BitGo Bitcoin Custody

Hi and welcome to the Stefan Livera podcast focused on Bitcoin and Austrian economics. Today we're interviewing Mike Belshe, CEO of BitGo. But first, a word for the sponsors of the show. Firstly, the show is brought to you by Kraken, one of the world's leading Bitcoin exchanges. They're one of the longest standing and they're consistently rated the best. They've got a high quality platform, there's high trading volume and- Low fees, no minimum or hidden fees. Kraken have twenty four seven support. on the institutional and business solution side, they're providing best in class accounting, reconciliation and reporting services for cryptocurrency hedge funds, asset managers and fund administrators. They've got a range of different trading tools, they've got an OTC desk for larger block trades, they offer five fiat currencies, they also offer margin and futures trading. So to sign up, go to kraken dot com. Next up, Unchained Capital, Bitcoin financial services. With a multi-signature vault and also with Bitcoin collateralized loans. So for the vault product, you can use Trezor or Ledger and you still maintain control because you're holding two of the three keys and this also allows you to distribute the keys, reducing that single point of failure risk. It's a really easy web interface. Unchained are offering open-source solutions such as Caravan and Hermit as well. So with the Bitcoin collateralized loans, you can get USD liquidity without selling your bitcoins and because of the structure You can actually see the bitcoins on the blockchain, so that's called collaborative custody. If you wanna sign up, go to unchained dash capital dot com. Next, Bitcoin Outlet. They're delivering rare and extraordinary merchandise to warriors of Bitcoin. Outstanding design isn't blindly slapping your logo on any object available. At Bitcoin Outlet, every product they carry is a work of art with a thoughtful design. In keeping with the ethos of Bitcoin, all products created at Bitcoin Outlet are limited edition. Once a product sells out That's all, folks. When you purchase something from Bitcoin Outlet, you'll be one of the only people in the world who have it. Bitcoin Outlet is a sister company to Canada's Bull Bitcoin. Both companies are Bitcoin maximalists through and through. Bitcoin Outlet only supports Bitcoin. This core belief has led them to align with o- other unapologetically maximalist companies. So if you want a rockstar merch from a designer with an actual moral compass and unwavering maximalist views, head to Bitcoin Outlet dot com, get yourself some of the best damn merch out there. Use coupon code Livera for twenty one percent off anything in store. Last but not least, check out GiveBitcoin dot io. Take it from me, I've given Bitcoin to people before and they lost it because they just didn't know what they were receiving. That's why I saw huge value in GiveBitcoin, which allows you to time lock your Bitcoin gift for one to five years. Every month for the first year, GiveBitcoin delivers a lesson of their world class curriculum, put together with input from many well known Bitcoiners including Saf Dean, Matt Odel, Jan Pritzkir, and others. I'm also an With a small equity stake, I'm assisting with the curriculum also. You can also get Bitcoin as a present for birthdays, Christmas, bar mitzvahs, graduation, weddings. Put Bitcoin on your wish list at givebitcoin dot io. I really think givebitcoin dot io can have a positive impact on Bitcoin adoption and understanding, so I'm excited to have them as a sponsor. So, carrying on with the Bitcoin custody series, we all know full well the rule, not your keys, not your coins. For this interview, I wanted to give my listeners some insight into the story of BitGo. BitGo, one of the world's largest Bitcoin custodians, if not the largest. In this interview with Mike Belshe, we talk about Bitcoin storage techniques over time, technological and procedural techniques, removal of single points of failure, insurance, the risk of government, structure of custodians and exchanges, and what the future of Bitcoin storage looks like. Here is the interview. Mike, welcome to the show. Thanks.

Nice to meet you, Stefan.

Thank you, Mike. I know you've got a long history in Bitcoin, and, I'd love to hear- A little bit about your story of how you came to Bitcoin and what was it that interested you?

Sure. well, you know, I mean, my story is fairly typical, I think, of the twenty eleven, twenty twelve era. I, I wish I was smarter. I read the Bitcoin white paper. actually, before I read the white paper, I'd heard of Bitcoin, I'd investigated, I was like, "Ah, it's a scam." later I heard about it again, I said, "Ah, that'll never work." And then eventually I read the white paper, I was like, "Wait a minute, does this really work?" And like a lot of computer scientists, you know, once you start reading that And then you, you start to challenge yourself, like, "Can I break this?" And like others, I start probing and trying to find holes. And I couldn't find holes, and that got me excited. And then you start to think about, "What the heck is money?" You know? And, I, I'm an American, so, you know, we, we are, I think fortunate in America to have a, a very, to say stable is probably the wrong word. I don't wanna con- connotate the wrong thing, but relative to other parts of the world, you know, the American economy has had a good run. And never really thought about what money was. And you start to think about that, you start to think about the computer science implications, you start to think as a technologist, and that's what I've done for the last twenty-five years. I've spent my time at startups. I like innovation, I like building things from scratch.

it gets your mind flowing, and I, I was hooked pretty fast once I really, really dug into it. And, you know, you keep digging deeper and you keep trying to find holes and you can't find holes, and, you know, gosh darn it, then you get excited about what this thing can do. So, I mean, that's how I, I got started or interested, pretty typical. And then with regard to, to getting into where BitGo is today, initially I was evangelizing to my friends and saying, "Hey, you should get some of this stuff." I bought some of this stuff and, convinced them to, and as the technologist in the crew, I held it for them. and, I was secure-- I was worried about security, and I was playing around with different things, so I did that. I had a laptop which I, which I airgapped, it was custom built and, and whatnot, but, I threw that underneath my couch and just let it sit there for a while, and then that grew in value. And eventually it grew in enough value, and I was worried my kids might pull it out, and it's just under the couch, and I thought they might spore, spill coke, coke on it or something, and, and lose it. and I thought, you know, there's gotta be a better way. so, you know, my background prior was I was at, I was at Google. I was one of the first ten guys on the Chrome team. Chrome does a tremendous amount for security. I, I don't think the Chrome team gets enough credit for how much they've done in terms of securing the web, whether you're talking about SSL or whether you're talking about how you patch browsers or whatnot, but there's a tremendous amount that went on. And had been exposed to some of the

