‘We’re trying to keep up with, candidly, a very diverse set of use cases’: Anchorage’s Diogo Mónica

We’re at an inflection point right now when it comes to blockchain technology. There is a handful of technology partners that, instead of bypassing the traditional financial industry, are working together with it. Anchorage is one of those firms. As the sole digital asset firm with a national banking license, it works with FIs to provide crypto custody, trading, staking, governance and more. At the end of 2021, it raised a $350 million round, valuing the firm at $3.5 billion. It’s just getting started, as banking slowly opens up to what appears to be the future for the industry, clients, and the world, frankly.

Anchorage co-founder and president Diogo Mónica joins me on the podcast to review where we are at this moment in time regarding Web3 and its connection to the incumbent financial industry. Diogo shares some milestones that Anchorage and the industry have hit and then looks toward the future for a snapshot of what it may look like for his institution, for banking in general, and for all kinds of customers. 

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The following excerpts were edited for clarity.

2021 as a pivotal year

2021 was amazing for Anchorage. It’s unfortunate that the macro backdrop was not as amazing. But we did grow quite a bit in terms of headcount, clients, revenue, business expansion, and one of the things that you did mention is we were the first and are still the only operational federally chartered bank. That means that the OCC actually gave us a national charter to operate as a bank and be able to serve our institutions for staking, custody, etc, from a bank, which is obviously amazing for us as a business. But it was also a big leap for the industry, because it was the first time that the OCC actually gave one of these charters, which obviously enables us to act as the only unambiguous qualified custodian.

The charter

From a business line perspective, it allows us to go into banking business lines that would have otherwise not been available to us. There are quite a few things that banks can do that just state charter trusts can’t do. But I would say that the biggest advantage of having a charter is threefold. Number one, it allows us to see eye to eye with all of the other federal chartered banks. We have the same charter as JPMorgan Chase, as BNY Mellon, as State Street. Anchorage is a platform that provides the services and the infrastructure that allows any institution to build products in crypto. And what that means is that a lot of the institutions in 2021 that have reached out to us are the traditional financial institutions attempting to build products in the space. And so the fact that they have the same charter from their service provider is really big for them, and really big for us, because we’re seeing eye to eye. We’re not state chartered – it’s not a piecemeal regulatory approach. And the competition is still following the piecemeal approach from a state charter perspective, where the banks just don’t have as much clarity about the law that is actually being applied to these assets.

The other one is the fact that the world at large, all of our clients and not just the banks, understands that the OCC has a higher bar for scrutiny of banking businesses. It is the de facto and the oldest banking regulator. So if you are a fund, if you’re a family office, if you’re a hedge fund, and you want to trust a third party, you do your own due diligence, but you also use the fact that Anchorage has SOC 1 and SOC 2. All of these things are proxy for trust. And the highest level of scrutiny for trust is the OCC charter. 

And the final one is that we are the only ones that are unambiguously a qualified custodian. And the reason why that matters is because if you are an RA, a registered investment advisor, you are mandated by law to use a third party custodian, a third party qualified custodian. And so far, the space only had trust charters, which is a little bit of a gray area. And so the fact that we had it allows RIAs, which are very large investment organizations, to know that they have this stamp of approval, and at the time of SEC review and audits, they can actually say, hey, yes, we do have our crypto assets with a third party qualified custodian.

New charters

The change of the administration definitely brought a different viewpoint over crypto assets. We got in just before the change in administration. There are two other charters that were conditionally approved, but ours is the only one that is actually in operation and it does not look like many charters will be approved. That’s not necessarily a good thing for the space. Yes, we were the first. Yes, it is beneficial for Anchorage to be the only operational one. But the thing that made the most difference for the industry was that there was a clear path forward for institutional providers of services for cryptocurrencies to get a legal charter that allowed them to provide this without ambiguity. It’s clarity that people are looking for, and so more charters being handed out would actually be beneficial for the whole space..

Stablecoins and Visa

That’s a really interesting one. Visa has been a great partner. We have quite a few projects together. But the one that you’re mentioning – USDC settlements – is interesting insofar that people always looked at crypto assets as Bitcoin, really. We’re very far off from crypto being Bitcoin. There’s 15 different product market fits and crypto institutions are interested in some of them. Retail is interested in some others. But what matters at the end of the day is that cryptocurrencies for payments was always something that we believe that Bitcoin was not adequate for.

