The Exchanges

Q So when it came time for you guys to think about doing this business, you started with custody. Clearly that was an issue in these examples you were seeing. Why solve for custody first?

A The interesting thing about custody in the digital asset space that is somewhat different than the traditional world is if you think of a prime broker in the traditional world, you can actually create a business at many different layers of the stack. You could do an execution business. You could do a custody business. You could do a lending business. All of these businesses are somewhat independent. And part of the reason why they're independent is because there's very clear segregation in the traditional world in the form of DTCC and in the form of other different types of market structure, who owns the security and how to actually transfer ownership. So that's why there's introducing brokers, there's caring brokers, et cetera. Digital assets work in a very different manner. There is no DTCC. There's no central repository. Owning the private key of Bitcoin is ultimately owning the ability to own the asset and settle the asset. And so if you don't own the private key, you can't actually do the associated business. So let's actually see what that means. What that means is that if you in digital assets want to do lending and want to take, for example, crypto, say Bitcoin as collateral, Towards a loan. So somebody can borrow dollars against Bitcoin as collateral. And if you don't own your own custody stack, you have a major issue in your hands. You are trusting a third party to ac…

AI assessment note: “you can't actually do lending without having a custody stack. Same thing for trading.”

Q that for the larger projects, you're able to systematize it, but then, as you said, there's this long tail of other things. I'm really curious about what happens if something goes wrong. And it calls to mind this idea of insurance of assets, right? In traditional world at banks, you have FDIC insurance for a certain amount of your savings. What does that look like in the crypto world today?

A So there is insurance for assets. And in fact, Anchorage does have insurance. We have modeled our infrastructure. We have gone to all the insurers, the Aeons, the Marshes, the Lloyds of London, and we in fact insured the assets on the platform. So that is something that you have available today at Anchorage. Now, ultimately, you do have to realize that the insurance appetite is still growing, and so there's not enough insurance interest to actually cover for all of the assets that are currently on all of the different crypto platforms out there. But it is a big component in a component that, again, works like the traditional world. You have asset insurance, and you have these large insurers actually making sure that things are covered in case of loss. Now, your question was a little more generic. What happens if something goes wrong? There's actually many ways of things going wrong in crypto that are unlike traditional assets. For example, what happens if a blockchain simply stops? Or what happens if there's code vulnerability on the blockchain? So ultimately, those are left in two big buckets, I would say. On one of them, Anchorage as a custodian, and we own the private keys and we're full custodial, so Anchorage Has exclusive access to the keys of the assets, and that's one of the requirements from the regulators for qualified custody. So possession and control of the asset. …

AI assessment note: “So there is insurance for assets. And in fact, Anchorage does have insurance.”

Q I'd love to dive down on that a little bit and just ask, what have you learned about successful hiring?

A I've been very lucky to have been at Square very early where hiring was world-class, and so a lot of the habits that I have and a lot of the biases that I have, I can trace them to the origins of Square. I will tell you this, the first person On the payroll at Anchorage, the first person that we hired before myself or Nathan were on the payroll was a recruiter. In fact, on our payroll system, I'm actually not number one. I'm number two, because this person had to set up the payroll because he sent us an email saying, Hey, I want to be paid. And we answered, then go set up the payroll system. And so that was how the company started. So from very early on, we knew that a world-class hiring experience Is something that you absolutely need to hiring, because if you are hiring one out of 10 people that you interview, then that means that your interview process should be made in such a way that the other 90% of people that don't get accepted have a terrific experience and will tell their friends, hey, I wasn't able to meet this bar or this was not the right opportunity for me, but you should absolutely go to Anchorage and apply to Anchorage. And I can't tell you how amazing this has been and how many references And people that we've hired have come from people that we've interviewed and have not hired. And so focusing on a world-class interview process and on leaving people with a fa…

AI assessment note: “focusing on a world-class interview process and on leaving people with a fantastic aftertaste”

Q What's an example of one of those maybe counterintuitive things that someone who's done it before knows instinctively, but someone who hasn't wouldn't?

A I think definitely the focus on the people that get rejected and the experience of people that get rejected versus the people that get hired is something that is not intuitive at all. So how you follow up, when you're rejecting, how you give that feedback, do you help people find other roles that are similar in different companies? The amount of work that goes into saying no to someone in a constructive manner, in a way that is not adversarial, in a way that is actually helpful and gives them feedback for them to improve, it is unique, and people don't focus on that. In fact, we've had people that Applied to Anchorage, didn't get in, and then three years later, applied for Anchorage and got in because they had a different trajectory in their career, and they were in a different place, and we had roles that were perfect for them, so that is paid dividends again over and over again. It's an intuitive for many reasons. Number one, because you obviously want to focus on the people that got in and the people that are going to accept, but then you don't realize of the advantages of the natural effect of the 90% of people that go through your process that tell everybody else, and the fact that every rejection is a potential future acceptance.

