9 April 2024

In this episode, Max Kei from Hodl Hodl and Debifi, explores the future of Bitcoin lending and borrowing. From industry insights to Debifi’s innovative approach, discover the benefits of Bitcoin collateral, multisig security, and fiat loan expansion. Gain valuable perspectives on navigating risks and seizing opportunities in decentralized finance.

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  • Insights into the evolution of Bitcoin borrowing and lending platforms.
  • Understanding the importance of peer-to-peer fully collateralized lending in the cryptocurrency space.
  • Exploration of the risks and benefits associated with borrowing and lending using Bitcoin as collateral.
  • Overview of Debifi’s approach to decentralized lending and its unique features.
  • Explanation of the concept of “super collateral” and its significance in Bitcoin lending practices.
  • Understanding how multisig solutions enhance security in Bitcoin lending and borrowing.
  • Insights into the potential benefits for users when utilizing a decentralized lending model.
  • Preview of the expansion of fiat loans on Debifi and its implications for users.


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:00] Preston Pysh: Hey everyone, welcome to this Wednesday’s release of the Bitcoin Fundamentals podcast. On today’s show, I have a very thoughtful guest, Mr. Max Kei. With all the financialization of Bitcoin ETFs happening and what’s expected to occur in the coming years. There are many people concerned about the rehypothecation of collateral and the commingling of funds, and in general, the games of fractional reserve antics that plague traditional markets getting ready to happen, all on top of Bitcoin.

[00:00:26] Preston Pysh: Well, today’s guest is a veteran in managing these risks for many years, and he’s somebody that I followed very closely because he continues to provide such services of borrowing and lending without ever being impacted by counterparty risk. And then the various actors of all these previous cycles where many of them had blown up as you’ll see in the interview There’s a reason why he’s managed this risk appropriately in his message to traditional banks and financial institutions is vital to hear right now So without further delay, here’s my chat with Mr. Max Kei.

[00:01:02] Intro: Celebrating 10 years. You are listening to Bitcoin Fundamentals by The Investor’s Podcast Network. Now for your host, Preston Pysh.

[00:01:20] Preston Pysh: Hey everyone. Welcome to the show. I am here with Max Kei. It has been, when did we record last, Max? Has it been four years or three years or something like that?

[00:01:31] Max Kei: It’s been a while. Three years and four years. Yeah, it’s been a while. Actually right after we launched the first landing product, you know, it’s kind of interesting thing.

[00:01:41] Max Kei: You were the first, you were the first podcast host. I talk about it, but here I am launching another one.

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[00:01:48] Preston Pysh: I remember how I got introduced or informed about you and it was Adam Back that told me and Adam was just, you know, he was tinkering with Hodl Hodl and we had, I forget where we had the conversation.

[00:02:04] Preston Pysh: It might have actually been just via text and we were talking about borrowing and lending and over collateralization and the idea of like, how can somebody actually go about this? In a responsible kind of way that does not introduce a systematic risk or a compound risk to different participants. And he told me at the time that he thought the only way that it was possible to do it was in a peer to peer direct between two parties, as long as they’re over collateralized.

[00:02:34] Preston Pysh: He felt like that was the least risky way to do it. And then he, he told me about Hodl Hodl. And from there, I was like, I was very interested. I was very curious. And then you and I have gotten to know each other through the years and just, it’s been a lot of fun, but anyway, I don’t want to start there with this conversation and sorry, I’m talking so much.

[00:02:53] Preston Pysh: I want to start with something that I found interesting when I was in Madeira and I had the privilege of being on stage with Michael Saylor, Lynn and Larry Lippard asking questions. And one of the questions that I asked to Michael was about borrowing and lending and where I think everybody’s looking at these ETFs and they’re looking at wall street showing up in style to Bitcoin.

[00:03:20] Preston Pysh: And finally, after a decade plus. And they’re building these ETF products. And then they’re, they’re about to construct derivatives on top of this. And I’m looking at you as this person who I think between you and Mauricio are like the only two people that I know that have gone through a full cycle and have not blown up a platform or an exchange or whatever, because you’re actually doing this in a, in what I would describe as a responsible way, because you’re doing actual peer to peer over collateralized lending.

[00:03:52] Preston Pysh: And so the question that I asked Saylor when we were in Madero was we’ve seen Mt. Gox blow up. We’ve seen FTX blown up. We’ve seen all of these borrowing and lending platforms, BlockFi, whatever you name it, blow up and now Wall Street’s showing up and it looks like they’re going to be playing the fractional reserve games and they’re going to be Doing all the things that we know are literally incompatible with Bitcoin in the way that Bitcoin functions, because it’s just relentless in the way that it, it presents itself, but nobody can step in and manipulate it.

[00:04:29] Preston Pysh: And so I asked him, I said, what would be your advice to wall street today, knowing all of this history and this incompatibility with Bitcoin and his response to be quite honest with you, Max surprised me in his response because he, he seemed to imply that he didn’t think that it was going to be an issue for wall street.

[00:04:50] Preston Pysh: But what I want to do is play you the clip because I deeply trust your opinion on, on this matter. I want to play the clip and then I want to get your point of view as you hear his response. So here we go. I’m going to play this clip and hopefully share it here correctly with the people that are watching it on YouTube.

[00:05:07] Preston Pysh: So here goes the clip.

[00:05:10] Max Kei: You know, I don’t think they’ll have any problem winning against Bitcoin because they’ve already got the problem with these other examples is they’re all wildcat banks. I mean, people are going to pry. Nobody in their right mind would put money in a private, opaque, unaudited operation run by two dudes out of their garage offshore without a mailing address, right?

[00:05:35] Max Kei: Like, and so, the problem wasn’t barring against Bitcoin, the problem was actually dealing with You know, people running personal banks out of their basement. And they didn’t know how to run a bank. The way all these wirehouses work right now, is you have a portfolio of assets, they mark them to market every day, and they give you loans, margin loans with loan to value no more than 50 percent or something, and actually they will adjust the advance ratio.

