Episode 62 of the Public Key podcast is here! With the crypto regulatory climate heating up in the US, we decided to focus this podcast north of the border on Canada and their innovative approach to crypto regulation and staking with a packed panel starring Dean Skurka (President & Interim CEO, WonderFi), Lorien Gabel (Co-Founder & CEO, Figment) and Jennie Levin (Chief Regulatory Officer, Figment).
You can listen or subscribe now on Spotify, Apple, or Audible. Keep reading for a full preview of episode 62.
Public Key Episode 62 preview: Staking as a Service and the Canada crypto regulation approach
With the crypto regulatory climate heating up in the US, Ian Andrews sits down with Dean Skurka (President & Interim CEO, WonderFi), Lorien Gabel (Co-Founder & CEO, Figment), and Jennie Levin (Chief Regulatory Officer, Figment) to discuss Canada’s innovative approach to cryptocurrency regulation and staking.
The panel explains what staking as a service (SaaS) is and demystifies the difference between yield and staking rewards and how this discrepancy impacts custodians, cryptocurrency holders, and the risk for regulators around the world.
The conversation jumps into the differences between the Canadian and USA regulatory crypto landscape and approach to staking and shares the journey of both WonderFi and Figment and how they lead with compliance before regulations in Canada had been implemented.
Quote of the episode
“The only way for blockchain technology to survive is through proof-of-stake, running nodes, and operating a staking service. That shouldn’t just be limited to certain classes of individuals or certain people who have the ability to do it from a technical know-how, everybody should be able to participate in that.” – Jennie Levin (Chief Regulatory Officer, Figment)
Minute-by-minute episode breakdown
- (2:25) – Canada leading innovation with adopting crypto and formulating regulatory guardrails for ecosystem
- (5:52) – Why staking became the foundation of Figment and the company’s focus on infrastructure and backend services for crypto ecosystem
- (8:45) – Discussion on the regulatory environment in Canada for crypto and blockchain service providers
- (13:08) – WonderFi and Figment focus on providing Canadians with compliant and safe access to crypto assets
- (18:45) – The differences between the Canadian and USA regulatory crypto landscape
- (22:42) – Figment’s role in providing staking infrastructure and a breakdown between proof of work and proof of stake
- (27:05) – WonderFi’s focus on counterparty risk mitigation and offering staking services to clients as a compelling product
- (33:15) – The misconception in the USA about staking as a service and educating legislatures about the actual risks of staking
- (39:15)– Liquid staking and its’ capital efficiency depending on the type of holder
- (43:35) – Figment app and making staking accessible to the masses while complying with regulations
- (46:25) – WonderFi’s focus on expanding internationally and partnering with trusted staking as a service provider or custodian
Related resources
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Speakers on today’s episode
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Transcript
Ian:
Hey everyone, back with another episode of Public Key. Today we’ve got a full house, exciting topic. I’m joined by the CEO of Figment, Lorien Gabel, CEO of WonderFi, Dean Skurka, and the Chief Regulatory Officer at Figment, Jennie Levin. Welcome to the show everybody.
Dean:
Thanks for having us.
Jennie:
Thank you for having us.
Ian:
I think Dean, WonderFI is doing something that might mystify most American crypto enthusiasts. Your company is not only publicly traded but also seemingly accepted by Canadian regulators. For folks not in the Canadian market, can you maybe give us some quick background on WonderFi and the business? And your role at the company, how you arrived at WonderFi?
Dean:
Absolutely. WonderFi, as you mentioned, is publicly traded on the Toronto Stock Exchange. I think as you touched on, Canada has been more at the forefront of adopting crypto and putting the guardrails in place, whether it’s publicly traded companies like WonderFi or some of the first Bitcoin ETFs like 3iQ put out. Canada’s really always been at the forefront. WonderFi itself, primarily today owns and operates two regulated crypto trading platforms being Bitbuy and Coinberry. Bitbuy is where I came from. I was there in January of 2018 as the head of finance and compliance which was a lot of fun, as you can imagine, in those early days.
Today really, WonderFi is focused on providing Canadians with compliant and safe access to the digital asset industry. As I’ve mentioned, I think we’re in a favorable jurisdiction given that the Canadians have … Sorry, Canadian regulators have put in, like I said, the guardrails. They’ve started with crypto trading platforms which really are the engine of all of the activity that’s generated at least today in the crypto industry. I think our focus is to continue to roll out products in a regulated manner that provide Canadians with access to the products and services that they otherwise would look offshore or to other jurisdictions to participate through. And in doing so, we think we’re really providing a safe compliant environment for Canadians to participate in this industry.
Ian:
Awesome. We’re going to get more into some of the business strategy and the products and services you’re able to offer as we get further into the podcast. I want to introduce our other two guests. Lorien, I was reading your bio and I realize there’s now two data points that to me indicates a trend of Canadian entrepreneurs who own sporting goods stores. I believe you own one in Wyoming, and that’s I think the founding story around Shopify if I’ve got the details right.
