Fireside Chat with Anthony Vassallo from Silicon Valley Bank

All right, next we have up uh Anthony Vasalo, the senior vice president of crypto at Silicon Valley Bank for a fireside moderated by Sonia Kim, the chef at Steakhouse Financial. Hi, Anthony. Howdy. Um, I was actually really excited for this fireside chat because Silicon Valley Bank was not the name that I expected to uh find at stable coin summit. So um yeah, we obviously all know the story of SVB um during the regional banking crisis in March of 2022 or 23 rather.

Um and yeah, like could you give us uh for the audience an update on how the uh bank had progressed since uh the acquisition by it was First Citizens Bank, right? Yeah. um and what the crypto team at SVB is currently focused on. Yeah, sure. Thanks, Sonia.

So, I've been at SVB for nine years. I've done number of different roles mostly on the commercial lending side, underwriting, portfolio management, and then a product manager looking after tech and healthcare lending and always looking to do more for our crypto clients. So we've been banking the space for over a decade more publicly for about the last four years and following the acquisition um first citizens has kept us intact you know same bank that you know more diversified balance sheet over 80% of svbers are still at the bank um our private bank merged and our commercial bank has remained intact as for our dedicated group we have a dedicated fintech arm And within that is our crypto practice and we focus on helping about 500 companies cryptof focused VCs and those building on and around the blockchain. So, First Citizens was really impressed with our processes, controls, and see this as a as a meaningful uh growth opportunity for the bank as a whole. And the types of companies that we support span from miners to marketplaces, wallet providers, networks, foundations, you name it.

So long as they have some sort of a basis in the US and have raised outside capital, we're happy to take a look at them. Very interesting. So you guys are open for business for crypto companies wanting to to bank with Silicon Valley Bank. Um very nice to know. Um so the discussion for today was going to be on stable coins.

So one thing that we did at the end of last year is separate from all the other reports that you see with folks looking uh what you're seeing for the year ahead. Um we thought a lot of topics were covered to death, but we wanted to focus on three things that we thought were particularly interesting. One one was um payments and the convergence of blockchain and fintech. The other one was decentralized AI and AI's increasing role in crypto innovation and finally gaming. Um so I'll I'll hand it back to you with where you want to start here.

Yeah. So as the slides show um you know crypto payments are actually gaining a lot of adoption um and I was interested to hear from your vantage point um how you're seeing the like the adoption of stable coins and what areas within the stable coin ecosystem is the most interesting uh to you know banks and fintex. Yeah, at the most basic level, you think about what is the utility of a blockchain and payments make sense. Uh blockchain being the rail, stable coin being the asset that runs along it. And in the last 5 years, you've seen almost a 40x in volumes.

Um biggest acquisition to date, Stripe of Bridge happened in October. You're seeing a lot of companies raise around this. And I think it's remiss for FinTechs to only observe what's going on in this space and and to have a strategy. So what we're seeing is um a lot of companies coming to us that have recently raised or are about to raise or um are beginning to support stable coins in some way and we help them with their with their commercial needs. So um what's really interesting here I think we all know but if you look at this as an American you miss the point what we might consider micro payments are truly essential for regions in subsaharan Africa India Latam especially Argentina where small businesses and individuals actually need to correct for the volatility and and have a way to transact.

So I might just skip ahead here to this one which was discussed earlier in the panel. Now one thing that's interesting here is Visa is one network. So you know to be fair but um it's a pretty big number right 2.1 trillion monthly stable coin transfers. So what we're seeing here is this this is the direction that we're obviously headed and we're we're pass we're passing the processing benchmarks that you're seeing on these traditional rails be because they are better.

Um so my personal thesis of how Defi grows is through the DeFi mullet. I'm sure all of you are quite familiar with the terminology, but it's essentially leveraging um you know CFI in the front. So the the uh distribution power of these fintexs who are interested in getting into crypto and defi rails really powering um the backend architecture of um of uh these new you know solutions where CFI and DeFi meet and I was wondering if you have any kind of like tangible examples or you know anecdotes of some of your fintech um partners or uh banking customers wanting to get into this sort of uh you know meeting of CFI and DeFi realm. Yeah. So we're obviously seeing the convergence of fintech and crypto and it kind of begs the question you know what was and what is fintech?

