Important points
- Stablecoins provide a safer and more efficient alternative to traditional banking.
- The future of finance includes the tokenization of all assets, including stocks and bonds.
- BitGo's operational management and regulatory framework is important for building the market structure of cryptocurrencies.
- BitGo is stronger than most of its competitors because of its preparation and strategic planning.
- Going public will benefit BitGo by strengthening its business and increasing transparency.
- U.S. capital markets are going digital, bringing with them unique risks.
- Custody risks in cryptocurrencies are unique due to the nature of bearer securities.
- Exchanges should not increase counterparty credit risk.
- Customers prefer cold storage for safety but require liquidity for trading.
- The emergence of new asset classes requires a reassessment of market structures.
- Stablecoins provide a safer alternative to traditional banks for deposits.
- The regulatory environment for cryptocurrencies will remain stable over the next three years.
Guest introduction
Mike Belshe is the co-founder and CEO of BitGo, a digital asset infrastructure company that provides custody, wallet, and security solutions. He previously worked as one of the first engineers on Google Chrome and created the SPDY protocol, the basis of HTTP/2.0.
Advantages of stablecoins over traditional banking
- Stablecoins provide a safer and more efficient alternative to traditional banking. “Stablecoins are made from bank-like deposits and retail deposits that are better than ever before, and they are very secure on a one-to-one basis, and you can put an auditor in and audit them twice a month.” – Mike Belshe
- Fears that banks will lose deposits to stablecoins are unfounded and historically unfounded. “This is not the first time in history that something like this has happened, so we know it won't happen… There was no bank run. Everything will be fine.” – Mike Belshe
- Banks are trying to block competition from stablecoins through regulatory measures rather than innovation. “Rather than trying to compete…their first option is that if they can block this regulation, they won’t have to compete.” – Mike Belshe
- Stablecoins should be viewed similarly to ETFs in terms of operating and regulatory costs. “I think stablecoins are actually a very similar type of activity…they’ve started operating a little bit again, they’ve been audited by some regulators, and they’re doing a very similar type of product with one-to-one reserve management.” – Mike Belshe
- Fees for stablecoin issuers should be significantly lower than they currently are. “We should be thinking about how issuers can hold stablecoins at a level of 25 basis points, maybe even 50 basis points…and not something like this 300 or 400 basis points that is maintained today.” – Mike Belshe
- There should be no loopholes for anyone in the stablecoin interest rate market. “I believe that there should be no loopholes for anyone and that genius should not be held back. It really takes genius to change to be interesting, and everyone should be able to do that and be able to compete in the public market.” – Mike Belshe
- The current regulatory environment gives certain companies an unfair advantage when it comes to interest on stablecoins. “If you're going to have a loophole like everyone has to have a loophole, should it be no loophole or should you have a loophole that no one can access? It should be one or the other.” – Mike Belshe
- Fractional reserve banking inherently involves risks that require insurance, whereas 100% reserve banking does not require such insurance. “If you don't take on those risks, you don't need insurance, because you actually have the money…Insured banks that are fractional reserve banks have a lot of risk and need insurance.” – Mike Belshe
BitGo’s strategic positioning and market structure
- BitGo's operational management and regulatory framework is essential to building the market structure for cryptocurrencies. “It's operational management and equity auditing, how do you have insurance behind that, how do you do cold storage behind that? What is the regulatory framework? What is the regulatory framework in each jurisdiction on the planet? How do you build a market structure to allow Bitgo to trade directly from cold storage?” – Mike Belshe
- BitGo is stronger than most of its competitors because of its preparation and strategic planning. “Without listing too many bests, I'd like to think bitgo is frankly a little stronger than most of its competitors, so we were ready early.” – Mike Belshe
- An initial public offering is beneficial for BitGo as it strengthens its business and increases transparency. “We like it because we think it strengthens our business and it's very simple.” – Mike Belshe
- Bitgo is fundamentally different from retail-focused crypto companies. “Bitgo is primarily an infrastructure provider known for storage and custody, but we've actually been trying to help build market structures, and more recently, a full-fledged financial services company for digital assets.” – Mike Belshe
- The industry would greatly benefit from regulatory clarity, even if it is imperfect. “We believe the industry can benefit tremendously from clarity, even if it is imperfect.” – Mike Belshe
- Transparency laws fail to address fundamental aspects of market structure. “No one is talking about it…What you described is actually a more fundamentally important part of market structure that is actually discussed in the Transparency Act.” – Mike Belshe
- The emergence of new asset classes requires a reassessment of market structures. “We are at this unique moment where new asset classes are emerging. Do we need the same type of market structure as before, or do we need something different?” – Mike Belshe
- Financial institutions will increasingly require robust infrastructure to support the delivery of digital assets. “Every financial institution on the planet that supports digital assets will be looking at where they can get the best infrastructure.” – Mike Belshe
Transitioning from traditional capital markets to digital assets
- The United States has the world's largest capital market, but its transition to digital brings unique risks. “First, the United States has the largest capital markets in the world that have been around for over 100 years…As the world goes digital, those markets go digital too, so all the risks inherent in digital fall into traditional capital markets.” – Mike Belshe
