Hello guys, welcome to the Fintech Espresso Break, I’m your host, Isabelle Castro, and right now I shared my espresso break with Matthew Homer, managing member of The Division of XYZ.
Matt’s profession has wound by way of the fintech and regulatory sectors, and his work at XYZ brings these two areas collectively within the discipline of VC. Paying specific focus to blockchain-based corporations, they goal to be the “regulator in on the cap desk,” offering perception to navigate the difficult surroundings.
On the again of Consensus 2023, I caught up with him at Fintech Nexus’ New York workplace to debate the turbulent regulatory panorama of U.S. crypto.
Isabelle Castro – Hey, Matt, good to have you ever in.
Matthew Homer – Good to be right here.
Isabelle – Good to have you ever on the present. I’m actually excited to speak to you. So to start with what will get you up within the morning?
Matt – Yeah, I believe what will get me actually excited is that we’re at this actually attention-grabbing second in time the place lots of issues have been digitized, however not lots of issues there but digital native. And I believe that’s what’s so thrilling to me about type of the brand new evolution of monetary companies that we’re embarking in. And the broader kind of blockchain crypto ecosystem is the potential for creating really new and digital native infrastructure. And I believe like, if you happen to take a look at simply any variety of latest examples, it’s actually clear that the monetary infrastructure in america and different components of the world is completely, completely damaged. So I’m enthusiastic about that massive bushy problem, it is extremely thrilling.
Isabelle – I imply, yeah, once I acquired launched to crypto, I used to be like, wow. However you’ve had a really various skilled development. Inform me about that.
Matt – Yeah, I believe that’s an excellent strategy to put it. I’ve been at all times inside type of the intersection of fintech and regulation my entire profession however from very totally different components of the ecosystem. I believe there’s one sample to my profession. It’s kind of constructing bridges throughout that ecosystem. So I’ve been a regulator twice, FDIC earlier in my profession, and extra not too long ago, the chief on the New York State Division of Monetary Companies liable for all crypto licensing and supervision. I’ve been an operator twice at an organization known as Quovo, which was then acquired by Plaid, the place I labored. After which I’ve been on the rising market facet. And targeted on how we use fintech and new expertise to advance monetary inclusion in that context that now I’m on the investor facet. And I’m, I’m the managing member of a enterprise capital agency known as the Division of XYZ. And we’re the regulators and the cap desk for early-stage founders and crypto, pre-seed, and seed. And simply getting began, nevertheless it’s a very thrilling time to enter the market from an funding perspective. And there are nonetheless lots of actually nice founders and lots of thrilling alternatives on the market.
Isabelle – Yeah, it sounds thrilling, particularly together with your background in regulation on this surroundings. So yeah, reducing to the chase, the place are we with crypto regulation? It’s such a multitude in the meanwhile.
Matt – Yeah, I imply, it actually varies the world over. My perspective is right now, principally US targeted, though there’s lots of progress elsewhere on the planet. I believe, although, taking a step again and pondering conceptually about regulation, you possibly can take into consideration a spectrum with prohibition on one facet of the spectrum and regulation, possibly within the center, after which like a completely simply kind of like libertarian, like free for all, like on the far finish of the spectrum. And regulation, I believe is actually vital in market economies. It performs a very vital function. And I’m a giant believer, as a former regulator, that regulation issues. And I believe we’d like extra regulation on this house.
Sadly, the factor for a lot of regulators, notably on the federal degree, in america, they’re pursuing coverage of prohibition. They’re not calling it that. They’ll’t name it that. However I believe actions communicate louder than phrases. And what we’re seeing is efforts to stop crypto from being a part of a regulated ecosystem, which is attention-grabbing, as a result of it’s not way back, you realize, that individuals within the US and everywhere in the world had been involved about shadow banking, proper, and like a shadow, type of non-bank establishments emerge that had been frivolously regulated or not regulated. And what we have now right here is an instance of regulators explicitly fueling the creation of a shadow banking sector, as a result of they’re saying, no, not solely, you realize, you can’t be regulated by us, proper? Like we don’t need, we don’t need you anyplace close to us. We don’t need you anyplace close to our establishments. So I believe which you could’t have your cake and eat it too. And I believe that that technique most likely received’t work. After which prohibition as a method usually doesn’t work. And there are a lot of examples from American historical past and kind of world historical past for that. So I believe we’re in a troublesome we’re undoubtedly in a troublesome spot proper now, in the case of regulation. And once more, I believe regulation is a charitable phrase. That’s not even like I wouldn’t even describe it that method. Regulators should not regulating regulators are prohibiting, I believe what will get me what offers me some hope and optimism is that the regulatory equipment that exists is just one a part of a broader system of presidency. Proper and So we even have courts which can be beginning to get energetic on this subject. Congress that’s that’s, has been energetic on this subject will proceed to be energetic states, you realize, states, we have now a twin banking system, and which offers optionality. So you have got a alternative? Do you wish to be regulated the federal degree or the state degree? I’m kind of simplifying it. However that’s how the twin banking system works. And so the function of states is essential. And I believe we’ll, we’ll see them additionally get extra energetic over the subsequent few years, however I believe for the subsequent goes to be troublesome for no less than a few extra years, however we’ll, you realize, that system of presidency I described has a method of self-correcting itself over time, I imply, usually not as like quick as folks, as folks would love or hope. However I believe we’ll, I’m very optimistic that we are going to discover an equilibrium sooner or later. Now, within the meantime, like, you realize, lots of different jurisdictions on the planet will profit from type of, you realize, a lapse in US management round this subject, however the US will finally get our home to order.