What does it all mean on on a definition basis? Um I think the fundraising data speaks to this pretty pretty solidly. So um if you look at the bottom here, this is a kind of a consolidated taxonomy that we use internally and via pitchbook. And looking at the valuation overhang from 21 to 24, um this goes right to left is something you should notice. If you look at the way that these categories are broken down, um the the least recession in a single category was crypto blockchain.

And a lot of these by and large are companies that are processing payments or doing something around stable coins. What's interesting here are these are companies that either self-identify in this category said so upon a fundraising announcement or specifically in a product release. So if a company doesn't first identify as it but they are playing into the mullet where they are using the the blockchain in the back um that would count as well. And if you look at the chart on the top um that also begs the question, should we be measuring the crypto blockchain footprint as a portion of fintech? When will they separate what means what?

Um my personal take is I don't believe this chart on the top is a triple top and has failed and is and is going to sink. I think you'll see that continue as well. And just a general footnote on what you see with fundraising announcements is these these lag, right? So you have the lag in reporting and then you have the lag in the announcements. Several companies elect to not announce until 6 9 12 months after they raise, whether that's alongside a product release or they're trying to do something uh more strategically, but the funds have already closed and then they'll come along that as well.

So I I would guess, you know, we'll we'll see as more time passes that this is going to grow even more and I I think it's a way that some of these fintexs are also trying to reach new users and and improve their cost structure. That's so interesting. So uh for the audience in case they can't see the the labeling on the bottom left chart is is the right way to read that chart that out of fintech deals crypto and blockchain subcategory was the the highest funded or the most popular um most popular subcategory. Yeah, there's a little bit these this is an attempt to be mutually exclusive and completely exhaustive. So it depends, you know, chiefly is it a paymentsoriented fintech or or something like that.

But I think the main takeaway here is that those that were identified as having a nexus to blockchain um had less suffering in what we saw from 21 to 24. And we would we would continue to see more of that restoration as fundraising comes back. And this is a trend that we're all familiar with at VC as a whole, but this just focuses on that fintech slice. Okay. Um, and since you represent Tradfi, um, this morning I read that, uh, the CEO of Bank of America, the second largest bank in the US, came out and said, uh, you know, contingent on legislation, making progress, we are happy and ready to jump into the stable coin market.

And I was wondering you know on a three to five year view right now we've got a market structure which is led by Tether USDT um followed by you know USDC circle and um then the you know uh distant third would be a decentralized stable coin uh D or USDS. Um we've been quite used to this market structure perpetuating over the last couple of years. Um, but it feels like as TRDFI comes in and they launch their own stable coins, the landscape might evolve quite substantially. So I was curious what your view was on, you know, on a 3 to 5year basis. Um, how you envision the stable coin market uh, panning out.

Yeah, I mean I think so generally as you see expansion in crypto markets, the demand for stable coins continues. So you see more minting than redeeming. I think there's a lot in here in the ethos of crypto specifically. You know, what's a true 10x improvement around an incumbent solution? How many tokens do we need?

What's the differentiator? And I think a lot of that applies to stable coins as well. Um so I think obviously it will continue to grow for just the obvious reasons of what it produces as well. Um on the banking side, if banks want to, you know, actually be at the forefront of banking tech companies and fintech, um this is a very meaningful opportunity. Now, I think first and foremost, it starts with them actually knowing the customer and the risk profile, the activity that is being requested from the client at the bank, not only what is approved, but how it's monitored.

So, there's just so many opportunities. Um, if you want to talk from more of a visionary perspective, I think right now what you're seeing a lot of is what can they do on the deposit and treasury side? Um, and then the stable coin reserves for their tokens. Um, what will banks do in issuing their own tokens certainly is going to happen. Could they leverage others?

Could there be a friendmy strategy? To be seen. Um but you know I think more of their customers in time will recognize that this is the superior payment rail. Um so to be seen again where does it play along the other traditional rails? Um that's that's something to be considered right because there there are no chargebacks.

