🎙 93 - Crypto Payments and the DeFi Mullet | Visa's Cuy Sheffield and Anchorage's Diogo Mónica

welcome to bankless where we explore the frontier of internet money and internet finance this is how to get started how to get better and how to front run the opportunity i'm ryan sean adams i'm here with david hoffman and we're here to help you become more bankless david all about the d5 mullet today we had kai sheffield we had diogo monica from visa and anchorage respectively and they know what they're talking about with respect to fintech and payments they are from the companies that work with all of the companies in these fields uh what a

fantastic discussion we had i really liked the uh this the back and forth that kai and diogo had their their dynamic between them as guests was phenomenal and i think that actually lends itself to the dynamic between their companies right there's a lot of back and forth between visa and anchorage one really isn't complete without the other visa is this gargantuan payments network whereas anchorage does all the custody for all the things being transacted so together they really illustrate a very complete picture of what it looks like to do

payments to do custody in the fintech world and really have a very deep understanding of the problem set that exists with tradfi integrating crypto and crypto payments and how to solve and route around those problems and really create a new payments paradigm that's based off of these new global payment rails yeah you know one of the themes from the conversation was um diego was talking about this fork in the world in in the road where previously crypto has been thought of as mainly a retail sort of phenomenon and retail use cases and that has changed it's it's now not just

retail now there's a massive business to business side of things that uh is being tapped into and like the value proposition of crypto within the fintech and payments industry is now we're talking 2021 is now self-evident so it's no longer the the champion internally who's struggling to help his or her organization understand crypto now they all get it and so this episode may be incredibly bullish on the next steps that fintech is going to

take in crypto we already knew coming into this david that the the exchanges of the world the crypto banks as we call them were becoming a bit more like fintech and now we're very clearly seeing and i think this podcast illustrates how fintech is coming closer to crypto as well um yeah it's just a really fascinating discussion that was a key takeaway to me and another cool takeaway to me was actually having kai explain how visa payments work okay so like when you go and you buy your starbucks

coffee right what's actually happening in the background and if you buy it in europe how are the banks interacting and how does visa sit on top of that and where is payment actually settled and we i think we have made some cool analogies between how that world works in the traditional world to how crypto works that um have really helped me understand things so that was cool as well yeah such a fantastic learning lesson right then and one of the mental models i have for this space is that like bitcoin ethereum crypto at large it's

like a mined virus right it's got its tentacles going everywhere and the more tentacles it has the more it can grab and pull itself in and what is visa other than something with the most integrations the most bridges to almost everything in the world and it's it's a huge milestone for visa to successfully integrate to payment rails on crypto and bridge them to the entire rest of the world uh and so like this this growing leviathan that is crypto is really like now

reaching inside of visa to access visa's network to grow to the rest of the world which you know just makes me bullish makes me bullish absolutely and i think we're going to talk about this more in the debrief because one of the themes i want to talk to you about david is something i was struck with is oh my god this is so inevitable now you get these major fintechs and institutions on board visas on board okay we're people concerned about regulation okay these guys these institutions aren't going to let regulation happen in a negative way for their investments they see the value proposition that they could bring so if

you guys want to tune into that full conversation that dave and i are about to have stay tuned for the debrief that is available for premium members and you could subscribe there's a link in your show notes with that i think we should get to the interview but before we do we want to thank the sponsors that made this episode possible matcha everyone's favorite dex aggregator has just launched an open beta for gasless trading so if you're trading more than five thousand dollars in common eath and wrapped bitcoin pairs then your gas fees on matcha are free and that's why you

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at bankless but i feel like we haven't pulled on quite enough well today we're doing that what are the squares the stripes the paypals the visas doing it seems like they've woken up to crypto here recently they've got hundreds of millions of customers they perfected many things user acquisition user experience so what are their plans we got to figure that out we have kai sheffield who's the head of crypto at visa of course you know visa they issue those plastic cards you carry around with you in your pocket kai is one of the biggest crypto champions i know certainly the biggest in visa we

also have diogo monica who is the co-founder and president of anchorage digital anchorage it's kind of a bridge between the fintechs i was just talking about in large institutions they do crypto custody they do d5 stuff everything that the fintechs can't do currently gentlemen it's great to have you welcome to bankless great to be here thank you so much for having me well fantastic let's start here you know david and i uh have a thesis that we we talk about a lot at bankless and this

