Public Key Podcast

Everything you Need to Know About Blockchain-Based Payment Systems: Podcast Ep. 65

July 18, 2023 | by Chainalysis Team

Episode 65 of the Public Key podcast is here! We have seen the evolution of technology in music, travel and communication change over the years, but one area that hasn’t seemed to evolve has been traditional payment rails. We talk to fellow podcast host and digital asset regulatory expert, Joey Garcia (Director and Head of Public Affairs, Policy, Regulatory Affairs at Xapo Bank), who shares how they are bridging the gap between the TradFi world and blockchain based payment networks. 

You can listen or subscribe now on Spotify, Apple, or Audible. Keep reading for a full preview of episode 65.

Public Key Episode 65 preview: How Xapo Bank became a bridge between the traditional banking world and the blockchain-based payment settlement system

Napster evolved into Spotify, Skype evolved to Whatsapp Calls and Facetime, even speaking to a teller at a bank has evolved into the ATMs and internet banking, but the payment industry seemingly hasn’t progressed much in the last century and in our latest episode, host Ian Andrews sits down with Joey Garcia, Director and Head of Public Affairs, Policy, Regulatory Affairs at Xapo Bank, who explains why. 

Joey shares his early days involved in digital asset regulation in Gibraltar and how Xapo Bank is bridging the gap between traditional banking and blockchain-based payment settlement systems.

He shares the promise of stablecoins in the future of the digital asset landscape and how the defunct Facebook Libra / Diem project may have paved the way for thoughtful contributions to the EU’s MiCA Regulation. 

He touches on grassroots adoption and use cases in Africa and LATAM and tries to shine a light on where DeFi will land when it comes to regulatory oversight. 

Quote of the episode

“For the industry to evolve, there has to be dialogue, there has to be open dialogue between the industry and the authorities.” – Joey Garcia (Director and Head of Public Affairs, Policy, Regulatory Affairs, Xapo Bank) 

Minute-by-minute episode breakdown

  • (2:25) – Joey Garcia’s crypto journey and discussion on the early days of cryptocurrency regulation in Gibraltar
  • (5:15) – Evolution of technology and Xapo Bank’s role as a bridge between traditional banking and blockchain-based payment settlement systems
  • (11:45) – Discussion of CBDC’s, USDC stablecoin, blockchain-based crypto payments and everything in between 
  • (14:37) – Explanation of fractional banking and how Xapo offers interest on crypto held in custody
  • (17:45) – Understanding the business models of VASPs above and beyond just AML and Compliance 
  • (22:45) – Is MiCA the GDPR of virtual asset regulations?
  • (26:59) – Overview of the development of digital asset regulation in different regions and the impact the Libra project had on such regulations 
  • (32:15) – One stablecoin to rule them all?
  • (35:25) – What is the main factor behind grassroots crypto adoption in Africa and LATAM
  • (37:45) – Where does DeFi fit into the future of digital assets and blockchain technology 

Related resources

Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.

Speakers on today’s episode

  • Ian Andrews * Host * (Chief Marketing Officer, Chainalysis) 
  • Joey Garcia (Director and Head of Public Affairs, Policy, Regulatory Affairs, Xapo Bank)

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Transcript


Ian:

Give us a little 3, 2, 1, and start recording here. Hey everyone, this is live from Amsterdam, a Live From Links podcast of Public Key. Today I’m joined by Joey Garcia, director and head of regulatory affairs for Xapo Bank. Joey, welcome to the podcast.

Joey:

Great to be here and lovely to be down in Amsterdam as well.

Ian:

Ah, it’s terrific. Normally you’re in Gibraltar, right?

Joey:

I am down in Gibraltar, long interesting history in this space, which is, it’s actually a pretty cool story if you want me to give you-

Ian:

Yeah, well, so my experience in Gibraltar when I was at university had the opportunity to travel through there for a few days. I’ve been on the Rock, I’ve seen the monkeys, had them steal some food from my backpackers. Yeah, that’s my experience. It kind of ends there, but that was 25 years ago. Now it’s this hub of cryptocurrency. So maybe talk a little bit about what’s going on in Gibraltar and how does Xapo Bank fit into all of that?

