The Future of Crypto Banking | Jeff John Roberts , Caitlin Long & Rok Kopp

All right, I hope we're ready for our next one. It's going to be such a fun conversation. I'm going to introduce the moderator, Jeff John Roberts. He is the finance and crypto editor with Fortune, and he will introduce the rest of the panel.

Thank you so much. Hello again. Uh I'm delighted to uh welcome a couple of the sharpest people in crypto finance. Uh Caitlyn Long, who I've known for years, has been fighting the good fight with Custodia Bank, and um Rock Cop, who I confess to me for the first time, but I certainly know Etherfi, which is I think on the sort of cutting edge of of finance. And we're here to talk about the future of crypto banking.

But first things first, can you each you quickly say what is cryptobanking? How should we think about it? Well, it's two things. One is just regular US dollar bank accounts for the startups in this space and for the users of crypto so that if you send a wire back from a crypto exchange to your regular bank account, your bank doesn't debank you.

Yeah. Uh for us, it's um basically maintaining custody of your assets uh while performing any action that you can currently uh with a bank. So whether that's sending money, spending money, uh or investing money, uh we want you to be able to do that through Ether.

Okay. But in the crypto context with you know sort of custody, how is it the same and how's it not the same as you know I think we all know what a bank is. They hold our money and there's a federal backs stop to it and you know they above all they cannot mess with our money and the rules are kind of the same in crypto or how is it different? Uh the rules are actually quite different because the way traditional banking works is when you put money into a bank and the bank tells you you can withdraw it on demand. It's literally called a demand deposit.

There are 5.7 trillion dollars of demand deposits in the US dollar banking system right now. But the bank doesn't sit on vault cash to be able to cash you out. The bank turns around and makes loans with that cash. And that's the disconnect.

There is in crypto some of that happening. Obviously SPF did it at FTX. We've seen, you know, BlockFi and and some other exchanges get nailed by classic bankr run type of type of situations. But the onchain assets themselves are not subject to that leverage, which is why if you own, you know, it's not your keys, not your coins. If you self-custody, you aren't exposed to that classic bankr run risk.

Yeah. So for us um I guess there's a couple things. So an important thing with Etherfi is that we never take custody of the assets. So the the user holds the assets um at all times. Uh so there's no rehypothecation of said assets when they come in, right?

Like the US banking system, US dollars go into the bank, but I think it's something like only 5% of dollars are actually held at the bank. Everything else gets you know go and make more money with with said money. Uh so for us the assets are there. Um, now you can place your assets into different things where you can continue to earn your capital, but uh the the bankrun situation just doesn't exist because we're overcolateralized. We we don't do anything with that money because it's just the users holding their assets uh on Etherfi.

Um I one of the interesting things I think on that uh and is scary for people is actually self- custody. Custodying your own assets seems scarier than putting $50,000 at Chase Bank. uh you you know we as Americans you put $50,000 in Chase Bank and yeah it might only be open 9 to5 Monday to Friday but you're not worried hey my $50,000 might be gone where uh everyone's heard every horror story in crypto where their keys are lost or whatever and you know someone's lost their Bitcoin seat phrase and has $10 million that's floating around somewhere. So

I've heard about that. Yeah.

Yeah. No, but can you know can you actually sort of how does Etherfy sort of square that circle in that self custody? I agree with you. You know, I've lost seed phrases before. It sucks.

At a certain point, you're like, "Damn, it's just easier to park on Coinbase, but you feel like you're not really doing crypto." So, what just break down for me the technology that lets people operate on Ether and self-custody without like the big headache of having to manage their own uh their own keys.

Yeah. So when you um our our user flow is a little more web 2. So you create an account with a email address and then you have to KYC to to get our credit card which is basically creating like this this vault. The vault is just a wallet that uh is created on optimism. Now we just announced that today we're moving from scroll to optimism uh which is a Ethereum L2.

But your assets uh your account basically sits there and so we try to make the flow good for normies I guess is what I would say. You can bring in stables, ETH, Bitcoin. Um, and then we have different products where you can either just hold them uh or you can earn yield against them. Uh, and you can also borrow and then spend with a Visa credit card. So, it's uh it's a Visa credit card.