[00:06:07] Max Kei: And the way they manage risk is they just mark them to market. They already know how to mark to market. With Bitcoin, they’ll just be able to mark to market 24 7, 365. And, and normally the way they work is they would say, well, we’ll give you a loan of X. If, if, if your portfolio is Apple stock and Microsoft and Bitcoin, they’ll give you a loan of up to 20, 30 percent of that.

[00:06:32] Max Kei: And then if those things trade down, they’ll just ask you to post more collateral or pay off the loan. And that’s, that’s a business that works perfectly fine for the last 40 years. All their systems are wired. And the risk here is, the people that got screwed in the Bitcoin loans, they didn’t get screwed because the Bitcoin collateral went bad.

[00:06:53] Max Kei: They got screwed because the bank stole their money. Right? And so here, you have JP Morgan, Citigroup, Bank of America, Wells Fargo with trillion dollar balance sheet. They don’t normally steal their clients money as a, as a normal thing, right? They’re too big to fail. And so I think that, I mean, anybody wanting a mortgage or wanting a credit card or a home loan, they would normally go to a mega, mega bank anyway.

[00:07:21] Max Kei: And the problem in the market is those banks haven’t, they haven’t custodied Bitcoin. And because they don’t custody it, it’s not part of the collateral package. And there are a lot of reasons why they haven’t or they couldn’t. But as soon as they can, I actually think the rest of the credit issues become very straightforward.

[00:07:40] Max Kei: And you’ll find a bank will give you either that margin loan in lieu of Apple or Microsoft stock. Or, sometimes they’ll give you a mortgage and they’ll say post some other assets as security against the mortgage and you end up posting some securities and you get, you get a 30 year mortgage with some securities posted to get it going and they may just take bitcoin as that security to top up your mortgage.

[00:08:06] Preston Pysh: So if I, if I was going to push back on this, I think like if Caitlin Long was here, she would say there might be a frequency mismatch. So when we’re looking at the speed of settlement of Bitcoin, and we look at the volatility of Bitcoin, and then we look at traditional rails, equity certificates, What’s the frequency that they’re able to, are they, are they 24 7 that, that we can clear those?

[00:08:28] Preston Pysh: And if we’re posting collateral with, with things that can’t match Bitcoin’s frequency, does that pose systemic risk for some of these custodians?

[00:08:39] Max Kei: I don’t think it’s supposed to systemic risk. You’re talking about 1 percent of the money. It’s, for example, a big bank would give you a 100 million loan against Apple stock over the weekend if you had a billion dollars of Apple stock.

[00:08:52] Max Kei: If you had 300 million of Apple stock, they’d give you a 100 million loan over the weekend. Maybe something happens and China declares that Apple can’t manufacture iPhones and in the morning Apple stock gaps down. Well, the bank took the risk. Not you. And the bank’s already willing to take 48 hour or 72 hour settlement risk on all these other securities.

[00:09:17] Max Kei: They would be taking an order of magnitude less risk with Bitcoin. So, so, Bitcoin de risks the bank, but the point really is the banks are already taking more risk. And they’re comfortable with it. They’ve got, and they’ve got massive balance sheets. They’ve got hundreds of billions of dollars of equity capital.

[00:09:36] Max Kei: So, so the point really is, the only thing that’s holding, holding back Bitcoin credit markets is the big bulge bracket banks being able to custody Bitcoin. And at the point that they begin to custody Bitcoin, they will start to extend credit as the natural next step. And there’s nothing about the asset class that makes it harder for them.

[00:09:58] Max Kei: It’s a better asset for them to extend credit. It’s better than the hundred trillion dollars of equity. It’s not worse. So, I actually think they will embrace it. And their view would be A lot less risk. It’s a lot easier to manage that. The reason they’re not doing it now is not because there’s an issue with bitcoins, just they’re not able to custody it.

[00:10:21] Max Kei: And if they can’t custody it, they can’t, there’s no handle on it. That’s why you don’t see that market taking off.

[00:10:28] Preston Pysh: All right, max. Okay. There was a lot discussed there, but I’m curious to hear kind of your general take as somebody who’s a, who’s an absolute expert in this, in this particular area, what are your thoughts?

[00:10:40] Max Kei: Actually, I like the part of you know, that Michael remembered is saying to be to fail, which is no longer true, I think, since 2008 and Lemon Brothers, you know, AAA and all that stuff. I remember that year because I was actually working in the asset management at that point. I think that the main problem and actually Lynn later on the same panel, she mentioned that there’s, there are companies that actually allowing you to do it in a proper Bitcoin way.

[00:11:08] Max Kei: And she mentioned Unchained Capital which is a multi signature base basically lending and borrowing and which we do with Hodl Hodl and with Debifi as well. So I think that the main issue that not many still yet understand that there’s there’s a huge gap between borrowers and lenders in that sense that if we, if we say that lenders are traditional finance companies, big institutional companies that are used to take custody of the assets, and we say that they want to start lending out money to Bitcoiners or to companies that own Bitcoin on the balance sheet.

[00:11:44] Max Kei: But there’s a huge problem because Bitcoiners and companies, whether it’s a legal entity or a private individual, they saw what happened with BlockFi Celsius, and they saw what happened in 2008, they saw what happened in general with when you give a custody of your assets to someone else. I disagree that these companies like BlockFi and Celsius, they were run from a garage, basically, maybe the, obviously there was some, some bad decision made, bad risk management, but in Bitcoin, I think the main value proposition, one of the main value proposition of Bitcoin as a superior asset, and I think Michael will agree with me.

[00:12:21] Max Kei: And generally what he promotes as well is that this is something that you own. If you have a key to your Bitcoin, this is your asset. It’s independent from everything else out there. You don’t need to custody those. You know, you take a hardware wallet, call storage, you send there your Bitcoin. That’s it.