Lorien:
There’s two of us with bad judgment.
Ian:
Apparently.
Lorien:
Well, I’m glad I’m not alone. Good, all right, fantastic.
Ian:
All jokes aside, you’ve had a fantastic career prior to Figment, a number of successful exits. But I think Figment may be flying a little bit below the radar for some of our listeners because you’re … It’s similar to Chainalysis, more of a backend service. As a retail player, I may not necessarily be familiar, even if I’m using your technology behind the scenes in some ways. Maybe give us a quick overview of why you started the company and what you all do in the crypto ecosystem.
Lorien:
A great observation. Obviously, a retail, sporting good store is not my main line of business but pre-startups. For some reason, I thought it would be a good idea when I moved to Wyoming. In other words, I thought it was pretty good idea, you can write off your skis as expenses. But no. Myself and our co-founder is our fourth infrastructure company going back more than three decades which a little painful to say I have to say. All Canadian startups than we had a national data center company, a very early ISP free browser cloud security company. And this is my way of saying that we really come out of the infrastructure space, not the financial space.
We each had our individual reason for being interested in blockchain and digital assets in crypto. Me personally, I had sort of … Because I’m old enough to have been around from the original internet and the original vision of a P2P communication system to what it’s become which is pretty highly centralized, both our financial system and large data providers like Google, et cetera, and was really seeing sort of a corruption of that original vision. What we were heading towards was a few large companies controlling everything. And I thought perhaps this technology could be a counterbalance to that. We’re not anarchists, obviously, we run a business for institutions but we really thought this could be a counterbalance to these trends which I think is pretty unfortunate in a number of ways and have a lot of negative externality. That’s my personal motivation for being in the business. And then because we come out of infrastructure, staking is natural. We’re used to dealing with security, large networks, complicated networks, and networking and so it was a natural place for us to enter the business.
Ian:
It’s a-
Lorien:
Why you might not know us is largely because we don’t deal with consumers directly we work through our partners like WonderFi and so we really provide the infrastructure for staking to our exchange partners. So you wouldn’t necessarily know it’s us but if you are staking there’s a decent chance you might be using some of our infrastructure as a consumer.
Ian:
Amazing. And last, certainly not least. Jennie, your background, I’m fascinated to understand the transition from US Attorney into the world of Web3 jumping into the deep end of the pool. I’d love to hear a little bit about your journey and the role that you play at Figment now.
Jennie:
Sure. I was fortunate enough to get a job at DraftKings after I left the US Attorney’s office. And this was just after PASPA was overturned by the Supreme Court and so there were a lot of regulatory issues surrounding rolling out sportsbook in the individual states. And so my path at DraftKings started with working on these regulatory and legal issues surrounding casino, and sportsbook, and to some degree daily fantasy sports. I was able to work with Paul Lieberman, who is one of the founders, and he had a strong interest in Web3 and in NFTs. I was able to work with him and his product team, who are amazing, to develop and create their NFT marketplace. And that was sort of my first forte into the Web3 environment. It was fascinating, it was exciting. I was able to try to take existing legal principles and extrapolate those and apply them to novel areas which I think is super exciting.
And that’s what I get to do at Figment too, albeit in a slightly different context in the world of proof-of-stake. We really deep dive into all sorts of regulatory issues because our customer base is so varied and so we have to be familiar. And it’s a fun space to be in to be able to navigate these uncertain waters and try to keep up with the ever-changing environment.
Ian:
For people that haven’t checked out the DraftKings NFT marketplace, they’ve come up with some really I think novel NFT into gaming intersection points.
Jennie:
Absolutely.
Ian:
If anyone that’s played fantasy sports before, you draft a team and then you … Based on their real-world performance you score and win or lose against your friends. I usually lose. Exactly.
Jennie:
It’s good for DraftKings.
Ian:
That’s right. Donating to the cause. The NFT games are driven off where you can actually acquire players and there’s a bit more ownership structure there that I think makes the game more interesting. It’s definitely on the cutting edge of actually using NFTs to do stuff which is very neat.
Jennie:
And we started out, obviously, just selling NFTs. And then as we dug into that it was a very complicated area of law in terms of having utility, and not being a representation of a security, and how that integrated with real-world play and the games that were being played as well. It’s a pretty cool product.
Ian:
It prepared you well for the challenge of is it a security, is it a commodity, is it an investment product or not that I think you’re faced with every day at Figment, right?