came about like a year ago from a blog post uh i wrote in the bankless newsletter this is called the d5 mullet thesis guys all right and i want rona want to run this by uh by you guys so last year at about this time we started noticing that many of the the fintechs were playing a lot in the crypto space starting to talk uh much more about crypto you know the stripes the robin hoods the plaids the ants the the squares our comment at the time was like fintech is kind of user experience but it's still almost like lipstick on a pig

and the pig is the banking system right the fax machines and the the old legacy pro payment processing system that underlies this thing and what we observed last year is what's really interesting is the top five apps fintech apps at the time um they were all like supporting crypto right uh the banks were below them but the top apps all supporting crypto fintech apps uh were um you know we're doing the crypto thing and so we came up with this this concept this thesis as we call it which is what

we call the d5 mullet thesis okay so this is fintech in the front you got the bank in the front everything looks nice in the front but the parties in the back right you have d5 in the back and our thesis at the time and still is and i think it's played out over the last year a bit more is that this is how the fintechs would come to crypto they would sort of perfect the user acquisition but they would slowly start to replace that old legacy crusty banking payments layer with crypto okay so i want to ask both of you because i feel like uh you know

you have the front row ccr you would know better than us what's actually going on what are your thoughts on the d5 mullet thesis are you believers kai why don't we start with you sure so i i'm definitely a believer in the mullet thesis and i'm a proud uh mullet you know myself uh so i i see i think you kind of have to start with what's been happening with crypto companies where i think many years ago crypto companies weren't really a part of the the fintech conversation it was

kind of seen as this separate thing you had these crypto wallets and exchanges you know they weren't really considered you know fintechs uh in the popular sense and then these companies you know the exchanges like coinbase and ftx and others were growing rapidly and they were acquiring customers you know they were getting billions of dollars of assets on their platforms and you know they started to get pretty ambitious and look to expand and to get into payments themselves and so that's

what we really saw first was when we set up our crypto product team in 2019 it was because we recognized that crypto exchanges and wallets had the potential to become major players in the fintech and payment ecosystem and they were looking to start to build products like debit cards and credit cards and giving more traditional fintech and payment features to the core you know customer bases that they had acquired and that they had a ton of engagement uh and

activity on their platforms and so we started working very closely you know with these crypto wallets helping with fiat on-ramps and fiat off-ramps and kind of giving them a path and a bridge to start to look more like you know crypto native neo banks and i think that was really the first piece that you know crypto companies were coming more into fintech and banking and then you had you know neo banks and traditional fintechs you know recognizing the success that crypto companies were having you know with their core crypto features and

saying wait a minute shouldn't we be incorporating crypto into our core products and so we think these two worlds are going to continue to intersect more and more oh i totally agree with that by the way and that's something we've been saying for a long time in fact like uh two two and a half years ago on bank list we started calling what everyone used to call an exchange a crypto bank all right we used this you know this small lowercase b for crypto bank but we started to recognize that hey it's not just about trading that's what an exchange does but these crypto banks the coinbases and geminis and binances and ftx's of the world

they're going to move into all of the other money verbs including one money verb i know you guys are interested kai which is which is payments let me ask you a question before we get to uh diogo's take on this um do you and does visa sort of see that as an opportunity or a threat with the crypto banks you know becoming more like fintech and and um entering into say the payment scene how do you guys view that we think it's a tremendous opportunity

and i think really the the challenge that that we see and that i think a lot of crypto companies have recognized is we're a long way from direct merchant acceptance of transactions over public blockchain networks and there are a lot of challenges for them to do that you know particularly in in the brick and mortar you know merchant ecosystem we know how difficult it is to get merchants to add new acceptance points at the point of sale and then to get consumers to change behavior where

you're used to buying coffee you know tapping uh your phone with apple pay and now you know you're supposed to scan a qr code which is not particularly in the u.s not really a form factor that most customers are familiar with plus you have the challenge that crypto is increasingly becoming fragmented in multi-protocol and so if you have many different blockchains and now you have many different second layers just this idea of accepting crypto what does it mean for a merchant you know what's let's say you want to accept usdc are you going to accept uscc on ethereum on