[00:12:40] Max Kei: That’s your asset. So when we’re talking about Bitcoin borrowing and lending and mentioning the custody, Maybe Wall Street and other traditional companies used to do a collateralized lending in that sense that they take a custody of the assets. But with Bitcoin, what brings us to the next question, what is Bitcoin in general in terms of lending?

[00:13:04] Max Kei: In Bitcoin, you can do things different, and it’s not necessarily bad, or it’s not necessarily something worse for a lender or for a custodian. It’s just different, way more efficient, and specifically way more forward thinking towards your customer, which is the end borrower. Who are you providing the services?

[00:13:25] Max Kei: So I generally disagree with the custody thing. I think I will always disagree with that because again, we saw BlockFi, Celsius, multiple companies. Yeah, there was like Voyager, which was, it was a good company, you know, with all that stuff blew up. So it doesn’t matter whether you have, you run it from your garage or you have an office on the wall street.

[00:13:48] Max Kei: It’s a question of how you build your product in a way that you can appeal both to Bitcoiners and both traditional finance people.

[00:13:56] Preston Pysh: But Max, at the core, like if we were going to go way upstream and deeply understand the first principles that presents risk and de risks or reduces the most amount of risk.

[00:14:09] Preston Pysh: It seems like co mingled funds for the escrow is where the issues are always manifesting themselves, especially when you’re using Bitcoin as collateral. So like I look at BlockFi, this is something that I covered even when interviewing the founder of BlockFi back then. We knew back then that you had everyday retail people that were, that were over collateralized with their deposits, if they were borrowing, and you had institutions that were also putting collateral up, but they weren’t over collateralized.

[00:14:44] Preston Pysh: And by co mingling these two into the same company is why we had issues, even though there were people that were completely over collateralized in a 24, seven, seven days a week, all, all days of the year. Kind of way that should have that should have had no risk whatsoever if it was just them that was over collateralized And so that’s how you ran Hodl Hodl, which was it’s point to point with another person.

[00:15:10] Preston Pysh: It’s over collateralized. There’s no co mingling of some institution over here that’s presenting additional risk. Is that the big one? Is that the big part that needs to be discussed when wall streets entering this space is the co mingling of collateral?

[00:15:26] Max Kei: I think yes. And also I think what, what they used to have, again, the custody of the funds, but they used to rehabilitate the funds, right?

[00:15:34] Max Kei: And that’s the main issue, you know, and what’s the offer. Usually the scheme is like on one side, right? You get a collateral on the other side, you get something, you match those, and then you can or on the one side, you get the person who wants to earn the yield on top of Bitcoin. And on the other side, you have a person who is like happy to provide certain services to get that to you.

[00:15:57] Max Kei: So number one issue, of course, mingling all the funds. It’s true. You need to be always over collateralized. You don’t mix them. You need to store them in a separate multi signature account, which we do, multi signature address. You don’t re opticate the fund, but also what I said in the beginning of our panel, which we did with you in Madeira, was that I think the yield generation products on top of Bitcoin should actually die because it’s it’s like Bitcoin itself is already yield generation product.

[00:16:29] Max Kei: It’s already an asset that actually generates you yield, so. Here’s my strategy. If you want to generate yield on top of Bitcoin, you buy Bitcoin you buy hardware wallet, you send your Bitcoin to the hardware wallet, you forget about it in four years, your yield is generated. So it’s, it’s that simple.

[00:16:47] Max Kei: It’s that simple. You don’t need to do anything because every time you think about, okay. I want to earn an extra 3%, 4 percent on top of what I’m earning with my asset. You ask yourself from where yield is coming. If you cannot answer that question, probably you are the yield generational asset with you and your Bitcoin.

[00:17:08] Max Kei: So I think that was the main reason. that people get greedy. Of course, greed is good. Gordon Gekko, right? But it’s not good when we’re talking about Bitcoin, specifically when we talk about yield generation products. You know, greed is good. Hold your Bitcoin, hold your keys. Don’t give up on custody. If you have to give up on custody, at least make it collaborative custody.

[00:17:34] Max Kei: At least hold one key and make sure that if you borrow against your Bitcoin, your Bitcoin is stored in a multi stack, it’s not re hypothecated, it’s technically impossible to re hypothecate one and that you have, you as a private individual has a proper risk management in that sense that you don’t borrow against all your stack.

[00:17:53] Max Kei: You always have something in case of a LTV ratio is falling down, you can always add more to collateral because that’s the best way to avoid liquidation. That’s the best way to go forward. And again, I think the main thing is that we need to teach Wall Street because I think we should do a heavy lifting, you know, not only provide them with the tools, but also talk with them is that Bitcoin is a unique, it’s a super, it’s not digital assets.

[00:18:22] Max Kei: It’s a super collateral. That’s the mantra we have in Debifi, and we need to teach them that actually Bitcoin collaborative custody is a possibility, and every sane Bitcoiner is going to be your customer if you will offer a service that is not re obligated in his fund, and that gives him a certain level of control and trust in things that you’re building or doing, or whatever services that you’re providing.

[00:18:47] Preston Pysh: I cannot agree with you more. When I look at Bitcoin, it’s just a fractal. It’s like. It started off, it demonstrated these properties at a very small level, then you go through another cycle, and it’s doing it at an even larger level, and now it’s literally at this global scale where we have hundreds of billions of dollars in fiat terms institutions, financial institutions that are now playing around with this.

[00:19:13] Preston Pysh: And I think it’s naive for us to look at it and say, Oh yeah, well, they’re, they’re the big boys in the room and they’re the, they’re the smart PhD people that have been schoolhouse trained in how to manage financial instruments. And, and it’s the rules that applied at the lower fractals aren’t going to apply up at this fractal.