So that's something to be really mindful of. And then in time what I'll just leave this rhetorically what will banks do to support this? So, um, in terms of on and off ramps, if a customer wants to tap on a revolver and then fund it in a stable coin or pay offshore developers instable coins, there's a lot that they might be able to do. Um, I think there's something to be said as well as enabling clients to manage a their true liquidity at least in a single view. So, seeing their fiat along their stable coins.

Um, so it's really exciting. I think I think there's more to come. Um but eventually I think there has to be kind of a convergence around what is the most utility, where are the most people and where's the most liquidity. One thing I wanted to ask you before we wrap is just looking at the creation the um I can't go back but looking at the volumes as well um in addition to wallet creation and just more transactions occurring what is some of that utility around yield and things like that that you're seeing or you you anticipate? Yeah.

Um, so I think payments of course is like a no-brainer use case for stable coins and remittances remittances but um I think over time what will really be important is what else can you do you know with the stable coins and at stakehouse financial we're basically building onchain credit markets starting with over collateralized lending. So um we have extended the use case for USDT and USDC uh through our vaults on Morpho uh providing yield to uh lenders who want to tap into the you know the onchain leverage markets and I can see over time how um you know leveraging the front ends of uh let's say Revolute or uh Robin Hood in time if they launch their own stable coins then it would be really interesting to see them leveraging uh infrastructure like Morpho uh to extend the utility of these stable coins um in DeFi. So that's personally what I'm very excited about and uh yeah, I think we'll probably end up working more with uh FinTech and uh traditional institutions in the next 5 years and work to bring DeFi more mainstream. Yeah, to totally makes sense. One one thing I would just add in thinking about where the puck is going is who does what the best.

So banks will probably play mostly where a license is helpful and you know working with the actual um final mile in in the asset as well. But if things can be done onchain with less friction and peer-to-peer makes more sense that probably doesn't need to go through a bank. That doesn't mean it won't. But I think thinking about especially as we hopefully achieve more regulatory clarity and and the passage of some legislation, I think it will naturally avail itself over time where the innovation occurs and where the different stakeholders uh place most of their chips. Great.

Unfortunately, we're out of time, but uh maybe if there's time for a couple of questions from the audience, feel free to raise your hand. Um, so love what you guys said about um, let's say how peer-to-peer and how it works in like local jurisdictions. How do you see something like let's say local stable coins cuz P2P let's say transactions are way to do the free market black market rate and local stable coins will live in some kind of trady licensing world. And how do you compare like P2P transactions versus something like local stable coins that would work with banking rails? What I'm sorry what exactly is the question just kind of a prediction or it it's kind of um more like commentary commentary on peer-to-peer transactions versus something like local stable coins which is like a common thread narrative being woven off recent.

Do you want to take that? You mean local stable coins as in like if banks were to issue their own stable coins in certain jurisdictions? Um you could um in the last panel they were talking about for instance the Brazilian realale which would be a private institution banking dollars in a local bank issuing Brazilian realale. Usually that would be done Brazilian realale fiat for USD. Now you could own the Brazilian realale and swap it for USD on chain.

I'm commenting on like the swapping of Brazilian realale for US versus Brazilian realale P2P for USD. You want to take this one? Yeah. I I think just from a first principles perspective um it's very much a compliance and a KYC question as well. So um who are on both sides of the transaction, right?

And what's the need ultimately in redemption? If the stable coin is just a means to ultimately offramp into a local fiat currency, then you know introduce the introduce the traditional players. Um but if something can happen peer-to-peer where you don't whether the two know each other or there's anonymity um and KYC is less needed or if the transaction amount is lower, that's probably better on chain. Um I think of course over time we will see more process just exactly onchain but it's who are the parties interacting um and what are their liquidity needs and do they need to offramp now or later? Can they can they stay in that stable?

It just really depends on the actual trade. That's a good answer and exactly what I was looking for. Thank you very much. Sure. I think from DeFi's perspective, we want these protocols to remain wholly permissionless and the KYC layer would come, you know, on top where the integrators like the FinTechs or the banks would be the ones responsible for conducting KYC uh according to their own processes.

So yeah, I'm obviously a little bit closer to the DeFi side and we promote permissionlessness as our ideology, but the practicality of, you know, integrating with the broader set of actors and finance probably means that there'll be various different KYCs um imposed on even DeFi rails. Cool. Well, thanks everyone for listening. Thank you.