AI assessment note: “the focus on the people that get rejected and the experience of people”

Q Without getting too technical, I'm really curious to ask you how custody works with digital assets. I think that in the traditional world, we almost take for granted now who these large custody banks and that they are secure and they can hold the assets and it's electronic and everybody understands it's ADTC. So how does kind of unit custody work in digital asset world?

A So when you think about the traditional worlds, ultimately, as you mentioned, DTCC gets to have the record of everything that is happening, and if there's anything that goes wrong, you get to go to a court, and the court gets to change ownership. In crypto, there's this element of self-custody and the fact that these are bare instruments in their, at their core, and so loss of an asset is a recoverable And there's no clawback of a transaction that happens. It is not like a wire in which you have one day or two days to try to claw back from the destination bank. Here, there's nothing that you can do. Once it leaves the ownership, it's done. So how does that work in practice? And I have a very hard time answering questions while not trying to be too technical, but at the most fundamental level in core, think about Bitcoin and other crypto assets Being based on public private key pairs. What that means is there's a public component that everybody sees on this blockchain, which is the equivalent to your bank account number, so everybody can transfer assets to that bank account number, and you hold onto yourself a private component called a private key, which you can think of it as a gross oversimplification, but as a very long password that you memorize or store on your own. And so what this means is that anyone with a public portion of this, your bank account number, can transfer …

AI assessment note: “think about Bitcoin and other crypto assets Being based on public private key pairs.”

Q Yeah, that's a good one. Which two people have had the biggest impact on your professional life?

A That would be an easy one. And again, also not, not very original, but the first one has to be my father. He taught me how to program at 12. He was very supportive throughout all my career choices. I think the only ding on my dad was that he forced me to do the PhD, which, you know, has very limited utility. That would be the first one. The second one has to be my co-founder, Nathan McCauley. It's just been 12 years of working together. We have done all of our careers together effectively. Because we met so early on in our careers at Square, and he's just been somebody that has made me push for higher and higher goals, made me a better person, and it's just such a good compliment. I can't realistically say that I could have done any of this by myself, and it's just so, so great to have a partner that he trusts a thousand percent to be able to share the burden of what it is to create a company.

AI assessment note: “the first one has to be my father... The second one has to be my co-founder”

Q What teaching from your parents has most stayed with you?

A There's a couple of them. I think My dad's rationality, and love for technology, and thinking from first principles have stayed with me for a long, long time, and from my mom's side, there's been something that is very, very unique. In your life, there's problems that you make a big deal out of that are not a big deal at all, and my mom has always been very unique in the sense of how she could actually reduce problems into their core fundamental Um, individual building blocks, and then allowed me to reason through why they're not a big deal. So silly example, but when I traveled, I was always very nervous about forgetting something. I'm going to forget my belt. I'm going to forget my flip flops. I'm going to forget something. And my mom is always taking this posture, very soothing posture of Diogo. Do you have your passport and your credit card? Those are the only two things that you need. If you reduce it down to it, you can always buy flip flops, can always buy everything. And so It's a silly example, but the level of anxiety that I had about forgetting things was just so dramatically higher than the outcome of me not actually bringing them. But yet, over and over again, I kept making the same mistake. And of course, this has a lot higher implications and larger implications in your life that are a lot less silly than forgetting things on a trip. But to this day, I travel a l…

AI assessment note: “My dad's rationality, and love for technology... and from my mom's side”

Q So you're going to have to take me back. How do you get involved in something called distributed systems? 15 years ago in your academic portion of your career?

A That is an interesting story on its own. So for context here, I've always been a security nerd. So I loved security. My dad taught me how to program when I was 12, and I love this aspect of security systems. Creating little software that moved the mouse around and opened and closed the drives, if you remember the CD drives of computers. Those kinds of things are really fun. The beginning of the internet and learning about websites and website security and servers, running servers. So that was all really interesting. So security was a passion. And back then, if you think about it, 1517 years ago, there was no specific cybersecurity curriculum. So you really had two choices. You had electronics, and you had computer science. And so I decided to go deeper into this path of networks and distributed systems, which was the most obvious and the closest Area to security that existed because it was where all the security was being developed. And so the other thing that is context that is interesting here is that I was pushed by my family, specifically my dad, to do a PhD because not of my own volition, but essentially everybody in the family has a PhD. My dad has a PhD. My sister has a PhD. My dad's dog is named Duck. And so... From very early age, I knew that I didn't really have a different path. And if I wanted to be part of the family and belong, there was this large overhang in the…

AI assessment note: “I decided to go deeper into this path of networks and distributed systems”

Q If we sit down in a year, a couple of years from now, what are these other areas that you're hearing from clients of things they would like to see you build?