[00:19:32] Preston Pysh: And I’m just kind of shaking my head and I’m saying, if you’re commingling funds, if you’re doing something that’s not over collateralized, you’re just going to get destroyed. Like this thing is just relentless. It doesn’t care if, if you have the name BlackRock or you’re just some trading card exchange from, from years ago, it just does not care.

[00:19:51] Preston Pysh: It’s going to be relentless. Nobody’s coming to rescue you. And, I’m just looking at what’s playing out and I’m very guarded and very, just very concerned as to like, moving forward. It seems like you, you share the sentiment.

[00:20:04] Max Kei: I share the sentiment, but again, I’m more positive on that side that you know, we, we can, and we will provide tools.

[00:20:12] Max Kei: I mean, in general, as a community to, to, because again, the my thesis in that sense is that every major financial institution, every bank out there, the big one, have at least hundreds or even thousands of people who own Bitcoin. among their customers. And at some point, those customers are going to go to that bank and gonna say, okay, guys, I don’t want to sell my Bitcoin.

[00:20:37] Max Kei: I have Bitcoin. I don’t want to sell my Bitcoin. I want to borrow, but we have a long term relationship history here, right? And I want to borrow from my bank. Can you offer a proper service to me? And they said, if you’re lucky, they will probably say, yeah, you can custody your Bitcoin with us. And we’ll give you a 50 percent LTV ratio and in case something, something, we’re going to liquidate you, which is fine.

[00:21:01] Max Kei: That’s how business work, but we can re hapticate your funds, you know, I read those blueprints, you know, terms of services. There’s always a possibility to be re hapticated in that sense. And most of St. Bitcoiners, I would say they’re, they’re not going to agree with that and they’re going to go to another bank because probably might be able to provide a non custodial set up, a multi signature set up for your lending and borrowing.

[00:21:29] Max Kei: It’s actually already happening in certain regions. For example, in Switzerland, you have these banks that work with digital assets. They can custody your funds, they can custody Bitcoin other crypto assets. And we actually been approached by several customers of these banks who told us like, guys, I can introduce you with people from that bank.

[00:21:51] Max Kei: I want to borrow from them because it’s like we have a long, long term relationship with that bank. I trust them, but as a Bitcoiner, I don’t trust any custody apart from my own custody or collaborative custody. Can you please provide this service to them? I can still borrow from them and they will be my lender, but the Bitcoin that will be holding collateral will be holding a proper multi signature setup.

[00:22:19] Max Kei: And we’re now talking with several of these banks, and I think these use cases are going to grow as the price of Bitcoin will grow. There will be more and more people willing to borrow against that, and there will be less and less people willing to sell that because the cost of opportunity is very high.

[00:22:38] Max Kei: You know, we already have a core layer of people in Bitcoin community, let’s say the existing Bitcoin community who already understand the long term value of Bitcoin, you know, low time preference people, you know, generational wealth, all these things that, that for us, it’s not just sounds, you know, it just works.

[00:22:57] Max Kei: And I think as more and more people will get to the Bitcoin, obviously some of them will go through custodian through, you know, large institutions. And then again, every cycle, we see that people get burned because of the greed, because of trusting, because one of the core mantras in Bitcoin is not only hold your keys, but also don’t trust verify, you know, you don’t need to trust.

[00:23:20] Max Kei: And that could be a problem for people or for institutions that actually, they, they have a longterm experience in custody funds. And again, I don’t see anything bad in custodying certain assets. I see bad when you need to custody Bitcoin because there’s a lot of tools that can allow you not to do that.

[00:23:42] Max Kei: And it will be, it won’t be even, it won’t be less convenient than when you custody the funds. Actually, you’re taking an extra risk when you custody clients, customers, Bitcoin, you know? I think the multi sig and again, collaborative custody. It’s less riskier also for a lender or for potential custodian.

[00:24:03] Max Kei: So if you offer that type of service, there’s like, it’s distributed risk, I would say, if we, you know, we figure it out the new term distributed risk. So it’s kind of, I think a proper risk management here, even better for a potential custodian.

[00:24:18] Preston Pysh: I think one of the things also to discuss when we’re talking about risks on borrowing and lending is really kind of where, where is, is the mark, the current spot mark coming from, and is that something that you’re looking across multiple exchanges?

[00:24:34] Preston Pysh: Is it just one reference rate that’s being used? What’s the liquidity of that? Like, I think it was just a couple of weeks ago. We saw somebody evidently key stroked in a massive, I think it was a sell order or something, and you saw the spot market on that particular exchange, just plummet down to absurd levels.

[00:24:53] Preston Pysh: I forget what price it got to in fiat terms, but it was like really low. And I’m looking at this and I’m saying, if I was borrowing and lending and I’m using that mark for adding more collateral or, you know, in that situation, you wouldn’t even had the time to add more collateral because it happened so quickly.

[00:25:09] Preston Pysh: Walk us through that risk and how you guys think about it from a Debifi standpoint.

[00:25:16] Max Kei: We usually have a price oracle and a price oracle actually, it’s a compound price feed from multiple exchanges, the most liquid exchanges out there. So we don’t take only one exchange or only one trading venue. We use several of them.

[00:25:32] Max Kei: Because again, we are good at at this with our experience with Hodl Hodl. And now we take that, that experience and move to Debifi. And we understand that these things that you mentioned, you know, somebody pressed the button and you know, that the price just went nuts, completely nuts for a minute, but it’s enough already for, to trigger the liquidation level.

[00:25:54] Max Kei: So we avoid that and we construct our own price oracles. We actually explain that in our in our help guides and terms of services, how we do that. We’re actually working on improving that, but usually our approach is that we take the most liquid, the biggest exchanges. And we take multiple of them and if at least, and if majority of them shows the different price, then of course it’s going to affect the price oracle, but usually even if it’s one or even two spikes, then the most probably is not affected on your, on your collateral, on your liquidation level and MTV level.