Joey:

Yeah, look, I mean it’s a really, really cool story, because back in the day, this was 2014, so around 2014, Wences Casares he was traveling the world looking for sort of jurisdictions, a bit of an assessment, and he came down to Gibraltar, we had a load of conversation. He started talking to you about this concept of this open network and this immutably recorded unit of value that was scarce.

Ian:

And what year was this?

Joey:

This was 2014.

Ian:

Okay, so very early pre-Ethereum.

Joey:

Oh, yeah, yeah, yeah, yeah. And we started having the conversation and in that context, he said to me, “You know, it would be really interesting if you could get a jurisdiction to actually build out law and regulation for this space, it would be incredible.” It doesn’t exist in the world. But he thought that that was going to happen and it was going to come. The rest of the world 2019, and the FATF recommendations, et cetera, et cetera, started to kick in. But we started that working group.

Ian:

You were five years early?

Joey:

Yeah, five years early. And back then, call a working group with some government authorities and regulatory authorities. And some of them would send enforcement teams or one sent a police officer once to the meeting, it is, “What the hell is this? And what are you trying to do?” So it was an interesting journey, but that whole sort of law and framework came into place in 2017, beginning of 2018.

Ian:

When Wences came to talk to you, what were you doing at the time? Were you aware of crypto? Were you in Bitcoin?

Joey:

Not really, not really. I mean, 2014 I was learning and he was delivering a kind of message around the concept of what this was. And in that place, small jurisdictions can move quickly, right? So there’s no secret about that to go way before the idea of virtual asset regulation or VASP standards or whatever you want to call it. There were other industries. There was the gaming industry, there were lots of, now we’re in 2023, people are talking about the EU and ME car, et cetera, et cetera. But some more jurisdictions are much more nimble, but they’re much quicker and they can adapt and set standards which are actually significantly higher than exist in most of the rest of the world. So it was a great interesting story. And back then, obviously again, back in the day, beginning of time, Xapo, it was the largest Bitcoin custodian in the world, about 800,000 BTC, I think it was at the time.

And again, the concept of all of the other stuff, cold storage, the Fort Knox of Bitcoin, all of these ideas of building bunkers and underground bunkers and mass different continents around the globe. It was all very novel and new. So it was a group that was very much on the front end of that. It was a group on the very front end of pushing the concept of regulation and regulatory standards and on the front end of lots of stuff. And that’s kind of where we are today, if you like the sort of whole banking touchpoint as well.

Ian:

It’s pretty amazing. So when Wences comes to you and says, “Hey, help me build out this regulatory framework,” is your first reaction, “Absolutely, Bitcoin makes all the sense in the world to me, I’m all in,” or was there a moment of skepticism, consideration?

Joey:

It was a moment of learning, but with most people in that world or in this world, you’ve got to try it. You have to understand it. You have to gain some exposure, you have to have an open mind. You have to be willing to consider things and investigate. And that’s really what the trigger was for me to start it. I was a lawyer, so I wanted to build new standards. They call people in this space that early on, legal entrepreneurs. So you want to operate within a system, but arguably the system that exists doesn’t really work. So you want to build new standards, you want to build new frameworks, you want to work to support and help build the secure ecosystem. And that’s been definitely in my role, the sort of push at the front of that. And then of course, in the Xapo context, way, way back, so post the big cold storage-based infrastructure, we wanted to issue credit cards, debit cards, didn’t exist at the time.

So we went through this whole process and obtained the e-money license and were the first card issuer in relation to a link to your Bitcoin account, which back today is relatively standard. I don’t want to say standard, but it exists. Back then it didn’t really work. And then we sort of went beyond that. So your e-money, what are the biggest differentiating factors that can exist? And that was kind of the banking your sort of trigger front end of development of a new ecosystem. And we’ve seen, I mean you’ve seen it, we’ve seen it, everyone’s seen it, development of these concepts. I mean, I love talking about the history of consensus mechanisms, Persian armies agreeing sort of where to invade at what times. And then you had that cryptography and you had the enigma of machines in the Second World War, all of the evolution things continue to evolve to new standards.

