Inside the $1B-a-Day Stablecoin Market Maker for 1,500 Institutions, with B2C2's Cactus Raazi

Speaker A: Hi, this is Lex, and welcome to the Fintech Blueprint. It's your podcast about fintech, decentralized finance, digital banking, investing, robo advice, artificial intelligence, and all the other frontier technology that is transforming financial services. To get more content like an illustrated transcript of this conversation in your inbox, subscribe@fintechblueprint.com so without further delay, let's jump into today's episode.

Speaker B: Hi, everybody, and welcome to today's podcast. I'm absolutely thrilled to have with us today Cactus Razi, who is the CEO Americas at B2C2. B2C2 is one of the original and largest institutional market makers in digital assets and crypto. So I'm, um, really excited to open up what a market maker does and how it works. But Cactus also has an amazing career in financial services, from, um, leading roles at Goldman Sachs during some really key times to building out his own technology platforms and trading firms. So we're going to learn a lot. Cactus, welcome to the podcast.

Speaker C: Thanks, Les. I really appreciate you having me on. I'm looking forward to our conversation.

Speaker B: It's my pleasure. I've been meaning to have you on for a long time. Let's start with big finance. You spent quite a bit of time at Goldman. How did you end up there and how did you get your start?

Speaker C: That's probably the most interesting part of my, my life journey. I started out in a kind of a backwater role at Goldman Sachs, and I got the job largely through great fortune at the time. When I was, prior to joining Goldman, I was living in Los Angeles. I was reading thestreet.com, which was an early finance website, and dreaming of being on Wall Street. I had no idea what that actually meant. And out of the blue, one of my still best friends, a gentleman named Nathaniel Clipper, called up the magazine that I was working at and asked for some advertising information. And he asked for it to be sent to his office at Goldman Sachs. And I took that as a sign from heaven and followed up with this gentleman. The actual advertising in the publication I worked at never happened, but he agreed to meet me on my next business trip to New York. And that kicked off a friendship where I started to learn more about finance through my conversations with him and through reading a ton of books that he recommended. I moved to New York eventually in 1998, uh, without a job, and just started interviewing. And after getting rejected by probably close to 30 firms, I got an interview at Goldman. It took quite a time to even just get the interview, but, uh, I was Pretty well prepared for that interview at that point, having having screwed up so many prior interviews. And I got my first job in 98 in money market origination is kind of the desk that oversees the issuance of commercial paper programs, which is not exactly the sexiest place to start but, but it was my foot in the door and things grew from there.

Speaker B: Which markets did you get exposure to sequentially? It sounds like a lot of it was fixed income, but you also traveled kind of through the different parts of the firm.

Speaker C: It's true I started in fixed income and the bulk of my experience has been in fixed income. But there's an important asterisk there. My client base starting around uh, 2000, I moved into a sales role in late 2000. And my clients client base was primarily hedge funds at the time. These were sort of dormant hedge funds that Goldman Sachs gave me as sort of a, uh, initial client list. And several of these hedge funds started to look into derivative products. They were convertible ARB funds and they were interested in interest rate swaps to hedge some of their interest rate exposure. So that gave me a lot of exposure to derivative products in general. And then a little later in the early 2000s with the growth of and sort of awareness of credit derivatives, that was another big stepping stone in my career. Fairly uh, complex product that a lot of the other salespeople didn't really spend the time and energy to learn and master. And so it gave me a terrific opportunity to go out and prospect a bunch of new clients. Again, mostly hedge funds. And that client base of large hedge funds then morphed into a bunch of additional products, structured credit products, mortgage derivatives, and then in some cases some different products that touched on equity markets as well. The hedge fund client base in general is pretty rangy and for the most part they're open to a variety of products and strategies to accomplish their mandate. Unlike let's say a more traditional asset manager who's generally pretty range bound. So the open mindedness and capabilities of my client base allowed me to get exposure to a variety of what you might call. Back then we didn't call them, but these days we called them frontier markets, I guess.

Speaker B: How do you sell to a hedge fund? What is it that they're buying?