[00:26:32] Max Kei: So it’s like, it’s also a certain thing that you need to understand when you’re doing Bitcoin borrowing, you need to understand how the price feed works for your collateral, what, what company or platform that’s giving you this opportunity to do your lending and borrowing activities, what tech they’re using, what price feed they’re using.

[00:26:53] Max Kei: So there’s a different approach actually and but I think that’s again, from our experience doing this for multiple years, I think that’s that’s the best approach so far that we have.

[00:27:05] Preston Pysh: When you and I have talked privately, you are a huge proponent of this idea of Bitcoin being a super collateral.

[00:27:13] Preston Pysh: For people that might hear that or just kind of hear that terminology that might say, Oh, well, that’s kind of an interesting idea. Put some context on that of why Bitcoin is such a revolutionary, super collateral versus anything that the world has ever seen before.

[00:27:31] Max Kei: I think it’s number one, it’s because it’s highly liquid like extremely liquid assets. If you’re a lending, the best collateral that you can lend against this is Bitcoin. Why? Because if there’s a liquidation coming and your borrower fails to repay your loan, you can liquidate it 24 seven any time of the year. Basically you can automate this to a level that you even don’t know that something happened on the back end.

[00:27:59] Max Kei: Highly liquid for a lender from from a lender’s standpoint of view, because like take any other asset out there, like real estate, months or even years before you can actually sell it and get some money back. Stocks, you know, usually during the weekend doesn’t work. Working hours, all that stuff. Bitcoin.

[00:28:21] Max Kei: 24 7, 365 days a year, easily to liquidate, deep market, deep liquidity, no issues at all. Now, second important thing is actually Fitspoll borrower and lender is a collaborative custody opportunity. That’s more important for a borrower, but as I said, I think lenders should also look from the point of view of security.

[00:28:47] Max Kei: You know, when you do collaborative custody. You spread the risk. It’s a, as I mentioned, distributed risk in that sense that you do understand that there’s certain amount of keys involved in the scheme if we’re talking about multisig and that even if you fail with your key management, so you lost it somehow, I don’t know, you were compromised.

[00:29:11] Max Kei: It’s not necessary that the collateral will be moved. Because usually it’s, we’re talking about either two out of three. So you need to have at least second key or it’s in Debifi we do three out of the four. So we have four keys distributed and you need to have at least three.

[00:29:29] Preston Pysh: Max, what’s the breakdown of the four keys?

[00:29:31] Preston Pysh: Just so we can understand the, what’s going on.

[00:29:33] Max Kei: So one key goes to the lender who are institution in case of Debifi. And that’s one of the main difference between Hodl Hodl. Like everyone can become a lender on Debifi. only institutional lenders. So one goes to the lender, one goes to the borrower, one key goes to Debifi.

[00:29:50] Max Kei: And fourth key is called an Authorized Key Holder Possession, which is an independent entity who holds the key. And in case of liquidation or in case of dispute, they can co sign with us and the winning party. The release transaction in favor of the winning party or the party who needs to get the funds after the liquidation and adding one extra key is actually was to some extent it was crazy idea because two out of three is more like an industry standard, but then we thought like, Well, we don’t want to provide liquidity by ourselves.

[00:30:24] Max Kei: We just want to be a tech providers, you know, we want to provide a platform for institutional lenders to meet any type of borrower out there who owns Bitcoin. And in order to avoid that and be just technical tool providers. which we’re good at, we need to ensure that there’s a liquidity stream on the other side and how we ensure that we offer the service to other lenders and liquidity providers.

[00:30:46] Max Kei: And that’s how we came up with the solution. But the issue is that we know how we manage the keys. And we know, for example, we do all of it and due diligence on authorized key holders, the independent entity that I mentioned to you. We know how they manage the keys, but we don’t know how lenders and borrowers manage the key.

[00:31:04] Max Kei: We can provide you with all the necessary tools out there. You know, we can do a hardware wallet integration. We actually have a different security system and model in Debifi than in Hodl Hodl, right? But it’s always, you know, there’s, there’s different levels of attack and getting the key. You know, there’s even physical attack.

[00:31:23] Max Kei: You never can be sure that borrower are storing the key properly, even if you provide them with the most modern advanced, sophisticated tools, you know, there’s still like human factor. And there still could be an issue. So this is why we came up with the idea of 3 over 4. Again, as I mentioned, highly liquid, collaborative custody.

[00:31:44] Max Kei: And I think one of the main things is also that it’s a global thing. You know, we, we saw with with our existing, with Hodl Hodl, and we see now with Debifi that We have lenders based in different regions who are providing the liquidity to borrowers based in different regions. If it’s not to be a Bitcoin, then most probably they would never met each other.

[00:32:06] Max Kei: It’s a global thing. You as an institution who has liquidity and want to provide liquidity, You can actually open new markets easily with Bitcoin. You don’t need to have a real estate agent who will go in a certain market, will access the property, you know, do the valuation, and then you will understand.

[00:32:24] Max Kei: No, the price feed for Bitcoin is up and running. It’s there. It’s online. You can check on this every second. Basically, it’s very transparent. And it’s also one of the reasons why Bitcoin is super collateral is because it’s like the price is. It’s highly objective. It’s not subjective. It’s not something that I value your house for 1, 000, 000, and you think it’s one half.

[00:32:47] Max Kei: No, there’s a certain price for Bitcoin, you know, its price is there, it’s market driven asset. You cannot say that my Bitcoin here in New York should be traded at the premium plus 5 percent than your Bitcoin there in Berlin, let’s say, you know, it’s a very objective asset. You have a deep market and the market decides what’s the price of the asset.