Jennie:
Yes, it absolutely did. It showed me the importance of working with the product team and the engineering team hand in hand, and we have an amazing team at Figment. They have an incredible amount of patience with me and they include me. And I’m able to figure out how do we work the problem. How do we make a small tweak to something to lower the risk but also be able to provide the service to our customers? And I think that that’s been invaluable. Working at DraftKings was an invaluable experience for me, and now working with the team at Figment has just been an incredible opportunity as well.
Ian:
That’s outstanding. We’re going to come back to some of those product features and what Figment’s building. But Dean, I think you undersold on WonderFi a little bit. You and I had the chance to hang out in Toronto and then recently around Bitcoin, Miami in Florida. My takeaway from those conversations were WonderFi is building the largest domestic exchange and probably the safest place to do anything with crypto whether you’re retail, institutional mining. Talk a little bit more about the business and some of the things that are on the horizon. I know there’s a couple big acquisitions in the works now.
Dean:
Absolutely. Excuse me. We announced the acquisitions of Coinsquare and CoinSmart back in April, and we’ll be hoping to close both of those transactions in short order. And that just continues along the path that WonderFi has been on starting with the acquisition of Bit Buy in March of 2022 and then following that on with the acquisition of Coinberry and Blockchain Foundry later that year. We were really looking to consolidate the best platforms in Canada and really just ensure that we have sufficient market share and scale. And I think the scale point is important because Canada is by nature a very small market. Many people like to say it’s the size of California which doesn’t help me sleep at night. When you have a smaller market, to begin with and you layer on all of these costs for compliance, for regulation, to maintain those good standings, scale really is important.
Certainly, as we’ve seen in the bear market, if you will when volumes dry up and you have to maintain that good standing with the regulators and maintain all of those compliance practices … As I’ve mentioned, scale really is important. From a WonderFi perspective, we really believe that on the back of these two acquisitions that we really will have the scale needed to not only survive and be successful during bear markets but really well positioned in better markets which we do believe will come. So we’re really excited about bringing all of these companies together.
It’s certainly not a easy task at all. You’re dealing with personalities, you’re dealing with different technology stacks, different providers for certain vendor solutions. And so we have our work cut out for us. We really see a path forward it to being the clear leader in Canada for digital assets, whether that’s the trading side or the OTC side or staking in new products that we’re going to look to roll out in the coming months and years. We really think that our footing in this market will give us the ability to do that and roll out these products that our clients are looking for.
Ian:
I love this story because it’s one that I have been talking about as a trend for at least the last year which is in a down market you see a flight to quality, right? Investors want to be with the safe choice, they want to be with the biggest players in the market who have the best services, most capabilities, and greatest likelihood to still be here a year, two, five years from now. And so the actual consolidation phase I think is really just beginning in a lot of markets. You’re a bit of ahead of the curve I would say in Canada but the outcome is exactly what I’m expecting to see replicated in other parts of the world.
Dean:
Well, and it’s interesting too because at the same time what we’ve seen over the last few months is large international platforms actually leaving the Canadian market citing regulatory costs or the significant changes that their business would need to undertake to be compliant in Canada. We’re really starting to see sort of the benefits of not only the larger players leaving but sort of the balancing act of platforms like ours being regulated over the last two years, the significant cost that we’re about to undertake as I’ve sort of mentioned. All the while these international platforms are continuing to operate in Canada and continuing to offer their products and services, albeit without the same regulation in place. And so it’s good to finally see this thesis playing out where regulation does matter to a certain extent. Having that first-mover advantage and having those relationships with the regulators in Canada is certainly going to be part of the long-term competitive advantage that we think we’ll have.
Ian:
I’d love to pull on that thread a little bit because we’re hearing a couple different narratives, right? In the US market, to contrast, people are saying, “Hey, we need regulatory clarity.” I think in Canada you’ve actually gotten regulatory clarity and a lot of people are going “Oh, okay. It’s now clear but that’s a very high burden and I can’t afford to do that, it impinges my ability to make money I think.” But, obviously, you’ve navigated through those waters successfully. Licensed as a broker-dealer, I think now have a staking license in one of the arms of the business. Talk to me about how you’ve been able to achieve that because I think that’s pretty monumental and could be a pattern for a lot of people listening.
Dean:
There’s a few things there. I think from a business perspective, when I joined at Bit Buy we were really focused on the long term. We weren’t looking to cut any corners, we wanted to establish strong banking relationships, we wanted to really have our partners and vendors understand our business model and how we intended to operate. And so we were always laser-focused on doing things right and building for the long term. And I think all of that really adds up when you can convey that and walk your regulators through some of the stuff you’ve done prior to needing this regulation or complying with regulation. I think it all sort of comes together to tell the story of the company and who you’re trying to be as a business.
I look at years past when companies like Voyager and Celsius, they’re on a rocket ship and they’re offering these yield products, and you’re sitting back and wondering why you’re in Canada and you’re sort of complying with laws and regulation that really isn’t in place yet. And now fast-forward a few years, obviously, that slow and steady approach certainly has seemingly paid off for now.
