What’s Wrong with Crypto Custody & How to Fix It | Live From DAS

Transcript

Can you imagine? It's like you click on an address, you see everything that someone has. So, it's not super in terms of privacy. Uh, and so we need to be very careful with this because this is money. And if you fast forward in the future, what if it's not just your ease, but now it's your, you know, real estate deed and, you know, everything that you own, your identity, etc. Hey everyone, quick disclaimer before we get into today's episode. Nothing said on bell curve is a recommendation to buy or sell securities or tokens. This podcast is forformational purposes only and the views expressed by anyone on the show are solely our opinions, not financial advice. Our guests and I may hold positions in the companies, funds, or projects discussed. All right, Pascal, great to have you at Digital Asset Summit. Thank

you. Yeah, great to be here. Hello everybody. Hello everyone. How are we all feeling in the audience? Yeah. All right. Uh we are going to be talking about institutional custody today and I thought Pascal you've been uh such a stalwart of the industry for so and you've been here for so long you've seen um you know you were kind of there in the very early days of crypto and now you're at the forefront of helping secure billions of dollars worth of crypto uh today. So, one thing that I'm very curious to get your take on is, you know, I think one of the early tenants of crypto was, you know, not your keys, not your coins, right? And this idea of self-custody has been at the heart of this industry for a very long time and is still at the heart of ledgers business today. But as we have more

institutional money coming into the space, um, you know, there are very different compliance and regulatory needs and different preferences. So, help take us through the history of, you know, custody and how is this idea going to change as the industry becomes more institutional? Okay. Well, that's a that's a great question and I hope you have a sort of 45 minutes. Yeah. Look, so first of all, you know, this industry exists because of the failure of the uh you know, of Lemon Brother in 2008 and you know, Bitcoin was a reaction to to that uh in a sense that nobody's too big to fail and you shouldn't put all your eggs in the same basket. And so to trust a third party is something that you don't have to do when

you're in Bitcoin or crypto. You can actually hold the asset yourself and it's been designed to do so. It's a peer-to-peer electronic payment system, right? [Music] um when they started in 2008. So it's not too long ago by the way like you know it was still in the infancy of this but the use case of payment with bitcoin is only sort of starting to bloom now and you know through uh probably uh you know so it's not directly linked but you know stable coin has been like a a great uh payment is a great payment method and whereas with a layer two that is being built on bitcoin and and lightning etc we can see you know payment with with with bitcoin coming but as we all know

the use case that that really uh was there for a while was the uh the new gold, you know, the the digital gold. And so using Bitcoin as a store of value and so therefore when you use Bitcoin as a store of value, what do you do with your private keys? And up until now, there's not much that you can do with a Bitcoin private keys apart from sending, receiving, right? Yeah. Um and so the primary use case for Ledger at the beginning was I buy a Bitcoin, I put it on my ledger, I put the ledger on the drawer and I forget about it. M okay which is not great because um we need to upgrade the operating system from time to time and we need to upgrade it for security reasons etc. So to forget your ledger is not a good idea and remember

that you know it's a piece of consumer electronic. So if you put a piece of consumer electronic in the drawer and you uh excavate it like 40 years after it's it's never a great idea because you know the world has moved on and your consumer electronic uh might not be working after 40 years of not using it. Um, but since the main use case was buy and hold, then people were like, well, you know, if I have to buy and hold it, you know, maybe I just need to put it at the bank. And uh, and it's funny because, you know, for the first part of the existence of of of Ledger, we had to explain why not Coinbase. You know, we were introducing Ledger and to say, you know, self-custody and digital private property. And people were saying, yeah,

but what about Coinbase? Like, you know, Coinbase Coinbase do it and Coinbase is great. um and they are great uh but then you have to trust a financial institution with your coins which sort of defeats the purpose of you know not your keys not your crypto but again since the only use case was buy and hold why bother having your private keys and I think um this is how like you know custody started Coinbase acquired the business of Zapo Zapo was the the actually the original custodian and Coinbase is in the custody business and is probably the biggest uh custodian today on the planet uh and uh and I think you know to the extent that now it becomes a problem.