ounce of malware on the internet, and it is just an exponential curve, right? it's the type of viral curve that, you know, any app developer would love to have, which is not a good so I was actually afraid that someday I would go to turn on this laptop or move the coins, and they were held in just single signature wallets. And, you know, if there were malware on my machine, would I lose it all? And some of it was my own money, and it was substantial, but, but more was not belonging to me, it was belonging to people that had much more money. And so that led me to dig and, dug around and found this thing called P2SH, which is a obscure portion of, Bitcoin had been already around for, I think about a year by the time I found it, and nobody was using it. There were literally zero wallets that could utilize P2SH, as part of them. There was multi-signature transactions, but it's a different experience, requires a lot more kind of manual work. So, I wrote a little paper about, hey, maybe we could do this with a kind of a, a three party key system to, to mitigate both theft and loss. And I circulated that and got a lot of positive feedback. So next thing you know, BitGo was born, out of that.

Fantastic. And when, when roughly was this, just so we can situate it in terms of the timeline of, you know, the security and improvements that came in Bitcoin?

That was early, 2013. the summer of 2013 was, was me Weeks log. it was, it was me coding server side, client side, learning about Bitcoin at the same time, putting it all together, not knowing exactly what direction it would ultimately take, but, you know, a lot of innovation and, you know, startup type of work is trial and error. it's meeting with people, it's trying to understand what do, what do people want, what's missing, how can you do something that's meaningful, you know, things like that. So, the early versions of BitGo were kind of a consumer-grade web-based wallet, multisig, and wasn't sure if it was gonna be a consumer type of thing or whatnot, but quickly started to find as, as I, I learned who was interested, the large value holders were interested, right? They were interested in securing large amounts of money in it. It's, it's pretty common sense, but the more value you have, the more time and money and effort you spend securing it, right? So the amount of- Security you would p-applied to a one million dollar problem is very different than the amount of security you would apply to a one billion dollar problem. And, I think that's played out, you know, pretty much throughout BitGo's history, and I think it'll continue to go this way. We, back in that era, we were talking about million dollar wallets, and that was a lot of money. Remember, all of Bitcoin was about six billion dollars at the time, market cap. So million dollar-ish wallets were big, and then, you know, that grew to ten million dollar wallets, and then, you know, eventually that grew to hundred million dollar wallets, then billion dollar wallets. And now what we're having to think about is like, how are we gonna secure not a billion dollar wallet, but a trillion dollar wallet? I've done a couple of talks on what securing trillion dollars looks like. I'm not sure I have a perfect answer, but the point is, is that you're constantly upgrading security, you're never done, you just keep working on and, it'll continue that way forever.

Yeah, that's really fascinating, and I think i-it's important to situate it correctly because in early twenty thirteen, there was no hardware wallets then, and I think, p-probably Armory Wallet was one of the early wallets that was around, and at that point Probably one of the more secure setups you could do then was an offline armory wallet, so you would have, you know, the full node, you know, connected to the internet, and then the keys held on an offline armory. And I suppose that was one of the more secure ways back then. How, how did, the BitGo model evolve and compare against some of the other early, you know, secure ways to store your Bitcoin?

Yeah. Well, Trezor was just getting kind of funded and developed, I think late 2013, maybe early 2014, I might have the date wrong on that. Armory was a single-sig cold storage wallet at the time. They didn't have their multi-sig variants in place until a few years later. So, you know, actually a usable deployment of multi-sig, it was kind of the first of its kind at that point. And BitGo was, you know, I didn't-- I'm a technologist, right? So Commission, things like that. I was really much more interested in, in the software side of things. And so the, the BitGo at the time was just, BitGo holds one key and you hold two keys. And at that time Did that mean you're a bank? Did that mean you're a money transmitter? Did you have to have regulatory? Was very unclear. and by the way, it wasn't until just May of this year, at least for the United States, and other countries all vary, but in the United States, FinCEN came out with guidance just May ninth of this year, and they said very clearly they vindicated all of what BitGo's done for the last six years. You know, holding a single signature, a single key in a tri-party wallet isn't money transmission. It's good to finally hear that. Back at the time, I was saying I had this two-factor litmus test, which was like, "Look, I can disappear off the face of the earth and you still have your money." And on top of that You know, I can never transact unless you participate. So my conclusion from that is that if those two tests pass, that I'm not holding the money. But that's very much a layman's description, has nothing to do with the law. Lawyers are crafty, they're clever. Lawmakers are even more crafty, more clever. But, you know, regulators and lawmakers weren't sure. I did a, this is funny, I did a talk at the California Senate. I was called in to talk about multisig. probably twenty fourteen, and, you know, they were considering whether they should pass a, a law here in California, around cryptocurrency. It, it must have been twenty fifteen or sixteen actually, I think it was, I think that's too early. But, they wanted to understand multisig because remember, we've never had financial assets before that had these software-like properties, right? Where you can actually now have multiple participants be required. We've had multi-party checking account systems, but we- We've never had them with cryptography in a way that you can mathematically prove that it works. So, so this was new, they didn't understand it, they wanted to understand it. So I, I got up on stage and I started my talk by pulling a hundred dollar bill out of my wallet and I said, "Okay, who has custody of this hundred dollar bill?" And they're like, "Okay, I guess you do. Alright, fine." I handed it to a guy in the front row. And I say, "Now who has custody?". They're like, "Okay, he does." And I take it back, after he begrudgingly gives me back my hundred dollars, and I rip it in half. I give him half and I keep half, and I say, "Now who has custody?" And I think all the senators were in shock. They're like, "Did he just rip a hundred dollar bill at the state capitol building? " but the point was made, right? Which is that with multisig, you can create these combinations where multiple parties are mathematically required to participate in money, and it's, it's a door that opens all kinds of avenues. you know, the two of three is, is a simple case to reason about, especially for retail, there's reasons why that works easier than other things do, but even at the business level You know, as you can go now from two of three to three of five or four of seven, and there's pros and cons of all that. There's features on the chain that are helpful, some features on the chain that you wish were there. but as software gets better, as we figure out what type of money works best for us as people, as opposed to as best for us as governments, there's a ton of opportunity. So, anyway, that's a little bit about how we got started.