We have two modes, direct payer mode or borrow mode. Um, if you borrow, you're paying 4% and uh you're just literally tapping a Visa credit card like you would normally. Uh, and then we work with Visa um and just settle on a daily basis with Visa. Um, it's all done in stable coins. So Visa is actually really really forward thinking with crypto and and their stablecoin business is a big focus.

Um but yeah so so I I guess the answer in short to to your question is when you go into edify you're creating a wallet on optimism uh and then you're adding funds that are being held in there. Um and we just kind of try and make that that flow easier. You can onramp and off-ramp fiat etc.

Makes a lot of sense. And um turning to I just want to pick up what you were saying earlier Caitlyn about yeah banks you know it's kind of shocking if everyone went to the bank and asked their money it wouldn't be there. That's fractional reserve banking. And I think I do see the crypto industry's point. It's like hey our stable coins 100% backed why you treat us differently.

But devil's advocate for sec here Caitlyn. I mean you know all of our parents need to go get mortgages. Maybe you guys want to get mortgages. You know unless you struck it rich with your ETH. Good for you.

But most people aren't in that position. And the banks need those deposits to go and lend out. And I think is this just FUD when they say, "Hey, if we let stable coins get what they want and give yield, all the all the money that's currently sitting paying very little interest rates, it's going to flood over there and then JP Morgan Bank of America won't have money to lend my parents for their mortgage." Is that a a legitimate concern?

It is a legitimate concern. And it's interesting because I've been waiting for a rift to develop between the big banks and the community banks because the big banks want to be all over this, issue their own stable coins, want to they're opening up branches in small towns all over the country, right? JP Morgan Chase is one of the banks that is has a massive growth strategy in bricks and mortar. Literally just opening up branches all over the place. They just opened up two of them in Cheyenne where I live.

uh and they're really competing with the community banks. So, um that's the bigger the bigger the bigger threat to the community banks is the big banks moving in. And it's so interesting because I think the community banks have not thought through this enough. But it's really fun because what custodia is doing with Vantage, Vantage is a $5 billion community bank based in San Antonio. And we have built a tokenized deposit to stable coin system for community banks to plug in.

And this is the first time that small banks actually have their own payment system that's bubbled up from the small banks themselves. If you look at the history of banking in the United States, the big payment systems, even Visa and Mastercard were built by the big banks and the clearing house built by the big banks, owned by the top 21 banks. I have been doing a lot of research into this very recently and I've never seen anyone talk about this and in fact actually as I've talked about this to banking people they didn't realize this either the either there's a gigantic arbitrage at the center of the banking industry that is in favor of the big banks that hurts the small banks relatively and I don't know how many people have thought about it but but it's because the clearing house is not a bank and it doesn't have the same capital requirements as a correspondent bank whereas if they community banks want to do this sort of business, they actually have to have 20% hold 20% risk waiting against the due from in the in the receivable from the bank. The big banks don't have to do that with the clearing house. Whoa.

Is anyone wondering why the big banks keep getting bigger? Right. And they want to dominate the stable coin market. So, I can't wait for the small banks to make the break. And the cool thing about what custodian advantage are doing, I love working with the smaller banks because that is where the main street credit is coming from.

So whether you you you are opposed to fractional reserve banking or not and there is a huge rift in that area. We can maybe talk about that next, but um but the community banks are the ones that are on the ground. They're the ones, you know, lending the small businesses. They're the ones, you know, that have that know their customers on a firstname basis. That's more legitimate in my mind than the the behemoths that just are too big a fail, keep getting bailed out and are trying to grab the core deposits from the community banks and then they build these payment systems to try to keep all the community banks and fintexs out.

It's not

Yeah. And in the 2000 financial crisis what failed some very big banks. Um, let's I want to go back to um, forgive me for being slow here, but the distinction between tokenized deposits and stable coins because that seems where the action is to the degree the banking system is touching um, you know, the the crypto rails is at the stable coin level, but you know, maybe I'll throw this one to you, Rock. How would you explain the distinction between tokenized deposits and stable coins?