[00:33:11] Max Kei: And there’s like multiple other levels and layers of Bitcoin. Why I believe it’s super collateral, but I think that. We have this unique opportunity in history of I would say in human, like in mankind that we have this highly liquid collateral, which is digital already, which is global, which has a single price, whether you’re in Japan, U. S. or Europe, which can be stored across multiple institutions or across multiple parties involved, and that every party can understand that, okay, I can own part of that and I can be in charge of part of that and I can be safe and secure that nothing will happen with the collateral in case I will follow the consensus rules, which is if the price of collateral is falling down, the consensus rule for more where you add more to collateral or you do the part sale repayment or you do a repayment.

[00:34:03] Max Kei: And for a lender, You know, you pay loan and receive loan back and then do the transaction in favor of the borrower because he has repaid the loan. So that’s, I think, and there’s like, again, you can build a lot of different things on top of Bitcoin, which actually can improve the current credit markets across the globe, traditional finance market.

[00:34:28] Max Kei: Like I’ll give you a short example, take credit cards, like the average interest rate in us for a credit card. I think it was last year, it was 28%, 28 percent the average interest rate for a credit card. Why so? Well, I, I assume it’s because banks give you this credit card loan as an S2 individual because the repayment and your obligations are based on the promise that in the future you will have the same cash flow stream that you had before you have taken this credit card.

[00:35:03] Max Kei: So you will have a salary. You won’t go crazy. You will do a proper repayment, but they need to, they don’t have any collateral underlying this credit card interest rate, right? They only have your promise, your certain credit history, which is a history. We know that something that happened in past doesn’t necessarily going to happen in the future.

[00:35:27] Max Kei: And usually that’s how it goes. So they have this risk premium. And they put a certain risk because they do understand that part of their customers are not going to pay back. So they charge 28 percent and they charge it for most of the customers, right? So with Bitcoin, if you have this underlying asset for a credit card.

[00:35:47] Max Kei: Then you can actually drop down this risk premium and you can actually ensure that you can provide a better service, lower interest rate, and that you can be secure as a lender because that credit card loan is actually over collateralized and there’s an underlying asset. And there’s no asset out there for a retail guy for a simple, you know, average job.

[00:36:12] Max Kei: That he can go to the bank and say, okay, I can collateralize my credit card loan and get better interest Other than Bitcoin out there because like Bitcoin is for everyone If you own a fraction of Bitcoin, you can already do that. And actually that’s one I already kind of, you know, probably share some secrets with you, but that’s where we’re moving with Debifi.

[00:36:35] Max Kei: And that’s only one part of the credit markets, you know, that can be improved with, with with Bitcoin, because it’s very easy to build credit products on top of that. It’s very easy to use Bitcoin as a collateral. You don’t need, like, there’s no stocks who are being used as a underlying collateral for your credit card.

[00:36:53] Max Kei: It’s nonsense. There’s no real estate, probably, right? But Bitcoin can be used for that. And Bitcoin can become a pretty nice collateral for most of the use cases out there.

[00:37:05] Preston Pysh: How do you think through? So on the credit card piece, my mind immediately jumps to the volatility of the underlying collateral, which is Bitcoin, which is call it 70 percent annualized volatility.

[00:37:17] Preston Pysh: And so when you’re looking at how much that person would be able to borrow against at a much lower rate than the, what was the, what was the number you said? 25 percent annualized for traditional credit cards somewhere in that-

[00:37:27] Max Kei: 28 percent 28 percent bearish rates.

[00:37:30] Preston Pysh: 28 percent annualized. I would imagine that if you had some type of Bitcoin collateral, it drops it to what?

[00:37:37] Preston Pysh: 12%, 15%? Somewhere in that ballpark? Am I close?

[00:37:42] Max Kei: We’ve been doing our research, talking with lenders. Well, most of them, because again, so most of them are saying it’s somewhere in the range between 40 percent to 20%, but still it’s like twice lower than than this current interest rate.

[00:37:58] Preston Pysh: Yeah. So, but some of that lower rate is also dependent on the collateral having to be pretty substantial, or at least the additional backing that you would have to be able to put in there to not have it called or converted because it dips below that.

[00:38:13] Preston Pysh: is also a part of the, of the calculation, I guess. So if a person has a lot of Bitcoin, they can buy, they can obviously have a much higher rate without the threat of it being converted because of such intense volatility of the underlying collateral. So I guess, how would you think about that in an offering to the public or to anybody that would be looking at that and saying, well, of course I want to pay half the rate, but you also have to have a whole lot more collateral to make sure that it doesn’t convert.

[00:38:43] Max Kei: Well, actually, that’s the mindset we need to change. You know, you don’t have credit cards with underlying collateral. Your credit card is usually like triple of your salary, right? So you get like one, let’s say, let’s simplify. You get 1, 000 salary per month. They will provide you 3, 000. So 2, 000 is non existent.

[00:39:05] Max Kei: You 000 with your salary. Most probably you won’t be able because you also have other expenses. So that’s the mindset you need to change because suddenly, for a credit card, there’s an underlying asset. And usually if we talk about fiat versus Bitcoin, in terms of lending, it’s 50 percent LTV ratio. So, in order to borrow, let’s say, 1000 in fiat, you need to put 2000 in bitcoin, which is again, it’s a multi sig based and you don’t sell bitcoin, it’s non taxable event.

[00:39:40] Max Kei: And you get double the interest rate that you actually will pay even if you use bilateral for a credit card. I think it’s a good, like good offering. It’s, it’s really, but again, it should be changed the mindset that the suddenly there’s a, there’s a collateral that can be divided in small fractions and it can be easily delivered to basically underlying account that supports your credit card.

[00:40:04] Max Kei: And that the credit card for average Joe can be actually collateralized as well. It’s not always something, some big, heavy loans. Real estate loan can be collateralized. With Bitcoin, you can collateralize. Yeah. And you know, like lenders will, will be happy to pay because they don’t have, they are over collateralized.

