Transcript:
This podcast was transcribed through a third-party application. Please disregard any misrepresentations.
Mark Eckerle:
Hello, listeners, welcome to this episode of Cryptonomix. Before we jump into today’s discussion, please keep in mind this recording is for general education and is not intended to constitute investment advice. Any opinions expressed are those of the participants and do not necessarily represent those of Withum.
Mark Eckerle:
Hello everyone and welcome back to another episode of Cryptonomix, brought to you by Withum. As always, I’m your host, Mark Eckerle, and today I welcome to the show Matt Walsh, Founding Partner at Castle Island Ventures. Without further ado, welcome to the show, Matt.
Matt Walsh:
Mark, thanks for having me. Good to see you.
Mark Eckerle:
You too man. You too. Thanks for joining us today. I think we have a lot to unpack on today’s episode. I’m excited to dive into a couple of our topics, but I think the best spot to start is tell us about yourself. A little bit of background, kind of take us through your crypto journey, right? Everyone’s got a little different path of how they fell down the rabbit hole. So tell us a little bit how you kind of ended up where you are today.
Matt Walsh:
Yeah, absolutely. So, yeah, Matt Walsh. I’m co-founder of Castles Island Ventures. We’re an early stage blockchain focused venture fund investing out of our third fund now. My origin story, so before crypto, I was a management consultant for a number of years and then went to business school from 2012 to 14. Got very interested in Bitcoin at the time, while I was in business school, not enough to make it a full-time career back in 2013, but joined Fidelity out of business school was originally on the strategy consulting side of Fidelity. And in late 2014, I guess it was, I was asked to take a look at Bitcoin through the lens of a disruptive technology exercise. We were looking at disruptive scenarios of future technology states and what could happen to Fidelity under certain edge cases. And so we were originally looking at Bitcoin through this lens of peer-to-peer value transfer and the impact that that could potentially have on the financial services world.
Matt Walsh:
You know, a lot of the things that we thought about Bitcoin, I would say at the time did not come to pass. So we were looking at things like colored coins and the open asset protocol and this idea that value transfer for equity securities could eventually move to the Bitcoin network. Obviously that didn’t happen, but we got really deep, you know, so we basically started a two plus year R&D exercise, eventually started a fund under Fidelity’s umbrella investing Fidelity’s capital into early stage projects in the space. And we left to go independent in 2018 to start Castle Island and have been at it since.
Mark Eckerle:
Awesome, awesome. So, you were very early on, it wasn’t more, so you took the plunge with Castle Island, it was, you were part of Fidelity’s original research team and kind of just perusing the, the asset class and what impact is it gonna have and is this here to stay? All that fun stuff.
Matt Walsh:
I like to say I had the, the luckiest career break of all time because I was spending most of my nights and weekends reading about Bitcoin on the Reddit forums and Bitcoin Talk back then was a pretty big venue and so, you know, just sort of fell into my lap that we were going through this consulting project and looking at disruptive technologies and I was sort of in the right place at, at the right time when people at Fidelity started to get interested in Bitcoin, that I was really into Bitcoin as well. And so I made the decision that I would do my best to just be aligned with anything Fidelity was trying to do in the space from an R&D perspective. And I was super fortunate. A lot of the people that I worked for were tremendously supportive of me spending time and attention on this. So was able to turn it into my full-time job actually, while I was at Fidelity and had a, you know, I guess a four plus year learning experience before we started Castle Island, which not a lot of people are as fortunate to get that experience. So was able to see a lot of cycles from the inside of a big company.
Mark Eckerle:
Yeah, it doesn’t get much better than that, right? When your, your personal life and your professional life kind of align together. I mean, that’s like a win-win in in all scenarios.
Matt Walsh:
Yeah, I used to get so frustrated in college when people used to say, well, just follow your passion, because I didn’t really know what it was until much later in my life and I was passionate about things like watching the Patriots, but that doesn’t really translate into a professional career for most people. Although I guess it does for some, but I was able to identify Bitcoin pretty early on in the journey and just got really obsessed with it, I would say.