Yeah, no, that's-- I think that's really interesting, because I think we can look at it now and see there's a bit more of a plethora of options coming. one question I had was around making sure that So in that example, even if BitGo were to go away, can the customer still recover it on their own and so on? And I guess part of that is having all the right xPubs and the redeem scripts and so on, so that, you know, the customer is able to do that, and they need to make sure they've got the right technical competence to be able to execute that correctly. Do you have any comments around, around that?

Yeah, I mean, this question's come up a, a zillion times for us. So we publish open source tools where our clients can verify that As part of that provisioning process, you get what we call a key card, which is a representation of the keys that are involved with your wallet. Now, we have one, and the client only has the public version of that, and the client has two, and they've got a couple of different versions of how they can store that, and, then we have a little bit of backup in case they forget their password, because Frankly, even though we're mostly worried about theft, I mean, that's the thing that's, scares us, keeps us up at night. Frankly, we are our own worst enemies, and we are far more likely to lose it than to actually have it stolen. But, because of that, we have a, a, a backup procedure where BitGo doesn't have access, but we, we can help you recover your, your backup key in certain cases. anyway, we give you that key, and then there's open source software, and it's been tested and Yes, indeed. If BitGo disappears off the face of the earth, you can absolutely get all your money back. There's, there's no code escrow, you don't have to go to some third party, you can do it yourself. Now, the only challenge that really remains there is that You know, cryptocurrency is a, a pretty technical beast, and, you know, an average person that's not a developer would have a hard time walking through that. But the point is, is that the software is open source, you could hire a guy relatively cheaply who basic-- understands the basics of multisig and Bitcoin, and he'd be able to recover the funds for you.

Great. and can you give us just a bit of an overview around the different service range that BitGo offers today?

Sure. Well, we started out as a software technology company. and my belief is that a good crypto custodian or financial services player today has to still be extremely cap-capable and competent at the technical layer. I mean, there's a ton of innovation that's going on, there's new coins that are coming out, there's- even massive changes within Bitcoin itself, we've got Schnorr signatures coming, Taproot coming, what does that mean? what features are different? How do you provide your service differently in light of those changes? So it's a, a heavy duty technical component, but things have changed a bit since twenty thirteen when we got started. twenty thirteen, I thought, you know what? We'll build this technology and software stack with hardware, software, et cetera, and we will sell that to banks and financial institutions and others that know how to provide service around it. trust me, the last thing I ever wanted to do was to become a banker. but, you know, here I am, and, and that's kind of where we find ourselves. We're not, we're not a bank, we're, we're a trust company, which is slightly different, but we are a fiduciary, we are regulated, and, we have a lot of oversight. Now, we run our own technology, which I think is important, because if you don't run your own technology in this day and age, maybe someday we'll get past this different topic, but what happened was the early days of crypto were at a smaller level of security and they were very much individual based. And the great thing about crypto and, and, and Bitcoin is that as an individual, you're on the same playing field with the bankers. That's the first time ever, right? Like, as an individual, try getting money outside of crypto from here to China, you can't do it, right? I guess you could put in the mail, good luck, I hope it doesn't get stolen, but how are you gonna do it without banks? but with crypto, you're on the same level playing field with them, so that's phenomenal, right? But when you get to large amounts of wealth, large amounts of storage, and you can think about this for yourself and try to reason about it, you know Bitcoin is like cash. We don't like to keep all our assets in cash, stuffed in our mattress. And taking on security as individuals that are, not generally familiar with security, how would you do it? Would you put bars on your windows? Would you put a security guard outside your front door? yes, the math, the crypto gives you a lot of protections, but it doesn't solve against fire, it doesn't solve against death, it doesn't solve against someone coming and putting a gun to your head. So Banks do actually play a valuable role. We kinda hate the way banks have evolved, but there's a piece of what they do that actually we value. And actually right now, at this point in time, BitGo is seeing a tremendous number of folks coming to us from kind of the high net worth family office perspective. They used to hold the money on their own, they're like, "You know what? This is just, it's too rich. I can't do this. I need someone who knows how to do this. I wanna hire somebody." So when you wanna hire somebody And frankly, whether it's Bitcoin or gold or stocks or any other type of asset, when you're holding money on behalf of someone else, we expect a higher bar. We expect somebody that isn't going to be selling an asset yet recommending it to you, right? We expect somebody that isn't going to front run us, we expect somebody that's gonna know how to securely store it, we expect somebody that knows the industry, we expect somebody that's got a capital balance sheet, we expect somebody that's got- Backstops in case they fail, right? All these things matter. unfortunately with, with digital assets, because they are so new, so revolutionary, so potentially disruptive to the existing incumbents, the existing inc-incumbents have a inverse relationship between risk and rewards. The risk is much, much higher to them than the rewards or profits today, so they just haven't come in. And we are getting there, we're making great inroads, but the financials- Setup isn't right for the large incumbent financial services companies get in. So BitGo decided to go and become a financial services company, decided to become a fiduciary. We can now hold money on behalf of others and help others who are fiduciaries hold, hold money and crypto assets, safely so that they can build additional products.

Right, and as I understand today, BitGo serves many exchanges around the world who are themselves holding on behalf of their own customers.

That's right.

