Sep 8, 2023

Anchorage Digital co-founder and President Diogo Mónica discusses the uptick in institutional demand for ETH staking in 2023.

Video transcript

Our next guest has some new insights on the adoption of institutional eat staking. Joining us now to discuss is co-founder and president of Crypto platform, Anchorage, Digital Diogo Monica. Welcome to the show. Thank you for having me. All right. So some new information that Anchorage is releasing this morning, talk to us about the key takeaways. What are you seeing when it comes to institutional eat staking? Yeah, this year has been um pretty great for Ethereum overall. Um Price action aside uh the platform, the evolution of the updates and specifically, there was a key moment early in the year which was the upgrade which we saw a dramatic uptick in institutional participation in particular, we've actually seen four times the volume and the amount of each staked on our platform uh beginning year to date and over 40% of our clients who hold the the at Anchorage are now sticking with us that was lower than 10% about 5 to 7% earlier this year. And so really the ability of having withdrawals post Chapela and the trust that institutions are having on Ethereum is um making institutions that had Ethereum not just participate in the consensus now. Uh but also other institutions bet on Ethereum and start buying back. You know, we, we had in our previous discussion, uh a bit about how, uh higher interest rates are, of course, pushing up a hurdle rate, uh for, for, for all kinds of returns. And that includes, I would assume staking, what kind of, uh what kind of returns have those who have staked, uh their, their, what are, what are they looking at? What kind of rates are they getting? It's interesting because I don't think anyone is looking at Ethereum staking as an invest investment when it's side by side compared to a T bill. For example, what is happening is that institutions are very excited about crypto and about the future of the space. And so they're buying into the assets that they believe are going to be the big winners and some of those big winners are Ethereum and Bitcoin as you'd expect. So Crypto natives already had Ethereum, they might not have been staking it, but they already had Ethereum. So there's no 1 to 1 comparison. This is just them reducing the amount of dilution they have on a yearly basis for um the fact that they were actually not actively participating in the consensus Corporates, obviously that had Ethereum are still waiting a little bit more on the tech side. But then there's major players in traditional finance and very large funds that are now either buying in because they are bet on Ethereum overall. And of course, they're uh want to participate in the consensus and they actually want to, don't want to pay for the dilution. So it's less a side by side comparison of uh different investments in more. If you are bullish on the space and if you're bullish on Ethereum, of course you'd participate and you'd take your e so, I mean, yeah, who are the more uh institutions that are taking with you? Yeah, there's uh lots of uh anywhere from sore wealth funds to uh very large asset managers. So you can expect VC, very large VC funds. And we also have uh some Corporates, some public traded companies, some of these uh large allocators pension funds. Those are the ones that are the most traditional capitalized institutions that actually are staking. Of course, the majority by number and percentage are obviously the crypto natives. So the, the institutions that actually already have crypto and are just comfortable with this um in post Chapela upgrade and having the liquidity in the to withdraw. Of course, they started uh migrating in mass to do Ethereum staking. So what, what would keep them from staking? Is it, is it because the many of them are not holding long term enough to do it. I it like what, what would be the, the mindset between staking and not staking? It's primarily about liquidity if you are a fund, for example, that has uh income redemption and has uh redemption rules for investors. You do not want to be caught in a situation where you stake all of your Ethereum. It takes you potentially weeks to get, get the Ethereum back and all of your Ethereum is staking and thus is locked, right? You can't take that risk, that liquidity risk and the next one is tax. So how is this treated? How is it taxed? Do you have the structure in place and the confidence from your compliance and legal team that you understand that taxation? And then, uh finally, I would say trusted partners and um parties like Anchorage that actually are, we're still the only Federally Chartered bank. And so it's pretty clear that institutions can do staking safely with us. And we've been in the market for a long time and that this is actually part of our charter taking is one of the actual business lines that our OCC Chartered Bank has. So all of those things were things were necessary for us to actually get uh the comfort from institutions to do it. And as I mentioned, the unlocking piece really was the Chappelle upgrade and the upgrade that allowed withdrawals and thus allowed institutions to feel more comfortably comfortable about their liquidity Diego. How are you working with regulators? You know, earlier this year, we saw Crackin settle with the SEC um and discontinue their crypto assets staking as a service program. How are you working with regulators after that happened. Is there any concern for you that the SEC may turn around and say actually what you're doing here is not compliant. There's always that risk. Anchorage is in a different situation than uh the majority of these folks. Well, really than all of them, because we do have a banking license and our banking license allows us to do things like custody securities. And so to, to a large extent, of course, we're following pretty closely what the SEC says. Uh but I would say the SEC likes the fact that there's an ambiguous qualified custodian in the form of a federal charter in Anchorage. And so, yes, clarity is necessary and whether an asset falls under the regime of securities and, or commodities or something else is incredibly important. However, Anchorage actually benefits from the fact that we have the highest regulatory scrutiny in the land, we've already done the hardest thing. And so to, to a large extent that insulates us from, um, we already have the bank that insulates us a little bit from uh some of these, um some of these changes because we can do uh deal with commodities very easily and we can also deal with securities. So ARC is filing for a, uh an ETF an E ETF uh they, they filed uh this past week for one, let's say crazy assumption that it gets approved. What does it mean for e staking? I think, first and foremost, um I think we're gonna see that an ETF will drive will, will drive interest will drive interest because it's obvious that if it's more available for retail institutions alike, then there will be more ability for people from their traditional brokerages to just simply uh put a theorem and buy an ETF uh from whatever broker, whichever broker they actually use traditionally. So that one seems obvious and I think the industry in general agrees because of the market movements that happen around uh news of uh ETF walking towards approval. Bitcoin is one thing, Ethereum is a little bit of a different um a different animal in the sense that it's going to be critical that some of the ETF S do stake because otherwise the difference is not just paying the fees of an ETF to hold Ethereum. Now as an investor, you're actually looking at this if you're an ETF and it's not just the fees that you're paying um that are down sides is uh the added solution that you have if these assets are not staking. So I do think it changes the calculus pretty dramatically and it is different from a Bitcoin ETF in terms of uh how the ETF is set up and how future ETF S will appear and whether they stake or don't stake will be one of the big differentiators of the folks that will be able to solve this problem. And partly is because the infrastructure is more complex. There is more risk, there is the need for different types of partners. Uh thinking is something that we do, but it's not something that everybody does. And so that will be interesting to actually see uh the first entity that actually comes to market, not just with the ETF for, for Ethereum, but with the EF or Ethereum that allows folks to claim the gains or um to be protected from the delusion, right? Diego, we are going to have to leave it there. Thanks so much for joining us this morning. Thank you for having me. That was Anchorage Digital co founder and president Diego Monica.

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