We have had the rise of stablecoins, which are effectively cryptocurrencies backed one to one to the dollar, primarily, but it could also be to the euro or something else. And they have become the de facto way that people in crypto do settlements. And the interesting thing for this is that it is settlements. That was the use case – it wasn’t really the payments use case. 

Visa came to us and said wouldn’t it be great if we could offer these issuers that are offering Visa credentials to be backed by cryptocurrencies? So think of an exchange like Crypto.com. You are a consumer and have your crypto on your Crypto.com wallet. Crypto.com wishes to give you a Visa credential. So a card that is Visa branded, so you can go buy a coffee. It is interesting, because everybody always said that crypto was not good for payments. But here we are, you can swipe your card. And you can actually use the crypto that you have on your Crypto.com account as the the funding mechanism, which is a brilliant way of using the traditional financial industry to our advantage in crypto. 

Crypto is being used on the back end, because that’s what you have on the wallet. But the payment mechanism is just a traditional Visa credential. And Visa has 70 million merchants all throughout the world. Now, the issue that Crypto.com faces is that they need an issuing bank – they need to have cash on a bank account to settle with Visa at the end of the day for all the transactions that actually happened. So Crypto.com has the responsibility of turning crypto into dollars, and then sending dollars to Visa to settle. And the issue there is some of these exchanges can’t really open these accounts. The second one is it is very expensive to do. 

So you need a partner. You need to leave cash sitting around for settlements. Stablecoins are a great way to do settlements, instantly. We can do settlement every minute if necessary. In the crypto use case, these exchanges already know how to get the stablecoins – the hard thing for them is actually turning into fiat. So what if for the issues of cryptocurrencies, we allow them to settle directly in the stablecoin? At no point do they have to touch fiat, to turn it into US dollars. And so it’s a brilliant way of offering a service to issuers. And that is all built on top of Anchorage. 

NFTs

That’s an interesting one that funnily enough also involves Visa. They came to us with a request: we want to buy a Crypto Punk. Let’s figure this out. What I find fascinating right now is that we have a federal charter and create a digital bank that is considered digital art. And this had never happened in the past. We did the legwork from a compliance, legal, and technical perspective to really do an acquisition of the first corporate NFT. 

We had to make sure that we supported the custody for this. We supported all the processes that are needed to acquire it. So in a way, what happened was Visa forced us into the institutional NFT space. And then after we announced this, every single one of our other clients said, hey, Anchorage, I also have Crypto Punks and these monkeys, I also have these aliens. Now we have an onslaught of clients asking us to store their NFTs. Because if you think about it, an NFT security is exactly the same as cryptocurrency security. Just because it is digital art does not mean that the loss potential is not also 100%. So the same level of security to have for 100 Bitcoin is the level of security that you have for Crypto Punks. That matters deeply because the technology, as we know, is very unique and very distinctive. And since Anchorage had already built the platform, what we had to do is build an extension. So coming in 2022 is actually a full featured product with more integrations with more ability of seeing your own NFTs versus just the custody part.

Integrating with core banking software

An interesting thing that people don’t realize is that there are all these market participants – cores being one of them – that want to come into crypto because they want to offer these services. Anchorage is actually the perfect place for B2B2B, and we can also do B2B2C. And we can also do just B2B, directly to our clients. But if you’re trying to build a product, and you are an institution like a Fiserv that offers this service to clients, then what you need is the technology, the integrations, the regulatory clarity, the trust, the operational excellence, the years in market, the support for crypto assets, a support for staking–  all of these things that you can’t really do on your own. Or at least it’s not your focus, and it will take you such a long time to actually get to the place where you can build something on your own internally, that you’d probably already lose the market. 

So what’s happening is that these cores want to offer this to their clients – their fintechs, their banks – and they’re looking for partners like Anchorage that are regulated, that allow them to add access to dozens and dozens of cryptocurrencies and many different types of services, not just buy and sell, not just holding, but really staking and these other yield generating opportunities. So we’re in the early stages of partnering with cores [like Finxact].

Evolution of crypto

I would say that we are closer from brand name retail banks to offer staking than we are to retail banks packaging these DeFi yield generation opportunities, which also are incredibly interesting. And the reason for it is that  our bank charter actually has staking as one of the services that we can offer. So it’s actually already understood. And the tax implications vary a little bit from protocol to protocol, but they’re also being actively figured out. And finally, it is a very distinctive offering very few people, if anyone, offer. 