Yeah,

I mean, Bitstamp just announced that they're moving all their cold- Storage to, to BitGo. others do it as well. Some are public about it, some are private about it. I, I think, it's pretty clear that BitGo is the global leader in terms of, both transactional real-time wallet needs as well as cold storage needs. a little known fact, that is that actually BitGo's over twenty percent by volume of all Bitcoin transactions today, globally. And that's because we have, you know- Those, a lot of the larger clients, so high, higher volume clients, use it, using BitGo. so we're, we're proud of that. it's a, it's a heavy burden, and that's why BitGo has moved to a level of security that's actually pretty far beyond, what most of the smaller players are about.

I, I guess just comparing some of the different cases there, let's say you're an individual hodler, you, you're probably caring more about just cold storage and rarely doing transactions, but if you're one of these larger To do large transactions as well, and so I guess that necessitates some level of segregation between things like cold and warm wallets. Can you, expand a little on that, on how you're thinking on that?

Sure. You know, so, so hot and cold comes up a lot, we're big believers that cold storage is a great way to go, especially today. the, the, the net result is like the amount of security you apply to a problem is proportional to the value of, of what you're securing. So, for real time needs, obviously cold storage doesn't work that well, right? You've got it offline, it takes time and effort to bring it online. so we use a small percentage of the assets in a hot wallet and the large majority, ninety In cold wallets that are rarely accessed. This is exactly what you would expect. Basically, we're putting additional controls on large money and less controls on low money, and then we manage the risk appropriately. frankly, you know, if you can move a billion dollars quickly, it's not secure. It's as simple as that, right? And this applies to dollars, as it applies to gold, as it applies to anything else. And, you know, one, one criticism we hear on, on this front is like, you know, here we have this fantastic internet- Money. And how do we secure it? We take it off the internet. Now, I'm a technologist, and of course it's incredibly disappointing to hear that. But what is our job as a custodian? Our job is to secure your assets. A custodian's first and foremost position is safekeeping, right? So, am I doing my job if I'm keeping your, your money online twenty-four hours a day? No, I'm not doing my job. It's irresponsible. And anybody that tells you- You that they can come up with a hot wallet where they've got it all figured out. Now, remember, you know, there's new companies that are coming out offering hot wallets, and they're saying, "Go ahead and put a billion dollars in it. Our technology's secure." Facebook has been hacked. They've got fleets of engineers, twenty thousand deep. Google, even bigger than that. Now, governments don't help you. The government census bureau here in the US has been hacked so that every identity of every US government employee ever has been leaked. And yet these guys with twenty-person startup teams are like, "Hey, I'm gonna solve this problem." It's pure hubris, frankly. I would love to see technology be able to win this game, but if we really want Bitcoin to win, the- The first thing we need to do is to make sure we have no more losses. Safekeeping is absolutely the number one thing. So, you know, like I said earlier, you know, Bitcoin by volume on real-time wallets, we do more in a day than other clients do, I'm sorry, other competitors do in a year or ever. so you can definitely handle the real-time transaction needs of the world's largest exchanges, no problem. And you do that by mitigating the risk with a relatively small pool of money that you completely backstop. And then for the large majority of funds, and frankly a billion dollars doesn't move that often, you put it in cold storage, keep it offline, keep it totally safe, it's the best thing to do.

Gotcha. what does it take then to- Take security to that level, is it auditing, internal controls? What are some of the factors involved to take it to that level?

Trust nobody. Yeah. So, I mean, security can be simplified down to eliminating any single point of failure, and of course, humans are single points of failure, computers are single points of failure, at some level, two humans are two single points of failure, and you break those apart. so you gotta start with a technical architecture that keeps everything separate. That's good, that's part of it. unfortunately, humans can screw that up too, right? So humans can create a great password, but they can also write it down and put it on a stick Key tab and stick it on their monitor. Not very secure. So technology alone doesn't get us there. The second thing you need to do is you need to put in process and procedures and controls. You need to break those apart. And, you know, we're mitigating single points of failure Risks, right? Where, you could have a single computer, a single human, a single government, a single geography. All of these are single points of failure, and you have to think of all of them and you get them audited. So in the case of BitGo we do SOC 2 audits. and by the way, as a technologist, I, I kind of hear audits and I kind of think, "Oh, bureaucracy, slow, stupid, not very smart." That's probably all fair and true, but at the end of the day, in order to get a SOC 2 audit, which is an operational controls audit, they come through, they look at your procedures about how you're separating this apart. How do you have A teams and B teams? How do you split across two different companies holding these different keys? Are you really doing that? What happens when someone leaves your company? Do you have a policy for that? What's your business continuity plan in case your data center goes down? All of these different points of failure, they double-check it, and you get And, you know, the reason BitGo has a cost-effective insurance program to the tune of a hundred million dollars is because we're able to convince an underwriter to get excited about, you know, hey, we can take on this policy and not lose money, but that's by looking at your SOC 2 audit, doing their own audits. and by the way, when it comes to a hundred million dollars, these guys are no fools, right? They, they have insured, you know, massive piles of gold and other assets many times, and they ask really intelligent questions Questions. They may not know the technology, but in terms of how it comes down to fundamentally securing this stuff, they know where to probe and they know where to look. So it takes a lot. it-- part of it is sexy, this technology piece, and part of it's unsexy, this procedural piece, and hiring redundant sets of people, putting them in redundant parts of the world, separate, far apart, you know, it's not exciting, but it's important. And at the end of the day, we want to have a boring business. A boring business is one where Every day when you wake up and you log into BitGo, your full balance is there, and there's no excitement that it's ever not there.

so that's what we do. With, insurance, I, I'm curious to dive into that a little bit deeper. So as I understand, BitGo has the one hundred million, insurance that- It involves a certain, level of, comfort around, for the customers of BitGo, W- but as I understand, then the insurance company will impose certain conditions and say, "Well, that, that only applies if the theft was of the physical keys, that sort of thing." And that's, that's one of the components where they wanna make sure, "Okay, this is the part we're insuring for, and then this other part, you're not-- we're not insuring that."