Speaker C: They are looking for the most capital efficient and risk efficient way to express a view on a specific outcome. So uh, the point I'm making there is if you thought for example company X was gonna, was gonna do very well over the medium term, you obviously could buy the stock of that company. Obviously you could buy the bonds of that company. You may actually, though, want to look at buying call options, for example, because you're going to get a much better payout to the degree that you're right. And this idea of picking up asymmetrical exposure in a capital efficient manner is really at, uh, the heart of a lot, not all, but a lot of hedge fund activity in general. How do I express this view? Whether it's bullish or bearish in the most sort of capital efficient way, with the greatest asymmetry, uh, to the outcome.

Speaker B: Were there different pockets of capital that you encountered? What is the sales cycle like? I'm really curious. You started fresh in the industry and then you built this bench of relationships, selling early on pretty complex products, you know, very mathematical sort of structures. And also you did it during a time where there was also a lot of market volatility. Right? Like in the early 2000s, you had the Internet boom and bust. In 2008, you had the great financial crisis and the mortgage bust. Within that, you had sort of like the hedge fund boom that I'm sure that you were exposed to and all sorts of other shifting ground. Which reminds me of the situation we're in today. So how did you find like a commercial path through that?

Speaker C: I've asked myself this question a lot because I did quite well in retrospect, and my sort of production numbers and I think the impact on the business were notable. And so I've asked myself, what was the common thread? And the answer is, really, I gravitated towards products of greater complexity and they were just more intellectually interesting to me. I might add that in my interview process at Goldman, one of the toughest interviews I had a real legend, a Wall street legend, a gentleman named Phil Derevoff, asked me a question towards the end of the interview, after I think I had barely passed probably, and he said, if you don't get this job at Goldman Sachs, what are you going to do? It was an interesting question, frankly. And I answered at the time, well, I'm pretty good at sales and I'll probably go sell the most complex product I could think of, uh, which I at the time I thought was jet engines. And frankly, I still don't fully understand jet engines sufficiently well. But having said that, that's the example that I cited. I said, you know, maybe I'll go sell jet engines or something. And I think once I got on, once I got into finance and got my job on Wall Street, I have continued to move towards new products, more complexity. M. It's more intellectually interesting. And that has continued not only through my time working at bulge bracket banks, but also in moving into electronic trading, setting up my own market making firm, and then more recently of course being in digital assets. It seems to be a through line over the course of my entire career.

Speaker B: Can you talk about what you saw in terms of the different market conditions in the businesses that you were in and kind of any lessons about how to behave in different market cycles, how to respond to them, how to think about them? Um, you know, there are people who say it doesn't matter what the market's like, we just go do our job. And other people are very reactive. It's like risk on, risk off, trying to find kind of the right weather. What's your view on why cycles happen and how you would navigate them?

Speaker C: It's a great question. Um, I might add, by the way, that when I started in 98, that was, uh, it was just a couple of months after I started that the Long Term Capital kind of implosion took place that you might remember was the world's famous, most famous hedge fund staffed with the world's brightest people who managed to blow up in spectacular fashion. If I'm not mistaken, the Fed actually convened a bunch of the CEOs of banks to deal with the mess and the fallout of Long Term Capital. And since then you've cited a few different up and down events. And I think even more recently we had the sort of archegos, you know, prime brokerage debacle which effectively took down Credit Suisse as an entire institution. And this seems to be a recurring theme. And Wall street tends to have a hard time learning its lessons. But more specifically to your question, I'm more of the latter camp where you need to be aware of what the overall market conditions are and understand what the opportunity is afforded to you. And many terrific asset managers of all stripes will adjust their exposures based on whether they view the opportunity as favorable or, or whether they view the market conditions as quite challenging in terms of, you know, whatever the mandate may be, extracting a return or extracting alpha relative to a specific benchmark or even on an absolute basis. And you'll see the things such as cash positions fluctuate or people stick on the sidelines when the opportunity is simply not there. And typically the best investors have that approach. I think that the question's a really interesting one because you've cited a few crises and then there are obviously have also been a number of opportunities over the course of the past 28 years that I've been on Wall Street, I will say that at this, it's quite timely to be asking that question because I have never experienced, and I've sort of thought about this a fair amount. I don't pretend to be a historian of financial markets, but having thought about it, I've never considered a market opportunity that rep. That even comes close to what we're currently living through. As you and I are talking. The scale of the forward opportunity with the uh, frontier technologies that your media company kind of focuses on, the scale of these opportunities is unbelievable. The complexity of trying to think about second order and third order, uh, impacts of these technologies is really mind bending. And then finally the speed at which this stuff's changing is also really, really remarkable. If you think about any seasoned investors, you know, anyone from a Soros to a Druckenmiller to many, many other famous names you, uh, know, whether it's Tepper and Distressed Debt or maybe Stevie, Colin or whoever you want to cite as your investing hero, I'm sure if they were on your podcast, they would probably agree that the scale of the forward opportunity, the, the speed at which it's changing and the complexity or the high dimensionality of thinking about the forward path makes for a unique investing challenge. On a going forward basis.