In terms of Canada and the US, I always sort of like to think Canada had its FTX moment in 2019 when a crypto trading platform famously went out of business. And I think sort of what you’re seeing now this heavy-handed response to not only FTX but some of the other platforms that, unfortunately, went bus last year is not too dissimilar from what you saw in Canada and so I think for right or wrong reasons, Canada had this moment a few years prior and were able to be pretty responsive in terms of establishing some framework to start with and then look to industry to evolve over time.
Ian:
Jennie, what do you think about that perspective, right? Are we having our Quadriga moment here in the US, and two, three years down the line we’ll have the peaceful, happy regulatory environment that exists in Canada? Or is that too optimistic?
Jennie:
I think that is quite optimistic. I think that the way that the Canadian government or the provinces are all working together, and the way that the Ontario Security Commission are handling their approach to cryptocurrency is very different. Now, perhaps if the US government, and regulators, and everyone could work together in a way that the Canadian regulators and legislature were able to do then we could achieve that. But I think there’s a fundamental difference in approach. When you take a look at the notices, and the guidance, and the rules that are in place in terms of what is being offered in Canada, you see that it’s not introducing new rules specifically applicable to these crypto trading platforms, to marketplaces, to dealers. What they’re trying to do is take the existing regime but make it very, very tailored to the needs of the companies that are operating there because they really recognize the need to foster innovation.
And so they take a look literally at every single company and figure out what’s their business model. They take the time to figure out what … They get in the weeds, right? And doing that adds the benefit of making a tailor-made solution to the company. And so I think that that’s a very big benefit because they’re willing to put in the work to actually understand. And I think that their regulatory sandbox provides a lot of help. We were talking about the path and is it cost-prohibitive to follow the regulatory regime in Canada. There are ways you can approach it if you’re not in a position where you have the infrastructure and the financial reserves to register as a full dealer or a marketplace there. You can take advantage of their regulatory systems, you can take advantage of being a restricted dealer like Bitbuy did. There are ways to approach it. And there are exceptions to that you can try to take advantage.
Back to answer your question. I think the problem is in the United States we are not being true to offering any type of regulatory sandbox. We are not taking the time to open our ears and listen and figure out what is actually needed and what’s not. Instead, we are just trying to take a square peg and shove it into a round hole, and nobody wants to listen and change their minds. They’re so set on their convictions that it’s … There’s so much tension there. I’m not as optimistic.
Ian:
I was deeply hoping for some optimism to come from you. I have to admit, in the last few months it feels like in the US we’re not having a debate about how do we get to regulatory clarity, we’re having a debate about is it legitimate to hold crypto as an asset. That is actually what’s being really argued about. And there’s people who are saying, “No, no, no, this is a thing that should just go away” which seems unrealistic as an outcome but that still appears to be the argument we’re having. I want to shift gears, Lorien, and come back to you. Talk to us a bit about Figment’s business. You touched on earlier the layer in the stack, but how have you actually built the company? Who are you working with? Obviously, a great partnership here with WonderFi. What do you actually do for them? And how does that in turn lead to services and products that I as an end user might experience?
Lorien:
Right. Appreciate the question. Just looping back a little bit on the last question of what Jennie was saying. I’d like to think, as Winston Churchill said, “That the Americans will do the right thing after they’ve exhausted all other possibilities.” I’m slightly more optimistic although not necessarily in the right timeframe that eventually will have a workable framework in this country, at least in an election later perhaps. So cautiously optimistic in that respect.
Figment, what do we do? Just taking a step back. There’s been a pretty significant change in how blockchains operate over the last five to six years. Everyone might be or is probably familiar with proof of work which is … You can think of it as it’s got a consensus mechanism, it’s really like an operating system for blockchains. The technical engineers will be mad at me for using that word in that analogy. But essentially you’ve heard about Bitcoin mining consumes a lot of electricity in some circumstances, some people have some green concerns around that. I think they’re personally overblown. And a lot of computing power.
About five years ago people were looking for alternative ways to essentially operate a blockchain with the same outcomes around distributed security and producing blockchain … Blocks and maintaining the blockchain. And so that was something called proof-of-stake. And really it accomplishes the same thing as what happens when you’re a Bitcoin miner providing a essentially distributed, secure decentralized ledger but with a lot less computing resources and perhaps more scalability. There are still computers involved in that process.
If you need to know one difference between proof of work and proof-of-stake perhaps is that in proof of work, you have minors and then you have people who have Bitcoin and they’re separate. With proof-of-stake, essentially if you have 32 ETH you can participate in running Ethereum. You can run a node, you can secure the network, and process transactions. So that’s a pretty big difference. It really brings together the function of a token holder and actually being able to participate running the protocol.