Yeah. I wish I could say it's in a better state. So what I can say is, I care a lot about this topic, I care a lot about getting the best possible insurance that BitGo can get, and, and if you look at BitGo's policy, and we do share this, you know, we have to it under NDA, not because of us, because the underwriters require it, because- The underwriters and the brokers in of insurance live in this antiquated world where they create fiefdoms and they pr-protekt themselves by creating semi-proprietary product, but We've, we've spent literally years working with underwriters, to cover insider theft, insider theft by key executives, hacks, geographic disasters, et cetera. and I feel quite confident in saying we have the most comprehensive insurance policy you can get. do I trust insurance underwriters? Not a hundred percent. I would love to see tremendous more transparency from the underwriters and the brokers. I think if that industry evolved and took a pay- age out of Bitcoin, frankly? we would all be better served. It isn't right that you have to have a PhD in insurance to go figure out whether this insurance policy is better than that one. so I'm, I'm incredibly dissatisfied with the state of insurance, but that, that actually has nothing to do with crypto. That has to do with insurance agents, kind of like real estate agents, living in a decade of the past. so nonetheless, yeah, we've, we've taken great care to do everything we can. We've met with, I don't know, how many hundreds of different underwriters that have evaluated BitGo and looked at it, but, we're, we're doing the best that we can. I We can do better, I think that part of BitGo's job is to continue to push that better and to make it more transparent and to make it so that you know exactly what is covered and what isn't. So, that's a fear and a, a growth area, I think, for the, the industry. One last point on this, which I think is of interest, is as crypto companies get more sophisticated in the services that they offer, I think they need to be a little bit more clear as to how an insurance product might, might help them. So, you know, today, there's a number of, Bitcoin-related products which are interest-bearing. And, some of them might use BitGo custody, which is great. But, you know, if you're creating interest, how are you doing that? I mean, you know, Bitcoin doesn't generate interest on its own, so you must be doing something in order to generate that. And, and most commonly, it's, it's generated by lending the assets out. so if you've raised, let's, let's say you've brought in a hundred million dollars of consumer money, and, your goal is to generate a return on it, you know Sixty, seventy, eighty percent of that money. So the amount that's in BitGo and covered by custody insurance would be the remainder, twenty, thirty, forty million dollars, that range. But the full asset balance, I mean, we can't, we can't ensure what's not in custody, right? So in addition to, insurance underwriters being more transparent about what's covered and what's not covered, I also think the Bitcoin industry needs to, rely a little less on marketing and a little bit more on fact. If you- You're gonna lend out assets, you need to tell people, "This is how much we're lending out, this is how much we're keeping in reserves, this is what our obligations are in terms of being able to return that capital to you if you ask for it. Is it a two-day notice? Is it a five-day notice? And then what are the backstops when you've lent it out? What types of clients are you lending it to? What credit risks are you taking? You know, so that's an area that, the Bitcoin industry needs to get smarter about.

Yeah, totally fair comment there, Mike. one other area I was keen to go back to, was from some of the earlier discussion around what's required to do good security or high level security. One component that strike, that, you know, comes out is this idea of getting tricked at a social layer, right? So if, you know, for example, there's a malicious browser extension and you're thinking, "Okay, I'm gonna deposit into my custody account here, and here is the Bitcoin address to send it to," but actually, there's a malicious browser- Browser extension that has replaced that with, say, the attacker's address. How do you think about that sort of problem and how to reduce or minimize that problem?

Well, well, for BitGo, there's, I think you can ca-divide it into two parts. One is, is our client tricked in terms of what they want to send, and then the second one is, is BitGo being tricked? frankly, on the first, it's really a usability of Bitcoin problem, right? I mean, the idea that, Bitcoin users or any crypto digital asset users can be is a problem and malware affecting them where, you know, in real time they might be trying to send to you and you posted an address and malware replaced your ad- replaced your address and that's a problem. so there are some efforts here around payment protocol and others, I think they've had medium amounts of tra-traction, but Bitcoin needs to do better. Like we, we can do better, we'll get there, and I think, that'll take care of itself at some level. The second thing is what does BitGo do? I don't mean to be self-serving, but I mean at the end of the day, like that is the job, that's the part we control. We can't really control what happens to the end user out. But a couple of things. There's no single points of failure, trust nobody. when we do our cold storage, people don't realize this, but there's actually multiple companies involved, and each of those companies has independent controls, procedures, and operative personnel. And you can come and put a gun to my head, and I can't move the money. and that's because we've set up completely independent companies with completely independent people that are required to access key material. So there's no single person, no single company, no single geography, no single- location that has access to everything. and as you go bigger, you continue to separate that apart. So, in the BitGo model, we actually have, I think, the first,