A One of the major focuses that again is very interesting about crypto is uses of stable coin. So we talk about volatility, we talk about the space, but the reality is that one USDC is worth one dollar and one DAI was worth one dollar. And so that doesn't change and it is crypto backed and it is a use of crypto platform. But it's not necessarily investment in crypto as a protocol, or risk asset, or an inflation hedge, or anything like that. No, it's just a more efficient settlement system for dollars. The thing that I've been the most surprised by has been all of these different corporates that are looking at their core businesses, and they're seeing how a better system that has instant finality and has very cheap transactions Can actually improve their own profits and they get to build new products. Say as a hypothetical example here, if you are a food delivery company or car sharing company, imagine that you want to do the following. You want after a ride, Your driver gets paid immediately for that specific ride and gets to walk up to a Walgreens and use the 50 dollars that they made from their ride to buy whatever they want. Imagine that transaction, that sequence of transaction. Somebody's dropped off, and then the next step is for somebody to swipe their Visa card and then buy something using that, or a debit card, and using those funds. That is what the system should be. Th…

AI assessment note: “One of the major focuses that again is very interesting about crypto is uses of stable coin.”

Q What are some of the other areas of inefficiency that you see maybe even more broadly as opportunities in the ecosystem?

A I would say one that has been talked about quite a bit, but it hasn't quite materialized is of course, security tokens. The trading of equities and the transparency around ownership, and we've talked about the DCC, the fact that is, these systems are not transparent about who owns what, and the blockchain really is a true solution to a lot of these problems, and so I think it's been very slow moving and slow going, but there's very, very, very high potential on equities and tokenization in general of mortgages, of equities, of other financial instruments, and That could actually gain a lot from the transparency and the speed of settlement here. So I think those are still up and coming. And we've been talked about for quite a while and quite a lot, but they haven't materialized, even though they're very, very high potential still.

AI assessment note: “one that has been talked about quite a bit... is of course, security tokens.”

Q You also mentioned governance and the concept of proxy voting, and we've heard some about DAOs, and it sounds like a lot of that gets done in these discussion groups, Telegram, Discord. So how do you go about taking something that feels a little ad hoc if you're in these chat rooms and making that easier to use for your clients?

A A lot of the larger projects actually have some pretty sophisticated Governments, dashboards, and governance mechanisms. And you're right that the web three phenomenon in general, so web three as a catch-all term for crypto assets, cryptocurrencies, NFTs, all of these decentralized protocols as an umbrella term, web three, it's very common for web three protocols to have what you call decentralized autonomous organizations. So DAOs, and it's a set of collective people coming together Owning the asset, and the percentage of asset that they own of the total diluted market cap is the percentage of vote that they have on the network, and so they vote on the outcome of what decisions should be made for the protocol. So all the future is decentralized, and that is where decentralization starts, is from the government aspect down. So for large institutions, they primarily invest in the more sophisticated protocols and the ones that have been around for a long time, and those actually have some very sophisticated dashboards and the ability of understanding which votes are in there. We've actually built Add anchorage, a very interesting product, which allows you to see what votes are going on, whether the executive votes, whether their polls see the details behind them, links to the full change that is going to be enacted on chain. If this is fast shows you in real time, which is very i…

AI assessment note: “We've actually built Add anchorage, a very interesting product, which allows you to see”

Q In each of these areas, so trading, governance, staking, financing, I'd be really curious, what does it take to be excellent in each of those for, say, Anchorage compared to your competitors in each of those areas?

A I would say that every single one of them has a different component. So what it takes to be excellent at security is Well, number one, deep expertise with the types of systems that you need to engage with, deep expertise with hardware security modules, deep expertise with distributed systems, expertise that in fact is incredibly, incredibly hard to get. There's not that many of these types of engineers that have this crossover experience of hardware distributed systems and security. So when this phenomenon started, there was no one in blockchain with Five years of blockchain experience does not exist, right? The industry does not exist, and so you cannot hire anybody with experience, which has actually made us have to train people up. And it's very hard if you're not a security engineer, if you don't have two founders of a company that are just deep security engineers and deeply understand what this actually means and what the responsibility is of having 1,000,000,010 of billions of dollars of irrecoverable private keys. It's a very, very high level of responsibility and obviously a very high technical bar that you need to meet. And so we had to train our own talent, which is something that in traditional, if you're creating a fintech, or if you're creating a brokerage business, you can find talent in the space. You can find people that have had experience, decades of experienc…

AI assessment note: “every single one of them has a different component. So what it takes to be excellent”