It's like you know the reflect is like if I have coins and I'm an institution I'm going to put it with Coinbase. Okay. So again nobody's too big to fail. Uh we have uh reminders every now and then that nobody's too big to fail. We have Silicon Valley Bank we have bybits. We have uh FTX. We have Salus. I mean you name it. uh and whether you fail because your business goes bankrupt or whether you fail because hackers are getting uh you know really good at what they do uh it's not very good to put your eggs in the same basket. So right now we are in this world of uh you can keep the the coins yourself and sometimes people hide themselves behind regulation to say that they can't but you actually can uh in there are many use cases treasury

management for example you can't keep coins yourself uh and or you can leave them at the bank and I think the future is both right uh and the way that we see the world is it shouldn't make a difference in terms of security whether you want to keep them yourself or whether you want to leave them at the bank you know uh If you leave them at the bank, they should run on a security layer that is similar to Ledger. Actually, we have Ledger Enterprise for that reason to make sure that if you compromise on self- custody and you want to trust somebody with your coins, at least you should trust somebody that has a security layer that is the same as the one that you have if you keep the coins yourself. So, that's the landscape I think. And what do you think you know we

uh we opened this conference uh with a speech or a talk with David Mercer actually from Elmax where he was describing you know there's a very different market structure in finance as a in crypto today where you know in somewhere like a Coinbase or a Binance or something like that it's it's almost the combination of a brokerage model and an exchange and custody um and there's potentially value for actually segregating out those different businesses within different companies for safety. Um and so you know when you look out into the future you know do you see a more tightly integrated world where these services are all bundled together in one business or do you see a world with separate custody exchanges brokerages etc. To be honest for me the future is not this at all in a sense that why do we need to centralize

everything you know it defeats the purpose of why we building all of this in the first place like you know what's great about crypto is bitcoin is not You know, no offense by the way, like Coinbase is a great business, but I'm trying to make the point of decentralization versus centralization. What's great is Bitcoin, the fact that, you know, it's censorship resistant, the fact that it's available 24/7 everywhere, the fact that you can program on top of it, you know, the fact that there is a layer 2 that is developed on top of it right now, that is that's a pretty significant uh move I think in the in the industry. So, I'm excited by that. Like you know I feel that why do we need to build the world the new world the way it was before like you know with segregation of duties you

have custodians on one side you have exchange on the other prime broker etc apply or even beg for the same regulation please give us regulation and please make it as hard as before you know I think it's a bit ludicrous so I believe more in uh decentralization I believe more in defi I believe more that you know custody will be probably a mix between self custody and custody the way that we see it today. Like for example, who has custody of the coins? If you shard a key and you know if we have like three shards, you have a shard, I have a shard, someone else has a shard and the three of us need to sign and with three different business entities and we need to sign all the three to move the coins.

So who who's got custody? Uh and uh I think it's a safer world like this, you know, because if you give custody to someone again, nobody is uh too big to fail. And so when it comes to institutional custody, I'm more in favor, not in favor, but I I see more the future as something that is more decentralized and banking on sort of transparency uh rather than centralized because you know regulation comes when you have a black box, right? So you don't know what's in there. So but you understand the input and the output and regulation is here to make sure that the output is is clean and the input is clean, right? Because they they don't see what's in there. And so whatever you do in there, just make sure that input and output are what they're supposed to

be. All these go through the window if you're open source and online and people can read the code, right? So I think that's the future. Yeah, I think one of the uh you know, one of the we've been talking quite a bit about regulation over the course of the last couple of days and I think something that's a little bit challenging especially for regulators and market participants to get their heads around is that, you know, this is actually a huge tech upgrade to the financial system. you know, you mentioned Bitcoin, the actual money itself is programmable. Same thing with even like Ethereum or so, it's much more programmable. Um, and the existing market structure and the regulation that we have uh presupposes that this technology didn't exist, right? And so, you know, a lot of the regulation, you know, could either be easier today or

maybe doesn't need to exist with these improvements in technology. So for some of the folks out there who might not know you know how like things like MPC and stuff like that you know talk to us about you know this decentralization idea like how what parts of existing uh regulation and market structure do we not need because we've actually have a new technological solution for I mean it's a very uh difficult question to answer uh just like that in detail you know because probably uh none of the above like you know if you look at bitcoin how is it regulated today I mean it's like nobody nobody says um I mean is there a law in the US that says that Bitcoin has a right to exist? I don't think so. I mean I think it's free