trifecta of checks and balances. the end user reports to BICO initially with the transaction, that comes in through, you know, electronic means, you know, so it's got typical, protections of, you know- Username, password, biometrics, two-factor auth type of thing. That goes into a trust company that looks at it, they take a look at it, and they can call the user back if it's a large enough transaction. If it's a small transaction, you pass it through, right? We've got insurance, we've got other things to take care of. But, if it's a big transaction, you can actually call the guy on the phone, you can check him on video, there's a number of things that you can do. we also look for red flags, all If a company decides to go to cold storage and enact a transaction, you know, that's multiple people that are there, it-- we don't have like a single person holding a key, we never do that. the, the physical vaulting that we use are class three bank grade vaults. Sounds sexy? What does that mean? Class three bank grade vaults is the same thing you'd see in a safe deposit box, foot and a half thick of concrete and steel, minimum break-in time, it's the maximum minimum break-in time that you have for, for You'll find keys that are sharded into multiple parts, with encrypted with passwords on separate devices that only separate people know. Okay. If you manage to assemble all that key, you can then send a transaction to a completely separate company, which is now gonna process the online processing rules. So first, if the transaction's too big, again, they're gonna call back the trust company and say, "Hey, wait, we need to check this. And by the way, it's all cryptographically signed from the, the user's original intent, so you can detect any attempts to transform the transaction, If someone internally tried to tamper with the address or the amount. so it's got the potential, it's got both the electronic and, again, the out-of-band, verification. And then finally, a bunch of policy rules that were set up by the user way back when they provisioned the wallet, so they can say, you know what, has to come from this IP address, it has to be this da-day of, of the week, it has to be from this location, it has to be approved by these seventeen people. Any arbitrary policy you can think of can And then if we're still not satisfied or it's too big of a transaction, we can call back the user again, create, creating a circle where we've actually gone from the user through two completely separate companies back to the user again. So, You know, is, is anything completely impenetrable? Probably not. but I think in terms of the checks and balances, they're all there. We've had it audited by multiple parties, and then we take this seriously. So the SOC two audits are about making sure that all of those policies and processes and controls are actually abided by through the whole system every single day.

Excellent. and so I'm also curious as well, do you see any sort of, so, I guess as you start out with, like, with a, if you imagine a very small balance, it's, you know, pretty easy, and then maybe, as you get to a certain size, you hit economies of scale. Do you ever notice, go, going the other way, like diseconomies of scale because you're managing such a large amount of money?

yeah, actually, great, we do. So we have clients That manage funds on behalf of a number of clients, right? So maybe they have a million clients. all of us love this idea of segregated wallets on chain. so each of those million clients on behalf of the client could each have their own independent addresses that make up their own independent wallets. The technology's here, it does that. it turns out that the blockchain, the Bitcoin blockchain actually has some scalability issues here. we don't see it so mat-so much right now because fees are relatively low on chain, but you go back a year and a half in time, and if you're trying to manage large numbers of users in segregated wallets, the fee expenses are massive so I think BitGo was really the first to kind of really address the fee problem and the scalability problem. although we focus mostly on the security solution, actually a lot of what we do is also around scalability. some of the largest wallets of the world are at BitGo. Millions of addresses on a single wallet, millions of users on a single wallet. And in order to make the fees manageable, you kinda have to do some batching, you kinda have to- Do some aggregation. so there's a strict trade-off here, you know, of how much, you know, kind of independence and isolation versus, you know, efficiency. and I would like to see over time blockchain technology that is more efficient on chain. We've seen a number of improvements over the last couple of years, you know, so SegWit was a huge thing, SegWit native addressing is also a huge thing, BitGo was pretty much the first to adopt those. So, our multi- Multi-sig transactions, which are bigger in nature because they are multi-sig, the cost of them is mitigated because we've made sure to use the latest features. upcoming is Schnorr and Taproot, which are significant milestones moving forward that are again gonna kind of compress these things down. so- I think we see, yeah, we, we would love to see more scalability on chain so you can have more segregation of, of, of assets. but this will be a thing that kind of continues as both Bitcoin and, BitGo scale to larger numbers of users.

Yeah, really interesting comment, sir. And, I suppose that involves all manner of things, whether that's, you know, coin selection algorithms and, you know, trying to look at advanced technology that may help, compress the amount of, on- One chain usage so, such that you can achieve more with less sort of thing.

On that point, that's-- I mean, that's absolutely true. So one of the folks that works here, you know, back when he was in, in school, actually done a bunch of research, wrote a white paper, his unspent selection algorithms have been adopted by Bitcoin Core, and implemented there. And as we've helped clients move, from, prior, algorithms to the new algorithms, you know, they're saving as much as seventy-five percent on fees just through Expense selection. on top of that, the dynamic adjustment of fee algorithms that we use, combined with minimizing the size of transactions and batching, again, you know, ninety plus percent reduction in fees. Actually, I just saw this morning, Jameson Lapp, he posted a thing about fees. he had a scatter plot of, different fee rates applied on transactions on chain today, and there's still a lot of wallets out there that are using fixed fees. When we got started on this thing, you know, people charged, I think I forget what it was, you know, point o o one, bitcoins per, per bitcoin, a thousand satoshi per byte, I forget, but pretty high level of fees. And so BitGo has stayed on top of this, and because we have so much scale, we're, we're doing a lot more, and it's, it's an, it's an ongoing thing, and we will continue to lead the, lead the force on, SegWit and, Schnorr signatures and Taproot, et cetera.

Excellent. I'm keen to discuss who should go with a custodian such as BitGo and who should self-custody. What are your thoughts there?

Great question. I mean, ultimately, I think we're all gonna have a combination of both. But the great thing about Bitcoin is you get to choose, and you get to choose where the threshold is. So, with your fiat currency today, you probably are already using a combo. You have some amount of cash in your wallet, and you know that, you know, you could lose your wallet, you could get mugged or whatever, and you'd lose some amount of money. And some people put a few thousand dollars in their wallet, and some people put a few dollars in their wallet, and that is your choice.

I think that in terms of really getting to scale, you know, on one hand, I love this decentralized idea. Like, what if everybody could just hold their own money and there's no middlemen? I think that's a nice utopia, but, I know for a fact that people that have large amounts of wealth, they a, don't know how to secure it that well. They don't think of things like what happens if they die, they don't think of fire, all these types of problems. They don't think about how they're gonna protect themselves from getting mugged or whatnot. so they don't want to deal with it. and we aren't gonna have global inclusion on crypto until you can hold it however you want. So if you wanna use somebody else We need to build that, banks, whatnot, and if you wanna hold it all yourself, we can build that too. I think that one's actually farther along, which is the great thing about Bitcoin.