[00:40:26] Max Kei: It’s win win for them. If he gets liquidated, they will get Bitcoin or they will get fiat. If you have a liquidation agent in place. So there’s like, it’s a win win. They don’t need to, and obviously the biggest win for them is that they can be sure that 100 percent of their loans will be repaid instead of, usually the rate is like 70 percent and 30%, so they 70 percent will repay with 28 percent of interest and 30 percent most probably will fail.

[00:40:58] Max Kei: And with that 28, they will cover the, the rest. So adjusted it will be around 20%, which is fine for them. Here you will have across the population of your credit card owners, you will have a hundred percent of repayment, even if they will fail, repay you with fiat, you will always have a collateral that you can get and cover all your expenses and applications

[00:41:21] Preston Pysh: Max.

[00:41:21] Max Kei: So that’s the beauty of Bitcoin.

[00:41:23] Preston Pysh: If I’m an executive at a traditional bank and I’m listening to this conversation, I’m thinking to myself, all right, so how in the world can I access Debifi via some type of API or something to start incorporating what deep knowledge you have on this particular subject?

[00:41:41] Preston Pysh: And doing it in a very responsible kind of way. And so I guess my question is, is that, is that an offering that you guys are trying to work with traditional institutions to provide it via an API, or is it just, they have to, they have to come directly to Debifi and start using the interface that you have there.

[00:42:00] Preston Pysh: Is it something that you’re?

[00:42:01] Max Kei: Yeah. Yeah. Currently they have they have to go to Debifi and start using the interface. So we’ll have them with onboarding. We have a team, like a concierge team who are, who are doing the onboarding, helping them. But soon we will release an API so they can actually use our API in their systems.

[00:42:20] Max Kei: So if you’re using an internet bank. And suddenly you want to borrow with Bitcoin, you don’t necessarily need to leave the internet bank of your bank. You can just use it as it is with the interfaces that are familiar to you. So we are, we are, we’re already like building the API. So you will be able to connect.

[00:42:39] Max Kei: And then there, again, there’s there’s two ways of how lenders can interact with Debifi. So we have a hybrid model in that sense. So you can go and become a lender directly on the platform. Which is great, because you will have direct access to the boards that we bring on the platform. You will have direct access you will get all your interest payment to your pocket, basically.

[00:43:01] Max Kei: And there’s also certain partnerships we have, where the funds, like licensed and regulated funds, they can provide you a service of managing the liquidity on Debifi. So you can basically arrange, do the arrangement with them wire them money, they will manage that liquidity. And you will earn certain interest from that and they will charge you a certain fee for that.

[00:43:25] Max Kei: So we’re trying to build a different type of approach to this, to Bitcoin as a collateral. You know, of course we prefer if banks will be onboarded directly to Debifi and they will actually start managing. And we’re actually building. The platform in that way, that even non technical person, like from traditional finance work can be easily on boarded and can use that easily with no, basically no hustle in that sense.

[00:43:55] Max Kei: But we understand that there could be, as we, as we call them, lazy lenders who just have a bunch of liquidity. They don’t want to micromanage anything. They are happy to wire funds to a regulated entity, which will do the micromanaging on their behalf.

[00:44:10] Preston Pysh: How do you see the key management for let’s say I’m a bank.

[00:44:15] Preston Pysh: I’m going to tap into this API that it seems like you guys are gonna be rolling out pretty soon. How would the key management look like for a customer of that bank that’s basically using Debifi, but the, the wrapper is the bank for the customer standpoint. What does, how would the customer be using those keys from that bank?

[00:44:32] Max Kei: We have several approaches, but two most common approaches that we’re, we’re offering. So first of all, we have as Debifi, we have an app. So Debifi is an ecosystem which contains two parts, equal parts app, which is a Debifi app. And a website. So the Debifi app, I’m going to show it to you. There’s like, I don’t know where, probably it’s blurring, but there’s like a bunch of keys.

[00:44:57] Max Kei: Yeah, there it is. So the app is actually your key storage. So the only purpose of app at the moment is to hold your key on your mobile device. So every time you need to create escrow or you need to release funds. Our website will send you a signal here to the app to press the button to, you know, to enter 2FA password, all this in codes, whatever.

[00:45:22] Max Kei: And you will do it then release. So we separated the utility, which is website from the actual security, which is your app. So your mobile phone effectively becoming a key storage device not similar to the hardware wallet, but it’s way more better if we also remember that there’s like four keys distributed across, across several parties. And of course, we’re going to add pretty much soon hardware wallet support. So you will be able to hold your keys on the hardware wallet working together with that. So the keys will be distributed. And of course, through API, you can also do a different type of key management.

[00:46:00] Max Kei: You can even store it like online on your server, which we don’t encourage. But that’s a possibility if, for example, other involved parties will say, okay, we’re storing our keys in cold storage and we can allow you to store your keys in a hot storage, which is not very secure, but again, it’s a multi sig, you know, there’s multiple keys, even if your key somehow get hijacked.

[00:46:25] Max Kei: So as long as it is not settled or compromised, then new order to do something with the collateral. So there’s different options we’re still like working development then, but at the moment is just an app that holds the key for institutional landers. We have a bit different approach. You Usually we have a technical yeah, the cold storage are coming because it’s highly requested feature, but again, it’s from the borrower side, you know, they want to store their keys on a hardware device.

[00:46:52] Max Kei: They know like cold card, for example, or treasure or ledger. So this is, that’s the next step. It’s going to be available pretty much soon.

[00:47:02] Preston Pysh: The last question I have for you, Max, is just, I think anybody listening to this will quickly realize that so much of the future of this is really dependent on stable coins and the liquidity of stable coins.

[00:47:15] Preston Pysh: And depending on where you live in the world, there’s different policies that are emerging. I’m just kind of curious your general thoughts on the direction of stablecoin issuers, whether you think that this is something that from a policies standpoint globally is trending in a direction that’s becoming more open or more closed, or just your general thoughts on it all around.

