Early Crypto Explorations at Fidelity + Cryptocurrency Infrastructure Needed [The Exchange #002]


Hi everyone welcome to The Exchange, a podcast that explores the institutional landscape of cryptocurrencies and blockchain technology I’m your host Abbey Titcomb today we’re sitting down with Matt Walsh former vice president of Fidelity Investments and current founding partner at Castle Island Ventures Matt thank you so much for being here and giving us your time so Matt is currently a partner at Castle Island ventures prior to founding Castle Island ventures Matt was a vice president at fidelity investments where you led a number of the firm’s blockchain and crypto asset initiatives while at Fidelity you also led the creation offered operationalization and the investment strategy of a private fund focused exclusively on the crypto asset sector so very excited to have you on the exchange today would just love to jump into it and kind of just tell me about your background how’d you get into the space I read that you you know you did crypto door you got into crypto during business school is that true yeah thanks for having me on yeah so my background was I grew up around Boston area I went to Babson it’s actually a management consultant and after college and I went back and got my MBA from 2012 to 14 and it was while I was there that you know I had some time on my hand that I start paying more attention to Bitcoin it was in the headlines a lot there was the mount cox happened it’s a situation a great way to describe it Silk Road had happened around that time and you know I was noticing a lot of the investors that whose blogs I would read were getting into it and you know there’s some companies being formed coinbase yeah they’ve been formed a couple of years earlier and so it was down there that I really just started to go down the rabbit hole of am understanding Bitcoin and you know I was fortunate that I had a little bit of time to explore and to yeah whatever I could on the topic yeah absolutely so then how did you what brought you to fidelity and and more on what your role was there beyond what I said in there yes I joined fidelity really not in a crypto capacity at all conditionally so I was a management consultant by training and fidelity has a great internal strategy consulting group and so I actually joined fidelity to join that group as a management mm-hmm and one of the first projects that I had the good fortune of working on was called scenario planning and it’s essentially looking 10 years into the future and imagining what Fidelity’s reaction would be if certain events happen and so some of those events are technology driven so we were looking at you know the automation of certain functions through artificial intelligence and blockchain was on that list and so you know I was very fortunate that I was in the right place at the right time yeah really you knew a little bit about Bitcoin initially and you know could could approach it from that perspective our initial lens on it was Bitcoin allows for a peer-to-peer settlement and a transaction without a trusted third party and so could you imagine a world where that type of a technology would be useful in the financial services space and I think the answer is you know probably yes there’s a lot of trusted third parties and intermediaries in those type of businesses and so it was from that perspective that we initially just got interested in it yeah yeah and you just started jumping into it and then growing in it right yeah so it was you know so we had some people at the firm that were you know really eyes wide open on the opportunity and we we really just took the opportunity to step back and try to learn as much as we could learn it it wasn’t necessarily a grand strategic plan when we first started it was more of here’s an interesting technology this could have some radical implications on our business model you know if it grows and if it you know effectuates the change that we think it might and so we we just spent a lot of time trying to get smarter about it and that manifested itself in a lot of different ways primarily just education and you know bringing in some people to do some guest lecturers initially and eventually conducting experiments and kind of snowball from there yeah well it also manifested in fidelity becoming one of the like the most forward-thinking you know financial firms in the crypto blockchain space now to write I mean you know we I read about fidelity all the time I mean from Abigail Johnson who’s adamantly supported Bitcoin and crypto in general from the beginning there’s a launch of Fidelity Labs and I see their inclusion I see three you know even talks of you know Fidelity starting their own exchange which is funny if you could touch on that but you know how did one of the largest asset management firms I mean what is it it was managed over two point four trillion dollars you know per year or something you know how did how did you guys become so prominent and progressive in the space because it’s hard for it just to be eyes wide open and jump right into it you know what what supported that and what led you guys so a good question I think there’s a lot to unpack there I think the first is that fidelity has always been very forward-thinking in terms of new technologies very early to adopt early to experiment and early to innovate and that across the board you know the the Chairman had has a great history of of that you know I think the the initial angle with Bitcoin and blockchain was really just to try to understand it a little bit more and so I think when you think about the things that have made that successful within Fidelity I think that it’s the the buy-in from the very top that that exploration is worthwhile and so that was always part of I always felt when I was at fidelity that I had the the permission to explore and the permission to really deeply understand something within the space and so I think that that’s a big part of the the ethos and certainly Fidelity has been very forward-thinking as it relates to permissionless public blockchains and open-minded about the fact that that could be a transformational change that could you know that could really have a big impact on all sorts of industries but certainly financial