solana on stellar on algorand on arbitrary like how do you have the right qr code the right acceptance point do i have to tell the merchant which network i want to pay with usdc over and they have to give me the right qr code for it we think it's going to be a long time before most merchants have the capability and most consumers are changing behavior to the point where they would want to transact directly and so the value that visa provides is you can have the same familiar experience of tapping to pay with a visa

credential whether virtual or physical that works at 70 million merchants across the world you don't have to ask the merchant do you accept crypto do you accept this network and have to go through extra steps it just works and now you can have that credential pull from a balance of a stable coin from a balance of a crypto asset and so it gives you access to liquidity of the assets that you have but without a merchant having to change a single thing and so we think for the next several years we're going to see

most major crypto wallets start to bring to market you know crypto linked debit and credit card products that consumers are really excited about and are starting to use them and use them at scale and we think that's a huge opportunity of for growth in our business so a tremendous opportunity for kai that visa sees in the uh the d5 mullet uh what about you diogo so you've got a broader aperture you're not just looking at visa but you're working with a lot of these fintechs and institutions at

anchorage are you a believer in the d5 mullet thesis and do you see it how do you see it playing out with other fintechs i definitely believe earn the d5 mullet love the analogy i will also point out that if there are pictures of kai with the mullet i would love to see them actually that can be arranged sir we can make these please kai is such a believer that at some point in his life he must have supported one and so i really want to see those that's the mental model that i have throughout this whole conversation is kai with the mullet so without that let's just uh you know i i generally

believe that the d5 mullet works because what's happening is is the following it is for these fintechs when when when the first win for the fintechs is that regardless of the crypto products themselves when you add crypto as a feature to your platform folks like square have figured out that it increases engagement in all of the other products that they have built into the product so that is the first one you just by adding crypto and by adding a feature you increase engagement and if

you have loops strong network effects or strong loops every single user that comes to participate in this feature stays for the network so that is extremely important in the first one the second win is a square cache is proven and love to see that they're constantly still to this day and presses me every time they're on the app store number one on the on the finance section you know makes me particularly proud but it's really interesting that square's proven that they can make a lot of money with this and that there's high revenue potential of adding crypto products and obviously trading and offering crypto

services to consumers so that's the second one the first one is obviously engagement and current products second when is revenue and the last one is public publicly traded companies companies are on the market there's definitely a recognition of the market that is valuable for them for them to be innovative and for them to actually be on the bleeding edge so the same way that when you add blockchain to your name your stock rises adding a crypto strategy that is legitimate not just lip service also increases the market cap of the company so think about this when when when what is on the other side of

the balance on the other side of the balance it's just been that it is different it is weird for the majority of these large players and people believe that there was some regulatory risk or some risks of them actually adding this to their platforms and that is proven not to be the case over and over and over again especially as companies start becoming regulated you know anchorage is the first and only federally chartered crypto bank so there is a bank that can actually do custody can do staking can do governance of all these default protocols that is just the clarity that

these institutions need and so now that we have removed the potential downside it really is just when when and thus every single fintech will go down this path and the ones that don't will just find themselves losing do you know diogo i think we're starting to observe this in real time david and i we do a weekly show we call the roll up which is like a rundown of things happening in crypto and we were just observing the the paypal earnings report that just came out with their quarterly earnings you know uh 13 revenue growth something like this and all they could talk about was crypto okay like it's just like uh you

know what else would the fintechs talk about if not crypto these days it's it's they're getting almost we often say in bankless um you know crypto pays you to learn about crypto right like we mean that literally right number goes up air drops come in um more opportunity comes your way well it's starting to pay these large fintechs to learn about it early as well and that's why i'm sure it benefits visa from being on the cutting edge but of those three points those three wins that you just mentioned diogo i get the revenue piece and i get the last piece

tell me a bit more about the uh the engagement piece because that's kind of new to me why does adding crypto to a fintech platform a venmo a square a stripe or whatever else why does that actually increase engagement in customer retention yeah we can definitely try to guess why that is um and but the reality is that it does and so the outcome is obvious and since the outcome is obvious everybody's trying to follow and i will point out that these platforms have also seen the same type of behavior from the