Also, I guess the other question that might weigh on the minds of Bitcoiners or potential customers is if there were to be a contentious fork in Bitcoin, and, you know, if BitGo were to go the other way, let's say, and the customer is n- saying, "No, I don't wanna go with that," how, how, what's your thought there on what the customers

It can't happen, because BitGo's not gonna choose a horse in the race. our job is custodian and safe keeper of your funds. So if you're looking for a custodian, you're looking for somebody who isn't religious about a particular technology or fork. You're looking for somebody who's gonna say, "Look, I'm holding this on your behalf. I'm gonna help you keep it safe. If it goes that direction to the left or that direction to the right, we're okay with both and you're still gonna have your money." that doesn't mean Mean that if a fork is coming and we're not gonna support it, well, we're gonna tell you that, right? but I think if you look at BitGo's history, we actually have followed, you know, I don't want to paint a preference towards Bitcoin or BCH or BSV, but BitGo's provided all of those to our clients, and in the case of BSV, we had to go to great engineering lengths. So we published a paper, Gosh, it's several years back about kind of what we would want any hard fork to look like in terms of replay protections and safety to the holder. and we said any fork should have these properties. BSV came along and they didn't implement those properties, right? So we had to go figure out how to build replay protection in both directions, for BSV, and we did that, and I think we were one of the earliest to, to deploy that. so there's a lot of challenges with like, are you gonna support every fork? is there ever such a thing as a fork that's too small? Probably. I mean, if two guys go out on their own limb and they're the only two guys, you probably don't wanna support that. Is it You may not be able to support that. on the other hand, the true value of the coin is, is still maintained. So this is a hard thing. I think the good news is that this is gonna become less and less of an issue over time. I think, you know, we've had a lot of learning experiences in crypto, and those that have smaller chains are looking to figure out, gee, how can we leverage that bigger chain to make our chain bigger? Forks and airdrops are, are neat. at the end of the day, they're kinda gimmicks. To jumpstart a new coin, right? so I think the world will get smart to gimmicks and these will become a thing of the past.

Right. Yeah, it seems that, we, we are definitely hearing of less forks nowadays than, say, twenty seventeen and perhaps twenty eighteen.

these days they've changed them to airdrops. Right. Yeah. And, I love, I, I don't love, I really hate, but, you know, you look at the gamification that's going into these airdrops, and they're like, date, you have to signal in this way that you want our airdrop, and then on this date, you have to actually commit, and then on this date, you have to do this other thing. And it's like, come on, really? Is this where money is born? Is where we're doing tricks, and gimmicks of custom arbitrary rules? Now, frankly, our clients, they have very little interest in this, right? Our clients are, holding positions of meaningful value on chains that have meaningful value, and anybody that's coming and doing an airdrop,

and our clients today, sure they want, they want all that value, and we listen to all of them, and we will help them. but, on the other side of it, they don't really want us distracted by gimmicks. They want us to continue down the front of constantly securing their asset of value, not- Helping with a gimmick that's gonna be, you know, a little bit of value for like three weeks and then, you know, decay by ninety-eight percent over the next six months. and there's way too much of that going on.

Right, yeah. The gimmicky nature of it. let's talk about if there's any risks that could happen if, let's say, a government were to try and apply pressure to a custodian, such as BitGo. Do you see any risk there?

Yeah. It's a great question. So,

first off, I suppose you could, you could, you could assume all governments are nefarious. let's assume at least for the moment that they're not all nefarious. I know we all have some hesitation around fiat and government money, which is part of what attracts us to digital assets. but the governments are also very much trying to figure out what's the right thing for them. They've had a set of policies and procedures and rules For decades to centuries, and they aren't sure what it means to have this crypto technology, and it's, it's not unfair that they ask for us to explain how that's gonna work. I think most people do have some amounts of monetary protections that we expect, and we want our governments to be able to help us, whether that's anti-terrorist funding or, and whatnot. Now

This leads us to a point today where what we're seeing from all of the jurisdictions is that the, the knee-jerk reaction from the regulator and legislator is that they want to hold the keys in that jurisdiction. and I get it, right? That's what they do with their banks and, and other assets, so it kinda makes some sense. But it's actually at odds with what the large holders want. The large holders are looking for jurisdictional protection. And, you know, kinda back to the single point of failure topic, you know, a jurisdiction is a single point of failure. the idea of asset seizure isn't science fiction. it's happened in the US in terms of gold, people don't remember that. It's happened in Greece relatively recently, and it's happened time and time again when governments decide that they need something for the benefit of the country. So none of us as large holders are trying to p-preserve wealth. want to be, subjected to that. And then by the way, in some countries, you know, whether it's well-intentioned or not, you know, they just have a hard time keeping control of their currencies. The, the people make bad decisions. Part of why we like Bitcoin is we, we know people make bad decisions, so we wanna hand the rules to the machines, and the machines will faithfully execute the rules and never, never vary from that, even if times are tough. And if you're in Venezuela, if you're in, Argentina, you know exactly Flated to a point where it's not, not usable. So we find ourselves today in a time where there's two competing needs. One is regulators that think they wanna hold all the keys, and the second one is users that- First and foremost, want regulatory compliance, but also want to make sure that they're protected against jurisdictional risk. I think we're getting there. I think we're gonna actually accomplish both. What we do want long term is a federated network of vaults across multiple jurisdictions, such that your money is protected against any single jurisdictional failure. and, I, I think that's the path that we're on. now that's a very costly thing. think about it, right? Setting up- Separate companies, independently controlled, not manipulatable by a single CEO or, or head of the master company, and yet making that economically viable so you can operate the vaults, right? I mean, it's, it's not cheap. so it's gonna take time. I, I think it's an area that, that, that we're working on and getting better. it's certainly a part of the vision that I have for BitGo.

Great. And on the point of, vision for BitGo, what does it look like over the next few years in terms Trying to spread out across jurisdictions, are there any other technologies or techniques that you foresee?