Isabelle – These are the type of regulatory our bodies that you simply talked about. Do they are typically extra constructive in the direction of crypto, or is it actually type of various?
Matt – I imply, crypto is so new, it’s actually exhausting to say, I might say that there are totally different set of incentives that exist, proper? So in, you realize, for instance, you realize, regulators within the U.S. federal regulators usually should not have a competitivity angle to this mandate. So typically, folks in trade will go and speak to a regulator and say, Hey, it is a massive drawback, or get like all these jobs which have gone to China or some other place, like if we don’t repair this right here, regulators don’t care. I imply, that’s not a part of their mandate. It’s not their mandate to make America a aggressive jurisdiction. Not an express half.
That’s not the case in each nation, within the UK, for instance, issues confirmed lots of foresight in explicitly giving the FCA competitiveness mandate, which I believe is among the the explanation why the FinTech white flight London had kind of grew to become an preliminary and nonetheless is right now a hub for FinTech exercise. In america. Once more, federal regulators don’t have that mandate, however some state regulators do. So in New York, for instance, the state regulator right here, they’ve a job creation mandate, they’ve a aggressive snap mandate, they’ve an financial development mandate. And so yeah, I imply, to reply your query, I believe just like the incentives, the mandates, the you realize, the missions of those organizations differ, and you will note that impression the selections they make on crypto in numerous methods.
Isabelle – OK, cool. How a lot of that is influenced by FTX?
Matt – I believe lots of it, I imply, FTX is, you realize, it’s attention-grabbing. So, some folks have described this as an FTX Hangover. And I believe that’s undoubtedly true. I believe that’s going to final a really very long time. I used to be at an occasion final yr, that had illustration from type of all the foremost regulators within the US, together with, like, company leads for these organizations. They usually had been nonetheless speaking about DM and Libra. Like each one of many trade has forgotten about. I imply, we keep in mind it, however like nobody is considering it on a day-to-day foundation about that stablecoin venture, which well-known Fb famously launched. And but regulators had been nonetheless like targeted on that. And I believe even right now, you see, you continue to hear them typically make feedback about that. So in the event that they had been if if there’s like that sort of a hangover for that, simply think about for FTX, the place FTX was even worse, as a result of it developed fraud and deception. So yeah, I believe it’s I believe anybody you speak to it’s kind of in DC, are type of within the coverage regulatory communities would acknowledge that FTX might be essentially the most important think about type of the, you realize, the posture that exists right now.
Isabelle – Okay. And I imply, Gensler, in his latest congressional listening to, tried to tie crypto to the latest financial institution failures. I imply, the place did they match into this? To me, they appear like extra of a financial institution failure, like simply that they don’t have anything to do with crypto, however as a result of Gensler is questioning and never simply him, different folks.
Matt – I imply, many individuals would disagree with that, together with individuals who had not more than verify reply on this subject when he doesn’t regulate banks, proper? He doesn’t have oversight into type of in the identical method {that a} Prudential regulator would. So I don’t suppose crypto is a major a part of the financial institution failures. I imply, Silvergate in fact, was predominantly, you realize, crypto. Nonetheless, I believe for the opposite establishments, Silicon Valley Financial institution, Signature Financial institution, and First Republic financial institution, I don’t suppose it was a major issue.
