Q&A: What BitGo CEO Mike Belshe wants from crypto regulation

Digital asset custodian BitGo surpassed $100 billion in assets under custody, becoming the first independent custodian and staking provider in the world to reach that milestone. The company has seven custodians that operate globally and though they are based in the U.S., more than 40% of BitGo's business is done internationally. In addition to custody and staking services, the company offers wallets, trading, financing and settlement services.

Mike Belshe, co-founder and CEO of BitGo, sat down for an exclusive interview with American Banker to discuss next steps and what guardrails need to be put in place for the U.S. to have a strong regulatory structure for digital assets and crypto that doesn't stymie growth and innovation. Our conversation was edited for clarity.

American Banker: BitGo just surpassed $100 billion in assets. How are you feeling? What's the next step from there?

Belshe: We're feeling great. We finally have a regulatory climate where we can start building confidently, where we don't have to worry about all of the big clients that we want to have being afraid [of getting involved] because of regulation. Wall Street has mostly not been touching digital assets, and that's because they're afraid of their risk from a regulatory side. Now we can start having conversations where people are like, 'Great, we want to do business,' whereas previously they were too afraid to. It's just a great time. 

AB: Why would an individual or company opt to work with a digital asset custodian?

Belshe: If you're institutional and you know what you're doing, you look for someone that's going to have a bunch of qualifications: You want to have good technology, you want to have a healthy company that has their stock audits – and all this type of stuff. The regulatory framework that we put around qualified custody means that regulators and auditors require us to keep our assets segregated and separate from our clients' assets, so your assets are always yours and they are bankruptcy protected, meaning, if anything should go wrong, then your assets will not be wrapped up in our bankruptcy. 

Institutions just demand this. They won't do large scale business unless they have it, and this is the way they've already always operated. It's difficult for some of the large traditional finance firms to interface with private companies, especially when you're talking about new technology. But by putting in the safeguards and rails, they can participate. 

AB: Market structure is a big topic right now. What do you think should be considered in drafting a regulatory format?

Belshe: We could talk for like an hour on this topic. We at BitGo have been studying market structure for at least five years – it's been in my board decks, it's been our customer presentations, things like that. I was at dinner recently with a bunch of really smart people from traditional finance, crypto, etc., and they started talking about market structure and there were views all across the table, and eventually I asked, 'What do you mean by market structure? Like, what do you want?' And actually, they couldn't give a good answer. Like, literally nobody could. Prior to that question, there had been two camps. One camp is like, why don't you just let Coinbase do everything? They can do it more efficiently. The old markets are slow and bad because there's multiple participants, and the market structure just slows everything down. Look, there's some truth to that, but there's also risks that come with that. But interestingly, nobody could really articulate what they really want. 

I do have some pretty strong opinions on this. And I also think there's a lot of reason to be practical instead of just trying to force market structure. We have a model of market structure, which is the equities world. This is, of course, regulated by the SEC. You've got basically broker dealers, kind of on the end points – you might have a buyer's broker dealer here and a seller's broker dealer there. It can be the same one or it can be different ones, it doesn't matter, and they connect into exchanges, and lots of trading happens. We've optimized it so that lots of trading can happen. You can trade, trade, trade. On a daily basis that drops down into a clearing house, a clearing and settlement process through a central clearing party and eventually it separates out into banks and transfer agents hold on to the actual underlying stock. So that's one model. It's got a lot of participants. Basically, there's about seven participants in every transaction. So it's got a lot of cost. That's what the equities world [does]. Now, by the way, I think people falsely criticize the system of being inefficient. While it is costly, and it is more overhead than you might need if you were doing it in a modern world – remember, all of these rules were created starting in 1940 – so, while it does have a lot of overhead to it, the notion of efficiency is cost divided by volume, and the volume on the U.S. equity markets is so large that Charles Schwab can charge five cents a transaction and still make a lot of money. So people forget that it actually is very efficient, even though it's more costly than it should be.