services mm-hmm yeah so you mentioned that I love that you said that exploration was in the ethos right that’s a great way to put it but how did you and your work also contribute to this trend of staying staying exploring to continue exploring continue being open minded and how much of it was a challenge if if it was any challenge to gain that internal support you know for various crypto investments and holdings yeah so I think the the most important thing to highlight there is just that a lot of these you know big financial institutions that were early looking at this space there wasn’t that broad support from upper man you’ve seen a lot of frustration from some of the junior ranks at some of those big firms so I think it’s important to have that in place as a foundational building block to just have the permission to explore this thing I think there’s a lot of career risk in the Bitcoin blockchain sector and it’s not you’re not going to find a lot of people that are out there kind of banging the drum for this technology particularly you know 2014 after mount dogs after Silk Road there’s some reputation rest there’s some reputation right right yeah yeah you know and so I think from my perspective there was there would have been a 0% chance of having a meaningful experience at a firm unless there was that support from the very top levels of the firm that you know we should explore this we should seek to understand this it’s not that we need to have a fully baked go to market strategy for this technology it’s not not at that point yet but there was the permission to to explore it and so I think that that is certainly no credit to myself anything that I did right so there’s a you know there’s some people over at fidelity that have had a meaningful impact on that culture and I think that’s the most important part and you don’t see that at a lot of places yeah exactly yeah so happy how did your work transform so at the beginning it was just oh I kind of know a little bit about this and then you’re given the permission to explore so what piqued your interest what did you transition into what was your work what was it transforming into as you were learning and as you were explaining yeah so we we started with exploration and so we started essentially having these steering committee style meetings with executives at fidelity bringing in guest speakers bringing in entrepreneurs who are building things trying to educate that transformed over time we eventually started a labs team coming out of that initial scenario planning effort and we started doing some experiments and so standing up a mining operation always been public about that standing up some you know just basically experiments at one point there was there was an experiment to have a tell wallet yeah and so some of these things are just testing out new ideas and so over time I actually transitioned to the investing side of those private equity gotcha a business unit at Fidelity looking at early stage companies as well as you know crypto assets correctly and so that was a mix over time and we got there and so that was kind of my primary thrust towards the end of my tenure at fidelity yeah awesome so well so I guess now that leads perfectly into you know you know your transition into founding Castle Island Ventures right so doing specifically investing so what spurred that transition you know what was behind it and tell me more about it yeah so I think the the whole crypto asset investing industry has been an interesting thing to just look at from 2014 to now yeah we’ve seen I think there’s been a lot of at first it was just Bitcoin then we went through this private blockchain hype cycle a lot of companies being formed around permission to private blockchains we saw the launch of aetherium and subsequently the ERC 20 token standard really spur a lot of investing activity a lot of crypto hedge funds being created to access tokens and to hold these you know these protocol tokens directly over time I think my you know my view on this has shifted somewhat but maybe not too much I think that there’s tremendous opportunity with some of these open crypto asset protocols particularly the ones that are focused on the non sovereign money use cases yes like a Bitcoin I’m less optimistic about about SEO and so yeah everyone hahaha yeah exactly to answer your question I think the so Castle Island Ventures has really formed around the thesis that we are at an inflection point for public blockchain yeah so your investment thesis is very specific in public blockchain that’s right and so we are very focused on public block chains and supporting infrastructure company and my partner Nick Carter and I have the view that we are really coming into this age where these companies these infrastructure companies are really necessary in order to promote everyday users actually using these platforms in order to get large financial institutions actually on board with holding these assets transacting in these assets getting data off of these networks and we think it’s a fundamental paradigm shift it’s a tremendous opportunity and so the the idea behind Castle Island was form a venture capital firm exclusively focused on the public blockchain crypto asset space making investments primarily in equity investments in infrastructure companies not the outside yeah so when so with a background in you know crypto assets basically what what you were doing at fidelity and the rise of so many different ways to invest we’re talking about ICOs we’re talking about just in general Dow’s whatever right what what why go into equity investments there’s so many opinions on equity investments right now and in VC people think VC is dead people think it doesn’t matter you know what else can you add as if you see so why go into equity investments an infrastructure plays and what’s your opinion on you know the landscape for early-stage equity investments in blockchain infrastructure plays yeah good question so I think to to give a little bit of background that there are there have been something like 250 crypto hedge funds that have popped up in the past 18 months and a lot of these funds are focusing on icos and buying into tokens and yeah you know utility tokens app coins you name it base level protocols you