As an individual, all of us on this call could probably figure out how to run an Ethereum note. Maybe not me, but everyone else given enough time could figure out how to do it, ironically enough. But if you’re a large fiduciary, if you’re someone like WonderFi that has hundreds of millions across billion of Ethereum proof-of-stake on the platform, it’s very difficult to do at scale. We provide a security framework, we scale that infrastructure, and we run those nodes, and provide a set of services around reward reporting and interface, API connections for our partners. So basically we deal with large holders, or parties who have large holders as customers, and basically run that very complicated infrastructure on [inaudible 00:23:53].
Ian:
Just to unpack this for maybe some of the less technical folks in the audience. At a basic concept level in Ethereum, it used to look like Bitcoin where you had a minor … A minor was just running an Ethereum node on the network and you would collect fees or rewards for creating a block that ended up as part of the chain. We had this transition last year from that proof-of-stake consensus mechanism … Or sorry, proof of work.
Lorien:
That’s right.
Ian:
To now there’s proof-of-stake where in order to run a node I have to deposit 32 ETH into the node. And so there’s a higher capital requirement but it also creates an incentive system where if I’m a bad node operator, my node goes down all the time, it doesn’t behave by the rules, it double signs transactions, all sorts of bad stuff, I’ll actually suffer a financial penalty which I think in the industry term of the art is called striking.
Lorien:
Slashing.
Ian:
Slashing, sorry. I was right there, man.
Lorien:
It’s as bad as close. It’s as bad as [inaudible 00:24:58] or missed rewards, one of those two for game time, exactly.
Ian:
There’s still the capability. I think some people have said, “Wow, 32 ETH that’s a lot of money.” Maybe not within reach of your average open-source hobbyist that just has a workstation under their desk and they want to throw some software on it. On the other hand, the role you’re taking on running a validation or a block producer node, a pretty important one, right, because we’ve now got billions and billions of dollars worth of value tied into the Ethereum network, we all want that to be super reliable. Now you have this scenario where people have a lot of Ethereum that they would like to participate in the network security by depositing it but they may not have the technical skills or the physical hardware, the servers, or the data center capacity to actually run this and so now they look to other people to do that on their behalf.
And so I think the relationship with WonderFi is I can be a customer of WonderFi, and I have ETH deposited with Dean, and I’m like “I’m not doing anything with that right now it’s just sitting there.” I can deposit, or ask Dean say, “Hey, I want to move this into a staking service I think.” That accrues the network reward to me. So there’s a service-provider relationship there. And when the technical backend, if I understand this correctly, that’s actually Figment doing all the work, operating on the nodes, on the backend behind the WonderFi service. Have I gotten all that close?
Lorien:
There’s a couple important things to note there. One is that however you hold your Ethereum, whether it’s with WonderFi or self custody or on a ledger, when you stake those assets you don’t give those assets to your provider as us.
Ian:
Great, a great point.
Lorien:
So we’re entirely point on custodial. So we’re not a counterparty in a sense that if for some reason we were to disappear then there’s any loss of funds. So however you’re comfortable holding custody with those tokens, that doesn’t change when you stake them which is a big difference from … Dean made some illusions to some other companies like Celsius, et cetera, and, unfortunately, some of those programs were called staking. We can get into that a little bit. But they weren’t actually protocol staking they were traditional borrow lend with counterparty risk, et cetera. That doesn’t exist with staking. You are really running the protocol. You have protocol-level risk, something could go wrong with Ethereum, but you have that if you hold a token anyhow.
So there’s no additional risk other than if we don’t do our job you might miss some rewards. Or if something really bad happens there’s a small portion in this slashing scenario which we can talk about, which never happened to us I need to knock on wood, and is a sort of very low-risk scenario. But generally speaking, you don’t have counterpart party risk which has been what happened with those other cases of companies blowing up. So it is really pretty much the safest and most useful thing you can do with your crypto if you’re a long-term holder.
Ian:
I think you hit on an important point there that I want to make sure we don’t gloss over which is, there’s been a conflation of activity I think under the banner of maybe earning yield which has actually been … It’s a series of very different actions. You’ve got a great blog that I think clears some of this up, we’ll link to it in the show notes. But maybe if you can give us a quick summary of the … I think you lay out three categories of activity and how they differ from one another in terms of what it means to participate in the network consensus versus some of the other options that have maybe been lumped together incorrectly.
Lorien:
Definitely. As an industry we’ve done a very poor job of defining terminology, and so talks on our house, et cetera. And we’ve tried our bus to talk about protocol staking as being different from lending or providing liquidity, but there’s a bunch of things you can do with your digital asset. You can lend it out to someone, then you have the counterparty risk, you can provide liquidity to a decentralized exchange and then you might have some risks associated with that, or you can stake and actually help run the protocol itself. And so we don’t actually even consider that yield, most of those rewards are inflationary. You’re doing work and you produce the next block, to oversimplify a little bit. And so essentially you’re protecting your relative position in the network, and you’re actually doing work by running that node, and securing the protocol, and processing the transaction, therefore you earn a reward.
