Introduction

It's my honor to be talking here. I saw Jameson posting his photo with Zimmerman. Sorry I couldn't travel. We are a little bit busy at Custodia Bank. I wish I was there with you. You have a great event and a lot of great people. I will dive right in.

What I'd like to talk about today is I'm one of the mere mortals in this industry... but that I mean the developers are the most important people in the bitcoin ecosystem. For those who like us who are not developers can help foster the ecosystem in the non-technology areas. Where I have been spending my time is trying to close off legal attack vectors. This is something Trace Mayer identified very early on as a challenge in the industry. Then there's the banking attack vector.

Attack vectors

What are the attack vectors? All of us know that a total ban on bitcoin is impossible. We learned that from Napster years and from Tor. Code is just speech. It's not possible to succeed in outright ban of bitcoin. Countries will try it, they have tried it, and they have failed. They will probably try again. It's not possible to execute an outright ban, though.

What are the attack vectors that are the most immediate threat? It's the on/off ramps from fiat currencies into the banking ecosystem. And it's also some of the legal attack vectors surrounding that.

The on/off ramps as you know have been unreliable. A number of banks have specialized in offering normal bank accounts to this industry but they have been attacked including Custodia Bank. But it is lawful to service this industry. Most of the banks servicing this industry are receiving extra regulatory scrutiny, but not being shut out.

I noticed a story today that Chase in the UK will be blocking all crypto payments or any payments related to crypto activities. In the United States, Nic Carter termed this "Operation Chokepoint 2.0" in reference to the original Operation Chokepoint from the Obama administration a little around 10 years ago to attack industries not politically favored by the Obama administration.

There's also working on regulations. These can be restrictive, but they could also be enabling. I've been working on enabling regulations in the State of Wyoming. It has now passed 33 different laws in 6 legislative sessions. Some of those are very simple and foundational. One is that Wyoming acknowledges that bitcoin is property under property law so that a judge in dispute of who owns a bitcoin knows exactly what to do. It can apply exisiting properting laws. Another one is that code is speech in Wyoming. If a developer writes code, and as long as that code is not used by that developer to commit a crime, then that is protected speech.

There are enabling laws and regulations that can be passed which is where I have been spending my time. Unfortunately there are also restrictive laws and regulatory rules that can be passed as well. This is where we need to pay close attention. I am predominantly a bitcoiner but I do work wit hthe broader ecosystem because there are efforts in the broader ecosystem that we have in common to ensure that restrictive regulations don't shut us down.

Banking

Under the basel 3 and in the US prompt corrective actioncapital requirements, banks are allowed to bank this industry. The US has been the most restricted of developed world countries on this point. But they can only bank this industry if they specialize in this industry and there are extra risks to bank this industry, the biggest one being anti-money laundering know your customer risks and it's absolutely possible for banks to comply with those requirements and laws. Those of us trying to keep the on/off ramps for this industry can only fight so much of at a time. This is one reason why many banks aren't involved though.

Another risk is operational risk. Perhaps most important is the technology risk. You'd be shocked by how backwards the technology platforms are for the banks. Most banks don't even have APIs. The concept of being able to transact or act as a bridge between this industry and the traditional banking industry is very difficult for a bank that doesn't even have an API to execute. Banks that specialize in these risks are important banks to support and help ensure that the banks don't shut down the fintech industry.

Mining

At Custodia one of the other really important pieces is spending time on supporting the bitcoin mining industry. This is a critical component of the ecosystem. It's critical for beyond on/off ramps for them to continue to exist. Power companies don't pay their employees and pay their vendors in bitcoin; power companies pay their vendors in local fiat currency aka dollars. Therefore there has to be on/off ramp available. With the failure of the two big banks that serviced bitcoin companies in the US, Silvergate and Signature, those on/off ramps were substantially disrupted. This is one place where Custodia has been spending a lot of time. Huff has joined Custodia to help us build financial services to serve the mining industry. In our business plan, we are authorized to do business beyond the United States but we're not ready at this moment to do this.