Speaker B: The opportunity is larger than ever, but then the amount of change is faster than ever and I think is probably one of the most complicated periods to try and figure things out. So on Wall street you were uh, doing a lot of kind of hand to hand combat and high level institutional sales relationship building. And then your career took you ToWards more software first and digital and programmatic ways of touching financial services. Can you talk about what happened next and how did the things that you used to do start to get transformed?

Speaker C: I was strongly of the opinion, along with a group of other professionals, I was strongly of the opinion that the process of buying and selling bonds in small size, not, not, not huge trades that will make your year, but rather just a bunch of odd lot stuff. As you probably know, most asset managers go through a monthly process of cleansing their portfolios of small amounts of positions that they want to reduce, adding small amounts of positions that they want to increase. And these can be as a result of slight changes to their allocation model or people asking for their money withdrawals, redemptions of capital commitments or new capital coming into the funds. And so our thinking was, hey, the pricing process for fixed income can be replicated by algorithms and we should be able to set up a fully algorithmic market maker that Provides a service, ah, in a superior way. As you, you may or may not know, most human traders who still price the vast, vast majority of larger fixed income trades can't be bothered with these tiny little, you know, offer a million here or a bit a million there. These types of small nuisance trades are not what most traders like to do anyway. Human beings that price larger blocks of risk. And so we thought, let's set up an algorithmic market maker. Let's, it needs to be a broker dealer. So there was that entire process and let's then go out there and start buying and selling bonds on an automated basis. It was a terrific idea. Yeah, it probably remains a terrific idea, but the execution of that idea was significantly more complex than perhaps we had realized. And I think that the technology stack that was available to us back in 2015, 16, 17, 18 was also not what it is today, rather obviously, which made for a difficult time. Uh, the biggest challenge we had though was not necessarily on market structure, nor on technology, but rather on the availability of capital. One of the more significant oversights on my part and on the part of the team that came together to build this company was the fact that market making firms, regardless of how they come up with their prices, are really capital intensive organizations. There is huge amounts of capital in the US capital markets for early stage venture, for growth equity, private equity, you name it. There is very little capital for risk equity, if you will. Or this notion that if your machines do something wrong or if your human beings do something wrong, you're going to lose all your money. That's just not consistent with what a venture investor or a growth equity investor would be looking for. That's much more consistent with what a hedge fund investor is looking for. And so there was kind of effectively you would say poor product market fit from the perspective of the, the capital base required for a market maker is not consistent with the type of capital that's widely available in the world's dominant capital market in the United States.

Speaker B: That's a bit of an odd question, but maybe from a definitions perspective it would help. Can you highlight the difference between maybe a custodian or a depository of uh, financial assets versus an exchange or a market place or a market platform and then finally a broker or an agent. Because I think for a lot of listeners that all smushes together, you know, but if you walk through it in the fixed income example, that would be helpful, right? Like where's the fixed income instrument live? And then what does it mean to try and build a, uh, Venue. Like what does the word venue mean? What does the word exchange mean? And then what's the role of the salesperson or the broker? And how is that different?

