s easy, quick, experts in the space. Is that something you guys are thinking about?

Joe Kelly (00:42:47):
Yeah, for sure. And we do have some offerings around that. And a lot of it’s been accomplished, want to shout out to our partner, Keykeeper IRA is Jeff Andrew, who’s walked a lot of clients through this process. And Parker is much more familiar with his work in hand with a lot more clients on the actual setup and use with Unchained but…

Preston Pysh (00:43:06):
You said that’s Key IRA. Is that right?

Parker Lewis (00:43:09):
Keykeeper.

Preston Pysh (00:43:10):
Keykeeper. Keykeeper IRA.

Parker Lewis (00:43:14):
Yeah. So Jeff Vandrew runs Keykeeper. And he specifically focuses on IRAs where individuals can hold their own private keys which is what we specialize in. And which is why a partnership between us has made so much sense. There’s a couple of key things that people need to know about if we’re thinking about IRAs. And it is holding Bitcoin in your IRA when you hold your own keys in my view is optimal savings. You can’t save better than that. Tax advantage, you got Bitcoin, you got your own keys, you don’t have any counterparty risk. One of the things I like to go out and tweet about, I don’t know if you recall the GBTC commercial that was drop gold, buy Bitcoin, I think that the next four years are going to be known for drop GBTC, buy Bitcoin. Buying Bitcoin and holding your own keys as people become more knowledgeable and more comfortable becomes fundamentally more secure than holding it in a GBTC like structure. And what we’re focused on is helping people with safe and secure Bitcoin custody where they hold their own keys. And what many of them find is that once they are comfortable holding our keys, and they become more engaged and more interested and more knowledgeable about Bitcoin, their conviction level goes up, they don’t think about it as a speculative asset.

Parker Lewis (00:44:35):
And it just so happens that those people who don’t think about it as a speculative asset are also the people who generally hold their own keys, which makes our offering so perfect for them. Now, in the traditional world of IRAs, Bitcoin is new, just like Bitcoin is new to practically everything. And so where you might be able to show up to your Schwab account and buy every stock and bond, potentially even levered ETFs I don’t even know, I don’t dabble in those, but you can find virtually every other financial product in a traditional IRA today. Bitcoin doesn’t exist that way. And there’s a few key things that are specific to Bitcoin and specifically holding your own keys that complicate things.

Parker Lewis (00:45:15):
You need a legal IRA custodian, you need a bank to have a bank account with the funds because you’ve got to transfer funds from a traditional IRA or from a 401k converted into an IRA, and move it to a bank that’s willing to be your IRA custodian, and that IRA custodian has to be willing to invest in a private trust for which you are the trustee, which there aren’t many of them out there. And Jeff Vandrew from Keykeeper has really helped find some solid partners to make this process even though that they’re complicated to be as seamless as it can be. Where we really come in, is you need the IRA custodian to basically facilitate the dollar flows. To get us dollars from one IRA, to another IRA that’s capable of buying Bitcoin in a way that you can hold your own keys.

Parker Lewis (00:46:07):
So we are not yet solving the IRA custodian piece, I think that that could be a future potential where we can help make this process even more seamless. But then there’s two other critical phases. How the bitcoins custody, and how you acquire the Bitcoin, and certain clients will, if we’re not yet available to help facilitate the execution directly, we do have an OTC desk that’s available in certain states, we either just help facilitate the custody of the Bitcoin and people onboard their IRA trust entity onto our…

Parker Lewis (00:46:38):
So you can have a personal account, [inaudible 00:46:40] retirement account and a business account, or multiple business accounts and multiple retirement accounts. They open up an IRA account, hold their own keys and deposit Bitcoin or they work with our OTC desk. So we can eliminate two steps of the three complicating factors, and they can also use our OTC desk. And it’s a beautiful thing for IRA from dollars that are exposed to zero yielding bonds or equity risk premium that you’re not being compensated for. And you basically, as soon as you roll over that IRA, at least with us, you can convert that in a single transaction to Bitcoin, and then we’ll deposit it to a coldstore multisig vault. And that completes the virtuous circle, you now have Bitcoin in your retirement, and you have the keys, you’re the trustee. There’s a legal IRA custodian that’s responsible for reporting.