Mark Eckerle:
Awesome. So, I mean, we’re coming up on basically your 10 year anniversary within digital assets and I kind of wanna start there. Let’s do a quick recap, right? We’re nearing the end of 2023. It’s been, in my opinion, a successful year coming off of 2022 and all the events that transpired then. Can you give us a quick recap of your point of view on 2023, what key takeaways or events happened that helped move us forward and where we are at the end of the year? Kind of, I think we’re moving in the right direction. I mean, everyone looks at prices. I’m not really a price person all that much, obviously. I feel like that goes with the ebbs and flows, right? If we’re in the green, everyone’s thumbs up and doing well or if we’re in the red, everyone’s saying crypto’s leaving and money’s going down the tubes and all that fun stuff. But curious, what, what is your takeaway from 2023 and where we are today?
Matt Walsh:
Well, I guess you have to start with 2022, as you say, it was kind of a bad year for the whole industry. So you had the FTX collapse, you also just have this backdrop of regulatory pressure and some of the, the lack of clarity in the US market in particular. I’ll note that outside the US there actually is quite a bit of regulatory clarity, but 2023, I think the story has just been a year of building. And so some of the technical advances that we’ve seen in this industry from an L2 perspective, from a modular blockchain perspective, new projects launching, that’s really been the behind the scenes story, I think. And, and a lot of the builders have just been hard at work, which, you know, is unlike some of the other bear cycles. You probably remember like 2014, 2015 time period, the Blocksize Wars, it felt a lot more negative, felt like less was being built.
Matt Walsh:
I’d say a lot has been built and you couple that with just the inflows to the asset class. So, I think Bitcoin is up, you know, 130% this year or something like that, but you’d never know it from reading the Wall Street Journal or looking at the public press. So, that’s really been the story. And, and of course we exist as an asset class that is not immune to the interest rate policy in the United States. So the past few years going from 0% rates up to whatever we are now, a little over five in terms of the Fed funds, that tapering off a little bit here or at least settling down, I think has brought a renewed interest to just Bitcoin as an asset class and that obviously trickles down into the startup economy as well.
Mark Eckerle:
Yeah, I mean I think it’s been an interesting year. I mean, it’s tough to say ’cause I agree wholeheartedly with that sentiment. I think it’s been a time of building, right? And you have a lot of people building those products that we’re gonna use in the next 2, 3, 4 years that when you’re in a bear market, it’s tough to survive. So it’s, it’s getting folks like yourself, right? I think that’s a perfect segue. It’s having the right investors, having the right people supporting your company and seeing that vision of where a company’s going and how they’re gonna benefit in the future. Because a lot of companies, especially in the crypto space, are right, their balance sheet pegged to the price, so they kind of go up and down as the market goes up and down. So it’s tough to really be sitting on certain treasuries if your balance sheet’s not in a fiat currency.
Mark Eckerle:
But I agree, it’s, it’s been a lot of building, quiet building, which is great for the space. And I think we’re really gonna come out of this. I mean, I personally think we already have, but we’re gonna come out of this bigger, stronger, better. And, and the regulatory front, it is interesting because I feel like everyone in this space, we’re all working together. We want that clarity, but it’s trying to figure out what that clarity is going to be, we, it’s like pulling teeth from any regulatory body to get some kind of, uh, guidance on what we’re looking for to move the space forward.
Matt Walsh:
Well, in the regulatory clarity, it’s not that we’re just saying, Hey, we need, we need this kind of ambiguous pie in the sky, regulatory clarity. I think there’s some very specific things that should happen as an industry. I I think there’s really three main ones. One is the repeal of staff accounting bulletin 121, which is this accounting guidance that is prohibiting the US banks from competing. And I never thought that we would be allies with the bank lobby as an industry, but I think we really are because you’re living in this paradigm where the European banks and the Asian banks are very actively competing for digital asset custody business. And the Bank of New York Mellons and the State Streets in the United States are just structurally unable to compete. And so if you had the view that you want to make this a more professional market, you wanna have fewer FTX style risks in the market, you would just be trying to get the US banks to play in this market.
Matt Walsh:
And so we, we need to fix that. The second thing is, it’s very clear that stablecoins are the killer app for public blockchains. Something like 70% of every transaction that is happening on a blockchain right now is just moving a US dollar around. And so we just need a clear framework for that in the United States. We need to know what type of issuers can bring these things to market. Ideally, we’d like to preserve the state path which exists in all other types of asset classes to have a state trust license, be a framework that you can bring these to market. So that’s the second thing. And I think the third thing is we should just have a comprehensive market structure bill passed in the US that codifies that banks and broker dealers can participate in this market that gives clarity over are things securities or are they commodities?