So we don’t even really see it as yield in the traditional sense of a form of income for a passive income or anything like that, it really is a very unique activity. Again, there’s probably a whole bunch of ways this analogy falls down. Is if you as a MasterCard or Visa holder, instead of the bank doing the processing you could actually process some Visa transactions and then sharing those fees generated by that. So it’s not a perfect analogy but that’s the cool thing about blockchains is that they’re permissionless anyone can help run the blockchain. Anyone could’ve set up a Bitcoin miner, this is a different way of doing that.
Ian:
I would certainly swap airline miles for a share of the interchange fee on my credit card if I could pull off that agreement with Visa, I’m in for that.
Lorien:
Exactly.
Ian:
But I mean, I think it makes a great analogy about the decentralized nature of something like Ethereum that that’s even available, right? These rewards don’t accrue to a centralized organization, the operators of Ethereum, it’s everybody that’s operating nodes. Let’s go to Dean first. How important is this protocol staking function to your business? Is this something that’s a tiny piece for really high-end clients or is this something that people have broad interest in? Talk to us a little bit about how it’s impacted what you do at WonderFi.
Dean:
Absolutely. And I think it’s a good point that Lorien had touched on earlier. When we started this journey because … As I mentioned, being a regulated platform any new product services we want to offer have to go through the gauntlet of the regulators in Canada. And so when we thought about how could we offer these types of services to our clients, really comparing what a lot of people were doing with Borrow Lend at the time and doing it quite successfully compared to staking, one of the big elements in our decision making was the counterparty risk mitigation. And we thought that would really resonate with the regulators and give them a lot of comfort in the solution.
In terms of the solution itself, I mean, you look at the largest international crypto trading platforms out there and this is table stakes. The reason this is table stakes for them is because clients are keeping their assets on the platform, and in aggregate that represents a significant amount of money. Giving these clients an ability to earn rewards on that is very attractive. You look at sort of the way your interest rates are today and the cost-benefit of holding Ethereum, if you can just make 4.5% on your dollars may not be there for some people. But if they’re keeping it on the platform, and they’re investors, and they can earn income … Or rewards rather, sorry, on the platform it’s a really compelling offering, in my opinion, and something that we’ve seen really strong conversion rates on which I think sort of supports that.
I don’t think this is something, as you mentioned, that necessarily is a certain high net worth or retail client-specific product, I think it speaks to everybody. Ultimately it really resonates with the long-term holders. If I’m an Ethereum believer and I’m going to hold it for two years, five years, 10 years, and I now have an ability to earn rewards while I do so, it’s a pretty compelling offer.
For us, it was all about just making it really intuitive for our users, educating them on the process and how the … How it works. To the other point earlier, how counterparty risk is mitigated and how it is safe and compliant. We really think this will be a really big growth opportunity for our business going forward. Certainly, as we consolidate the platforms that we are acquiring into one platform they will all … All of those users will now be able to stake through Bitbuy as well. For us, as we continue to list more tokens that are available to be staked, we just believe that this is a really exciting growth area for our business.
Ian:
Jennie, what Dean just described is in high contrast to what we’ve seen in the US. Kraken I think just settled with the SEC recently to basically turn off their staking platform. What’s going on between the US and Canadian markets where we end up with two completely different views and outcomes here around staking? Or is it maybe that there’s differences in the programs themselves?
Jennie:
I think both. In Canada, the regulators have not said that offering staking as a service is a security, right, so that … Let’s make that perfectly clear. And it’s our position that it’s not under Canadian law, under United States law, under any international law. In the Canadian regulatory scheme as part of being a restricted dealer, when you offer new products or services you have to update your prospectus and you have to make sure that it’s covered by the exemption that you are falling under. And so as part of that process, they reviewed the staking offering. And we met with the Canadian regulators and they were able to parse through the product, ask a lot of interesting questions, and ultimately gave their sign-off. Not in the context of this is a security, we’re giving you our sign-off, but in the context of we believe there is sufficient investor protection here, consumer protection. We believe this is a safe, secure product for you to be able to offer Bitbuy. And we believe that Figment providing this service enhances the quality and the safety and assures us that it will be offered correctly.
I think to answer your question, the difference is … There’s a misunderstanding in the United States based on these enforcement actions that are being brought as to what staking is. And so right now I think there’s a disconnect between Canadian and US perceptions of what staking as a service is, the true protocol staking, and so therefore there’s a difference of opinion about these things. If the United States were able to sort of wrap its head around and understand what the Canadian government does, or the Canadian regulatory bodies do, excuse me, then I think that they would come to the same conclusion that this is not a risky product, you can protect consumers, we’re not seeing fraud associated with staking as a service.