speech. So free you know open source code is free speech in the US is protected by the uh is it the first amendment? Yes. Yeah. Um and so I mean it starts with that like you know how can you you know you cannot ban free speech and so therefore none of the regulation is uh is is useful in a way and actually you know the the world of innovation innovation usually thrive with the lack of regulation. Not saying that regulation is bad because regulators are trying to u most of the time they're trying to prevent from something bad happening to the to the public. I mean, you know, that's a and to to investors and whether they're institutional or private investors. So, you know, I'm not saying that, you know,

regulation is, you know, bad per se, but I'm just saying that if you look at the world of innovation, usually it thrives when there is no uh regulation and, you know, good actors shape uh the future and you try to shape the future with good businesses. The interesting thing about like an online business in general is that you're always one click away from the competitor. And so you know these are the things that keep you honest. Uh you are trying to do your best to capture value to capture users and if you don't do the best and if you don't trade good value with your users then they can go uh they can go elsewhere. So you know as far as I'm concerned I think that open source code when it comes to to finance uh is you know brings uh the necessary

transparency that has been lacking uh sadly lacking for for the financial industry. the financial industry is heavily regulated because it's vastly opaque. If you remove that opacity uh then you know why is there such a strong need for regulation? The problem becomes different for me it's like the problem becomes privacy. Mhm. So, so actually I think when we talk about this right now that we're talking about something that you know was valid to discuss 5 years ago almost I think the point right now is not so much you know centralized versus decentralized because for me like it's already the proof is already in the pudding if you like but what about privacy and so you know you cannot have

a democracy if you don't have private property and private property is based on security and privacy. If you're not secure and private, you cannot have private property. If you cannot have private property, then you cannot be free. And so I think what's happening is very fundamental. And we should worry more about privacy because it's all like synonymous or anonymous but traceable. And so now if you have your whole financial life and I'm talking not just about a personal uh like a consumer but I'm talking also or a citizen I'm talking also about the financial institution is if all is online I mean it's great because then it's very transparent but there are privacy issues that is the real concern

for the future. So I think the the talk about is is about privacy. How can you do your financial line online but being absolutely secure and private? Mhm. Just out of curiosity, how do people feel about the issue of privacy? Do people feel okay if every uh transaction over $600 is tracked and available for Treasury? It's hard, it's hard for me to get, you know, get a grasp on I think people care about privacy a lot, but there's still almost this knee-jerk reaction of, well, if you have nothing to hide, you know, why do you care? But increasingly, it feels like we're inching more and more towards a world of having almost no privacy. Um, yeah, that's that's that's a slippery slope. So, so first of all, I'm talking about privacy in the sense of like

decentralized finance or you're online, you have a public ledger, but what about your privacy? But you talk if you talk about privacy in the in the fiat world and you know, finally, if you have nothing to hide, why do you care that the government sees all of your transaction? Well, it's not because I've got nothing to hide that I want you to know about what I'm talking about with my sister. Like, it's perfectly okay. I assure you, I'm not breaking any laws, but you don't need to know. Uh because and that's my privacy because we all have secrets. And it's not because you have a secret that you're a criminal. Uh and so therefore, no, you don't need to know what I'm buying with my $600 like if it's a TV or if it's a phone or if it's if it's bread, etc. And you

shouldn't assume a criminal activity to take away my freedom. It's like, well, prove to me that you're not a drug dealer. It's like, why would I do that? M I'm not a drug dealer. Like who's a drug dealer in the room? Who's a terrorist? No hands. No hands. No show of hands. Okay. I'm surprised. High quality attendees at very few terrorists. Very few. Um so so so we have to be very careful because you know this is the World Economic Forum that says, "Well, you got nothing to hide. So why or you you why do you need to own something? It's okay." Well, no, it's not okay because I need to own something because it's my private property and so therefore it's mine and you know and it's okay if you want to rent everything

for the rest of your life, go do it. It's fine but you need to have the choice. Okay. And so the choice is this and so I think privacy is extremely important. There is a story actually that is a cautionary tale because you know all these things happen and we don't notice but Apple made exactly that decision. So, what you may or may not know, who's got an iPhone? Okay. So, everybody, so do you know that Apple had a back door into your iPhone like two summers ago just to check all of your pictures? Did you know that? Okay. One person, two. Okay. Not. So, most of you didn't know. Okay. So, they did that for the greater good because they wanted to check if you're not a pedo. And it's funny because they wrote an internal memo to say we are on the