Parker Lewis (00:47:30):
I do think that over the next two to three years, I believe every single one of our clients will have an IRA, I believe we’ll be making more investments to make this even more seamless. And oftentimes when people are feeling a little bit tabs, and they’re currently in the personal bank accounts and they realize, “Oh, shoot, I’ve got all these IRA funds,” and that becomes a source to increase allocations to Bitcoin. So it’s not just our clients that will have IRAs, I think that it is the single best way to hold Bitcoin. And then more institutions will invest in it, we’ll increase our investments, but I’ve done it personally and swear by it.

Preston Pysh (00:48:09):
So we’ve talked about interest rates, and we talk about interest rates in an on-chain way where you’re taking your Bitcoin, you’re potentially lending it out here in another year, and then you’re getting Bitcoin interest paid back to you. How do you guys see Lightning evolving as far as Lightning Pool, because I look at… And this is my opinion, I’m really curious if you guys would agree with this or how you see it, but when I’m looking at it, and I look at how there’s no maturation in the lightning network today relative to where I would say it’s going to be in five or 10 years from now. And I see it being very similar to the early days of Bitcoin on-chain where miners weren’t making really any type of fees for the minepool being fully loaded with a bunch of people that are trying to get on the next block.

Preston Pysh (00:48:59):
And if we could go back six, seven years ago and look at that and show people where we would be today and how much those fees are really already adding up to these miners that are mining a block, I think we would have all been really surprised at how much value that’s really adding up to as far as those fees. And so do you guys see that being similar in the lightning network, if we could warp ourselves 5, 10 years from now, where people are able to capture interest rates by just taking their Bitcoin and opening channels on lightning to route almost like Transmission Control Protocol, TCP, but you’re routing money, you’re routing Bitcoins, do you see that providing any type of meaningful interest rate for people that have Bitcoin to plug them in and open up these channels on Lightning in the future?

Parker Lewis (00:49:52):
Yeah, I think the single greatest dynamic that is going to cause Lightning network investment and to allow this path to accelerate is on-chain fees. So if every on-chain fee, while it’s going to go down on a basis points perspective, going to go up in real purchasing power. And that dynamic is what will incentivize companies like Unchained, Lightning Labs is already making big investments and enlightening companies like Strike. But I think every single financial institution that deals with that claim will be making investments [inaudible 00:50:29]. Today in this point we focus really on base layer and multisig because that’s how the vast majority of people will hold 95% of their wealth.

Parker Lewis (00:50:39):
But then when we think about the future, and I think about Bitcoin commercializing as transactional day to day currency, it’s going to be Lightning or something like Lightning. Let’s assume for now that it is lightning, and that there’s a reality. I do believe that it’s always important to have an architecture where just as I as an individual can transact on-chain, there’s going to be individuals that are connecting directly to businesses to facilitate lightning transactions. But there’s also a reality that payments are generally one way flow. And I think that that dynamic is what will dictate how the network topology forms for lightning. And what I mean by that is, the people that you pay on a day to day basis, regularly, practically speaking never pay you. And so it doesn’t necessarily make sense for American Airlines to have Lightning channels open with Preston, Parker and Joe. And because I’m only flying periodically, so are you or even Uber.

Parker Lewis (00:51:50):
I think it’s a great example. Like Uber transactions are probably on average between five and $15. And that’s not economical to facilitate Bitcoin transactions on-chain. And so the way I see that evolving is that Uber is going to have a Lightning channel likely with a financial institution, and it’s going to process 10 Lightning dollar transactions or the equivalent, every minute, and then periodically through the day they’re going to settle on-chain. Basically they’re going to use that to batch flows. And then institutions will rebalance channels with merchants. And so I think that there’s a reality to that on the payment side, the payments role is basically nearing goods fulfillment with currency settlement.