And then you come to this, again, concept of the internet, and you move beyond that, this concept of an internet value, and it becomes sort of more interesting. Then you have this banking world that sits behind it again, opposing change. So we oppose, I mean, banks opposed, my goodness, go back to ATMs. That was crazy, the idea of drawing cash from a machine on a wall, instead of speaking to a bank teller, massive opposition. Then you had internet banking. That was crazy. The concept of getting access to your bank account through a computer that was seriously opposed.

Ian:

I’ll tell you what, in the United States right now, in 2023, there are people who are with a straight face arguing that the reason that we’ve seen these bank collapses is in part, due to the fact that people have smartphone apps that allow them to move money quickly.

Joey:

It’s incredible. It is actually quite incredible. But now, if you think about all of these new infrastructures that are developing and this new technology and these new efficiencies, I mean, every industry’s evolved. So you have the music industry back in the sort of shared Pirate Bay, Napster universe of sharing files that evolved to what Spotify and Apple Music, et cetera are today. So Skype and sort of telecoms interactions, how that works across the world, that’s evolved to me being able to, I know, call through WhatsApp, do all my stuff over VoIP, but payments and sort of banking services haven’t really evolved. So when you talk to me and you say, well, there’s a guy and he moves to jurisdiction A and he wants to send money to jurisdiction B to his family or whatever it is, and he’s got to pay, I don’t know, three, seven, 12%, it’s going to take three days to settle. It’s got a big cost, it’s incredibly inefficient.

And by the way, it’s almost impossible for that guy to get access to the payments network through a banking relationship of the country he’s moved to. It just seems strange. So if you think about the concept of Xapo, at the moment, it’s operating as a bank, so really, really secure. You have your 4.1% interest-bearing U.S. dollar account, very, very safe, very, very secure. No fractional banking, no lending, none of that stuff that exists, just simple, safe, trustworthy and secure. But an interaction with a blockchain base payment settlement system, at the moment’s USDC. So you could send from your USD bank account at the touch of a button on a conversion across border, immediate, almost zero cost transaction immediately to anyone, anywhere. And it acts as an access point, right? So you know I’m sure, all the world of DeFi, all the world of these exchanges, how they operate, et cetera, how do you interact, how do you create a bridge between one universe and the other? And that was the vision of where we wanted to focus being that bridge, being that intersection between those two worlds.

Ian:

I have a bunch of questions here.

Joey:

Go for it.

Ian:

So who can sign up for a Xapo bank account? Do I need to be in Gibraltar or anyone around the world?

Joey:

No, I mean, you can apply to become a member from anywhere. Also, we have our restricted country list, et cetera.

Ian:

Sure, sure.

Joey:

But yeah, you can open and apply to become a member. And again, conceptually think of, I mean, Wes is a great example, back in the day, Argentina, his family lived through, I don’t know, three currency collapses. But of course, if you live in Argentina, you live in Mexico, you live in wherever it is. If you live in Zimbabwe and you’re very concerned about the value of your holdings, your life savings, you have little faith in your central bank, whatever it might be, in the olden days, you wanted to open a Swiss bank account. Yeah, right? But do that today, the minimum account opening balances are what, 10 million, 15 million.

Ian:

Out of reach for most people?

Joey:

Yeah, it’s inaccessible. So again, we don’t operate in that way at all. We want to be an accessible option for those people to maintain the assets securely, safely. But we want to be the bridge between, we’re a crypto-native bank. And that sounds easy, but there are lots of, I think it’s really, really interesting. I mean, a lot of people talk about CBDCs now. It’s a big rage at the moment, CBDCs. And I will say, I also always say the same thing. The Bank of England or the Federal Reserve, or the ECB, whoever it is that starts to issue massive CBDC-based, local currency-based digital assets, that’s amazing, but all of the banks need to be able to support that infrastructure as well. So you do that in the UK it’ll be whatever Barclays and RBS and these guys have to have wallet-based functions and features within their applications. They need to be able to transact between that network and the payments network. And all of that will happen, it will happen eventually, but we’re already doing it.

So we do it on stablecoin, open networks, not within CBDC arguably restrictions that are going to be factored in. And we do it now. So I see it as we’re talking about the context of Xapo and the evolution and evolution of technology, evolution of new systems, new frontiers, and that’s what I think we’re pushing on.