Speaker C: Sure, yeah. I mean frankly your audience would be, would be, it's be very understandable why there'd be confusion around fixed income market structure. It's so opaque. I'm not even sure Claude or Chad GPT fully understands it. But yes there is. Uh, you know, custodians are where you would sort of keep your assets. This could be true of stocks as well. There's complexity, micro uh, complexity in market structure. But in general you have companies that hold on uh, that provides safekeeping for your assets generally. Custodians could also be in some sense as a prime broker or whatnot. But in general it's where you keep your assets and then you have venues on which you can transact. And the purpose of most of these venues is price determination. So you have an exchanges. The purpose of exchanges is obviously to determine price. Buyers and sellers come together on the same instrument and they form a stack of prices at which they're willing to buy, at which they're willing to sell. And the intersection of those prices creates trades. Of course even in over the counter markets, which is how fixed income is primarily set up, you as a, as an investor would have multiple service providers, typically brokers or broker dealers where you would be able to ask for prices on your, the fixed income instrument that you're looking to either buy or sell. And this is a uh, portion of that marketplace is satisfied by market makers. By the way. This is also true in equities and other asset classes such as commodities or fx, where a market maker's job is to provide liquidity to either an exchange or some other execution venue or potentially directly to the end customer. Again there's some microstructure there. Some market makers don't actually serve customers directly for regulatory reasons. They're effectively just proprietary traders on exchanges. But ultimately the experience from an investor's perspective is an abundance of liquidity. First safekeeping of your assets when you're not trading them. That's at custodians. The world's. To the best of my knowledge, the world's largest custodial bank is bank of New York. But roughly $36 trillion of assets under custody. But you know, there's many smaller operations out there. And then once you're ready to transact you've got your various execution uh, possibilities, electronic execution in a bilateral sense on platforms such as Tradeweb or market Access as well as over the counter transactions with large banks, smaller institutions, even pure agency broker dealers, lots of different ways that you can actually buy or sell. And ultimately though you are going to need a balance sheet on the other side. That is the truth in not necessarily in exchange based markets where you may have an intersection of natural buyer and a natural seller, but in over the counter markets it's typically the case that, that the person who is purchasing something that you are selling does so as a business and then we'll keep it on their balance sheet and look to sell it later. The corollary I like to use that almost everyone can understand is a used car dealership where you can show up to a used car dealership and buy anything on their lot and you can show up with your car and they will show you a price for that car. And if you don't like the pricing, go to a different used car dealership and that's more or less the market structure of a, of ah, fixed income.

Speaker B: Let's use that as a jumping off point to talk about B2C2 where you're running the Americas business. What is B2C2? And then maybe let's use that as a path into the market structure of digital assets.

Speaker C: So B2C2 is a global market maker and liquidity provider. And just a little bit more on that. There are firms out there in not only in digital assets and crypto, but also in other asset classes whose business it is to just provide prices to exchanges. The largest uh, exchange in digital assets is Binance. So we can use that as one example. But this would be true of many other exchanges such as Coinbase's Exchange or Kraken's Exchange. The idea is that firms like ours as well as other firms provide prices at which customers can buy or sell crypto and digital assets. On these various exchanges. B2 C2 and a small number of competitors also have a large over the counter business. We serve end clients directly. We have a global franchise of about 1500 institutions who have onboarded with B2C2 and can trade with us using our balance sheet as the repository of the assets that they're looking to either buy or sell.

Speaker B: In these two contexts like do the words exchange and liquidity, do they mean the same thing as in Wall Street?

Speaker C: Yes, they, they really do from the perspective of either an institutional Investor and, and B2C2 by the way is 100% institutional. And we don't have any individuals, we don't serve any individuals directly. We typically serve platforms that then serve individuals. But having said that, for the most part from the perspective of your listener, the, the, the way that an exchange works in digital assets is the same as the way that an exchange would work in, in traditional securities or other asset classes.

Speaker B: Then let's walk through what a market maker does. And you mentioned words like balance sheet and liquidity. Can you unpack for us what it means to provide liquidity, what it means to use your balance sheet? What does the world look like with or without market makers supporting particular assets?