know that’s that is interesting I have a very pessimistic view on the capital raise structure behind I cos I think that a lot of these I cos have securities law violation look and feel to them a lot of them are simply non diluted of capital raises by the founders and I think most importantly if you do any level of technical diligence on a lot of these networks they would require a monumental feat in computer science to even be possible as a platform and so we look at a lot of these things and say a lot of these are ideas are really interesting ideas and you know certainly a lot of them are good uses for public blockchains I don’t think that a lot of them are good uses for having their own native token I don’t think that we’re gonna live in a world where there are 1,500 different crypto assets cryptocurrencies whatever you want to call them and in that you need to call on specific ones to do certain features and so what I mean by that is you I think we’re gonna live in a world where I have a wallet with 37 different types of tokens in it and I’m gonna every time I want to do file storage have to go through a process you know clicking on it I don’t think so but what I am very confident on is that some of these networks is based level networks will be fundamental in the sense that there will be those services built on top of them without the need for a native token mm-hm but to maybe back up entirely I think regardless of your world view on how many of these assets they’re going to be which ones have any validity or not and whether or not they’re actually securities laws compliant you know in raising them whatever your view on the 1500 or so assets I think there is a level of market infrastructure that needs to exist regardless yeah regardless working or not right and so when I think about that market infrastructure a lot of it just does not exist yet and so I’m thinking about things like custody things like custodial work flow to make holding private keys easier for institutions and you know less dangerous I’m thinking about exchanges and thinking about order management platforms portfolio analytics how do you trade these things how do you get access to them let me get them into your custodial setup and then the other category that you know is very necessary and completely immature is data and so market data network data who’s actually using some of these underlying block chains is there any utility on any of these chains is it an all speculation or do we actually see people economically transacting on them and so we have the view that that infrastructure is necessary regardless of which platform emerge and we’re really at the early stages in some of that infrastructure so that’s where we’re we’re focusing you know the bulk of our time mm-hmm yeah no I think that infra it I’m with you that’s my opinion as well you know that infrastructure it needs to be built before you can put all these utilities tokens on it that nobody’s gonna use them yeah I mean you see your this you know you hear a lot of people say you know with internet comparisons like what year are we in are we in 1994 we 1989 and I’m not sure but I think there’s a lot of things that have the look and feel of trying to do like a streaming video service on the Internet of 1994 yeah I think absolutely well that’s like literally what people are doing you know like decentralized video sharing and yeah streaming or whatever that’s actually like and happen right right okay it’s for you right you know so a lot of these ideas will happen it’s just a matter of time and a matter of do they need their own token yeah they may be built on top of something else absolutely so uh so let’s talk you you mentioned something that I would love to segue into you said you know there’s been like 200 plus crypto funds popping up right so there’s been a bunch of crypto funds popping up crypto hedge funds whatever but there’s also a lot of early-stage blockchain VCs I mean some that are ranging from you know like underscore and pillar in you know Boston to specifically like poly chain capital blockchain capitals so so what how do you guys see Castle Island Ventures differentiating what do you believe differentiates you from all of these other funds that are popping up yeah good question so you know I think if you look at the crypto / blockchain whatever you want to call it category of funds I think there are very few that are structured in a venture capital construct and so partially that’s because they’re buying liquid kind of tokens and they need to meet certain redemptions and whatnot so we’re differentiated in the fact that we are exclusively focused on the permission was open blockchain space yeah yeah and we’re a venture firm and so we think that that’s very founder aligned you know we are looking to partner with entrepreneurs for a very long at a time and this is all we do and so we’re not looking at other categories of FinTech we’re not looking at enterprise software we are focused on the permissionless blockchain infrastructure so mm-hmm so yeah that’s it’s definitely something that’s very specific to you guys I believe and so tell me more about the fun – so what is your check size and we know your thesis what’s the structure and are there any portfolio companies that you’re you know you’re particularly excited about or building something awesome yeah and so we you know we just launched yeah when did you close you close a couple weeks ago congratulations so you know we don’t have a ton of portfolio companies to talk about yet but we are we anticipate doing fifteen to twenty equity investments over the life of our fond we are writing checks anywhere from 250 thousand dollars to a million and we’re trying to be very early so we’re gonna be seed focused our first investment is into a company called Flipside Crypto which meets a lot of these things that we’ve been talking about about market infrastructure they’re a data focused company started here in Boston a great team that we’ve worked with in the past and so that’s our first announced you know portfolio company and should have a couple more to announce in coming weeks awesome what gets you excited so if it you know it hasn’t come through your portfolio yet cause you’re so early but when you when you see Dex come across