The superintendent for the New York State Division of Monetary Companies, the place I labored beforehand, explicitly mentioned beneath oath in entrance of Congress that Signature Financial institution’s failure was not associated to their crypto actions. What I do suppose I imply, I do suppose that, like a few of these failures are a results of focus danger of banks specializing in too slim of a shopper section. I believe. And I believe there’s lots of blame to go round for that, together with regulators. I believe regulators have made it troublesome for banks to serve new and novel sectors of the economic system. So what occurs when you have got a coverage posture like that? It means, like fewer establishments are going to do it, fewer establishments do it. That’s these grow to be establishments that serve the entire sector. And you’ve got you have got focus. And so, for instance, you realize, earlier this yr, the Prudential regulators Federal Reserve, OCC and FDIC put out some joint statements which can be making it troublesome for banks to serve this house, that’s going to result in focus danger. 100%. Kind of, by definition, and so I simply I hope that we’re studying classes from what’s occurring, that, you realize, banks want to have the ability to serve a broad section of purchasers for stability functions and reducing them off for sure purchasers doesn’t obtain that goal.
Isabelle – Yeah. I imply, how can we transfer on from this? Like, the crypto banks, if crypto isn’t getting banked, they usually’re going some other place? That’s not an answer. You mentioned so your self? How can we transfer on then?
Matt – Nicely, I believe within the quick time period, you realize, peep founders are kind of accumulating as many financial institution accounts as they’ll get, proper? It’s kind of like buying and selling playing cards or no matter you wish to get, you wish to acquire them. You need possibly a few regional banks, possibly you desire a credit score union, and possibly you need a few international banks, I imply, in order that’s what’s occurring is that persons are making an attempt to get as many banking relationships as they’ll.
And there are various kinds of banking relationships, like essentially the most primary is simply having a checking account for payroll functions, proper. However then you definately even have FBl, banking, proper? The place you possibly can maintain buyer funds and accounts on their behalf. And also you’d have like service provider companies and cost funds, kind of associated companies. And so, you realize, banking companies are a spectrum. And I believe like, we have to acknowledge that enabling a authorized firm to have a checking account, to carry their very own cash to pay their staff will not be inherently any extra dangerous for crypto than every other sector. So I believe we’re most likely on the nadir of like, problem of getting a checking account, if I needed to guess, and I believe I believe it’s going to grow to be simpler over time new establishment, new banks is not going to new, however like banks, Will. They’re already banks which can be making an attempt to kind of eat up the type of market share that SVB and others had.
So some banks will serve the house. However I believe, yeah, I imply, I wouldn’t be shocked to if there’s some laws or some strain in Congress to make it a legislation that you simply can not discriminate, you realize, who you choose, as a shopper solely primarily based on the, you realize, the sector of the economic system they function in. So, yeah, I imply, I believe it’s gonna, it’s gonna take some time, however I do suppose like, we’ll, you realize, I believe 18 to 24 months from now, like, most likely be speaking about this much less.
Isabelle – Okay. And I imply, earlier than this, you probably did see regulators and crypto entities type of participating, type of, that’s what you noticed, FTX was one in all them, clearly. However that’s not occurring. It appears vital a part of it proper, prefer to get them to know. How can crypto entities nonetheless have interaction with regulators, though the surroundings will not be actually good for proper now?
Matt – Yeah, I believe it depends upon the stage of the corporate. I believe corporations nonetheless wish to have interaction it, it kind of depends upon the regulator, proper? So like, three years in the past, if you happen to had requested me, must you go in and meet with a regulator proactively, like once you’re rolling out a product, I might mentioned completely. Proper. It doesn’t matter, just like the regulator. Now, I believe the reply is most individuals would give is that it relies upon, proper?
Prefer it depends upon who the regulator is, which I believe is is is unlucky. However I believe, you realize, actually like development stage Firm. Is that they don’t have any alternative like, however to have interaction the regulator, if you happen to’re already a regulated entity it’s important to. And I believe for them, you wish to have interaction, like, typically like regulators don’t like surprises, proper. So if you happen to’re already regulated, you wish to be speaking together with your regulator. I don’t know, weekly, bi-weekly, no less than month-to-month. And also you wish to be previewing for them your product roadmap.
Once I was a regulator, one of the crucial efficient issues that for me, and doubtless for the businesses that some corporations would do is they might are available and meet with me and like a quarterly or biannual foundation and say, right here’s our product map for the subsequent 1824 months. Like we simply need you to have full consciousness and what we’re constructing, you possibly can ask questions now you possibly can ask questions as you go alongside. However we don’t need there to be any surprises. I believe that’s a really efficient technique.
Isabelle – Okay, cool. How a lot of successful do you suppose innovation is taking within the US now?