Parker Lewis (00:52:43):
Where how do I know that the Uber actually satisfied my ride to affect final settlement of a Bitcoin transaction? What if I make me pay for the Uber transaction in Bitcoin before I ever take the ride? I don’t think so. And so that the payments layers in the fiat where I think this oftentimes gets a little bit distorted, is that they’re actually essentially a counterparty risk management function, mirroring two processes that happen at different times. And I think that same type of functions will exist in a much more decentralized way, in a much more competitive way. But that the value delivered will in part be the capital, but it will also be that fulfillment, the same service. And so other than it being routing fees, which I believe will exist, I believe that the primary economic incentives will be in facilitating transactions between consumers and businesses. And the businesses similarly to how they pay transaction fees today, will pay for transactions to have liquidity committed via Lightning pools, and that they’ll pay for it per transaction that gets consummated rather than…

Parker Lewis (00:53:56):
At least that’s how I’m thinking about it really is from the first principle, that one way payment flow will dictate that there’s certain people that can most efficiently use capital, and that they will allocate that capital and connect buyers and sellers, much as payments networks exists today and that the transaction fees will be derived as a function of the commercial transactions.

Preston Pysh (00:54:19):
So Parker, what I think you’re saying here is, you see the bigger companies, the ones that are the nodes between the everyday people that are making transactions at Target, or American Airlines or whatever, I’m a customer, I’m an individual, I’m making those payments. But because those payments are going through those big business hubs, and then those businesses are interacting with their primary businesses that they’re dealing with at a b2b level. I think what you said was that that’s where you see the fees being collected on Lightning or at those those major hubs of financial activity, correct?

Parker Lewis (00:54:59):
Yeah, and I don’t want to present like I don’t think it’s going to be we’re going to have five mega banks doing that. That’s not the vision of the world that I see. But I do think that as a micro example, think about Unchained. Unchained will inevitably be running a Lightning hub at some point and will be servicing Unchained clients, and will have Unchained businesses that want to have final settlement to Unchained vaults, and will be in the best position to help fulfill their payments as well via Lightning. And then there’ll be other financial institutions helping intermediate. And then there also will naturally be applications where individuals can also send particular transactions to merchants. But I think when people start to think about the dynamic of those fund flows, and the reality that rebalancing is an expensive activity, that there will need to be people that specialize in routing liquidity, and that those institutions will typically be financial institutions.

Preston Pysh (00:55:59):
It was fascinating, I saw a tweet from Jack Mallers talking about using Strike to do something on the Fold where you were basically paying with Lightning. So I have the Strike app on my phone, I went to the Fold app, I selected pay with Lightning, it gave me an invoice QR code and I scanned it with Jack’s app. And when I did that, that app for me, I don’t have connected to my full node at all. I just deposited 50 bucks on Strike straight from my bank account, it’s sitting there, and I scanned with that app, a Lightning QR code, and it was ready to lock and load, ready to send and fulfill that lightning payment right there to Fold, and I’m sure Will’s running his own full node, and his own lightning channel. And for me it was just this huge lightbulb moment of here I am as your typical person that’s getting ready to make a transaction. If I was not running a full node and not doing all this swoopy tech stuff of opening a Lightning channel, I didn’t do any of that stuff, but here I am able to conduct a lightning payment seamlessly.

Preston Pysh (00:57:13):
And it was just a total aha moment. And it plays to exactly what you’re saying Parker, as far as these rails between businesses where you’re going to see a lot of this technical expertise and transactions taking place and probably interest being paid to the people that are processing these coins that are going back and forth between these hubs and then they’ll settle on-chain like you’re saying, once a week, once a day, whatever it might be, whatever makes the most sense for them to reset.

Parker Lewis (00:57:41):
Yeah, I think in that equation exactly. Somewhere there was some Lightning liquidity that Strike, they may have either gone direct to Fold or gone through some other routing, or some other route. Strike is offering you some set of services that are of value to you. One of them being disability, and Fold may be competing directly for your business. But if they don’t have your business in this capacity, then it may not make sense for Fold to connect directly to you, but to route through Strike.

Preston Pysh (00:58:15):
Absolutely mind blowing stuff. It’s just mind blowing stuff. And it was so seamless. That was the part for me that was just like I can see how this is going to change a whole lot of things for people because you don’t have to know any of this stuff, or really understand any of the technical aspects of it. And it was just as easy as, “Hey, send some money from this bank account into this app.” And I scan the QR thing and here I am doing Lightning and if you don’t have that technical background you’d never even know.