Yeah, so, so BitGo wants to make digital currencies and digital assets usable by everybody on the planet, and we think that that means that there's times when you want to hold it as an individual, and there's times you want to hold it, you know, with a fiduciary in some capacity. Maybe they're gonna invest it for you, maybe they're going to just secure it for you, but you wanna be able to trust both parts. now- Until that latter camp can participate, I think the entire digital asset and Bitcoin space is held back. And what I'm talking about here is market infrastructure. So, I'll use, I'm not sure if you're familiar with, Market infrastructure in the US in terms of equities through the SEC and FINRA, or if you're familiar with the futures and derivatives world with CFTC, but Pretty much any established marketplace, separates checks and balances across multiple parties to help keep investors and consumers safe. and the types of protections are, you're protecting against front running, protecting against just straight fraud like Bernie Madoff, you're protecting against someone ripping you off and giving you a bad trade when there was a better execution somewhere else, it's called best execution. There's a whole bunch of protections that, you know- At least in spirit, some of these government regulators have been trying to fix, and yet we don't have a marketplace that works today for our decentralized currency. We have decentralized Bitcoin, and we trade it on the world's most centralized markets ever known to man. We take it to one guy who acts as the, the exchange. He's the broker for the buyer, he's the broker for the seller, he's the clearing house, he's the custodian for the buyer, and he's the custodian for the seller. And it's ripe for abuse, and we've seen failures. We've We've seen failures at Coincheck, we've seen failures at QuadrigaCX, right? When one guy holds all the roles, where's the checks and balances? So in order for institutional investors to be able to come in, they need to see checks and balances. and although, you know, companies like Coinbase have been, very successful and they've grown, and I think they do, they deserve credit for that, you know, they can attract a check from somebody that represents, you know, maybe ten or twenty million dollars worth of investment money But if you're running a pension fund, and you've got a trillion dollars under management, can you write a hundred million dollar check with a hundred percent counterparty risk to Coinbase? I don't think you can. and we hear this time and time again from, from our clients. They're looking for the industry to mature to a level where you have checks and balances. And to make this clear to like, more retail types of folks, think about Bernie Madoff. This is a guy that was trading, right? And he was claiming to have all these assets, but he wasn't using an independent custodian. And as a result, he was able to say, "I have these assets," and he reported these returns, but there was nobody, nobody checking to verify. And as a result, he perpetrated the world's greatest fraud ever, and that had nothing to do with Bitcoin. It had everything to do with a single point of failure, which was Bernie Madoff. So I don't think we should rebuild the exact market structure that you have in the equities world. I think there's a lot of middlemen there, I think there's dated reasons why all those parties exist. I think digital assets actually change fundamentally what we can do, especially around clearing and settlement, by the way. but we do still need checks and balances, and if we want to get to the level where large institutions can invest money in digital assets, whether that's, you know, real estate backed tokens, whether that's Bitcoin, whether that's anything else, They need to have a place where they don't have a hundred percent counterparty risk on the other party, and we don't have that today. So the custodian of today is somewhat isolated, someone like the exchange of today is extremely isolated in that they're taking on this siloed function. We need to build a market structure where you separate first and foremost trading and holding of asset. It's two very different subject matter expertise, it's two very different businesses. You know, while Coinbase is off, busy signing up a hundred- thousand new retail clients every day, which is a tough problem and commendable to and of itself, it's a very different skill set from how to use secure funds, and that probably goes to explain why they still use today single signature cold wallets. And we've known single signature isn't the best way to secure a cold wallet for a long time, and yet that's still what they use. Now, I'm not saying they're not secure. But, you know, would a bank be better? would someone that specializes in security be better? another example would be Coincheck. You remember Coincheck? no, I'm

not

familiar with that

example actually.

Okay, so Coincheck, I think it was a year and a half ago, January 2018, they lost a half a billion dollars in NEM coins, they're a Japanese exchange, and they lost it, in a single sig-ha wallet. And, you know, anybody would say, "Geez, single-sig hot wallet, must have been a bunch of idiots." I don't think so actually. I think they were simply caught in a whirlwind of growth in a way that they shouldn't have had been caught if market structure had been proper. So what happened was, you know, fourteen months before that, they, they started carrying Nemcoin. And they put zero NEM coins in a single-sig hot wallet, which I would argue is reasonably secure, right? and then they went around plastering Tokyo with ads for Coincheck, and if you go and ask anyone that was in Tokyo at the time, they'll tell you Coincheck was everywhere. And their business grew, and they were busy hustling and hustling and bringing in new clients and signing up new clients every day. And I'll betcha they had some guys in the back office as their assets grew from zero to five million, to ten million, to fifty, to a hundred, we oughta figure out a better security mechanism. They're like, "Yeah, we'll get there, we'll get there, we just gotta sign up this next client." Well, they got caught, right? Now imagine a different scenario where they did the exchange, they did the customer sign up, and yet they had like a trust custodian, like a BitGo. And, you know, as they went from zero to a million, to five million, ten million, they get a call from BitGo and we say, "Hey, you know what? You got a little bit too much in your hot wallet. We're gonna go move some of that to cold for you. Is that okay?" And they'd be like, "Ah, thank you." Click, hang up

So we can do that. And that's all about market structure. That's separating the duties of who's trading from who's storing. Different expertise.

Yeah, fantastic comments there. Thanks very much for that. I, I think we're pretty much getting to the end of time now, so just for the listeners, make sure you, let them know where to find you and follow you online.

Sure. I'm, I'm Mike, co-founder, CEO of BitGo. we're at bitgo.com and, any comments or feedback about how to make our products and services better? we're always here. Our goal is to build trust in digital currency.

Fantastic, thank you very much for joining me, Mike. Thank

you, Stefan.

Alright, I hope you got some valuable perspective there from Mike. Remember, you can get the show notes, the transcript, and the link to subscribe to my podcast at stefanlivera dot com. Look out for some interviews coming next week with some of the stars working on the Lightning Network. That's it from me. Thanks for listening, and I'll see you in the Citadel's.