Matt – I believe I imply, it’s a major hit. I’ll provide you with one indicator. So for some time, FCA began this pattern of getting innovation places of work, proper, they usually had venture innovate. And actually, I believe, impressed earlier than this, in an earlier a part of my profession, I used to be targeted on type of innovating inside a regulatory surroundings and serving to regulators within the US and type of in different markets suppose by way of this. And, you realize, there was this pattern the place each regulator needed to have an innovation workplace. And beneath the Obama administration, it began really, so it’s not a political factor, proper. And also you had federal Prudential regulators and different sorts of not simply Prudential, however the CFPB, and others that stood up innovation places of work.
Sadly, now, lots of these innovation places of work have been de-emphasized. Or they’ve been kind of layered, like deep inside a corporation, or they’ve been rebranded. So I believe it’s, I believe it’s unlucky that that’s occurred as a result of regulators themselves must innovate, proper? I imply, like, I believe one of many one of many issues that been so surprising to me about these financial institution failures is if you happen to take a look at a number of the experiences that regulators have launched, they’re not likely speaking about how can we use knowledge, machine studying or AI, or simply expertise to raised supervise establishments. Like is there a strategy to supervise establishments in a completely totally different method, however is like completely, like rather more efficient? That’s not just like the ton of those experiences, there are ton of the experiences is, we’d like extra folks. So we are able to do it the identical method. We’ve at all times finished it. And to me, that’s simply not an excellent,
Isabelle – Nice level. It doesn’t sound prefer it. So reg tech, possibly, is the subsequent massive factor.
Matt – Completely. Yeah, no, it’s going to. I imply, it’s kind of like an inevitable factor, proper, simply because you possibly can’t proceed to oversee, like a market that’s digital native utilizing type of the practices of the previous. So once I was at NYDFS, we did a tech dash. And we introduced in corporations, we introduced in lecturers who introduced in type of like a broad swath of individuals from the neighborhood to develop reg tech options that may profit us as a regulator, give us higher knowledge, extra real-time knowledge, but additionally profit trade members by making it simpler for them to fulfill type of these regulatory requests. You haven’t seen these sort of efforts from federal regulators.
, within the final yr or so there have been some beforehand, nevertheless it’s actually, it’s actually slowed down, which is, which is unlucky. I believe the massive lesson, I imply, innovation is kind of, in some methods, it’s a meaningless phrase, proper? As a result of, like, it simply means doing issues in a different way. And, like, it may be good or dangerous, proper? It actually simply depends upon, the product. And so I believe that, you realize, what we’re seeing is also simply most likely a maturation of, you realize, how we take into consideration innovation, not simply innovation nearly as good or innovation as dangerous. It’s that, you realize, it may be both. And, however yeah, I do suppose there may be kind of a broader tech lash, proper, as folks have known as it towards massive tech. That’s, I believe impacting different different segments. Satirically, I believe crypto and blockchain, you realize, may very well be, you realize, an antidote to love, lots of the issues that regulators and policymakers see in massive tech.
Isabelle – Okay, let’s hope that they perceive this. So, the regulatory environments in numerous areas, I do know you deal with US, however you realize, you bought the MiCA that’s type of inflicting folks to no less than discuss transferring abroad. Is that viable? And what would that do to the worldwide panorama for crypto innovation, even for possibly even fintech innovation?
Matt – Yeah, it’s undoubtedly occurring. I imply, once I was a regulator, I might at all times low cost these threats. So IT corporations would are available and say we’re gonna transfer, and we’re like, positive, no matter. I imply, you’ve acquired household right here, youngsters, no matter, like, are you actually simply going to choose up the transfer?
They’re now not idle threats. I imply, it’s occurring. But it surely’s not like a lightweight swap. It’s not like, Okay, I’m within the US right now, tomorrow, I’m gonna like, transfer the entire firm, however you’re already seeing corporations shift their precedence. They usually’re type of consideration to different markets. That’s completely occurring. Coinbase, Gemini, and others have introduced offshore merchandise. So I believe you’ll proceed to see that you simply’ll see corporations, I believe what corporations need is optionality and redundancy. So that they don’t wish to place all their bat all their eggs in a single basket. And so you might be seeing and can proceed to see geographical range by way of the locations they function, but additionally geographical range by way of the place they get charters and licenses.