[00:47:38] Max Kei: Like on Hodl Hodl, if we compare it to again on Hodl Hodl, you can only borrow with stable coins. So on Debifi, currently you can borrow with stable coins, but in one month from now, as we speak, there will be also fiat loans available. We actually already helped to basically deliver some fiat loans to that extent.

[00:47:57] Max Kei: So we, we are trying to, we understand that the most liquidity still is in fiat and the traditional financial institutions. They work mostly with fiat. They still don’t understand what is a stablecoin. For stablecoin, I think the general approach is the same as with Bitcoin. There are markets and regions that are very aggressive towards regulating, you know, enforcing, even prohibiting, even Bitcoin, you know, not only stablecoin, but even Bitcoin.

[00:48:27] Max Kei: And there are markets who are happy to, you know, to get this adoption up and running like in Latin America, for example, if you compare their, their countries like Salvador, El Salvador, which is basically, Bitcoin is a legal tender there, and there’s also countries like Argentina. If you go to Argentina, everyone’s using Tether.

[00:48:49] Max Kei: Everyone is using USDT. People are happy to borrow against Bitcoin with USDT. They don’t care. They don’t do conversion to the fiat because USDT is widely used in Argentina and in multiple countries in Latin America, actually. You know, and the stable points are widely used for cross border payments in Asia, in Eastern Europe, a lot of countries, actually.

[00:49:11] Max Kei: And I think that the general, I would say it’s becoming more and more obvious that it’s a elephant in the room that you cannot ignore anymore. And I think that’s I see that most of the stable coin issuers, they’re happy to, you know, to work together with with government authorities to help them understand too, because I don’t think anything bad, I don’t find anything bad in that sense.

[00:49:35] Max Kei: Because for me, stable coin is way more, better version of fiat if we choose between fiat and stable coin. Again, we don’t take Bitcoin in that, in that equation, but if we choose between fiat and stablecoin, then actually stablecoin allows you to be more peer to peer than fiat, you know, with stablecoin, I can just send you, let’s take a liquid, for example, there’s Tether on top of liquid.

[00:50:01] Max Kei: I can send you a tether directly, you know, with no middleman, you will receive that in like five minutes or even less, I will pay 10 cents for sending you, let’s say, a million worth of tether, it will be confidential, and there’s nothing wrong about it. We are like, It’s an evolution of money. There was like traditional finance.

[00:50:23] Max Kei: There was money, there was gold. Then there was banknotes. Then we know what happened in 1971. I think now it’s then there was Bitcoin. Now it’s stable coins and we’re just moving. It’s, it’s an evolution. It’s a normal process. You know, we are moving forward. We are improving. And I think in general, like, again, I might answer your question.

[00:50:46] Max Kei: As a politician. But I think that the case with stablecoin is similar to the case with Bitcoin. I think that there will always be a countries that is going to be wrong on the history path. Those who encourage the innovation, they will prevail and win eventually. Those who will try to ban something, they will lose because as I say, life will always wait or find a path to grow somewhere.

[00:51:15] Max Kei: And I think that financial freedom is something that you cannot ignore anymore in 21st century. And you need to embrace it as a government. You need to embrace that.

[00:51:25] Preston Pysh: Well, I just want to tell you as, as a person who’s been your friend through the years and I’ve seen you navigate something as complex as a borrowing and lending platform through a period of just intense volatility and disruption where.

[00:51:43] Preston Pysh: All these people with just unbound amounts of counterparty risk blow up and then the next one blows up and the next one blows up and here you guys are just continuing to plug away, offering a service to people that are borrowing and lending without any interruption. There’s no greater compliment than just your performance that I can really kind of talk to for people to kind of really understand why I trust a person like yourself to cover this really.

[00:52:09] Preston Pysh: What’s the word I’m looking for? This is a very energized topic for a lot of people in the space. And I really appreciate you and what you’ve done to kind of lead by example. And it’s really exciting for me to know that you’re offering a product to institutions for them to see how this can be done in a thoughtful, in a, in a way that is de risked as much as possible.

[00:52:32] Preston Pysh: And in a responsible manner, because I’m, I’m very concerned that a lot of them are going to show up playing fractional reserve fiat games at a time when this thing, this thing’s going to be relentless if you bring that, that mindset and that approach to it. Just really appreciate it.

[00:52:49] Max Kei: Like, of course. Yeah. Of course. Thank you. We just covered like, basically I think we covered just 5 percent of, you know, landing and everything, but we’ll continue eventually. We know we will continue, but I think that eventually they will play the, the old school playbook. And they will, there will be like, some people will get burned, of course, because Bitcoin is a different, you know, they think that it’s the same asset as it was, you know, previous one and previous one, but it’s a different, you know, but if at least 5 percent of them will try to understand and use different approach.

[00:53:27] Max Kei: I mean like non custodial approach for respecting your borrower and respecting your customer and your customer rights to having their own asset and an independent asset. Then I think those 5 percent again will prevail and eventually they will grow stronger and bigger because like bull beer market, they happen.

[00:53:46] Max Kei: We see that, you know, some get bust and some get stronger. And I think that we’re there. We can provide them with tools. It’s up to them to decide whether they want to use that tool or not, because we know that some of them will use and those who will use will be on the forefront of the adoption and on the forefront of actually making money in an ethical way.

[00:54:10] Max Kei: So yeah, that’s my final thought.

[00:54:13] Preston Pysh: Love it. Love it, Max. Thank you so much for making time and coming on. We’ll have links to Hodl Hodl. We’ll have links to Debifi in there if people want to read up and learn more and just thank you for your time and coming on the show.

[00:54:25] Max Kei: Thank you very much, Preston. It was a pleasure. Talk soon with you.

[00:54:29] Preston Pysh: If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for, We Study Billionaires. The Bitcoin specific shows come out every Wednesday, and I’d love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it’s something that helps others find the interview in the search algorithm. So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening and I’ll catch you again next week.

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