Another example of a market structure that we have is a CFTC model. It's not a lot different: An exchange is now called a DCM, and the brokers are now called FCMs. They have slightly different rules on what they could do, types of investors they can take. Then it drops down into a DCO, which is the clearing organization. It's a similar model, I think, probably mostly different by the types of investors that are allowed to participate. 

AB: What critical components do you think need to be embedded in the structure to mitigate nefarious activity? 

Belshe: There's two areas within market structure that matter. One is first the safety of custody, getting checks and balances in place. The second one is going to come with leverage. The U.S. markets have been closed for the most part to crypto to extend leverage like a broker would. But this is changing quickly. We don't really have to worry about the second part yet, but if it changes quickly, it could be upon us very, very soon. 

Visualize, if you will, there's the exchange in the middle with the brokers out here, and the exchange drops down into the central clearing party which goes down to the transfer agent, etc. The guys in the middle are supposed to be robust. That is, the market itself should never go down. What makes the U.S. capital markets great? They never go down. They have the most liquidity. They have the most buyers and the most sellers. It's critical that those central parties will never do something or take a risk which could cause them to go down, which is why NASDAQ and NYSE don't hold customer assets, and don't extend leverage. They trade. That's their job. And when you go down into clearing, again, it's kind of a different thing: They're not extending leverage beyond making sure that the daily net settlements can settle. They have a specific role. Instead, leverage is pushed out to the brokers. 

AB: What needs to be included in the market structure to reduce potential risk? 

Belshe: There's two things you need to do. Number one is separate custody from exchange. They should be separate. And I would argue this for crypto, if you go back and look at every single exchange failure that we've had, and then ask, would it have been mitigated or completely avoided by having a custodian? You'll find that, in many cases, that's absolutely true. So going all the way back in history to Mt. Gox. 

[Mt. Gox was a Japan-based bitcoin exchange that opened in 2010 and grew to handle 70% of transactions globally by the time it abruptly closed in early 2014, leading to the loss of hundreds of thousands of bitcoins.] 

Mt. Gox started losing money. It's a little bit still unclear. It seems like a combination of poor management, operational capability. Maybe there was a little bit of hacking that was going on, but just basically a lot of sloppy stuff. If they had had a third party custodian, the third party custodian would have noticed that the balance the company said they had with them didn't match the balance that they said they had on their exchange. So instead of waiting a year and a half to kind of let all this thing sort out, and people wondering if there was a problem, it could have been caught way earlier, mitigating the problem. QuadrigaCX, [another crypto exchange that failed and declared bankruptcy in 2019] – the CEO of the exchange runs away with the money. Again, with a regulated custodian, where you've got audits, where you've got regulators, you've got fiduciary duty over somebody else's money, it couldn't have happened. It would have been just straight up fraud from the custodian. We don't have those types of issues. Coincheck, there's another one. Coincheck was an exchange, and they were doing many parts of their business, and they started carrying this new coin, which got really popular. They were plastering Tokyo with ads and all that. But they grew super fast, and they didn't take the time to actually secure the assets they were holding in a big hot wallet. So, again, a custodian wouldn't do this. And the regulators can also monitor the custodians, which they now do in Japan as a result of Coincheck, to make sure that they're dropping down into cold storage and whatnot. I strongly believe that if you just did this one thing, you would get a check and a balance, which would be tremendously beneficial to retail investors. 

AB: You mentioned leverage as another component – can you expand on that?

Belshe: In the U.S. today, basically nobody's running leveraged trading because we've had a lockdown on regulation, whether it's the securities world or the CFTC world or anything else. So instead, what happens is everybody's doing the trading. It's just the clients all open up Cayman accounts, the exchanges will open up Cayman accounts, and everybody does the exact same thing, but they run it through the Caymans. By the way, this may sound terrible, right? Like, oh, you're avoiding us regulation. Guess what? Every hedge fund not related to crypto has been doing this for decades. They all have offshore feeder funds. So if you're upset about things running through the Caymans, it's been happening for forever. This is not crypto. As we do bring this into the U.S., which is going to happen, I think, very quickly, we're going to then see the trade financing and leverage start to kick into the system. Then now we've got the issue I was describing, where, what's the central part of the market that can never go down, and who's taking various types of risks, where they're allowed to take risks – they should, that's no problem – with some guardrails to make sure investors are protected, but we can't have those same guys be running the markets. 