Ian:

So I’m fascinated with this idea of U.S. dollar to USDC transfers. So I can send to another bank and the payment rail is USDC, but then it shows up as dollars, or can I send to a crypto wallet or potentially send directly to a DeFi protocol from my Xapo Bank or all of the above?

Joey:

No. So yes, I mean, in summary, it works both ways. It’s U.S. dollars from my U.S. dollar bank account sitting there earning interest, and I can use it with my debit card to buy my Starbucks, pay for my flight or whatever it is. But when I want to deliver the U.S. dollars to, let’s call it a DeFi-related platform or an unhosted wallet to whatever it might be, it’s an auto-conversion at no cost. So it’s an API integration with circle, et cetera. And that happens USD to USDC and hits a destination address. So we want to be, you can conduct whatever activity you want and whatever network you want, you can take the risk that you choose to take on any platform, but when that is doing well, or you’ve done well, or whatever it is, you need the rails both ways. So USDC into your bank account and USD also works. So you could send your USDC into your effectively bank account, and then it sits there securely. So we’re the pillar of security and the access and exit point to, let’s call it the Web 3.0 universe.

Ian:

That’s amazing. Yeah. I might have to go sign up right after we’re done with the podcast. The last question I had for you about what you said was 4.1% interest rate, but no fractional banking. And this is a thing that is a hot topic in the United States right now. We’ve seen a couple bank failures.

Joey:

Absolutely.

Ian:

And it primarily driven off of short-term deposits and long-dated treasuries. Exactly. Interest rates moved against the banks and then assets they were holding, backing these short-term deposits, suddenly valued less. People get a little shaky on confidence side. Deposits flee, banks collapse. How are you able to offer the 4% interest if you’re not lending out deposits on the other side?

Joey:

I’m going to go beyond that. So on the bank side and on the VASP side. On the VASP side, it’s Bitcoin only. And by the way, the Bitcoin is also 1% yielding at zero risk. So we don’t touch your BTC, we deploy our own assets and we pay our users 1% interest at zero risk.

Ian:

Wow.

Joey:

I mean, I won’t go into the whole security standards and protection standards that exist around that. So it’s sort of quasi banking, but I can’t call it a bank, the VASP is not the bank. On the bank account, it’s all ultra secure, short-term treasuries, overnight, very, very short-term. We know the risks that can exist around those long-dated markets against short-term inflation and interest rate rises, et cetera. So we simply don’t want any of that. When I say trusted, secure, simple, safe, I mean that the whole business is built on that model. That is the way that we operate, as a matter of fact. It’s very, very simple. So yeah, we always say, or I would say, you’ve got to trust your bank. People when they open bank accounts, there’s a certain standard, you just accept it, hey, that’s a bank, so it must be okay.

People don’t perform deep dive due diligence on a bank when they open their account. And I don’t expect that they will, but they need to understand something about the model. And same with the VASP, that’s even more extreme, because on the VASP side of things, there are lots of registered platforms from around the world and they comply with, I mean, whatever the FTX example could be one, but there are many, many, many that simply operate to AML standards. So you cannot be a fully compliant, massive global multi-billion dollar cross-border exchange platform for derivatives if you are simply conducting AML.

So how many people know the VASP? Banking standards find there can be quasi differences between a bank registered in London, New York, Singapore, but broadly they operate to a certain standard. VASPs don’t do that. So I would super-encourage people to look at, I mean, not again, proper onboarding in DD, but understand the business, look at the board, look at the management team, understand something about the core business of that entity. I think that’s really important. So we want people to know how we operate on the banking side and how we operate on the VASP side. I don’t think there’s a more secure ecosystem out there, but obviously I’m very biased.

Ian:

I think it’s a great point. One of the big takeaways that I hope people in the crypto ecosystem learn from 2022, is if you don’t understand how the business is generating the interest that you are being paid on your deposits, you should be concerned.

Joey:

Absolutely.

Ian:

Right, I’m not saying that you need to audit the existence of every asset backing your deposits necessarily. That probably takes it a step too far, but at least have a basis of understanding of the profit-generating strategy of the entity you’re depositing money into.