This is more Caitlyn for sure.

So, it's the same smart contract. So, Ethereum doesn't care what a tokenized deposit versus a stable coin is. Um and our smart contract will go live on Ethereum soon. We will probably release it. It's on testnet for people who want to look at it.

But um the at when it in our in our network, the stable coin always is it starts its life cycle as a tokenized deposit and it'll bounce back and forth between banks. So bankto bank a bank bank A's customer uses it to pay bank B. Then um it it it changes obligor and then the moment the customer takes it to a self-custody wallet or sends it overseas it automatically programmatically becomes a stable coin. It's the same smart contract. It's the same token but the obligor changes.

So that's what we're doing in the background. We've effectively built a what's called a sidecore system for for banks to seamlessly offer this to their customers via a widget on their online banking page. So there's not a big technology lift up front. This is bringing smart contract technology into the banking system. And you you you guys are going to love this.

It's Vantage and Custodia are very philosophically aligned. We do not want to build walled gardens. We want to tear down the walls. We want to be true service providers. So we did it.

We're starting on Ethereum. We're not going down the walled garden corpocoin, you know, um um permissioned networks strategy.

Corporin. I like that. the um so so one thing I'll say on that too and why I mentioned that so etheri we're neo bankanking we we don't we're not a bank um there's banking services I guess that that can happen but we never take custody of the assets uh and we participate in DeFi um which allows us to move quicker right we're we're because of how we're kind of set up uh we can move faster into different markets etc so um it's actually really interesting learning some of the the like legal ease and regulatory stuff. We just use the products that are out there, the stable coins that are out there, etc. Um, but I think who's going to benefit from this is the users like over the next Yeah, like over the next 3 to 5 years like users are really really going to be benefiting the most because there's also going to be a massive customer acquisition play um from all these people to get into this future of banking and what it looks like uh or retention from the existing players in the space too.

So I I I think users have a good future ahead of them in the next 3 to 5 years.

I guess I'm just conceptually trying to figure out how to make the two things come together cuz banking, you know, you get interest, not much of it, but you know, it's cuz I lend the bank my money and it lends it out and pays me a trickle of interest. Um but with like etherf platform like that it's you know the the the the money comes from you know the validators and then you know the the rewards being shared and then sort of repled you know is there you know I'm trying to figure out is there any common ground between these two worlds and if so where

probably um so like with Ethereum if you put your ETH if if you commit it to the beacon chain uh in return you get rewards from the transactions that happen on the chain right and so this is the the proofofstake mechanism uh which gives some incentive to people who commit their tokens to to the blockchain. Um, you can withdraw those at any point, but while they're staked, uh, you you get some return. I think it's similar to a US dollar in and the interest you get back from that, right? You put your dollar into the system. Um, liquidity is the most important thing with this, right?

You need enough liquidity to kind of make the thing thing go and and make it move forward. Um, so yeah, I think there's a lot to do there. Ultimately, I think what you're seeing in crypto, too, uh they're just financial markets and and I I think uh Hester did a really good job kind of explaining it in just a couple talks ago, but uh they don't want to block the markets, right? Like let's just allow fair play within in the markets in financial markets. And I think that's what what crypto is trying to do, you know, because there was no regul regulation for a while there skewed some like misbehaving fraud, etc.

But the ethos of crypto and and what is possible there, I just think the end state ends up being like banking ends up being on the blockchain. That that is going to be the end state.

I think all of the 5.7 trillion dollars of demand deposits that I referred to earlier will be tokenized within the next 5 years. And the old AC system, which is a 1970s technology system, will just be obsoleted and stable coins will replace it in tokenized deposits. But again, the difference between tokenized deposit and stable coin, it's from a from a programming perspective, it's the same smart contract.

Um, right. And going forward, you know, I know you've been battling the Fed for years now. My goodness, I think we had this interview like five years ago. We're trying to get your master account. And a master account is basically the unlock where you get access to cheap money through the Fed and the AC system and the Swift system too.