The factor is that, like, if you wish to serve US prospects, it’s important to be licensed within the US, like, you possibly can’t simply get, you realize, an offshore, and possibly you would serve some like some, you realize, establishments or no matter, proper, if in addition they have, you realize, subsidiaries or no matter arrange wherever you might be, however like, if you wish to entry to the US market, and I believe it’s true for like, lots of different markets, you continue to should, sooner or later, you realize, have licenses in these markets. I believe it’s it’ll be actually attention-grabbing to see, as jurisdictions compete, to draw corporations, who wins. I believe smaller jurisdictions, you realize, are rather more agile, they’ll come out with very sturdy, like complete, sturdy regulatory regimes. However what’s that? What markets does that get you entry to? And it might get you entry to some issues, however if you happen to nonetheless need entry to massive markets, just like the EU and the US, like, you possibly can’t actually keep away from going within the entrance door.
Isabelle – Okay. Okay. And as a VC investing in this sort of space on this surroundings, what are your methods?
Matt – Yeah, it’s nice query. So I believe anytime there may be, I believe it’s a good time to be an investor on this house, really, for lots of causes. Proper. I believe the enterprise is all about vintages. This yr, subsequent yr gonna be nice vintages I believe. Valuations are down. Plenty of the noise from the house is gone. Founder equality is I see lots it’s very, like lots of proceed to be lots of sturdy founders, new founders, type of the house corporations have massive corporations within the house which have finished layoffs like these persons are going to be a few of them are going to be nice founders. Proper. So I believe it’s kind of like the best, there’s at all times there’s no higher strategy to attend to the market. My technique may be very kind of differentiated and distinctive technique with the Division of XYZ. Our price proposition to founders is that we wish to be the previous regulators on the cap desk that will help you make sensible regulatory selections. We’re not going to switch like a basic counsel or CCL for you. However we’re going that will help you type of navigate this world and be like the previous regulators on pace dial that may enable you. And thus far, I believe, I believe founder it resonates like founders, sensible founders know they want that.
Isabelle – I can think about it’s like, good. Proper now. All proper. So what’s your recommendation to crypto companies making an attempt to maneuver throughout the house proper now?
Matt – Yeah, I imply, it’s exhausting to type of give basic recommendation. I imply, it actually depends upon the corporate. I imply, I believe one is you search for alternatives in a altering panorama. I imply, that’s like I believe any once more, anytime there are regulatory adjustments, there are rule adjustments, yow will discover alternatives. I believe even when you concentrate on partnerships, I believe partnerships are going to be extremely vital. It’s gonna be very exhausting to get licenses and charters in lots of jurisdictions proper now. And so to the extent which you could companion with establishments that already regulated, if you’re participating, regulated actions, I believe that’s crucial, as a result of that may enable you kind of, you realize, climate, climate the storm. However, yeah, I believe it’s identical to remaining optimistic and fixing actual issues. I believe if you happen to’re fixing actual issues, then over the long term, I believe you’re gonna be advantageous.
Isabelle – Okay, that’s a really constructive strategy to type of finish the dialog. However earlier than you go, you have got your curveball query. Should you had been stranded on an island, with just one e-book and one music observe, what would you wish to be caught with?
Matt – That may be a nice query. One e-book and one, we’ll begin with the music observe. It’s the soundtrack for Hamilton, and possibly that’s just a little cliche or New York Metropolis, however like, I simply listened to that continuous simply acquired the correct quantity of grit and like i imply, you want that if you happen to’re on a desert island, proper it’s essential be motivated. Yeah, proper, and I believe that that that with out offers you lots of motivation.
After which what would I pair that with? I might pair it with… I’m gonna dodge the query just a little bit I might pair it possibly that is an excessive amount of of a New York query reply too I might pair it with a complete yr of New Yorker magazines. Good since you simply have like lots of selection. Proper? And, most likely, one thing for each temper or problem you’ll face on that island.
Isabelle – Okay, good. I’m now imagining you strolling by way of New York with the Hamilton soundtrack in your thoughts the entire time, a real New Yorker. How can folks come up with you?
Matt – That’s the one query I didn’t put together for. Now, the simplest strategy to discover me is on LinkedIn. You could find me, Matthew Homer, or on Twitter @Matt_Homer.
Isabelle – Okay, good. Nicely, thanks a lot for approaching. I actually loved speaking to you. And yeah, have a very good remainder of your day.
Matt – Thanks. Nice to be right here.
Isabelle – As at all times, you possibly can chat with me on my LinkedIn or Twitter at @IZYcastrowrites. However to entry nice each day content material, try Fintech Nexus on LinkedIn, Twitter, Fb, or Instagram. You may as well join our each day publication, bringing information straight to your inbox.
For extra fintech podcast enjoyable, try the web site, the place yow will discover extra fascinating conversations hosted by Peter Renton and Todd Anderson.
That’s it from me. Till subsequent time, get pleasure from your downtime.
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