Joey:

I agree. And again, going back to, and that’s on the bank side of things. On the VASP side of things, I think you should really be looking at that in a lot more detail. I ran some four certain authorities around the world. I ran these fake FTX blowups in those jurisdictions. So we would run a test case. Okay, you feel that you’ve built a standard in your regulating this space, let’s run an FTX scenario and see what you would’ve captured and what you wouldn’t have captured. And most of them, they wouldn’t really have captured anywhere, anything.

Ian:

They wouldn’t have seen it coming.

Joey:

No, they wouldn’t. There are core principles of consumer protection in a regulated business, but whatever it is, internal controls, resilience, proper segregation of assets. Do the authorities understand what they’re monitoring? Do they have the capacity? I mean, in The Bahamas with FTX, just as an example, I think legally they had a requirement for the segregation of assets. Did they have the capacity to monitor and enforce that? Well, I don’t think that they did, but do users actually understand that people who are actually using that platform? I don’t think that they did either. So I don’t know. There’s a lot to do. And I’m always pushing for standard setting and raising the bar, but it’s a learning process.

Ian:

Can I ask about this segregation of accounts and third-party custodians? So in the banking world, it’s very standard. There’s custodian banks in the U.S. and they operate globally. Bank of New York, State Street, Northern Trust are kind of the three big custodians that hold funds on behalf of banks that you or I might do business with. And that creates a layer of segregation. In the case of a bank failure, you know assets are being held by another responsible party. In the case of FTX, clearly there was co-mingling of funds that were FTX sort of the assets on balance sheet of the entity, end customer funds. And it all got blended together and it was very hard to tell it apart. And clearly some customer funds got spent that shouldn’t have been or invested or moved into other assets. How do you think about that at Xapo, this third-party custodian? And where do you see this going from a regulatory perspective? Because I know it’s different in certain markets. Malaysia, for example, requires third-party custodians.

Joey:

Yeah, absolutely. So I think that in banking is one thing sort of underneath banking, you have, let’s call it e-money or electronic money standards. And under e-money standards, there’s a requirement for segregation safeguarding of those accounts. It’s very different to a bank. So again, some people use the word banking or banking services a bit widely, and they’re actually talking about payment services or e-money, not really banking, but on an e-money side of things, it’s an easy example. You have to have those assets segregated, stored, and safeguarded in a segregated account. In the VASP world, that also doesn’t exist. So the question is, do the authorities want to introduce a layer of custody and effective segregation requirements that matches an e-money standard? We already do it. So we already have it as a standard. We’re required to do under the law that we operate in group Gibraltar, actually, we have ongoing dialogue with the authorities who’ve actually just performed a sort of thematic review of everyone’s custody infrastructure that operates in this license there.

And we have even above that, I mean, Xapo specifically, additional layers of protection. So we have the security, we have the capital, we have the business continuity and wind-down provisions, and then within our terms, we have another 30,000 BTC, which is a fourth layer of protection. So even in the ultra, ultra, ultra, ultra worse case scenario, there’s an additional layer of protection. So we take it uber, uber seriously. But is there a requirement for if you use a third-party custodian, let’s say in Malaysia, wherever it might be, to what extent are you actually reading the terms of those custody arrangements to make sure that that custodian isn’t themselves mixing the assets of your platform with others? Some people don’t even look at that, some people-

Ian:

Look at it. I would guarantee almost no one looks at it.

Joey:

Well, exactly. But like I say, it’s sort of standard setting, right? You’ve got to be at the front pushing for these ideas and concepts, and we all have the same objective, we want to have a secure and safe ecosystem that allows people to interact with this new world.

Ian:

Yeah. Now, one of your roles outside of Xapo, you do some work with the UN, as an advisor, consultant, and you’ve kind of touched on this experience being able to run some of these tabletop exercises, but I think you’re also trying to bring a level of expertise into markets where digital asset regulation’s still developing. Talk a little bit about what you’re seeing out there. Where are we converging? Maybe there’s not convergence, but it seems like Europe has led the way with the first kind of coherent and comprehensive regulation around digital assets with MiCA. Are you seeing things that look similar to that being adopted in other jurisdictions or is there a divergence to other rules and racks?

Joey:

I wouldn’t say that the EU is completely leading the way. I think that’s a bit of a misunderstanding.