One of the interesting things is that banks and the power companies are afraid to service crypto companies because of the defaults like mining companies that ran up big power bills, bitcoin price goes down and then mining companies walk away and default on their power bills. This creates an interesting challenge where financial service players like Custodia can step in and create daily payments in our case US dollars to the power companies which is one of the demands will help support the continued access to power for the mining companies that are mining especially on-grid mining. That's what we're spending time on for the unique needs in the mining industry.

Custodia Bank

We are a bitcoiners bank built by bitcoiners for bitcoin. We are authorized and have recently launched in a certain number of states. We can't market because we're licensed to do business in the Czech Republic. If you are interested in learning more, please go to our website where we have a list where we are allowed to do business.

What's interesting about Custodia is that we are about to unveil a new type of bitcoin custody. Many of you might hear custody and think nails on a chalkboard. Why build a bitcoin custodian when I constantly use the phrase not your keys not your coins? I live it, anD I believe it. The answer is that there are certain types of owners of bitcoin who legally cannot self-custody. There are others who because of the connectivity to the banking system will need to have continued access to a custody arrangement such as the miners we were talking about to be able to liquidate to US dollars which needs to go through a custodian even if it's for a 10 minute block time. It needs to come back into the US financial system.

How can a custodian build something that respects the ethos of Satoshi? The bank that Custodia has built is a Rothbardian bank. It's a non-lending 100% reserve bank that holds 100% of its US dollars in cash. Our proposal was to hold 108% of our dollars in cash at the Federal Reserve and you know that's in litigation right now.

Segregated custody at Custodia Bank

Regarding the bitcoin piece, we are about to unveil something that doesn't exist in the market right: we built truly segregated custody. We will custody actual UTXOs. This is closer than the omnibus or pooled custody model that most bitcoin custodians use today. Segregated custody is closer to Satoshi's ethos. The concept of custodying a customer's UTXOs as opposed to having customers send into an omnibus wallet and then the custodian owes an equal amount of bitcoin from that omnibus wallet... but we have seen a few custodians have failed in the US, and custody customers had to take a proportion haircut because they became a creditor of the omnibus pool of bitcoin. This was not Satoshi's design.

There were references to bitcoin banks... banks in the US are not allowed to hold bitcoin on balance sheet, but we can hold custody of bitcoin and we are going to keep it as close to possible as a not your keys not your coins ethos. We all know that is the optimal organizational structure for bitcoiners. The reason why the cypherpunks built bitcoin the way they did is, and it's not just proof of work. We talk about a lot about proof of work-- it's proof of work plus the longest chain rule and the difficulty adjustment built into the rules.

On/off ramps

How do we keep the on/off ramps to the old fiat system that we all know is eventually going to be drastically disrupted by these new technologies? The answer is we should do our darndest to keep it to the ethos of Satoshi and respecting cypherpunk ideals.

Q&A

Frank Holmes: What about Bermuda or other jurisdictions that have regulation and pathways?

CL: Great question. Wyoming originally copied the custody regulations of Bermuda. It is interesting, and having connections to the UK and being respected because of its insurance regulations within the TradFi ecosystem. The challenge is that Bermuda does not have US dollar banks so all bermudean banks still need to go through the US dollar ecosystem. I had a conversation recently with an interplayer in this industry who told me that they have talked to all the top 15 US banks and every one of them told him that their regulators told them to not bank the crypto industry. The reason I bring this up in the context of Bermuda is that those top 15 banks are going to be the biggest correspondent banks that service banks in Bermuda. If all of them were told not to bank the crypto industry, then it's going to be difficult and Bermuda doesn't give any better access to US dollars than on-shore US markets.

Q: In the current number go up narrative that the potential approval of an ETF is being slowed down because incumbent organizations are all competing to acquire cheap sats. I think it's an inevitability that at some point bitcoin is part of the established financial system. How long until bank acceptance of bitcoin?