majority of the features that they add to the platform the flash here the feature or the most interesting the feature the highest engagement they get on these other core portions of their product and so think about it less of a crypto specific component but the fact that crypto is so um so so obviously something that people want to talk about and so obviously something that is marketable i think it increases further than just traditional product features that you'd add that incremental it feels like it's a step function it feels like it's something that is obviously bringing in the millennials and bringing in people with

connection to crypto and thus this becomes your home and you're a lot likelier to use these other products that square and paypal and all these other players are using because now they're part of your crew so there's this uh getting ahead and in the public markets they're clearly in uh but also for consumers they're in and so really there's no downside to this it is an obvious strategy at this point it's been proven over and over and over and it really is win-win-win yeah so so one thing maybe i

would add on this is that you know i feel like for a long time people in fintech and people banking they looked at crypto and the volatility and it was a bug it was like oh this this asset class is super volatile and then at some point this switch turned where a product manager who's responsible for how many daily active users can we get in our mobile app looked at crypto's volatility and it's like this is a feature that people are opening their crypto apps to check the prices a lot more than they're opening

opening their bank mobile apps to check the balance i have not heard that anymore and i think volatility is is a major driving factor of that but it's fun and interesting and exciting and it's got this just repeated consumer behavior and if you could take someone opening your app multiple times a day each time they open the app is a touch point where you can then be able to try and push them into another product upsell and be able to build that loyal customer base and i think that's something that we're starting to see kai some might say another word for engagement then is addiction

maybe some of the people listening can can relate in the number of times they check their block folio and crypto prices during a given day no but i'll jump in and say that uh it really speaks to this competition for your home base right this one app that you have to use across all of your finances it's not just about equities it's about equities and crypto and your cash and all of it from one place and all these fintechs now are in competition with one another so once somebody adds something that i want to check on my portfolio to their home screen i have one less incentive to go open some other application that only

gives me a slice of my my my whole exposure or my whole um my whole market exposure right and so once you start thinking about it that way and we're competing you need to include everything you need the superset because not including something means that engagement will go somewhere else and yes sky's absolutely right volatility is one of the aspects of um how much um how much have i made today or how much have i lost today there's there's both those components that we see on wall street bets that are human elements that are definitely at play here and i think there's also this notion of

just the consumer demand what a lot of people don't realize is banks and and fintechs they can see that directly even if they don't have crypto in their core products they see how much money flows from their consumers to a coinbase or crypto.com or an ftx you know they see the card volume they see the ach volume and so it's it's very clear to just say okay there's a trend here my consumers are interested in these products they're sending funds out of my

core product to a third party that's offering access to crypto and i think that there's this this fear that what if they don't come back and it was one thing when they were sending money to a third party that was providing access to crypto and that was it and they were only providing access to crypto you're always going to come back for your debit card and for your credit card and for your loans but now that those companies that they're sending money to that provide access to crypto are offering debit cards or offering lending products like there's the potential that they

build a new relationship and so you know with that data and that insight plus the benefit that you get from engagement it's because it becomes a very strong business case uh for you know ford thinking uh fintechs and and banks to say this should be a part of our product roadmap so there's the carrot but there's also the stick of like what if they don't need us anymore it's absolutely right in this fight for who's your home base every single every single company is competing for it the

same way that we were saying that every tech company becomes a fintech now every fintech will becoming a crypto company so that is a very clear flow because all of them will have to have these types of these types of products and it's particularly interesting kai's point around volatility there is one aspect here that people are adding to their platform and also realizing that it has massive advantages which is there's a lot of different products being added but if for a moment if you think about crypto rewards on credit card so credit card rewards that are crypto based so bitcoin um cash back equivalents things

like that there's an interesting phenomenon that is happening here which is people only really feel the upside and what i mean by that is the following the volatility of crypto is bad because if you invest a thousand dollars and now it's worth 500 you have lost effectively 500 but now if somebody's giving you something for free instead of airline miles in points if somebody's giving you crypto the volatility means that you're incredibly excited because you got something for free there's a lot more valuable today and if it goes down there's not as much of that sting of this was actually my money that was invested here and so the volatility for