Matt Walsh:
And let’s just have a framework for regulating the spot market. So I’d say the industry has coalesced around those three major structural needs and that is happening in other jurisdictions. And so Coinbase put out this great chart in their latest 8-K, that 83% I think of the G-20 nations have already done this. So, it’s unfortunate that the US is lagging its peers and you know, look, this is a global market, so capital will find its way into the frameworks at work, and we’re already starting to see that in this space for sure.
Mark Eckerle:
Yeah. And the one thing we all don’t want is to be driving innovation away from the United States, right? So we’re trying to figure out what the best path forward is and keep that here on US soil build here and have that product be a domestic product. And like you said, we don’t wanna be falling by behind our peers at all. And it’s felt like that for a long time that we have been, but yeah, I think we’re moving in the right direction, which is great to take a quick pivot now, I wanna dive a little bit into Castle Island, I guess your day to day, right? Let’s see kind of what, from your approach on investing and being a VC, especially in the crypto space, because it’s very nuanced, right? You see a lot of different types of products being built, a lot of different moving parts.
Mark Eckerle:
I feel like every day I’m here about a new token being launched or a new L2 going live. The space is constantly evolving, which in other industries is not the case. So, what have you seen being a VC from a Castle Island perspective? What’s your point of view on like, which series do you like to invest in? Is it early, I know you said early stage, but is it Series C, is it Series A? Is it pre-seed where you just kind of maybe do a safe investment? And I’m just curious, your approach when working with your portfolio companies. Are you hands-on? Are you hands off? Are you, I mean, I’m gonna assume you’re there to answer any calls that come up on a day-to-day, right? Like, it’s all about strategy and building and, and helping as much as you can, but I’m just curious what you’ve seen has worked and hasn’t worked in your sweet spot almost.
Matt Walsh:
Sure. Absolutely. So the way that we think about things, if you just think about the investible universe for Castle Island is that there are three big macro trends that are influencing new startup creation in the blockchain space. One is the monetary use cases for blockchains. So things like Bitcoin, which are non sovereign money or things like dollars, frankly, you know, stablecoins is a, as I mentioned a huge use case. So that’s one big area that we focus on. The second is financial services. So we, most of the team comes from a financial services background. We think there are tremendous opportunities to just re-architect the financial services system, not only in the United States but internationally. And then third thing we, I always called it decentralized internet architecture. This, this idea of community owned software. Some people call this Web3. Our view has been all three of these things are happening.
Matt Walsh:
You can argue they’re happening on different time horizons. Obviously Bitcoin was first stablecoins are kind of the killer use case at the moment, but we think there’s investible commonality underneath those three big buckets. And so we seek to invest in 25 companies per fund, as you mentioned, we’re early stage, so we go Pre-Seed, Seed and Series A, so you won’t find us later than that and we do get very involved. So we take board seats at our companies, many of them sometimes when they’re pre-seed investments that may not be appropriate. But I would be towards investing with the company on a go forward basis and very involved at a day-to-day level, I would say.
Mark Eckerle:
Okay, when you’re talking to a company or in the early stages of, I guess them, them courting you, right? And they’re trying to figure out like, Hey, we want Castle Island help us. We want them to be our investor and they’re gonna help us build that path forward. What recommendations would you have for a company to present to an investor or potential candidate, whether maybe it’s something that they’re lacking, right? Like what would be a good sell point for you outside of the product, right? ’cause obviously that’s gonna be the biggest driver, whether you want to get invested and be a part of a company. Is there anything that a company can do, management can do that helps like ease your mind or helps give you comfort and be like, yeah, this is a winning company, this is the way forward. Is there anything that you’ve seen that has worked or maybe it hasn’t worked?
Matt Walsh:
So the way that we think about underwriting, every investment is through the lens of four things. It’s people, market, product in then deal terms in that order. And so from a people perspective, we’re really looking for exceptional founders that have some deep experience, that have lived something that leads them to believe there’s a big opportunity. I mentioned market, obviously there are some markets that we just don’t play in, so you won’t see us looking at a, a blockchain based gaming deal. None of the partners have DNA in the gaming space. So we really look at markets that we understand that we believe are huge addressable markets that could support billion dollar businesses being built in them. On the product side, I’d say we’re comfortable taking pre-product risk. It’s certainly something we’ve done in the past, not in a market opportunity that we don’t understand very well.