But I think that the issue is we need to educate the US regulatory agencies, particularly the SEC, and we need to educate the legislature so new laws can be passed so it can encompass that.
Unfortunately, Kraken’s program was called the staking program, and Lorien touched on this earlier. But the reality of the situation, when you picked up the veil, is that they were offering a rate of return, and they were having their customers provide them with these assets. They were using them in a multitude of ways, one of which was staking but that was not the only way that they were being used. And so it really much more closely resembled a investment contract where they were making decisions. How do we use this money to give them the promised return? Staking will be one way but that’s not going to be the only way. And I think that that’s where the issue came from.
I think that in general though … And I want to also just touch back. And Lorien made the point that he’s a bit more optimistic than me. I don’t think people should run from the United States based on the current regulatory environment. I think that uncertainty, it doesn’t … Isn’t always a bad thing, right? Because as you said, we don’t want to be stuck with a regime in the United States that boxes people out of participating. We want it to be a good regime that’s thought through and that is adaptable to the different types of businesses we see in this space. And that does take time and we will get there. In the meantime though, we also don’t want people to be afraid that they’re going to be slapped with an SEC subpoena and a lawsuit because not everybody has the deep pockets to be able to fight that type of legal action.
I think there is definitely room to operate in the United States, I think that there are large markets to serve in the United States, and I think we will get to a point … And we can navigate through the regulatory uncertainty if we’re careful, and we structure our programs, particularly our staking as service programs in a way that really gets back to basics. Let’s mirror the protocol rules. This is what Bitbuy does. They are adherent to the protocol rules, they are basically a pass-through to allow people to engage in staking, and they use us as their technical service provider behind the scenes. And so the more we can structure programs like that the more insulated we’re going to be. Because again, we’re not seeing hacking, we’re not seeing fraud associated with these programs. It’s a really great way for people to be engaged in the crypto blockchain space without running afoul of regulatory rules and security concerns.
Ian:
All great points to unpack there. Lorien, I’m curious on a … When we saw the merge happen and the shift to this proof-of-stake, there was a fair amount of news I think in the following months that articulated a concentration of staking providers, right? You weren’t seeing very many individual node operators but you saw a handful of providers I think with varying business models. Some that were maybe more retail-focused, some that offered something known as liquid staking. It looked like most transactions were being routed through a handful, maybe five, six staking providers. Is that situation still current? I haven’t read nearly as much about this as I did in the immediate aftermath of the merge. How do you think about that as an operator? Obviously, you want to grow your business, and I’m sure you think about things like market share.
Lorien:
That’s right. Great question. So first of all, Ethereum generally is probably, along with Bitcoin, the most decentralized, has the most holders, has the most number of … Has a whole set of technical infrastructure that’s varied, run in different places, different clients, et cetera. Ethereum itself is very decentralized. With respect to the particular question about staking, I think most of that concern was around a liquid staking provider that mostly serve consumers called Lido. Really before the merge, if you wanted it to stake this was really one of the easiest and only ways to do it effectively for an average Ethereum holder. Or that protocol, or that method of staking on Ethereum did accumulate a fairly large percentage of the protocol. Now it should be said that behind Lido is a whole set of infrastructure providers so it’s not one entity. It’s a Dow, and then behind it there’s a whole 10, 15, 20 different infrastructure providers.
So in fact, the stuff that we do is pretty decentralized. Lido’s share is still I think too large but that is changing post-merge. So what you’re seeing is a whole set of different ways of staking people like us, et cetera, people doing it on their own through self-custody, et cetera. So I think that that is changing. But yes, I think that was the original concern. Really they had a predominant amount, or that method had a predominant amount at stake. It’s still pretty large but I feel pretty good that it’s will decline over time. It in itself is pretty decentralized, it’s not like one provider running an Amazon East or something like that. So it is itself decentralized.
To your question about market share, yes, there is a cap on how big we would want to get on given … On Ethereum or any other protocol. By its definition, I would be extremely skeptical of a digital asset or a blockchain where one set of nodes or infrastructure was run by … Or one centralizing force had 30 or 40% or even 20. We’re a couple percentage points and that makes us pretty large, but there’s just a natural cap on how big we would or could ever get.
Ian:
You touched on liquid staking there which has been a topic that has fascinated me because I … Generally it felt like double counting money. And we did an episode last year with Mara Schmiedt from Alluvial. They’re the liquid collective that they’re part of and she unpacked this topic for me. At that point in time we hadn’t reached the moment of the unlock, and so liquid staking seemed almost necessary because you were locking-
Lorien:
That’s right.
Ian:
Your assets into the protocol with-
Lorien:
For an indefinite amount of time.
