Nathan McCauley on Anchorage’s approach to institutional crypto custody

0:00I'm Ashlyn Addison from event chain for investmentpitch media and FinTech news network and today on blockchain interviews we have Nathan McAuley the CEO of Anchorage Nathan thank you so much for taking the time to be on the show it's a pleasure to have you here today ashin happy to be here you're very welcome I'm excited to learn a little bit about Anchorage if you

0:21would just kick it off with some background on your expertise in the security industry and how you're applying that to cryptocurrencies sure so I've been working in security for my whole career starting with anti reverse engineering for both tanks and video games kind of across the board and then after working in that field for awhile I ended up being one of the early security

0:44engineers at square that's where I met my co-founder geo go and we spent the next few years together building all the security infrastructure at square and then moved on to docker where we worked on security for containerization until late 2017 when crypto called for us to to join and to work on a custodial solution that allows institutional investors to hold their crypto assets

1:10securely that's great and how is anchored specifically making cryptocurrency a safer place is it that dangerous out there right now so it's been pretty clear to institutional investors from the very beginning that since crypto assets are in a sense bearer assets security of those security of how they're held is paramount from the fact that there have been

1:35historically many hacks of exchanges and other custodial providers to the fact that just the underlying situation with yes that's kind of demands that it's always been pretty pretty important so luckily there are some solutions out there like Anchorage that are able to provide really secure custody of the of the assets while also allowing some of the great advantages that we've gotten

1:57out of blockchain networks to be realized mm-hmm security has been a major issue especially with exchanges and people looking to trade between coins when you have to move your coins on to a hot wallet and they no longer become your private keys alone you have to share those to trade the coins often those exchanges are compromised and the coins are lost as people are

2:19looking to continually hold access to their own private keys and trade or stake coins how do you foresee the industry coming up with a solution to have the best of both worlds sure the way we look at it is that people should have a temperature the weather should have a temperature but we shouldn't have to be thinking about the fact that our assets might have a temperature no other

2:42no other asset class has this kind of dichotomy that you have to deal with and you shouldn't have to deal with it in crypto assets you should be able to get all of the advantages of what people call cold storage all the security advantages with none of the trade-offs you should still be able to take those assets you should be able to vote in them you should be able to participate

2:59in airdrops all while keeping them safely stored and usable yes security and access seems to be some sort of a trade-off or a compromise do you foresee in the near future or has Anchorage already solved this problem where you do not have to compromise either of those things we have we have solved the problem we have a solution that we have on boarded many crypto funds – already

3:26where they're able to hold their assets they're able to move them out to trade them at their leisure on timeframes that are useful for them and they're also able to do crypto native activities like participating in participating airdrops staking in those networks where that that is necessary and can help generate yield and very soon we'll be rolling out

3:49participative voting in some of the networks interesting and what is one of the important things that investors and fiduciary should know about keeping their digital assets safe and many are still learning about the industry know so with the responsibilities of Volusia arey you have to be considering kind of two aspects of that first one is how do you make sure that you don't lose the

4:12assets themselves how do you make sure that they're held in a third party qualified custodian and the qualified custodian themselves should also be acting as a fiduciary we're able to do that through a South Dakota trust company and kind of execute fiduciary powers there and for us that really means two things that matter both to us and matter to the

4:31investors that is keep the assets safe and generate yield on top of the assets it is the responsibility of any fiduciary to seek out yield where it is available and in crypto assets there are a whole host of activities that are crypto native that require participation in the networks that are yield generating and it is is our opinion that the investment advisors who are

4:56investing in these funds must do those things and the custodian who is holding those assets has the responsibility to participate in those activities mm-hmm how long ago was Anchorage started and what does the customer base look like right now sure so we we finished our first fundraising round in late 2017 we spend all of 2018 building the technology we

5:18kind of went into stealth mode one quiet and just built up the technology we knew that this was going to be kind of a net new innovation to the space and really spend the time to get it right so I whole year building in 2019 we came out of stealth launched launch the company started onboarding clients and right now we have a a host of clients that are

5:38large crypto investors in the space think of your your poly canes paradigms andreessen horowitz crypto all of the large crypto investors have already on board it and we are continuing to onboard more actively traded funds funds that are looking to gain gained yield from staking and increasingly having conversations with more traditional investors like family offices who are

6:03looking to allocate some percentage of their holdings in the crypto and hold them safely and generate yield mm-hmm very interesting and is the custody industry a very competitive I saw recently zap oh and coinbase are growing rapidly and there's two to four hundred million dollars coming in every week how do you have a competitive advantage over these guys sure so there's there are a

6:29number of legacy players within the within the space who have been around for a while and are focused on cold storage custody of their assets it is our opinion that that model will not be the model that serves investors long term within crypto and so what we're seeing is among funds who are looking to kind of take a long-term view and take a long-term

6:52position within crypto they're looking for the enduring partner to work with within the crypt asset space and many of them look at that and say hey we're going to need a place to hold assets where we know that we're gonna be able to trade quickly we know we're gonna be able to move around the assets and we know that we're gonna be know generate yield on top those assets and Anchorage