Matt Walsh:
And so happy to invest pre-product in things like trade execution platforms that have to exist, probably less so in a market that is a little bit off the beaten path for us. And then deal terms at the early stage, we typically are coming in at, you know, sub $20 million valuations for most of our companies. I would say the thing that we really look for is an initial hypothesis from these companies. And so when you’re investing at the pre-seed or seed stage business, typically these things don’t have revenue yet. They really just need to have a vision of what the world could look like and a real process to de-risk that. And so we’re not financing these things for a 15 year runway. We’re looking at discrete milestone based financing. We’re putting, you know, 24 months of capital on average into these businesses and just looking to de-risk that thesis and continually checking in. And so we really see the earliest stage the pre-seed and the seed stage as having a hypothesis either proving it or disproving it, and then just acting accordingly. And so that’s really what I would say is that we’re really just looking for teams that are oriented around getting to work quickly in proving a hypothesis.
Mark Eckerle:
Yeah, and it’s all about being nimble and flexible, right? And you wanna make sure like, Hey, is the product going the right way or do we need to quickly pivot, tweak something here? And I think that’s really important, especially when you’re working with founders and smaller teams, right? Everyone’s kind of wearing multiple hats, you’re doing different things every day is something new. But you mentioned so, so some of those key industries. I’m curious, like drilling down any sub-verticals within digital assets, right? So financial services products, you mentioned stablecoin based companies. Do you guys do anything around, and and the reason I ask is because it’s coming up and it’s a prudent topic around mining. Are you guys active in that industry With the halving coming up, I know everyone’s gonna be talking about bitcoin miners and computer rigs and new software’s, as the ecosystems changing and the network becomes more backed up. I’m curious what your take is on that space. Are you in it for personal and expertise or are you guys in it from an investor strategy point of view.
Matt Walsh:
We’ve never made an investment out of the funds into a bitcoin mining business. Primarily just due to the capital intensity of those businesses. So typically we’re coming in at a very
early stage and so we really look for models that can be very capital efficient over time. Mining has historically not been right and so it’s large CapEx required. There’s obviously a lot of discipline around power purchase agreements and stuff like that, that is really interesting. So, you know, I think these businesses to us are academically quite interesting and there’s probably some periphery software plays that could be interesting as well. I view mining as more of a private equity style based investment though, as opposed to an early stage venture investment.
Mark Eckerle:
How about NFTs? You guys invest in NFT companies? I know that was very much at the forefront about two years ago and it slowed down a little bit, but I know there’s definitely a ton of activity still in the NFT space. I’m curious, is that something that’s up your alley?
Matt Walsh:
Definitely. I think NFTs, I, I really just think that this is a new file type for the internet that will have broad applicability towards all sorts of different industries. So we’re investors in a company called TYB that is using an NFT backend to power loyalty, uh, plans. They don’t go to market and say we’re an NFT company. I think that’s the real secret sauce here is to really be below the hood. We don’t know that we use, you know, SMTP on a daily basis. I think it would be very unlikely to me to live in a future where NFTs is the kind of the tagline for consumer facing product. But I think there are a lot of opportunities to build NFT infrastructure companies. So we’re interested in the financial services side of this. So brokerage and lending, trading platforms. And I think, you know, the ultimate vision here is that a lot of things that exist in the analog world will eventually exist within NFT backend, whether that be ticketing software, I think restaurant loyalty programs going on chain via some sort of an NFT file type is quite likely.
Matt Walsh:
So we’re very, very interested in it. You won’t see us buying NFTs outta the fund. I, I don’t think that we’re going to be out there buying, you know, bored apes. But I think this is a primitive technology is quite interesting. And this idea of having digital scarcity at the file type level, uh, in a non fungible way, I think it’s just a logical evolution of where this industry has gone. Obviously we started with the fungible tokens like BTC and ETH, but not all assets are fungible. And so this idea of representing NFTs on chain, I think just has broad applicability.
Mark Eckerle:
It’s funny you mentioned that the portfolio company, what was the name?
Matt Walsh:
TTYB is one that’s in the loyalty program space. We have a financial services company called Arcade that’s, you know, doing quite well in the NFT space as well.