you know or you see projects happening in the space you know what what do you gets you really excited what kind types of infrastructure for what I know you mentioned data you know is that identity is it data is it exchanges you know what’s really getting you excited in the space yeah and so the thing that excites me the most is if I open a deck and they’re not doing a token sale the data is probably the one to highlight so I I think that we’re in a very very early stage for this technology there are a lot of use cases that will happen it’s clear that there’s a couple use cases that are here and ready to go and yeah you know I think the first one is around store of value non-sovereign money and so the use case of getting access to Bitcoin and a you know buy-and-hold basis I think is a really important one and I think that there’s a lot of infrastructure just to support that use case and you know from there that infrastructure will be deployable against any number of other use cases whether that be identity supply chain management or you know but list goes on and on and so companies that are really uniquely focused on servicing a particular use case that is actionable and then you know in the next couple of years and so that data space is really interesting to us particularly I’d say on the network data side and so companies that are seeking to understand the actual economic activity happening on the block chains which is hard it’s I’m not talking about the trading activity I’m talking about how many people use this platform like how many nodes are they’re connected how many addresses actually do transactions on the underlying blockchain I think the you know the kind of dangerous thing is you see a lot of these projects these quote unquote permission West open block chains and you really try to understand is anyone actually using them and the answer is no I mean there’s very negligible transaction size on the underlying chain happening it’s all just exchange kind of trading on the speculation use case and so I think companies that can surface some of those insights are gonna go a long way in really do an important service to the community in terms of keeping people appraised on these things it’s the equivalent of having fundamental analysis on them so it’s yeah really deeply understanding you know these things I guess you could compared to a like a fundamental equity research type of a thing where it’s is there anything actually going on on these chains [Music] so we’ve been talking a lot about Bitcoin but let’s talk let’s talk regulation and compliance for a second what are your thoughts on the SE C’s recent denial of Bitcoin ETFs right so what do you think needs to happen or change to get one of these proposals passed in the near future yeah so I wasn’t surprised at all about the you know the various rejections I think if you think about what is going to be necessary for the Bitcoin ETF or any other ETF based on a crypto asset to be approved there there’s two really important things one is the emergence of a qualified custodian and so I’m talking about there is a an institution that is capable of holding crypto assets on behalf of instant other institutions so pension funds endowments you know big institutional investors and and that doesn’t exist yet in the crypto space and say that’s a regulatory framework that certainly will be achieved but there are certain hurdles around getting the SCC a comfortable with the definition of a good control location and you have the safekeeping of these assets certainly not insurmountable it’s just that where we are not there yet and so I think within the next couple of years we’ll see the emergence of several custodians that enter the space some of them will be startup some will be existing financial institutions that see the opportunity to provide the service so that will be that will be happening the second thing if you read the SEC’s denial is really around the spot market and particularly around the manipulation of the underlying spot market for Bitcoin and so you know as recently as like 18 months ago you know I think 90% of the trading volume for Bitcoin was in China and these are not venues that are regulated in the United States these are not venues that have spot market surveillance sharing agreements in place with each other and so over time I think we have seen the maturation of the exchanges in the crypto assets base that will continue to evolve and we will start to see and we’re already starting to see regulated venues come in and offer a spot market product and so once we have enough meaningful traction meaningful volume in the spot market on those venues as opposed to on venues that are outside the United States I think some of the concerns that the SEC is addressed around the surveillance sharing and the manipulation of the potential manipulation of the spot market become addressed and so if you pair the qualified custody peace with the regulated spot market piece I think a lot of the the concerns are alleviated and we probably do end up seeing a Bitcoin ETF approved you know could take could take a year could take two years I’m not a prognosticator on that front but I don’t think that it’s an insurmountable obstacle moving off of regulation now regulation into exchanges what are your thoughts of regulation in centralized exchanges in regulation in decentralized exchanges which has been a recent trend we’ve seen a bunch of them popping up do you have any opinions on that yeah I think I think that decentralized exchanges are really interesting I’m constantly seeking to understand them more yeah what’s a hell yeah reading as much as I can about that I think if you think about that maybe just to to back up I mean the way that I view it decentralized exchange is this is a really unique blockchain enabled platform I think this is something that you could not do before blockchain platforms essentially what it is is allowing for a peer-to-peer value transfer without a you know third party and you know that’s exciting I think that where there will be some challenges there on the decentralized exchange front is around knowing the other side of the trade and so some of the platforms that have looked at don’t have the ability for you to know who you’re transacting