Speaker C: Yeah, well a uh, market maker's primary role is to give the marketplace prices at which the other side, so to speak, can either buy or sell some underlying instrument. We can use Bitcoin as the example here. Simple and obvious example. Our job is to put prices onto exchanges in the first instance where the, anyone else on the exchange can either buy or sell Bitcoin against some other asset. Typically it'll be against usdc, usdt, that would be a, the circle Stablecoin or Tether Stablecoin. We can also show prices against many other assets. And that would be the idea that you can sell USDC and buy Bitcoin or you can sell bitcoin and buy USDC. And we put these prices on over 440 exchanges globally. And then we also have our large over the counter business directly with end customers. As we've discussed. An end customer could be, for example a digital asset hedge fund that manages a pool of digital assets on behalf of their investors and may have a, uh, decision to make around buying or selling an asset and is going to look for the best price. They're going to look to what their execution may be on Coinbase or Binance or any other of the 40 exchanges that we're connected to. Or they may compare that price to contacting us directly. But we say we call it a voice trade. But these days it's mostly through some sort of an electronic messaging platform and asking for a price. For example, if a client were looking to buy a hundred Bitcoin, they would be able to guesstimate, um, how quickly and at what blended price. They'd be able to do that on one or more exchanges and compare that to the price we would give them on a hundred Bitcoin. Uh, that would be our offer to them. So this idea of what a market maker does is it, we use this term liquidity, but liquidity obviously translated is just the ability to buy or sell something at a price that you're happy with and in a time frame that you're happy with. Price and time frame will change and the uh, more focused you are on getting the best possible price, typically the longer the timeframe and therefore uncertainty you're going to have. And that tends to be a natural trade off in all markets. And what market makers do is provide prices to either end customers or to exchanges in order to facilitate transactions. That's really the heart of it. It's a pretty simple business for, from a perspective of the what but the uh, operational realities between managing the risk of your balance sheet, trying to avoid negative selection, that is to say every time we buy something its price goes down. Every time we sell something, its price goes up. Trying to avoid those types of outcomes is the art of being a market maker.

Speaker B: It's exactly where I was going to go next, which is the risk engine and how you hedge out all of the exposures and keep yourself net neutral every day. Like what does that infrastructure look like for, for the firm to be confident that it can provide liquidity in all these different places? Like it sounds like there'd be a lot of M math.

Speaker C: There is a fair amount of math. There is also a high level of variance between market makers in terms of what their core business model is. I'll give you kind of the two extremes. One end of the spectrum would be a firm who really represents to their clients and to their customers the pricing that's available to them. And what that means is you're not really expressing a view on the marketplace. What you're saying is, for example, I see five Bitcoin on offer at Binance and five at Coinbase. And I see three uh, at Kraken and maybe another three on another platform. So I'm, I'm observing that there's 16 Bitcoin on offer and I'm observing what that price, the price of each is. And so I now have a price at which I'm able to offer 16 bitcoin to some end customer. I would just make a small amount of money there because I'm essentially an agent between the exchanges to which I'm connected and my end customer. And that's a very, very low risk, sort of almost, uh, you would call that a riskless principle type of transaction. And so that's at one end of the spectrum for market makers is really low risk, no point of view on the market, not necessarily a lot of infrastructure in place to determine the uh, right price, but the ability to look at available pricing and aggregate that together for your end customer. And that's the service there. And that type of service allows your customer to avoid going to a bunch of different exchanges dealing with exchange deposits and some of the other operational questions there. In some cases there may be some compliance considerations. And so there you go. That's one end is very low risk, riskless principle type trading. The other end of the spectrum would be a much greater risk appetite, a strong point of view around where any one asset is going to go, whether it's going to go up or down in the medium term, typically near to medium term, maybe a, a signal generation framework. And this signal generation framework attempts to use quantitative techniques to generate a bunch of alpha signals. That is to say a point of view in some example. For example, in, in Bitcoin you may have a medium term alpha signal that predicts whether Bitcoin is going to go up or down in the next five minutes. And a very high frequency or a very short term type of alpha signal might actually be whether Bitcoin is going to go up or down in the next couple of seconds or even shorter. But putting all of this together, a firm that trades with a heavy proprietary bias has invested quite a bit of time and money and manpower or smarts and analytical capabilities into having a point of view on any individual asset and the correlation between these assets and their pricing. And therefore what is the quote, unquote right price for any given inquiry is much less a function of what's available on exchanges and much more a function of what the machines tell them is going to happen with the assets price over the, over the next very short to medium term. These types of firms also exist. They just have a reasonably different business model. It tends to be a much more proprietary trading business model and therefore the client experience there is, I say, probably less consistent. You know, in some cases you would ask for an offer on Bitcoin and if the signal suggests Bitcoin's going up, you're going to get a, you're going to get a terrible price. If this, their signals, if the, if the market maker signal suggests Bitcoin is going to go down, then you would potentially get a much better price. And these are the types of differences between the firms. BTC is kind of somewhere in the middle. We have a, we have a, uh, fairly well built out alpha framework, but we overall have a pretty constrained risk appetite. We're owned by a public company, a Japanese public company called sbi, and that translates through to a, um, more moderate risk appetite than some firms that are owned by either a founder or a founder and a group of partners and have probably more leeway to Take a more proprietary point of view on the marketplace.

