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Diogo Monica

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2022-06-30
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2022-06-30
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  1. “Raise what effectively was a bull market and then go through the bear market of 2018 and 2019 where we were lucky enough to be extremely well capitalized and just focus on the building. And then once we brought the product to market, you had the bull market that we've seen in crypto and we've been able to capitalize ourselves on all the right times and just bring on more and more institutions in larger and larger institutions. So just been absolutely fascinating to be here. We also had the benefit of coming into this space in 2017 and learning from past mistakes from past companies that were in crypto to the bear market of 2015. One of the main things that we saw, there were companies that lost a very significant percentage of their employee base when a bear market came around. Imagine that you're a CEO of a company, you're running a company, and then there's a bear market, and then 30% of your company quits. That is incredibly hard on the culture, incredibly hard on the company.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “The talent gets attracted and comes into the space when there's bull markets, but they don't leave when there are bear markets. It's a one-way function from traditional finance and from tech into crypto. And that is one of the best data points that you can have for the maturity of a space and for the type of talent. So you add large amounts of cash being deployed with amazing teams and very ambitious ideas and you really have just all the ingredients there to have a world changing ecosystem and phenomenon. And we've already seen that happening. And so that's really interesting about bear markets is the fact that there's no talent leaving and the capital might not increase, but it actually stays constant. And across the five crypto bear markets or six bear markets that we've had, you've always seen these very high conviction entrepreneurs and investors stay in the space. So for us, what we've seen is we've seen the exact same thing. We've seen the company start out with a very specific use case.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “It has been up and to the right and it feels like a monotonically increasing function. And what I mean by that is it is not necessarily up and to the right in a linear fashion, also not in exponential fashion. It's actually sort of like a multiple S-curve. So there's a bull market in which all the interest grows. Everybody comes into the space, talent accrues, money pours into the space. And then there's a bear market where it's very interesting.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “Sovereign wealth funds to obviously the traditional funds, but also crypto native miners, exchanges, all of the crypto native folks like protocols, the protocols themselves need custody for their treasuries, all the way to fintechs, corporates like Visa that we've participated in many different projects with around settlement. We bought an NFT for them. We have a partnership where they can offer custody services to their clients using Anchorage. And of course, just the traditional financial behemoths of the world, large custodians, a large consumer banks are the large institutional banks. So everybody right now has a crypto pay. And many of them are very advanced in offering these services.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “When we started the business, the primary clients of this were venture funds, family offices, and crypto funds. So in 2017, that was the status quo of the market. Very sophisticated investors, but on the very, very bleeding edge of risk-taking early stage investments. And that's what was there. Four and a half years later, we are in a dramatic different place. Right now, the types of institutions that Anchorage engages with more and more are the largest consumer banks, the largest institutional banks from an investor perspective we've upgraded from family offices all the way to sovereign wealth funds that use anchorage to take direct crypto positions. We have really a very diverse set of client types. I think at this point we have 37 different verticals of clients. So it's anywhere from the financial institutions to endowments to”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “That are physically controlled by us in data centers with biometrics and physical security at no point do they ever connect directly to the internet. They are segregated from any public network by these airlocks that guarantee, physically guarantee, that there's no connection between any of these systems at any point and allow us to run many types of security audits on any kind of transaction moving back and forth to ensure that the right humans and the right institutions are moving the right assets to the right locations.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “Be offline. They're never directly connected to the internet. So, how do we do that? Well, what we've created effectively is the equivalent to a human going online, understanding what transaction needs to be done, taking that information offline to a very segregated location, say a data center, and then inputting information on what transaction needs to happen, and then bringing it back to an online system. So we've created what can be described as an airlock. So you know how an airlock in space You should never connect the inside of the space station to the outside because all the oxygen and all the air will just blow out. So how do they do it? Well, they effectively have these airlock mechanisms. An astronaut is on the inside of a space station, pressurizes the airlock, goes inside of the airlock, slowly depressurizes the airlock, and then can do a spacewalk, and then does a reverse on the way in. We've created an equivalent system, but for transactions to happen. So at no point do these hardware security modules and these servers”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “Security that cold storage provides. The way that we've done it is we generate keys, these long passphrases that are very sensitive inside of what we call hardware security modules. Hardware security module has been around for many decades. In fact, hardware security modules is what it's used by the military to store nuclear launch codes, for example. So it's that type of security. You know what's even more important than Bitcoin? Nuclear launch codes. That's the type of security that is actually being brought to bear. What we've done is we've used these devices. We generate keys inside of hardware security modules. And then we make them”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “We have from day one created infrastructure that had in mind institutional needs. So at the time, as I mentioned, people were doing what we call cold storage. So that's the equivalent of what pirates did in the 1700s to protect their gold coins. It was gold coins. You would store them in treasure chests. You'd bury them in an island and you'd have a little map on how to recover them. You're laughing, but this is exactly the equivalent to modern cold storage, which is very sophisticated investors with passphrases or smart cards saving them in safety deposit boxes and then creating checklists on how to recover them. So it was a very manual process. What we've done is we brought to bear both Nathan and I's background to build a solution that was actually a digital solution that allowed us to access these assets fast without humans involved, but allowed us to have the same type of”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “And who possesses the password possesses the access to the asset. And so that's why it's so critical and it's think of the world's most valuable password. There's no recovery. You can't do an email recovery. You can't call someone to recover my Bitcoin because Bitcoin has no CEO.