Ian:

That’s my American-centric view.

Joey:

Yeah. No, no, no. It’s not an American-centric, it’s definitely a sort of common thing. People often talk about MiCA as being the GDPR of crypto regulation. They set a standard on data privacy and those, et cetera. And now, MiCA’s the new world, but lots of parts of the world have been doing this for a long time. Look at the first drafts of some of the law in, I don’t know, Thailand, I think it was 2016 or 2017. They’ve evolved and developed, and lots of those markets have evolved and developed. And they’ve evolved in a way that is very different. They’re I would say very open to discussing things, to looking at things. You have a problem, you have a risk, and then what is the solution? That sounds simple, but if you have an open network, if you’re sitting in dialogue with experts, if you’re having those interactions with the industry, you can evolve things in a certain way.

And if you don’t, and if you’re operating in a binary, no, no, we’ve had this law for 50 years, therefore it all applies, that doesn’t really work. And I would say in the discussions and interactions that I’ve had, there are very open standards. I mean, the Philippines, as an example, has prepared the sort of draft proposal for a framework for regulating decentralized finance in a new innovative way. That people talk about that under the MiCA umbrella as MiCA 2 in five years time and whatever it might be. So I don’t know. I think that there’s a big world out there. It’s also, it’s a cross-border digital universe. So forming your base in one jurisdiction or another, I applaud, I really support MiCA, the whole concept of regulatory harmonization, legal clarity and certainty, that’s awesome.

Ian:

It lowers the cost of business so dramatically. I think that is a big deal.

Joey:

It does. It lowers the cost of, it does, but at the same time, you’ve got to ask the question, is it proportionate to an incumbent new innovative startup industry? It’s quasi method too. I mean, you are bringing some activity on the scope of full financial services regulation. Is it too much? Not sure. That’s going to be something that we’ll have to explore. Is there a bit of a, I’m going to call it a tech infringement? So I can sell you a baseball bat on eBay, and of course, I’ll operate to certain standards, et cetera. Now I digitize the baseball bat. Now I’m a full-blown financial services business. Is it fully proportionate? Is it a bit unfair to the incumbent industries who have much, much, much greater degrees of flexibility. If you’re an operating firm or bank or whatever it might be, you have a longer period, it’s much easier to comply with those standards. Is it an unfair weighting? Not sure. And then there are other things. I was also part of the Libra DM initiative.

Ian:

Yeah, talk about that. I think this is an interesting rewind into history to-

Joey:

Yeah, it is. Yeah, I found that it was an incredible exercise, and I’m not going to go into masses of details, but when MiCA came around and you have this concept of an asset reference token and an e-money token, makes a lot of sense. It was slightly outside of the scope of the definition of e-money and we wanted it to operate within a regulator framework. But now people slightly forget that under MiCA there’s a significant test. And the significant test for that e-money issued token is, I think it’s 10 million users or a 5 billion market cap, which in the stablecoin universe is not that big. Now, in that world, you are being brought within the remit of the European Central Bank. I mean, that’s very significant. And some of the tests around whether you are significant or not, one of them anyway, is the degree to which the token is connected to the financial system that’s amazingly wide.

So the scope is there for this activity to be brought within the remit of ECB, like a currency. And that’s pretty significant. So Libra was I would say the most compliant network that could have existed. I mean, it was just unbelievable the number-

Ian:

The initial plan is it was effectively a closed network.

Joey:

Absolutely.

Ian:

I couldn’t bridge assets out to Ethereum.

Joey:

Well, and the value of the token would be stabilized by a pool of assets. The breakdown of that pool could have adjusted, it could have been 70% USD, 90% or 10%. It was a global weighting to create a new value. But of course, there was a massive global reaction to that, which I understand. And what happened? They listened, learned, adapted, every single piece of information, listened, learned, adapt at every level. But it got to the point where you have, let’s just call it many massive global unregulated stablecoin networks exploding in value. And then you have this one really regulated, really serious group of people coming together to define a standard and wanting to comply. And the authorities are to an extent slowing things down in an incredibly fast-moving environment. And that becomes, it just becomes impossible. It becomes impossible. And that weights things towards unregulated environments, I’m afraid. That was, I suppose, for me anyway, slightly frustrating.