Speaker B: One last question about the role of market makers. And for those people who are really close to the crypto markets, there's always so much feeling about the role of market makers and performance of tokens and performance of tokens on different exchanges and so on. Whether it's sort of this, people say if you're launching a token, you need to hire a market maker in order to support the price in the beginning. Or if you looked at the Binance crash in October, whether it was, you know, Wintermute or GSR or somebody else, the sort of collapse of one of the large market makers has led to effectively beta level extinction across all the markets and liquidity drying up and price levels going down. I think in crypto, sort of this assumption between, you know, it's not just taking orders, it's something to do with price support in traditional sort of equity markets. You definitely would not have that sort of conversation. What do you think is the disconnect? What is it that you think people are doing in crypto and why?

Speaker C: I think that the role of a market, in the context of, of your question, what the market maker is really trying to do is demonstrate to the marketplace that there is sufficient liquidity in whatever token we're discussing. It's typically a newly issued token or one that's still early in its lifespan, so to speak. And that's typically because you're going to get relatively, uh, low levels of familiarity on the part of the investor base and therefore you're going to get relatively low levels of transactional interest. And what it tends to be the case that the perception that there's sufficient liquidity, that is to say that, uh, an investor is able to buy or sell with relatively low cost. And then that perception tends to create a virtuous circle where the perception that there is liquidity brings more investors to either consider the asset or potentially, you know, make an initial allocation, some sort of an initial purchase, which then feeds more liquidity and tends to get the, uh, kind of virtuous circle going. Obviously, we don't need market makers for the large liquid tokens. Anything most of your listeners have heard of don't really require the support of a market maker. But that's less true for a newly issued token or one that perhaps has been issued but is still languishing. And I don't mean languishing as in, you know, its price should be higher. I mean languishing in terms of visibility, engagement on the part of a broad set of investors, familiarity those types of metrics. So that's where a market maker comes in and I think can be really helpful to sort of priming the liquidity pump, facilitating more transactional activity off of their own balance sheet and over time leading to a larger investor base and greater levels of activity without the need for a market maker support a different function.

Speaker B: Right in early stage. And I think the lines kind of get blended a bit.