Mark Eckerle:
It’s funny you mentioned that they don’t go to market saying they’re an NFT company, although that’s maybe one of their operations or something that they do. I almost view like taking a very high level step back. Like blockchain technology’s the same. You hear five, six years ago it was like, blockchain technology’s gonna take over the world and it’s gonna do this. And it’s companies utilizing that as like the plumbing underneath their company. It’s not a go-to market strategy of we’re using blockchain technology and that’s our product. It’s, no, that’s a means to an end to get somewhere and to build upon. But I almost view that the same was as you mentioned. So it’s funny ’cause I give the same analogy to a lot of people I talked to.
Matt Walsh:
Yeah. I mean, remember the early days of the internet, I remember when CMGI raised a big fund back in the day, it was advertised as, hey, it’s an internet only fund, right? They invest in the internet and associated kind of companies, and now every company is an internet company. You would never describe a startup as an internet focused startup. It’s just, okay, the internet is a tool and we use it and we have a product and we sell it to customers and it, yeah, it goes on the internet, but I think a lot of this will end up that way where you’ll have stablecoins becoming a ubiquitous payment rail. So it’s quite possible, and even likely to me that at some point in the pretty near future, most companies in the world will touch public blockchains. And it might just be for moving dollars around, but I think there will be broad applicability. So yeah, maybe in five, ten years calling Castle Island, a blockchain focused fund is even going to be outdated.
Mark Eckerle:
Yeah, yeah. And that’s what we’re seeing a lot in our, the clients that we work with and advise companies that are not crypto native customers are coming to them and saying, Hey, I wanna pay you in USDC or a stablecoin, whichever one it is, and that’s their front door, that’s them opening the door to the crypto space, right? That’s the first foray of how do I set up a wallet? How do I accept this? And because vendors won’t pay me. I’m not gonna say no to a vendor paying me. It’s like, let me make it happen.
Matt Walsh:
Totally. I mean, you can accept payments on the nights, on the weekends. I mean, this thing is just 10 times better than using legacy rails. And so I think that will be what gets a lot of companies into the space. It’s just that their customers are transacting in stablecoins and they want to make a payment into the company, or they wanna receive a payment from the company. We’re seeing companies pop up paying international vendors using stablecoins. There’s the use cases here are pretty vast. Not to mention the fact that you just have the dollar being used as a savings technology in all sorts of countries that have really terrible fiat currencies, where there’s this emergent behavior of not necessarily holding Bitcoin. I don’t see that as much, but just holding US dollars on a, on a wallet. So people that can’t otherwise have access to a US Bank account, they can actually just hold on an Ethereum wallet. They can hold US dollars. And so we’re seeing this emergent behavior that I think is, you know, really been fascinating. I think the volumes on some of these platforms that are offering these services are just skyrocketing.
Mark Eckerle:
Yeah. The stablecoin industry is, the use case is so relevant and prominent in today’s society. And I think that was one of the early things when I first got into digital assets in like 2014, 2015, it was like that was the first light bulb to go off, right? Outside of like the investment side of things and seeing the, the peer to peer model. It’s the, the settlement layer, the transactions, the cross-border payments all in real time. It never turns off, I’m not going to a bank nine to five. That’s when I was like, all right, this is not going anywhere. It’s here to stay. It’s gonna be a slow build 10 years later, but it’s here to stay.
Matt Walsh:
Yeah. And I think you’ll see this proliferate even further. And so things like the Lightning Network, at some point in the future here, we will add Stablecoin functionality and so all of a sudden you’ll be able to see micropayments happening to content creators using fractions of a penny to make those transactions happen. So I think the use cases here are just getting started.
Mark Eckerle:
I agree. I do wanna take a quick pivot ’cause I wanna get your thoughts, feel like it has dominated the airwaves, uh, in 2023. Been a topic of discussion for quite a while now with the SEC and a lot of funds spun up the Bitcoin, ETF race battle, whatever you wanna call it. Where do we stand and do you expect that we’re gonna get the green light sometime soon?
Matt Walsh:
So yeah, as you mentioned, this has been sort of the 10 year hobby horse here since the, the Winklevoss twins applied for it in 2013. I guess it was. It feels to me like we’re getting closer and if, you know, if we end up with a denial out of this current crop, I’ll really be scratching my head at how many man hours appear to be spent at the SEC going back and forth on some of these applications right now. So it seems to me like in early January at the latest, you would have a decision from the SEC on the 19 before filings with the Division of Trading and Markets, at which point it will get kicked over to Division of Corporate Finance to evaluate the individual S-1s. And you know, it’s tough to say since we’re not in those rooms, but from what you can see from the Bloomberg reports and some of the folks that are deeply knowledgeable about this space, it seems to be that there’s a very active dialogue with the SEC and the sponsors in a way that hasn’t happened before. And of course now you have Fidelity and BlackRock sort of leading the charge on these applications. And so it’s, it’s a different type of sponsor coming to market. So my base case assumption is that it happens.