right side of history. you know uh we need to track the speed of files etc. And you know who's going to disagree with that like you know so you know that's for the greater good. The problem being that they suddenly had a back door in your phone that of course hackers can use to then do other things. Yeah. And also if they can do that what else can they do and so there are other ways to to to track pedophile that's a crime and you know we should 100% go after them but there are many other ways to do it. And if the way to do it is to sacrifice everybody's freedom and everybody's privacy in the seek of you know uh finding the 0.01% of the population that commits crime I think is too much to sacrifice

for the 99.9 law-abiding citizens. Uh and so we need to be very careful with these big ideas and very generous is like well but who likes a terrorist? Okay, nobody likes a terrorist, but equally I don't want to be treated as one every time I want to do something. And so what's interesting now with the future and with decentralized finance is we don't need to I think KYC in Europe is 150 billion a year just to KYC everyone. I mean that's crazy stupid. And by the way, do we see less drugs? No. Do we have less terrorist attacks? Okay, maybe. But we still have and so it's not super efficient. Okay. Uh terrorist

organizations are still functioning well. You know, drug organizations are functioning super well. So it's there is obviously something that we're doing that is not working and that cost a lot of money. So I would take the 150 billion. I would invest in uh a cyber police force. I would invest in a cyber army uh to catch the criminals. Because if you ask me, do I want to catch the criminals? Yeah. If you're criminal, I think uh you should be caught and and we should have a police for this and that's and that's okay, but not to the expense of our global freedom. I agree. So, in our closing, you know, couple of minutes here, Pascal, what is the uh you know, help land the plane on what is the role of crypto? How does that play into this future of privacy? Because I actually

think if we're being a little self-critical, I think that's an area that we've failed a little bit thus far uh both ideologically to prioritize it uh which is very difficult, right? I mean in you know governments across the world uh even it seems like that's actually an area where everyone agrees that we we're getting less and less especially financial privacy but also technologically right like all of the transactions on major L1s like Bitcoin you know Ethereum Salana they aren't private right so there's actually a design uh challenge that we're facing here so you know when you look out into this world and I think we want a world where there is more financial privacy what role does crypto play there no I think you you you asked the question you frame the question in the right way and you know it uh and that's I was saying this like you

know privacy is the issue going forward and sometimes and the discussion that we just had like is the discussion like why do you want to hide something I don't want to hide something you know privacy is a right and so therefore there is tension uh now huge tension sorry because what uh what what crypto really is um is this way for you know people to to exchange value together directly. Uh and so that's that's that's a real novelty and you know those digital assets that that can be yours. That's that's a real novelty. So we need to sort of reinvent everything that goes around it and including privacy. Right now we've been sacrificing privacy for two reasons. One

because it's cool. I mean you know crypto is fun you know so people like to show their stuff and like this is my ETH address etc. But can you imagine it's like you click on an address you see everything that someone has. M so it's not super in terms of privacy. Uh and so we need to be very careful with this because this is money and if you fast forward in the future what if it's not just you but now it's your you know real estate deed and you know everything that you own your identity etc. you know, do you want to dx yourself on online like this? You know, I think you should not. Uh, but there is a bit of a catch 22 because now if you're trying to hide things, then people say, why are you hiding? Are you a terrorist? So, we are

a bit in that moment where we need to redefine philosophically, you know, how we think about freedom, how do we think about security, how we think about privacy. It is not an easy an easy problem. Uh, it's a very difficult one. Uh the good news is technologically uh we have the bricks that we need uh in order to uh do what we want to do. Uh zero knowledge proof for example I probably live with with that example in terms of technology brick that is helpful. I can prove to you that I'm 18 but nothing else and uh and I think that's powerful because you know if you think about online porn for example um it's not great the way that you prove that you're 18. Are you 18? Obviously.

Yes. Uh and so that's terrible for the young generation because that's what they watch growing up and I think it's terrible. And so if you could prove with certainty that you're 18, but also you know if you're of 18 it's perfectly legal and I don't want to tell you much more about my identity. Uh then you should be able to do that tomorrow with a ledger you'll be able to do that exactly. I will share with you what I need to share. I'm 18 and that's it. I love that. Well, Pascal, unfortunately, that's all the time we have, but thank you so much for doing this, guys. Give Pascal a big round of applause. Thank you everybody.

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