Speaker C: Yeah, I mean you see the same thing in equities. Obviously in the context of an ipo, you have the underwriters and their job is to provide some level of support and stability for the newly issued stock for a moderate period of time. And if there's extreme levels of interest, they typically have some stock in their back pocket, typically, uh, usually called a green shoe, to which they can then feed some more stock into the marketplace. But the overall idea, even in securities markets, is to ensure that a newly issued security comes to market in a way that's sort of stable and in the best interests of the issuer over the medium to long term, you know, creating some goodwill on the part of institutional investors, creating the perception that the security is well stabilized and sort of, uh, its price action is reflective of the sum total of the market's point of view on the security. A lot of that translates over directly to crypto, I would say. You know, the world of crypto is a mixture of what you and I would probably call sound enterprises who are coming to digital asset markets looking for financing and have a real business and have a real use case and are exploring product market fit and growth. And then at the other end of the spectrum, crypto, for better or for worse, also includes a bunch of, you know, jokey, extremely speculative assets whose fundamental value is questionable. And it is sort of, it's both a feature and a bug, I suppose, and, and needs to be acknowledged. That's. That last part's less true. It's pretty. Well, yeah, I was just going to say it's less true of securities markets. But if you look at some of the, some of the SPACs, for example, that have come to market over the past five or six years, I mean, there has been a fair number of those that have turned out to not be a particularly hot investment either. So perhaps there is a corollary to securities markets and maybe crypto is getting a unnecessarily harsh rap. But nevertheless, the point here is the market, uh, makers in both instances, or service providers in security space would be investment banks, but their job is to ensure that a new investment comes to market with a degree of stability and establishes good rapport with its investor base as that security or that digital asset takes on a life of its own.

Speaker B: Yeah, I guess the difference is like there's the primary markets and there's the secondary markets and those are two different business lines. Effectively they both use balance sheet, but in different ways. One thing I wanted to talk to you about is stablecoins and sort of this broad adoption of stablecoins that's now happening within fintech. You know, even like five years ago, one thing that just stood out at me is how we've managed to conflate two different versions of cash. And it's funny that you, you know, you started out at Goldman with commercial paper, uh, which I think brings it nicely into a loop here. There's different things that the dollar does. Some dollars are used to buy sandwiches in a shop. Some dollars are used as deposits in a bank to earn interest. Some dollars are used as a cash sweep account inside of brokerage, you know, that may go towards funding that commercial paper or money market funds and so forth. From a software perspective, stablecoins are just tokens that are collateralized by different versions of these dollars. We only have like one word for them and we've got one law and it sort of smushes everything together. I know that B2C2 has been working on initiatives around stablecoins and maybe a way to get into that is to talk about the differences that I've touched on, what you think of them. And then what is it that you see happening on the capital market side?

Speaker C: Well, the fact that you were thinking about stablecoins five years ago puts, uh, you in rare company because, you know, most of us could not have cared less five years ago. But at B2C2 we transact quite a bit in stablecoins, about a billion dollars a day. It's a function of our, of our heavy transactional activity in digital assets and crypto and stablecoins being sort of the native funding instrument. And it's a little bit of a legacy also from some of the challenges that uh, digital asset companies have had in accessing traditional banking. And so we've, you've, you know, digital asset investors have had to move to stablecoins for a variety of reasons, some of which have to do with banks until recently, the uh, lack of appetite to touch crypto and digital assets amongst traditional financial institutions. So for us with stablecoins, we made a big, a, kind of a big bet a little bit more than a year ago about uh, maybe 18 months ago that there were going to be many more stablecoins in the future. This was at a time when the big discussion in digital asset markets was whether Circle was going to beat Tether or whether Tether was going to beat Circle. And we always thought that was a rather naive conversation to have. And we expected that many more institutions were going to issue their own stable coins for a variety of reasons. That was our first bet. And the second bet was that the programmability of this, this form of money, we'll talk about that in a second. But that the programmability was going to be increasingly important over the next three to five years. Specifically, you know, when you think about money, and you mentioned that there's different forms of, of money, we have store of value. That's a very common sort of perspective on what money is, a store of value. Ah, Although the, you know, a lot of monetarist people are with the kind of like debasement, people will argue against that. But, uh, if we can set aside the philosophical component, you know, there's a store of value and then there's a transfer of value. And the transfer of value component is where stablecoins really shine. Most people would agree at this juncture that stablecoins are in fact a better mechanism to transfer value. What does better mean? Like all technologies, better means faster and better means cheaper. That is what better means. And that's at the heart of almost every piece of new technology and why it succeeds. And with stablecoins, we have this idea that you can move, in most cases a dollar. But you know, we're seeing more stablecoins in other currencies, but nevertheless, you're able to move a, uh, digital representation of a unit of currency that's held in trust in a, typically in a custodial environment, and that it allows you to move this currency much more quickly with much less cost than current systems such as ACH or swift. I would probably also point out that in certain jurisdictions, the central bank or some sort of a central governing body has set up an instant payment system to some degree, obviating a portion of the stablecoin, uh, benefits. Examples could be the PIC system in Brazil, where money is able to move, uh, very quickly and basically for free 24, 7. So there are, there are certain jurisdictions where they've leapfrogged what we can do in the United States. But more generally speaking, the transfer of value, whether it's in western developed economies or developing economies, has always been too expensive. And stablecoins really address that problem. The second thing I think is forthcoming, so that even the stablecoin skeptic would have to agree that a piece of software, which is what stablecoins are, has the ability to then, um, run additional software on it. You can think of it as not that different from some of the SaaS platforms, where the SaaS platform is the software, but they open up an app store and there's all sorts of different applications that can run on top of stablecoins. That's something we expect to see over the next couple years.