Ian:
An indeterminate future. Exactly. You had no idea when you could withdraw. We’ve now passed this withdrawal moment. Does liquid staking still need to exist? Is there utility in your opinion or is that a point-in-time momentary feature?
Lorien:
I think it’s a capital efficiency question depending on the holder. It doesn’t need to exist. I think there are some holders who will essentially want to get a coat check for their stake deeds and then perhaps do something with that coat check. Yes, it is a layer on top of naked staking, core staking, and so I think you need to be cautious for a whole bunch of reasons that you’re adding one layer of complexity. But I think there are certain institutions who will be like “Hey, we have $100 million dollars of Ethereum staked, we’re going to get this coat check, i.e., a token back for it, and maybe we can do something with that either borrow against it, et cetera.”
Again, I think it’s probably for pretty sophisticated investors, I don’t think the average ETH holder needs to really be focused on it, frankly. Again, it adds a layer of complexity. I have my own views on keeping things simple. But again, I think it’s more like an institution or a large holder and not really for a general small consumer-type holder. But I think it’ll play an important part in the ecosystem for that reason going forward.
Ian:
As we wrap up the show … I see we’re running out of time. Jennie, what should we be thinking about in terms of regulatory landscape? Obviously, there’s a lot of churn in the US market but there’s some exciting things happening internationally. MiCA just got passed in Europe. I know there’s tons of things happening in the APAC region. Hong Kong seems to be reopening to crypto in an exciting fashion. What’s on your mind keeping you busy these days and what should we be paying attention to looking forward?
Jennie:
So all great points. I think one of the things that’s on my mind is where is the market share going to go. Are people going to be afraid to engage in custodial staking in the United States
We talked about that the only way for blockchain technology … Forget about just whether we should be owning crypto or not owning crypto or if it plays a role in the financial industry, blockchain technology is not going to go anywhere, right? Tokenization of digital assets, healthcare, social platforms, email, there are so many uses for it and none of that can survive without proof-of-stake, and without running nodes, and operating a staking service. That shouldn’t just be limited to certain classes of individuals or certain people who have the ability to do it from a technical know-how, everybody should be able to participate in that. So we’re trying to figure out how do we make that available to … And do it in a way that is not toeing the line from a regulatory perspective.
We’re also very focused. And I think on the APAC market, as you mentioned, and expanding internationally, we’re happy to be working with WonderFi and Bitbuy in Canada and we think there’s a great market there. So all options are on the table. And I guess I would just encourage everybody to make sure that you’re partnering with a staking as a service provider or a custodian that you have trust in, that knows the regulatory landscape, and that you have open communication with, and that you guys are partners and have each other’s backs to get through this time.
Ian:
That’s great advice. I didn’t realize the Figment app existed so now I’m going to go download that after we get off the show since I’m not in Canada and can’t go work directly with Dean at WonderFi. Lorien, anything you want to add to Jennie’s comments as we wind down?
Lorien:
No. I think that summarizes the state of play where we’re at. I really believe that this technology is important for all our digital futures in many ways. If you have a proof of state token and you want to play around and actually participate and run the protocol, take over staking.
Ian:
That’s awesome. Dean, I’m hoping here you’re going to tell me you’re expanding to the US market but I have a feeling that’s probably not on the radar for the rest of the year. What is the things we have to look forward to for the rest of 2023 for WonderFi?
Dean:
Now, Jennie’s talked some sense into me from going into the US as soon as I had hoped so it’s no longer on the roadmap. For WonderFi, we certainly have our hands full with the closing of the acquisitions of Coinsquare and CoinSmart which will be in short order integrating those platforms, and streamlining our operations, and finding those synergies between the companies that, obviously, exist. More broadly than that, I think what we’ve seen with our staking license in Canada is that Canadian regulators can find a balance between product innovation and consumer protection. And so with that, we’re really going to look to build on top of the products that we have, demonstrate to our regulators how and why we can do this in a safe and comply manner, and continue to roll out the products and services around the digital asset industry that our clients are looking for.
I think an important point is, if we don’t provide these services to our clients it’s not as if they’re not going to find them elsewhere. As we’ve seen with … I hate to keep bringing up the Celsius and the Voyagers, but when you don’t provide these services or offerings in a compliant and safe manner, Canadian investors are going to look elsewhere to find them. They’re inevitably going to find them and that puts them probably in a less favorable position or in a position where there’s less recourse in the event things do go wrong. And so for us, we’re really focused on rounding out the offering to really encompass all of what the Canadian investors are looking to do in the digital asset industry.
Ian:
Outstanding. Dean, Lorien, Jennie, this has been a fantastic conversation, I learned a ton. Slashing not striking. Thanks so much for joining us on Public Key today.
Lorien:
My pleasure.
Jennie:
Thank you for having us.
Dean:
Thank you for having us.