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “A public component that everybody sees on this blockchain, which is the equivalent to your bank account number. So everybody can transfer assets to that bank account number, and you hold onto yourself a private component called a private key, which you can think of it as a gross oversimplification, but as a very long password that you memorize or store on your own. And so what this means is that anyone with a public portion of this, your bank account number, can transfer assets on chain, and anybody with this password gets to move them. And so gets to access the value that is on the blockchain. So that's at its basic core, what's actually happening. And so these passwords are just the base elements of candidly modern cryptography. So everything from your browser to your email to many types of security work on this concept of public-private key security. But the innovation here is that this key actually in this password owns value.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  12. “So, when you think about the traditional worlds, ultimately, as you mentioned, DTCC gets to have the record of everything that is happening. And if there's anything that goes wrong, you get to go to a court and the court gets to change ownership. In crypto, there's this element of self-custody and the fact that these are bare instruments in their core. And so loss of an asset is a recoverable and there's no clawback of a transaction that happens. It is not like a wire in which you have one day or two days to try to claw back from the destination bank. Here, there's nothing that you can do. Once it leaves the ownership, it's done. So how does that work in practice? And I have a very hard time answering questions. Well, I'll not trying to be too technical. But at most fundamental level in core, think about Bitcoin and other cryptoassets being based on public private key pairs. What that means is there”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  13. “And in fact, Anchorage started from institutional custody, but many other players started from other portions of the Prime Brokerage stack, so to speak, and they all have either acquired or tried to build their own custody solutions. So all of them now have realized this need, and many of them are realizing that it is so hard to do custody in a safe manner, in a regulated manner, and not just for Bitcoin, but really for many hundreds of assets that exist that they're now partnering and using Anchorage digital in specifically Anchorage Digital Bank as a subcustodian. The same way that many large banks don't build their own gold vaults and they don't have security armed guards and these armored trucks, they sub-custody that to third parties, people are now realizing that this is a great model also in digital assets. And so they are doing this subcustody model and using platforms and parties like Anchorage to help them out.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  14. “The associated business. So let's actually see what that means. What that means is that if you in digital assets want to do lending and want to take, for example, crypto, say Bitcoin as collateral towards a loan, so somebody can borrow dollars against Bitcoin as collateral. And if you don't own your own custody stack, you have a major issue in your hands. You are trusting a third party to actually hold your assets. These assets that are critical for the solvency of your loan book, because that is the collateral that you're actually taking on. So very quickly you realize that you can't actually do lending without having a custody stack. Same thing for trading. If you're actually trading indigenous assets, where are you saddling these two? Are you selling in his third-party wallets? And so you're trusting third-party wallets, third-party custody systems to actually settle these assets. So it doesn't matter where you come in at the stack of the digital asset equivalent to the prime brokerage stack, you realize that you need to own custody.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  15. “The interesting thing about custody in the digital asset space that is somewhat different than the traditional world is if you think of a prime broker in the traditional world, you can actually create a business at many different layers of the stack. You could do an execution business, you could do a custody business, you could do a lending business. All of these businesses are somewhat independent. And part of the reason why they're independent is because there's very clear segregation in the traditional world in the form of DTCC and in the form of other different types of market structure. Who owns the security and how to actually transfer ownership? So that's why there's introducing brokers, there's carrying brokers, et cetera. Digital assets work in a very different manner. There is no DTCC. There's no central repository. Owning the private key of Bitcoin is ultimately owning the ability to own the asset and settle the asset. And so if you don't own the private key, you can't actually do it.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  16. “Of a software that had been updated a few years later, and so they were sitting on Bitcoin with a C that didn't really was able to be recovered on the new version of the software. And so for that specific case, I didn't have to do anything fancy, brute force to pass phrase, or do anything that was complicated from a secured perspective. I simply had to go to a prior version of the software, compile it from source, and then it was able to actually recover the keys. So in this particular case was easy, but let me tell you that there are tens of billions of dollars worth of private keys that have been lost in an irrecoverable fashion. So that is the status quo right now. When you have this ability that crypto assets give you of being your own bank, of doing self-custody, of having this sparrow instrument, it really brings out this principle of maximum liberty and maximum responsibility. And the maximum responsibility is if you really don't do a good job, then you will lose access permanently and there's no recourse.