Ian:

The version of history that I hear repeated often is that the project collapsed, because of the association to Facebook and a general at the time distrust for big social networks and specifically Facebook. Is that your view or do you think it was more, because it was crypto and it was somewhat disruptive to central banks and monetary policy controls or perceived to be?

Joey:

I mean, it’s very, very public, the view of Facebook and et cetera. But I mean, I’m not sure. I wouldn’t weight it sort of too much one way or the other. But yes, I mean ultimately, again, people when that association was created, and if you look at the actual voting powers, if you look at the makeup of the board, it was controlled as a proper association. Facebook had no excessive voting powers or control that that’s the reality. But of course, the timing was that from a pure timing perspective, it became branded as a Facebook-only initiative. Not really fair. But that’s the way the world works. Once you have that, there was a long sort of complex process around that and trying to really explain to the world. And it did start to happen. But again, I do get slightly frustrated sometimes. I always say for the industry to evolve, there has to be dialogue, there has to be open dialogue between the industry and the authorities. Most of the industry want to collaborate.

So if we talk about compliance risk, and I don’t know, decentralized finance, there’s some fantastic on chain compliance, zero knowledge-based systems that are trying to address the problem. So you can identify the risk and you can listen to the market and they can build the solution. If you are open enough to that, if you understand the way that genalysis works as a simple example, and you look at the analytics that are available, the starting point in conversations with banks five years ago or was like, “What are you talking about?” Look, it’s like coming to you with a 20 pound note and you’re running an assessment from the second that that was created up to today on the deposit in the bank. And they don’t understand it.

Ian:

They can’t imagine.

Joey:

They can’t imagine it. But when they see it and it has to have that kind of openness. And I put to Libra broadly in that context, it could have done a lot of things in lots of ways. So I don’t know.

Ian:

The team from Facebook that was leading the project, a number of the key execs have now launched a new company that is payment services on the Lightning Network on Bitcoin. Have you followed this at all? Is that something?

Joey:

So we’re integrated.

Ian:

Okay, awesome.

Joey:

We know David Marcus and the team and Lightspark. So we, as I say, when I talked about the bank being crypto, blockchain-native, and we talked a little about USDC, we’re also Lightning-integrated. So you can make settlements and transactions effectively from your bank account application on the Lightning Network. So yeah, again, you’ve got to be at the forefront of all of this stuff. And we have a good degree of faith in David and his team.

Ian:

They’re doing some exciting stuff. I just started looking at that recently. I’m curious, as you kind of forward project across all, it seems like everybody is rushing into stablecoin and payment services. That feels like a hot topic these days for everybody that’s building in crypto. Do you see a world where there’s hundreds of these, maybe tens of these things that are all somewhat popular? Or do we end up converging around one or two or three? I mean today, there’s kind of primarily three really popular stablecoins, if you judge by market cap and transaction volume, does that grow to a large number or do we stay at that three to five range?

Joey:

That’s a good question. I would say there’s going to be, I would say when people talk about stablecoins and CBDCs in particular, I think that those will coexist and they perform very, very different functions in very different ways. I don’t say, I definitely don’t agree that a suddenly U.S. dollar issued stablecoin will evaporate the stablecoin U.S. dollar issued CBDC will absolutely not within the stablecoin universe, I think there’s going to be, let’s call it stablecoin currency fluctuations. So if the entire banking system of the U.S. starts to completely disengage, to the extent that it becomes difficult to interact with the SWIFT network or more and more and more difficult, will the global weighting of the USD stablecoin rebalance? I think that it could.

Ian:

Yeah, interesting.

Joey:

I think that it could. In terms of the actual operators, the standards, everything in this space, standards of regulation will increase. It is probably one of the biggest priorities of most authorities of the stablecoin universe. So there are at the moment, one of the standards for the reserve of a stablecoin. If they’re properly regulated, how those assets are deployed and used most circle and back-source and these guys very openly published what those assets are doing and how they’re being used. Are there going to be more and more standards that are defined as to how that can happen? I think there will. Will everyone be able to comply with them? I don’t think that they will. So I’m not sure I would expect there to be 20 massive global stablecoins. I think it may be a little bit narrower than that.