- The New York Stock Exchange's move to go digital signals a major shift in capital markets. “The New York Stock Exchange recently announced that they want to digitize everything…If I come from a traditional field and value transparency…I'm going to digitize everything and create a one-stop shop. That way, my business could grow significantly.” – Mike Belshe
- By 2026, the entire capital market could be tokenized. “SEC Chairman Paul Atkins has said…the entire capital market will essentially be tokenized by 2026.” – Mike Belshe
- The United States must maintain its position as a leader in capital markets by identifying and mitigating risks. “I think we need to think very seriously, like, what are the risks that we're protecting against in the capital markets… Identifying those risks is a lot easier to understand how to solve those problems.” – Mike Belshe
- BitGo operates 100% as a reserve bank, positioning it as a financial services institution rather than just a custodian. “Look, at this point we are actually a national bank, we are 100% a reserve bank…we are a financial services institution” – Mike Belshe
- Traditional custodians may build their own infrastructure or partner with companies like BitGo to increase efficiency. “Are BNY Mellon and the State Highway and Heritage Trustee going to try to build this infrastructure themselves, or are they going to partner with Bitgo?” – Mike Belshe
- Bitgo's cold storage solutions are essential to protecting billions of dollars of digital assets. “What we have is 100% cold storage. When you set aside billions of dollars, you have to keep it offline or you're vulnerable to hackers 24 hours a day.” – Mike Belshe
- Traditional companies are currently analyzing how to enter the digital asset market. “All traditional companies are currently analyzing how to enter the market.” – Mike Belshe
Regulatory challenges and the future of cryptocurrencies
- Despite the legal uncertainty, the regulatory environment for cryptocurrencies is likely to remain stable over the next three years. “Even if we don’t get transparency…it feels like we still have a solid three years left before we get regulatory precedent.” – Mike Belshe
- Overregulation can hinder innovation and create ineffective products in the cryptocurrency industry. “If you impose too many regulations, you freeze the industry and end up with products that don't actually work very well.” – Mike Belshe
- Overregulation can stifle financial innovation for consumers. “If we overregulate, we will stifle better finances for the American people. If we overregulate, people will need to be a little more responsible for the investments they make.” – Mike Belshe
- Although the regulatory environment for cryptocurrencies has improved, there is still work to be done. “I think there is work to be done in terms of codifying the law.” – Mike Belshe
- The current banking system may lack competent leaders who can effectively manage finances in a changing economic environment. “It's not at all clear to me that the heirs of these 100-year-old organizations are necessarily better stewards of people's finances and money just because they've been at it for so long.” – Mike Belshe
- Banks may not have innovative investment strategies and instead rely on traditional low-yield options such as 10-year Treasuries. “It's rather shocking that they didn't have a better idea. And what's really shocking is that they didn't think about what would happen if interest rates started going up, like we're in a zero interest rate environment.” – Mike Belshe
- Bitcoin remains a unique asset due to its rarity. “We will realize that there is indeed a lack of capital that only Bitcoin can provide at that level” – Mike Belshe
- Bitcoin will continue to grow despite ongoing challenges. “I think Bitcoin will continue to grow… It will take a lot of hard work… The Bitcoin ecosystem team needs to keep working hard to get people to fully trust Bitcoin.” – Mike Belshe
Bitcoin’s resilience and human ingenuity
- Human resilience will help strengthen Bitcoin over time. “The good news is that we humans are very smart and resilient over time, and despite our flaws, we actually usually do.” – Mike Belshe
- Customers prefer cold storage for safety but require liquidity for trading. “Our clients love the cold storage where they store billions of dollars in assets, but they don't want to trade online…But when they want to trade, they have to take the product out of that cold storage and put it on a volatile exchange that they don't want.” – Mike Belshe
- The market structure allows for both safety and liquidity in trading. “The market structure provides both. You can have the security and safety of where you bank and store your money, while also having liquidity and getting the best price anywhere.” – Mike Belshe
- The current market structure of cryptocurrencies does not guarantee the best execution for traders. “When you use cryptocurrencies, you pre-fund an exchange…those exchanges are not obligated to Bestex, they just give you the best price on the exchange, but we all know the best price is everywhere.” – Mike Belshe
- Exchanges should not be allowed to amplify the credit risk of trading partners. “Exchanges should not be allowed to amplify counterparty credit risk. In the crypto world, exchanges are one-stop shops, they take on custody risk, they take on counterparty credit risk. They want to say oh, but we can do it better.” – Mike Belshe
- Custody risks in cryptocurrencies are unique because they require holding bearer securities that cannot be recovered if lost. “The most difficult thing to manage by far is bearer securities, which are gone if you lose them, unlike stocks and other things where you can rewrite the database and restore them in a matter of days.” – Mike Belshe
- In the future of finance, all assets, including stocks and bonds, will be tokenized. “Larry Fink says…everything will be tokenized, so every stock, every bond, every fund will all be tokenized.” – Mike Belshe
- BitGo's operational management and regulatory framework is essential to building the market structure for cryptocurrencies. “It's operational management and equity auditing, how do you have insurance behind that, how do you do cold storage behind that? What is the regulatory framework? What is the regulatory framework in each jurisdiction on the planet? How do you build a market structure to allow Bitgo to trade directly from cold storage?” – Mike Belshe