Parker Lewis (00:58:44):
Yeah, I think when people talk about how Bitcoin is too complicated, like, “Oh, no one’s ever going to get it.” Nobody knows how telephones actually… I’ve worked with telecom companies so I know more than most, but people pick up the phone, they talk to people all over the world and they have no idea how that technically happened. Better example to this case is nobody actually knows how the dollar system works. They swipe a credit card and they think that money went from Starbucks or from their bank account to Starbucks magically.

Parker Lewis (00:59:14):
No, that didn’t actually happen. That transaction basically checked to see if you had enough money and they’re going to net and settle later with about a million other transactions. And the same will be true of Bitcoin, that we’re in the process, we’re making it very seamless for people to secure millions and millions of dollars of wealth at very low to virtually no cost. And the idea that we will all do the same for routing payments and in solving that piece of the equation. It’s just a matter of the value of the network rising and having the proper incentives to dictate that the investments we’ve made and those payments applications which it feels like we’re getting to now.

Preston Pysh (00:59:53):
Gentlemen, that was incredible. I learned a ton. I’m really excited to see your next big moves here and to get the pilot going. And I know there’s a lot of people in the space that are watching what you’re doing very closely, mostly because we’re very excited to have a product that allows us to continue to hold one of the keys to lend a Bitcoin out and receive interest and just everything you guys are doing. So I really appreciated this interview and having the opportunity to talk to you and hopefully we get a chance to do this again soon. One final question. What is the best brisket in Austin?

Joe Kelly (01:00:35):
I’m partial. There’s this place called [Mum’s 01:00:37], they sell at the Farmers Market here. My wife might have worked there for a minute but it has one of the best brisket around this, gets really great a… It’s about the meat quality and if you find the spot that gets the highest quality meat that’s the bottom right there.

Preston Pysh (01:00:50):
Parker.

Parker Lewis (01:00:52):
I’m going to I’m going to go with Cooper’s because it’s where are the Austin [Beat Devs 01:00:55], there are after Beat Devs, Partners so I must stay true to the home team. There’s a lot of good barbecue, there’s a lot of good Bitcoin moving to Austin. I was joking with Justin on Twitter, Justin [inaudible 01:01:09] that I was supposed to hijack this conversation [inaudible 01:01:12] awesome. And I figured we’d better spend time talking about Bitcoin and Unchained but we’ll get you to at some point.

Preston Pysh (01:01:21):
Next time I’m in Austin I’m hitting you guys up.

Joe Kelly (01:01:23):
Please do. Yeah. Welcome anytime.

Preston Pysh (01:01:26):
All right guys, so tell people where they can learn more about you, any papers you want to highlight, websites you want to highlight, throw it out there to the audience.

Joe Kelly (01:01:34):
I’d say go to website, these days you can actually use unchained.com, it’s going to be our principle domain, so make it easy on yourself. And if you haven’t experienced holding your own keys or using multisig, you should definitely check out our concierge starter kits. Really simple process, we can get people going in as less as 24 hours. And we have some experts, much folks who are here that are standing by to help people onboard into the full multisig experience with on-chain vaults.

Parker Lewis (01:01:58):
Yeah, and I would just add that reemphasize that if you haven’t hold held your own keys, there are things that you will learn about Bitcoin by going through that process. And that if you go through the process of concierge onboarding, set up your keys, you don’t necessarily have to deposit all your Bitcoin at once. But through that process, you will definitionally learn things that have been abstracted away from you. And our team specializes in helping people graduate to that point. And when people realize that the longer they hold Bitcoin the more likely they are to hold their own keys, they’ll also realize that it’s not for ideological reasons, it’s for security reasons. And we are helping to commercialize and standardize multisig and collaborative custody. And so come check us out at Unchained Capital and if you’re in Austin, come and visit us. We’re right downtown.

Preston Pysh (01:02:49):
Gentlemen, thank you for your time. This was really fun.

Parker Lewis (01:02:51):
Appreciate Preston.

Joe Kelly (01:02:52):
Thanks.

Preston Pysh (01:02:54):
Hey, so thanks for everybody listening in to the show. If you enjoyed the conversation, be sure to subscribe to the show on whatever podcast app you’re using. We really appreciate that, and if you have time, leave us a review. So thanks for joining us this week and we’ll catch you next Wednesday.

Outro (01:03:08):
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