So it’s something that if you are holding on to an asset that is stakeable, you feel bad for being inflated away. And so it becomes a necessity, if you support an asset to support staking alongside it, and we feel it and we do it. The banks and these other institutions are thinking about it very deeply. And so I think that’s going to be a lot closer than the repackaging of the DeFi yields for consumers. I can’t really say what the timeline will be for them to be comfortable with it, because as you know, a lot of them are just coming with Ethereum and Bitcoin and Litecoin and traditional ones. But I do think that the Ethereum unlock will be a big one, because it’ll be a forcing function for these financial institutions to start caring about it. 

Because I don’t want to hold my Ethereum with you if you don’t allow me to stake, and thus, I can’t be an institution offering a product that doesn’t get in use, because people are not willing to use it.

The big fundraising

We raised $350 million at over $3 billion valuation in our Series D. And the interesting thing here is that we hadn’t really spent any of the money of our Series C. So the business was doing really well. And we’re growing really fast

The unique thing about this particular round that nobody else has is the brands that we really brought on board. KKR was the lead of our Series D. This is a very well regarded brand in the traditional financial world and this was their first foray into crypto investing. But alongside KKR, we had other folks that are of similar dimensions like Apollo. We had banks like Goldman Sachs, and very large fintechs. like PayPal, participating. We had BlackRock coming in. There’s obviously all of the current investors also participated: the sovereign wealth fund of Singapore (GIC), Andreessen Horowitz, Blockchain Cap, which led our series B. So every single one of our investors really came in in a meaningful manner and we added institutional grade investors. 

In 2022 and beyond, we are focused on very large financial institutions. So it makes a lot of sense that these institutions recognize that they need players like us. And they also see the investment opportunity. And by having Goldman, Apollo, and KKR on the cap table, it obviously makes it a lot easier for us to get into these New York relationships and networks in a way that is even better than what we were able to do before. 

The other thing that is also important is internationalization for Anchorage (even though we are a very international company already, from an employee perspective). The majority of our clients, I would say 80% of them, are still in the United States. There’s going to be a big effort this year and has already started and is ongoing to internationalize: focusing in on Asia, starting up in Singapore to serve APAC and also other countries in other regions, such as India and South America, where there’s going to be a little more of a concerted effort there, too.

As a bank, we have to be extremely, extremely well capitalized, because your balance sheet matters in a business where you’re doing business with other banks, and just being marked to market as a multi billion dollar company, in this case, a tricorn, which by the way, I learned is some kind of fringe hat. I didn’t know about that before. So, fun fact. The tricorn valuation, a balance sheet of over $500 million – all of these things just give you confidence that this is a company that is very long lasting, that is here to stay. 

If it increases the probability of us closing a very large client by 20%, because it just eliminates that concern, then it’s worth it for us to be at the level of capitalization and to be at the level of valuation. Of course, it helps for mergers and acquisitions and aqui-hires. That’s also something for which you always do a markup of your own price. 

2022 priorities

The history of Anchorage Digital has always been client demand based. We started with custody, we added trading, we added lending, we added staking, added governance – the sequence made sense because this is what clients were clamoring for. And right now, what we’re seeing is that these corporates, these fintechs, are building very innovative products. What they want is a platform that is regulated, that allows them to build what they want on their product lineup. And so we’re trying to keep up with, candidly, what is a very diverse set of use cases that I could not have thought about. Some of them actually materially affect the core business of some of the largest fintechs in the world, or at least optimize it in a way that is a lot more profitable to run their operations. 

So using stablecoins for settlements, for streaming payments – all of these things that can be done with crypto and can’t really be done in the traditional world are just coming in a very, very meaningful manner for these businesses’ bottom line and innovation. Those are things for which we constantly are going to be looking for productizing. If a client comes to us and says, hey, I want to do streaming payments for A, B or C, then we look at streaming payments as something that we add to the product line. 

If a client comes to us and says hey, I actually want you to custody my securities because I’m an indie trader, alternative trading system, or ATS, and I really want to trade these securities. After registering with the SEC, of course, and after being approved, then we can do that use case and let’s build a platform for the use case. That’s something that we’ve already done.