something like crypto credit card rewards only really works one direction which is on the way up and that is just absolutely fascinating as a phenomenon that then drives engagement new types of products and it can really help people with savings exposure to an asset class for free in a dollar cost average way just by using a visa credential how beautiful is that that we're helping people in a way include their savings and exposure to a very high growth potential asset class without them actually feeling the downside because effectively from their side they're feeling that i got it for free so there's a lot of these like

smaller phenomenons that are working on the background that really speak to engagement that really speak to stickiness they really speak to the sense that this fintech that i'm engaging with is on my side and helping me with my financial goals you know that i that that point right there diogo is like super interesting to me because i've long we we talk about tokens so much um but we don't often like delineate right there's like like stable coins there's also like um you know crypto monies like ethan bitcoin right but there's also this class of tokens that are loyalty points effectively

right these are not securities these are these are the equivalent of like airline miles like you do something that the platform wants and the platform the network gives you some sort of a bonus and it feels like man the the credit card in the payments industry has done a lot with this over the years what does this look like in erc20 form in tokenized form when that's unleashed inside of open finance and i can't wait to see the experimentation there i know you know some like um you know maybe crypto.com with their their car they

they have some of these things like their cro token that maybe this resembles some sort of the loyalty point but but it seems to be the case that every every company that wants to reward a network of users is going to want to have some form of of loyalty point credential are you seeing much develop in that space i i would just say that crypto backed rewards on card programs is becoming a major major trend and i think we started to see this in 2020

and i think first for consumers it's as simple as i didn't get on a plane you know for a year and so my existing airline miles just meant less to me because it wasn't something that i was using well they literally expired don't they i and and i don't even know because i i don't know exactly how much an airline mile is worth and it's hard to track what is the value of that mile i highly doubt becomes more valuable maybe it becomes less valuable over time and there are restrictions of where i can use it

and when you compare that to being able to earn crypto back and for consumer who is either already into crypto and excited about they're checking the price every day and they know exactly how much their rewards are worth and they're excited that the rewards can appreciate in value or for a consumer who may be more risk-averse and may say you know i'm not ready to invest my money but it's still fun to have some skin in the game and have some exposure and through the purchases that you make on a

card be earning bitcoin or another you know crypto asset back and so just if you look at the math of if you've been earning one and a half percent back uh in crypto on your purchases you know over the past year you probably would have paid for many things that you bought and i think that that's becoming more and more of a mainstream customer value proposition and at the same time it's also interesting to think that crypto companies they have a different business model than a lot of traditional you know

fintechs and neobanks and because of how profitable you know crypto trading businesses are they're actually willing to offer even more lucrative rewards in a dollar term than most other programs would and so i think there's a real possibility that if you read the the points guy blog and you know if you're one of the there are people who spent all their time figuring out how to optimize you know card spend to get the best rewards back we could look at that in nine months to a year from now and say the top 10 card

programs are all crypto backed rewards because they're incentivized to pay out a higher amount to acquire customers get them into their platform introduce them to crypto have them start trading where they can monetize uh and because if you factor in the appreciation of the assets that people are earning you know it becomes a lot more than two and a half or three percent back and so we think this is a major major trend that many of our clients are paying very close attention to and have you know plans to to participate in once again crypto paying

you to use crypto i think there's an interesting analogy here where the airline miles model where these companies issue these credits and they use them as incentives if you want to take the worst most dystopian future of what a a top-down central bank digital currency would look like where it's restricted based off of like limitations because they want to control you it's also highly inflationary because they print it out like the worst case of a cbdc actually starts to look like airline miles as we know it today and direct juxtaposition on the other side of the

things you have exactly what you guys are talking about with crypto crypto rewards so like one you have the most top down most controlled most restricted currency being issued and then on the other side of things you have crypto which is freedom money if you will money that appreciates money that's scarce and so the incentives where exactly what we've been saying of the incentives of crypto actually rewards and incentivizes this sort of behavior like no wonder this engagement is being tapped into by these companies they're starting to put all the patterns together and actually formulate products around these things

and uh i would go to you know to ryan's point it's uh pretty interesting to see that what is the next step so kai is absolutely right it's uh we've seen a ton of demand on crypto back rewards because of this component around access to an appreciating asset versus a depreciating asset in the form of miles but the next step is really the at the core of this uh web 3 phenomenon and crypto phenomenon which is and to quote chris dickson right web one was about read web 2 is about read write and