Mark Eckerle:
So if it gets kicked over to Corp Fin in January, what is the time horizon before that ultimately goes to market? Is that a month? Is that six months? What would that look like from like a consumer investor point of view?
Matt Walsh:
You know, there’s no set timeline once it gets over to the S-1 process. And so it’s really until those products are buttoned up from a, you know, disclosure perspective. But from what I have read, they all appear to be pretty close. You know, I’m obviously not a lawyer. I’m not sitting at the SEC, but you have this back and forth and you’re starting to see amendments filed, new risk disclosures being put into these S-1s. And so you would think that that would be pretty quick once it gets approved on the 19 before, you know, maybe a couple of regulatory type of updates. You know, hey, we have these risks that we previously had not identified, but I view that as really kind of minor compared to getting through the 19 before process.
Mark Eckerle:
Yeah. It does appear that they’re already right going through the commentary process with the SEC filling out responses and kind of like you said, filing those amendments now as opposed to waiting two months from now and then going through that whole process. It’s like they’re doing both in tandem. So hopefully it happens pretty quickly after that.
Matt Walsh:
I don’t remember any of these previous wave of applicants over the past 10 years actually going back and forth and amending and having what appears to be pretty substantive conversations with the division of corporate finance at the SEC. I always had the impression that things always just got bogged down at the 19 before level before. And so to me it feels quite different and, you know, whether that ends up in a yes, an affirmative listing, we’ll see, but I’d be, again, I’d be really surprised if it didn’t, just based on the man hours that appear to be being spent on it and obviously grayscale winning the Administrative Procedures Act lawsuit against the SEC here. I think that’s a big piece of that. I’m not sure that we’d actually be as advanced as we are if, you know, the courts hadn’t come in and said that the SEC was in the wrong on that. And so it’s really been the court system that has really taken the lead here in terms of the industry.
Mark Eckerle:
Now, not to be Mr. Negative, but if we do get a denial, I would think if one gets denied they probably do all 12 at the same point. ’cause I think all are following suite, right? Or following suit. Do you think that’s the final nail in the coffin for the Bitcoin ETF if we get a denial or, because I’m just, like you said, I think there’s been so much headway and so much steam behind like this movement almost for 2023. So many firms, so much money and time spent. I I I just feel like we would be at a, we’d be hitting a wall if we don’t get through this time.
Matt Walsh:
Well, keep in mind the SEC has already approved Bitcoin and Ethereum futures based ETFs. And so the surface area on which they could actually deny the spot ETF proposal is a lot smaller than it would be if they had also rejected those. So I would think that, you know, I think qualified custody is an addressed issue. I think the authorized participants and how they create, whether they do it in cash or in in kind, it looks like most of them are moving over to cash creates. It just seems to me like the list of things that you could deny on is quite small. And so, you know, I certainly don’t think it would be the end of the road if it got denied. I do think you’d immediately see lawsuits, you’d see Administrative Procedures Act lawsuits almost immediately from several of the sponsors.
Matt Walsh:
But no, this will continue. And you know, the SEC is not an institution that doesn’t turn over either, right? And so administrations come and administrations go and eventually, uh, we’ll have this market structure. These products exist in many other countries, right? I mean, just look to Canada. Look to Europe, these products are at scale working. It’s not that this is a theoretical thing. I don’t know how to run a Bitcoin ETF, will this thing break the market? I mean, all of these players that are doing this operate ETFs other places, right? Like most of them at least the high profile ones. And so I think that this is fairly inevitable now whether it happens in January or a year from January, I think you could debate that.
Mark Eckerle:
Yeah. So, so hopefully right after the holidays we’ll have a good, right. January would be nice. We’ll get some good news. I’m curious, what else are you looking forward to in 2024? Right? Both from a personal point of view, right, for the industry as well as a professional point of view. Is there any industries, like I mentioned sub-verticals earlier within digital assets. Anything that you’re excited about? Anything that has been building that you’re excited to come to fruition? I’m just curious, what are you most looking forward to in 2024?