AB: What do you think lawmakers working on this should ask themselves as they're thinking about balancing innovation with regulation?

Belshe: This is coming up a little bit more in the stablecoin proposals that are happening. One of them has, like, a $10 billion market cap, at which point you have to be federally regulated or something like that. The concept here is reasonable. When you're just getting started out and you're innovating and you're coming up with new stuff, you shouldn't be subject to massive amounts of regulation that would prevent you from growing. In general, I like that. I've been doing startups for 30 years. The first one I joined was Netscape, before as a public company a long time ago, and then I've started a bunch of companies, sold in Microsoft. So, getting companies going is something I do know a little bit about and I'm Silicon Valley-based and whatnot. Startups are disadvantaged if the first thing they have to do is go to spend a bunch of money on legal. If the first thing you have to do to even get off the ground is spend $5 million, that raises just the capital bar before you can even go and that can hurt innovation. 

The second one, I think, is the worst one: it's time. How long does it take to get approved to do whatever activity you like to do? So let's say it's $5 million – which I actually don't think it would be. Let's say we had a stablecoin bill; let's say there's no exemption, no safe harbor for small companies, like a $2 million bill, $3 million bill to hire some lawyers, it's not great, but it's not the end of the world for innovation. There's plenty of people that can fund that today, so doing some amount of process to get going is OK. The second part, I think, is the harder one, which is, if it's going to take you a year or two years to get permission to start, that's difficult. Nobody wants to do that. If regulators can move at a quick pace and have a fast-track approval process, then that works better. 

AB: There's been an ongoing debate over where to start: Should Congress start with market structure? Or do they start with stablecoins? 

Belshe: Well, stablecoins, I think, should be super easy. I mean, there's just not much to it. Like, what is a stablecoin? Are you allowed to be algorithmically backed or fractional reserve, or is it one-to-one backed? If you're talking about a one-to-one backed product, that should be pretty easy. Then what do you need? Well, you need some audits and fiduciary oversight. The stablecoin one, to me, seems like such a natural layup. Because it mostly has to do with relations of fiat, and, of course, the token matters also.

I also think that the U.S. needs it. When I say the U.S. needs it, I think the U.S. needs stablecoins. I asked a number of people: 'What benefit do we get from having stablecoin regulation?' And nobody's really able to articulate anything. I mean, we've got two very large stablecoins today. We've got Tether and we've got Circle, and neither one of them had any regulation. Circle has MTLs [Money Transmitter Licenses], and that's it. And Tether just runs outside the U.S., and it still works, and the U.S. has no jurisdiction over them, which is both a feature and to some people, it's a weakness. But I do think having a regulator could bring credibility to anyone offering a stablecoin, and so those that opt into that regulation, I think, may just have a better product that institutions on Wall Street can count on and better rely on. 

I actually kind of hope that if there is stablecoin regulation, it's optional. Why do you have to get it? Are they really providing something better? And shouldn't the market decide which one's better? I haven't heard anyone articulate what's the issue that you're trying to solve with regulation? I suppose you could say, well, we don't want to [go the route of] Terra LUNA [which collapsed in 2022], which is a valid concern. I would expect stablecoin regulation to say it has to be one-to-one backed. By the way, one interesting thing I think most people don't think about is we already have stablecoins in the traditional finance world, and we have both algorithmic ones and fully backed ones. The Hong Kong dollar is a one-to-one backed dollar, and the AE dollar [Aeternity] out of the UAE is an algorithmically backed dollar, where it's partially dollars and partially oil. So we actually do have these things already. Now, those are different governments obviously choosing to do those things. They're not issued by the U.S.