CL: As you know, I have said for years that the ETF would be a double-edged sword for bitcoin because ETFs are just wrappers around a core product like in this case bitcoin. They have the ability to play the old Wall Street games specifically rehypothecation and creating claims to bitcoin not backed by actual bitcoin. If you look at any ETF, you will see market makers have the ability to create naked short positions in the underlying and the SEC allows this under the notion that it allows market makers to prioritize liquidity over solvency. As a result, the market makers can create more units of the ETF than they hold actual bitcoin in custody. We will start seeing some of those Wall Street games just like we saw them with the futures market and with the companies like Blockfi and Celsius that told their customers they were rehypothecating their coins. In the Celsius bankruptcy, the judge said that the customer coins belong to the customer and they won't give them back until the other creditors were... they got a haircut of 70% on their other assets, just to make sure they wouldn't wait for the whole bankruptcy process. MtGox is about to be 10 years before the gox creditors get their coins back. One of my lessons that taught me "not your keys, not your coins" lesson. It takes a long time to go through bankruptcy. I think the bitcoin ETF is coming but it is not necessarily a positive. One of the tricks or one of the things about the bitcoin ETF that would be interesting and I have publicly talked about this and as Custodia gets custody up and running I'd like to work with an asset manager to do the following... under ETFs, technically there is an ability for the investor to redeem the unit for the underlying. The issue is that the ETF structure gives only the issuer to allow the investor to redeem a unit for the underlying. Do you see where I'm going with this? If an ETF were to be introduced that gave the investor in the ETF unit to redeem for the underlying bitcoin, then that becomes a very interesting pathway for more people to acquire bitcoin and enter our ecosystem. Now, that doesn't exist right now. But Custodia has the bitcoin custody capability- again we're not officially launched that product- but we are working on this exact idea of creating an ETF that will allow the investor to redeem the underlying. This would stop the market makers from being able to play games ((or from markets being able to do naked short selling?)). .... they tend to favor the big incumbents because they know how to comply with regulators. I am spending way too much time in Washington DC with my ear to the ground and I don't think an ETF will be approved until the end of the Biden adminitsration until that's next November or 5 years from now. I don't think Gary Gensler is going to approve a bitcoin ETF. I'm not here to provide investment advice. I don't care about the bitcoin price. I'm here to build the ecosystem. But personally I would not make a bet that the ETF is going to be approved before the end of the biden administration.

Q: Who is Gary Gensler going to be working for once he leaves the SEC?

A: You know what's funny, I've said this publicly since February 2023 since we figured out everything going on with Operation Chokepoint 2.0. It's real. We knew about it at Custodia on January 26th because we got an email from a reporter who said that they knew that all of the pending bank charter applications having anything to do with crypto would be simultaneously asked to withdraw their applications from the federal agencies in DC. We knew there was a coordinated effort from that. We had insiders coming to us almost immediately to tell us that. I have been told by reliable sources- I can't prove the following- but President Biden doesn't care about financial services. President Biden is more of a foreign policy guy and a deal had been cut with Senator Elizabeth Warren to-- and by the way, Mike Novogratz is now talking about this for a while. Someone close to the democratic party- Novogratz- at mainnet conference last week that there was a deal cut between Warren and Biden that she got to veto the financial service nominees of the Biden administration and it was her people at the Whitehouse who we have been told executed the crypto crackdown in the United States. Ryan Selkis has also been tweeting about this. It's an "open secret". The person at the Whitehouse who orchestrated this at the Whitehouse is now leaving the whitehouse. Gary Gensler is definitely part sure- I was told 3 people locked arms to crack down in the US and crack it down. I have been told they honestly thought they could drive it to zero because they thought it was nothing backing it up and it was all just circular leverage and if they could pop it then it would drive to zero. We all laugh at this as a total joke, but they thought they would succeed. Really. But they didn't. Now they have some cracks showing up: the novel activity supervision program 7 months later might be a crack in the door. Who is Gary Gensler going to be working for? He's in his job because of these deals that got cut behind the scenes which are in Washington "open secrets" and now big Democrats are talking about it publicly. But it is the case, allegedly, so then the interesting question is that as campaign season for the US starts to heat up, is there going to be a backing away from this kind of extreme anti-crypto position? Nobody knows the answer to that other than those cutting the backroom deals. We should assume that none of thee people are going anywhere from their current jobs, not at least until the end of the Biden administration. The base case you should assume is that nothing will change ((unless we make a change)).

I'm sure the cypherpunks in the crowd are cringing at this whole talk. But I will say that someone has to carry the flag and try to keep the fiat on/off ramps open for this industry while we are still building it. I really appreciate the support from everyone in the ecosystem. Most of you understand why this is necessary. We're trying our best to stick to the ethos of Satoshi.