Uh, no, not the Swift system. That's a that's a separate system. But uh but yes, it's d basically no counterparty risk and no risk of debanking. We were famously debanked five times uh in in 18 months of operating just simply because we were in the crypto industry even though we have a crystal clear compliance record. It's literally just and I mean it's it's also obvious the Fed was certain elements at the Fed I I shouldn't say generally certain elements at the Fed wanted us gone because of our lawsuit.

And if we had lost our banking access, that would have been an easy way to make our lawsuit go away, right?

Yeah.

I think that the image of crypto was kind of tarnished by some bad actors, though. And so you unfortunately crypto like bad is assumed, right?

Well, I mean, the the discovery in our lawsuit showed that it was FTX that precipitated the Fed's move against us and the Fed's move against Silvergate. We had nothing to do with I mean, Silvergate was banking FTX, but custodia had nothing to do with FDX. And yeah, um I won't go into all that all all that, but it just look at the dates. FTX filed bankruptcy November 11th, 2022. The Fed decided to deny custodia November 23rd, 2022.

And I found out through a a back channel. We had lots of people coming forward. Thank God Washington DC is a civ. We found out that the Fed moved against Silvergate on that same November 23rd. So it was obvious FTX was the precipitating factor.

Yeah. And I think choke choke point 2.0 was not a fiction. It was it it happened but I assume we're kind of like in in new era right now where you do have people like Paul and Hester who are under who like no crypto. So is is it going better now or

it is but the Fed still has not let a single crypto native company have access yet?

Uh I was just talking with Chairman Atkins and um and and Commissioner Pur and they were asking what can we do to help and uh I there were a lot of people around so I don't think I'm breaking a confidence. Um, Chairman Atkins said he's going to call the Fed and and and get them to to uh, you know, have a conversation. Uh, there are multiple both Kraken and custodia have been we applied for our Fed master accounts literally five and a half years ago.

Yeah, it's ridiculous. Let's end on an optimistic note though. I think it's fun to look into the future because realistically the AC is kind of a primitive like email system from the 70s and you can have a blockchain. So, can we see a world where the glob's banking is done on blockchain? And how does that specifically look like?

Is that in 10 or 20 years? How long is it? And what's it look like?

Well, I think it'll be a lot faster because the the the Fed tried to slow and there are some some argument that part of the reason they slowed the crypto companies who were trying to get access down is because the Fed created its own real-time payment system called Fed Now, and it didn't want stable coins to compete with Fed Now. One of the problems with Fed now though is it was designed for the banking system architecture which is still in most cases closing the books overnight. So there's still a lot of batch processing, no real time processing going on in in the vast majority of the number of banks in this country. It's still overnight. And so the message this is I I love to give credit to Lyn Alden because she talks about the the data leg of a transaction versus the money leg.

We've been able to send the data leg at the speed of light since the mid 1800s when the transatlantic telegraph technology came into play, but money was gold and it was limited to move at the speed of matter, right? And so when Bitcoin finally came along, you could move the data leg and the money leg simultaneously. So you could truly get atomic settlement. So much of the abstraction in the banking industry is is all these layers of not having the ability to move the money.

Exactly. We know we have a better system. We're out of time, but I want to give Rock last word. When is like Ethereum going to be part of the mainstream banking system? What's that look like?

I think it's 3 to 5 years. I I don't think it's that long. Like I think we're super super close. Um the the fact that uh Paul Atkins and Hester Pierce were here like that is amazing in in like the growth that we've seen. Things are moving so much faster.

Uh, and so like I know prices are down and prices drive narrative and the feelings in crypto so much because like a lot of crypto is still a casino and so people are trading and prices are down but like I've never felt better positioned in working in crypto. Like I'm super super bullish on where we're at and uh things are moving super fast. So I'd say three to five years.

Yeah, if you have a better technology you'll prevail. I've seen it again and again. Okay, please give it up for our panelist. Thank you everyone.

Well done. Thank you.

Thank you.