against I think the regulator’s will potentially gonna have an issue with that and I think that the most successful companies and those successful entrepreneurs will be the ones that figure out a way to to weave that path and to make their platforms you know capable of being used and you know some of these things and we’re I’m probably the most optimistic about decentralized exchanges is not necessarily for the trading and speculation use case but potentially for the use case of applications that require the exchange of tokens to function and I think that that’s somewhere where you know that’s just now starting to become a reality and so very optimistic and continue to look for ways to deepen my knowledge in that space cool so to wrap up here since we’re running out of time I wanted to ask you higher level question but what is your long-term view on this market as a whole and how do you view blockchain technology evolving over the next five years or even ten years yeah I I’m very very bullish as you might imagine I wouldn’t have started so I think you know what I hope and what I I think is that ten years from now I’ll look back and say how crazy was it that we started a blockchain fun like that you know that’s basically the equivalent of saying we’re gonna do a fund and we’re gonna focus on the Internet and every company ended up behind our net enabled and yeah yeah everyone ended up using it and so it just became this fundamental fabric and I think the what I’m most excited about for some of these early blockchain projects Bitcoin kind of being the the best of the bunch is that this is just an innovation that wasn’t possible from a computer science perspective when the internet was being built and so we’re playing catch-up here we didn’t have the ability to have value transfer in a permissionless way that anyone in the entire world can use and build things on top yeah that wasn’t possible with value transfer when the internet was being built and Satoshi Nakamoto figured out a way to do it and now we’re all kind of reaping the benefits and every industry will be impacted by this and so this is a situation where ten years from now I’m of the belief that you know will it’ll be hard to find a company that hasn’t had a meaningful integration with a blockchain open Network and so I’m massively optimistic I think that we’ll have some infrastructure companies being built now that get to the scale of a Google or Facebook and have that widespread name recognition really because they start with the fundamental first principles of you can have this value transfer and it’s not a bolt-on they’re going to build companies that are uniquely suited you to interact with these systems and so talking about Google and Facebook and these you know just larger firms in general not just like fidelity in the financial firms but other big giants who just dominate data and dominate you know our current if you say Internet our current web right how do you how do you see them being adapting or being disrupted with the rise of the technology over the next 10 years so there’s been an interesting narrative over the life of blockchain and Bitcoin around the big opportunity here for a while it was thought to be disintermediation of Custody banks in the DTCC yeah financial post trade settlement I think by and large that was with the private blockchain kind of hype cycle and eventually it was all about that’s not where I’m excited I don’t think that that is the fundamental breakthrough here to me that feels like a little bit of just sprinkle a little blockchain on an existing process and that’s incremental innovation where I see the most disruption happening would be in business models that are centered around being data monopolies and so if you think about what Google and Facebook what that whole business model really is is give us all of your personal data and we’re gonna monetize it on the back end you know the service is free but actually you know you’re the product and so but we have all your data and you don’t know who we’re selling it to and you have no idea what we’re doing with it so that is something that could be uniquely addressed through permissionless blockchain networks the idea of having self sovereignty is really fundamental to this technology and so the way that that will manifest itself I believe over time is the first kind of killer use case for the technology self sovereignty over your money so the ability to hold your own money and transfer it to anyone you want whenever you want you know that’s a real fundamental breakthrough but what if you could do that with your data as well and so these data monopolies business models really stand to suffer if we can get the right infrastructure in place so that people can safely hold these things safely manage their data exchange it the way that they need to the user interfaces will need to evolve I mean this is going to be an evolutionary progression here but I think if you think about where it needs to start it needs to start with the market infrastructure of how do you hold these things how do you trade them how do you get data off of them eventually we’re going to place where you can build fantastic user experiences that are just way better than you know some of these data monopolies and the value proposition will be will be there and so when I think about the most imperiled types of businesses it is those data monopolies I mean these these companies don’t necessarily have an obvious move when it comes to permissionless block chains because taking a step to integrate with them or taking a very positive proactive step to become a part of these communities is antithetical to what they stand for right now there this is classic innovators dilemma in the sense that they would need to cannibalize their own business model to do anything yet and it’s not clear to me that they’re willing to do that and it’s not clear to me that it’s economically rational to do yeah exactly well that’s great thank you so much for sharing your time with us we’re gonna wrap it up here and see you guys soon Thanks. The Exchange is sponsored by Everbloom a decentralized crypto asset exchange with the intelligence liquidity and trust institutional investors need

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