Speaker B: So it's not about competing with Stripe about who can pay people better for products on the Internet. It's going back to that point about using the balance sheet for liquidity across all sorts of different venues. Isn't that right?

Speaker C: Yeah, I think that's exactly right. I mean, it's funny you mentioned Stripe. I was blown away by what Stripe announced nearly a year ago now at uh, at uh, their annual Stripe sessions, which was, you know, the idea that they were going to create their own, effectively their own stablecoin network amongst all of their merchants, obviating the need for a financial transaction to necessarily touch a bank balance sheet until you go from transfer of value to store of value. And of course I don't think there's a company out there that is planning on self custodying their cash. Most companies think it's the, uh, right thing to do to keep your cash out of bank. This has everything to do with governance and not necessarily so much to do with whether you receive interest or not. That's, that's sort of a little bit of a side note. But there's probably not a CFO out there that feels comfortable keeping 100% of the company's cash in some sort of a, uh, crypto self custody wallet. Having said that, moving money around and being able to do that 24 hours a day, seven days a week is very much at the top of the wish list of many CFOs and treasurers. And that's where the stablecoin transfer of value discussion, I think has the greatest potential.

Speaker B: Absolutely. If our audience wants to learn more about the stablecoin initiative or B2C2 or about you, where should they go?

Speaker C: Well, these days I suppose you can go to Claude.

Speaker B: You are the first to defer to the robots.

Speaker C: Oh, is that right? No, I mean the robots are so, boy, they are so powerful. Here's what I would say. Uh, B2C2 has an actual product that's been receiving a huge amount of interest in the institutional context and this product is called Penny and it's a stablecoin facility that allows any user to instantaneously, that is to say instantly and effectively with zero fees and zero cost, swap from one stablecoin to another. Again, the stablecoin landscape is still to this very day dominated by tether and circle with I think a strong third asset being the global dollar network usdg. However, we are seeing really exciting announcements not only from Stripe, as you have already mentioned in their acquisition of that terrific company Bridge, but also from Western Union. That's public. I think Revolut has made it public. It's quite likely that other consumer platforms, large retail platforms, are going to issue their own stablecoins and then therefore there's going to be the need to be able to go from one stablecoin to another instantly, no counterparty risk and very quickly. So that's our Penny product and it seems like the product market fit there is excellent. The other places to go for stablecoin information, I found LinkedIn to be terrific. If you don't want to deal with Claude or you don't trust it for whatever reason. A, uh, simple search for stablecoins on LinkedIn. There is the amount of information there, formal research reports. I'm not referring to, you know, random tweets like you get on on some platforms. I'm really referring to proper formal research sanctioned by banks and consultancies. They're huge amount on LinkedIn. I don't know if you agree with me, Lex, but there's that. And then of course your own podcast. You've been very early on the stablecoin topic and I think a lot of what you've put out has been absolutely spot on.

Speaker B: Cactus. Thank you kindly for joining me today.

Speaker C: Always a pleasure. Speak to you soon.

Speaker A: Hi everyone. That's it for this week's episode of the Fintech Blueprint. For more technical deep dives into all things fintech and decentralized Finance, check out FinTechBlueprint.com and grab a free subscription to the newsletter. This is Lex and I'll see you next time.