Ian:

Yeah, I would tend to agree. Shifting topics a little bit, Blockchain Africa Conference just happened recently. Xapo is a huge sponsor. What’s your take on what’s going on in Africa as it relates to crypto and stablecoins and Bitcoin, all of our data chain analysis suggests grassroots adoption in the main African markets is just off the charts, some of the most rapid adoption in the world. What’s your sense on the ground of why is that happening? And it seems the regulatory regime is actually kind of against it in many countries and it’s happening in spite of the regulatory approach.

Joey:

Yeah. I mean, it is, and Africa, South America to an extent. The other day there were some announcements in Argentina, these new restrictions for PSPs engaging with the industry in a certain way. I mean that the flight of capital that’s the main concern in some countries in Latin America, et cetera. In Africa it’s also slightly different. I would say this is very, very difficult to broadly brush an entire continent, but from a regulatory perspective, there are things in development. In Latin America, the focus is much more sort of tax-driven and cross-border control-driven than actual regulatory infrastructure-driven. But in Africa it’s different. So it’s not necessarily around crypto trading. It’s again around this idea of, I mean, I’m going to talk in the Bitcoin context, a unit of value that’s outside of the control of a local authority or currency system or Central Bank, et cetera. You can talk to people. In some countries, I use a Zimbabwe example about Bitcoin volatility risk and they look at you, “But what are you talking about?”

Ian:

Relative to the current currency?

Joey:

Volatility risk for me is not like that. But they’re also some people for whatever purpose they choose, they would like to have their operating accounts and they’re working solidly and securely and it can be a very small percentage of their assets or part of their assets that they want to hold in a separate asset class or a separate country or whatever it is. The Swiss banking model doesn’t work for a lot of people in Africa that don’t have huge amounts of money. And some of them want exposure to these markets. They want the efficiencies, they want the disconnect from that local base, inverted commas, risk. So I think that’s a big driver. We’re very excited about a lot of the stuff happening there. We’re very excited about a lot of stuff happening in Latin Americas. We do feel that we plug that gap.

Ian:

Yeah, that’s exciting. Last question before I let you run back to the conference. So I always love to get people’s outlook and I used to ask, what do you see over the next three to five years? And I realize that’s a silly question to ask in crypto, so I’ll constrain it a little bit to the remainder of this year. What gets you excited? And this can be specific to Xapo Bank or it can be broadly to the industry. What are you excited about?

Joey:

I mean, there’re going to be lots of challenges. The DeFi universe and what’s happening in that universe, the PTP networks, unhosted wallet universe. All of that stuff is, I understand and I believe in it to an extent. I also think a lot of it’s a little bit naive. So you can’t sit with a regulatory authority, show them a liquidity pool risk report of a decentralized exchange and say, oh, but don’t worry about it, it’s all fine, because it’s decentralized. So the fact that that’s, people still think that that’s going to be completely out of the scope of any activities is wrong. I really think it’s wrong. But from our perspective, I think the exciting thing I always say, so you’re into the world of DeFi, what’s the best DeFi project out there? I say it’s the Bitcoin protocol, that was the best and biggest and that’s a DeFi network and platform.

So how do people today gain access to DeFi? They do it through Xapo, they do it through Coinbase, they do it through Binance, they have intermediaries that gain and give access to that ecosystem in a secure way, you’d hope. So that when I talk about DeFi, I think it’s very exciting. Again, in the context of Xapo, we are the access point to that network in a very simple, safe and secure way. And we’re an exit point to that network. Do we want to allow access users to networks that we have a higher degree of faith in or protocols that we have a higher degree of security? And yes, and I think authorities and people will look at that intermediary and yes, there are lots of tech people that will always insist on meta mask integration with project ABC, but that’s not, that’s 5% of the world. If we want to get to 15 and 20% of the world, it’s going to be a very different world and I’m excited that we can play a part in that.

We kind of already offered the facility and that will continue to evolve. And I think the CeFi to DeFi, TradFi to DeFi will be one of the evolution points and I think we’re in a very good position in that sense.

Ian:

Exciting. Great place to end. Joey, thanks so much for being on the podcast.

Joey:

Thanks very much. Good to be here.

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