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  17. “What ended up happening was interesting. So they had lost the passphrase to this wallet, but they had what is called the recovery seat. And this is something that is pretty interesting to note. Early 2017, there were no institutional custodial solutions available. Investors were literally using consumer devices, $50 devices. They were generating wallets on their normal personal laptops, and they were storing these seed passphrases, which is effectively a set of twelve, twenty-four words that allow you to recover your passphrase to a wallet in case you lose it. And they were storing it in their password manager. They were writing down on paper and keeping it in a desk at the office. They were doing what would you traditionally do with your own passwords. And we all know what happens to your traditional passwords and how many of us have had to recover access to our private accounts. So of course that was not enough and sufficient for institutional investors. In this particular case, they had the seed, but it was to a prior version.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  18. “Yeah, we were able to recover the passphrase, which actually was a lot simpler than you'd expect, which goes to show how very sophisticated investors can be very unsophisticated when it comes to private management and operational security.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  19. “To security that existed because it was where all the security was being developed. And so the other thing that is context that is interesting here is that I was forced by my family, specifically my dad, to do a PhD, because none of my own volition, but essentially everybody in the family has a PhD. My dad has a PhD, my sister has a PhD. My dad's dog is named Duck. And so from very early age, I knew that I didn't really have a different path than if I wanted to be part of the family and belong, there was this large overhang in the form of this credential. And so when I did my PhD, it was obvious that distributed systems in security, specifically for distributed systems, was the closest to my individual passions. And so to a certain extent, it was an obvious path. There was a path that was available. To another one, it was obviously a very fortuitous path because it got me where I am today.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  20. “That is an interesting story on its own. So, for context here, I've always been a security nerd. So I loved security. My dad taught me how to program when I was 12, and I love this aspect of security systems, creating little software that moved the mouse around and opened and closed the drives, if you remember the CD drives of computers, those kinds of things are really fun. The beginning of the internet and learning about websites and website security and servers running servers. So that was all really interesting. So security was a passion. And back then, if you think about it, 15, 17 years ago, there was no specific cybersecurity curriculum. So you really had two choices. You had electronics and you had computer science. And so I decided to go deeper into this path of networks in distributed systems, which was the most obvious in the closest area.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  21. “It was the boom of the ICOs, and so I was doing consulting on my free time while I talker. And there was a fund that reached out to me that had lost the passphrase to a one point five million dollars Bitcoin wallet and offered me 20% if I could break into it. So that was my introduction to the need of this business. Talk about selling painkillers, right? That's a large amount of pain that could be solved with the key recovery. And then more and more of those funds started materializing until we realized this is a real business. Institutions do not have the technology that they need to safely invest in this asset class. And so that was really the starting point. Anchorage is now today a very different company, but it really started from the core need for security.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  22. “At Square for the next four years. My cool claim to Fame at Square is that we are actually on the patent for the little encrypted credit card reader that I'm sure you've swiped your card on. And so that was really fun process. There was ups. There was downs. There was lots of infrastructure built that now is moving hundreds of billions of dollars of annual IGP still at Square. And then after four years at Square, we also moved together as a pre-product AquaHire to a company called Docker that now runs on over half of the internet. And so the container ecosystem and the security that we built into it really runs on every single cloud provider today. And it was in late 2017 that we decided to start Anchorage because we're getting a lot of these requests for institutional investors that were reaching out to us and were actually having a hard time investing in the crypto asset class. It was still nascent.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  23. “Absolutely, it's actually a really interesting story because it starts about 12 years ago when I and my now co-founder, Nathan McCauley, joined a little company called Square the same week. So that's when the story actually happened. So Nathan and I've actually been working together for 12 years at this point. And we were working together for seven years before we started Anchorage. If we zoom back a little bit more before Square, I was working on something that was not particularly useful 15 years ago, which was a PhD in distributed systems in security, which you can say that now has a modical amount of utility given that all of blockchain is essentially distributed systems and security is so fundamental for this asset class. And so join Square very early on. We were employees 40 and 41st just around. So we joined in early 2011 and really created a great partnership, worked together leading the security team.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source

  24. “Today's final episode of Crypto for Institutions 2 is a special sponsor insight from Anchorage Digital. My guest on today's show is Diogo Monica, the co-founder and president of Anchorage, the first federally chartered digital bank. Our conversation covers Diogo's uniquely qualified background for this role, the importance and implementation of digital asset custody, and anchorages client-driven extensions from custody into brokerage, lending, staking, and governance. We close covering the creation of the bank, partnerships with Visa, and what's next for the company and its clients. Be sure to stick around for the closing questions to hear Diogo's perspective on exceptional hiring practices for startups.”

    2022-06-30 · Capital Allocators · Diogo Monica – Securing Crypto at Anchorage Digital (EP.259, Crypto for Institutions 2, EP.06) · IDENTIFIED FROM THE TRANSCRIPT · source