Matt Walsh:
I’d say there’s two categories that I’ve been spending a lot of time personally. One is cybersecurity. And so we’re very active in that space, and I think that’s a huge need. I mean, this industry has repeatedly shot itself in the foot as it relates to cybersecurity incidents over the past 10 years. And so that can never be, you know, you can always get better in that category. So we have cybersecurity companies, but we’re looking at key backup companies I think is more, uh, institutions come into this market, the need for cybersecurity will only increase. Second thing that I’m spending a lot of time just personally thinking about is just what is this market structure going to look like? So you have a market now, which has no banks and no broker dealers active in the US and if some of these regulatory things that we talked about earlier come to pass, all of a sudden you’re going to live in a much different market.
Matt Walsh:
And my suspicion is that we’ll be a market where trading is divorced from custody and that this starts to look like a safer market that can prevent things like FTX from ever happening again. And so I spend quite a bit of time just thinking about what that trading landscape needs to look like. These, these new venues that are starting to pop up that do not actually take possession of the client assets, client collateral where really there’s a settlement process that happens, divorced from the trading. I think that’s a safer market structure. I think that’s where US institutions will tend to want to focus. So I think there’s just some big betts to be made there in terms of what will this market look like? It almost certainly won’t look like the relic markets of the past where you have exchanges that are also custodians that try to be prime brokers. I mean that those days have come and gone
Mark Eckerle:
Rather try to do everything all under one single umbrella.
Matt Walsh:
Yeah. I mean, and, and honestly, it’s not to knock any of those companies, it’s just what the market had to look like because there was not enough capital to support the bifurcation of the market. And some of the early adopters of this technology were retail. So retail really front run this whole market. And, you know, the retail customer has a different risk profile than a big institution that is managing capital on behalf of their limited partners, for instance. And so I think you’ll just start to see the evolution here and, you know, does it look like the FX market or does it look like the equity market in terms of how it clears and settles? I think you can have that debate, but the one thing I’m pretty confident in is it won’t look like a wild west kind of unregulated casino market. Like that doesn’t seem to be like that is in the house of cards there.
Mark Eckerle:
That can’t be the long-term play.
Mark Eckerle:
No, but it’s funny because I, I, I definitely agree that early on, right? Especially, and the first thing that comes to mind is the 20, was it 2017 holidays when it was the ICO craze and crypto really took off at that point and everyone was talking around the holidays and everyone that was getting in, it was all about the UI experience, right? So you have your basic investor who’s just trying to get exposure to crypto. They don’t want to understand the wallet infrastructure or not your keys, not your coin. Like they want everything under one umbrella and they don’t wanna have to worry about it similar to a financial institution. So I think we’re starting to move away from that as more and more people become educated. And I agree, I think some of the events that transpired in 2022 has helped bring us forward to where we are today to kind of change some of that path forward. And you wanna make sure that you’re mitigating your risk and you’re being that diligent investor and making sure you’re not tying up your assets with all in one, one shell, right? So you are diversifying your funds a little bit.
Matt Walsh:
Yeah. And look, I mean, FTX was a terrible thing for the whole industry. I’m sure it was terrible for anyone that invested in FTX, but the positive that came out of that is that now you have actual legislation that has been written. And so you have this uniform treatment of digital assets bill that would impact the banks. You have the stablecoin bill, you have the market structure bill, then you have all sorts of other things that have popped up, like proving reserves and going through processes like that. So there’s a dialogue now that is very active on a bipartisan basis in a way that it never had been before FTX. And so maybe that’s a silver lining here, is that we just get to speed run the regulatory process by a couple of years just because of this disaster that happened to the industry.
Mark Eckerle:
Yep. Well, Matt, I think that’s a great bow on today’s episode. I appreciate you joining us. It was a pleasure catching up today. Where can listeners go and learn more about yourself and Castle Island and we didn’t even touch on your podcast On The Brink.
Matt Walsh:
Sure, yeah. Check out On The Brink with Castle Island. That’s our weekly podcast. We have a good time doing that. Check us out online at Castle Island VC and follow me on Twitter, I guess @MattWalshInBos for Matt Walsh in Boston.
Mark Eckerle:
Awesome. Matt, thank you again so much.
Matt Walsh:
Good to see you, mark.
Mark Eckerle:
You too.
Mark Eckerle:
All views expressed in this podcast by Mark Eckerle or his guests are solely their opinions and do not reflect the opinion of rhythm. This podcast is for informational purposes only.