7:13is the only market participant right now that doesn't focus on cold storage and rather holds the assets in a way that they're safe and can be can be used effectively we're seeing overwhelming interest inbound to come and talk to our sales team in fact we're scaling up our sales team right now to deal with the demand that we're facing mm-hmm I was just gonna ask that what does your

7:36team look like right now and are you mainly based in the u.s. sure yeah we are based in the US we have 40 employees here in the US many engineers many engineers are responsible for implementing the assets and implementing all the security behind the system we have a large legal team because we are very regulatory and compliance focused and then we have a sales and marketing

7:58team that is there to really serve our clients and provide that institutional experience that many of them would like to have mm-hmm yeah and what does the business model look like for Anchorage right now and is it competitive within the space it is competitive we're finding that we we charge a percentage of the assets per year kind of an AUC fee that is fairly typical among

8:22traditional custodians we're finding that our our prices are competitive with the market and the people are in many cases even willing to pay a premium to come with us because they they recognize the superior security that they gain and the superior access to that is congratulations now one thing you mentioned was you spent all of 2018 developing and that

8:46often happens in the blockchain industry once the funds of raised you put your heads down and put the pedal to the metal now that the product is live in the market what does the development look like is it finished are you guys continuing continuing to develop new services yeah so some of the some of the features that we're adding kind of now are on top of the core

9:08custody protocol I would split those into two main phases the first phase is implement new assets so we have support for some of the larger cap tokens right now our investors and our clients are looking for a single custodian to hold all of their assets so we continue to spend a large a large amount of time energy and effort on implementing new assets that are that are coming out into

9:32the space in addition to that there's another whole set of features that people want from the institutional custodian so we spend a lot of time over the last few months adding an API that allows fund administrators and auditors to integrate very nicely we really want to be the custodian that solves the entire lifecycle for our funds not just hold the assets but help the help the

9:56fund deal with fund administration help the clients pass their audits and help their help to the client fully act as a fiduciary and help them in every way we can mm-hmm that's great and I also read that you've become one of the members of the Libre foundation could you speak a little bit about this joining Libre and what that means for Anchorage and what

10:17it means for the industry sure Libra is an extremely exciting product project we've been talking to Libra team since the very beginning our focus with working with Libra is basically it is going to be one of the largest projects in the two-hit crypto and has the potential to have very large impact on the underbanked throughout the world and create a mediums change that can really

10:43help a lot of people and really kind of achieve some of the goals that crypto has always looked to do the fact that it kind of has a dual focus of helping individual users get access to crypto but also has an institutional angle where there are institutional investors looking to investing it makes it a very natural fit for us so we will actually be one of the

11:05founding members of Libra means we'll have a seat at the table and vote on all the important issues that face them we will run validator notes which will help us actually run the network and we're really looking forward to working with regulators all over the world to help them understand Libra and really bring bring the promise of blockchain to many

11:26more people worldwide that sounds very promising and best of luck with that thank you and now as you continue to grow what challenges or obstacles do you foresee that Anchorage may come across sure so the challenges that I imagine will come across are ones that we are absolutely planning for right now so one of the biggest challenges we face right now is scaling up our sales team I

11:52like I mentioned earlier there's there's so much inbound interest so many more people coming in to crypto that we're we needing to scale that up that's kind of a near-term challenge longer-term crypto is an area that just has tremendous amount of technical complexity so continuing to wrangle all that complexity hiring a stellar engineering team that is able to build all these

12:13features build these crypto native integrations that are allowed to enable clients to generate yield will kind of be a continuing challenge for us the other one I would say is not necessarily a much as a challenge as an opportunity and that is speaking exactly what I was talking to about rail Ettore landscape there is a lot of questions need to be answered and we're spending a lot of a

12:36lot of resources and time investing in that area because the the way this really works for the institutional investor base is that everything ends up being regulated and ends up looking and feeling like like an offering in like an asset class they're familiar with so spending a lot of time on on regulatory is going to continue to be an opportunity for us where we will invest

12:57time energy and effort that's great Nathan and are you you mentioned that you're growing the team and you're also looking for more customers is there anything else that you're looking for sure we we really like partnering with the blockchains themselves so any of the blockchain developers who are looking to add a new asset we're always interested to talk even earlier earlier in their

13:22development cycle about how we can be a custodian for them and how we can best serve the most needs for us they are as much a constituent for us the the blockchain teams the teams that are implementing the assets are as much a constituent for us as our clients are as our employees are and as a regulators are mm-hmm and if these parties are interested in learning more information

13:43or reaching out to Anchorage what is the best way for them to contact you sure the easiest way to reach us is through our website Anchorage comm we have a contact form there where any inbound interests can be represented and can come in join us and let us know how we can help serve you best thank you so much for your time Nathan that's all the time we have today but it's been a

14:05pleasure speaking to you and let's follow up in the near future sounds good Ashton thanks a lot for your time