Hi guys, welcome to the Fintech Coffee Break, I’m your host, Isabelle Castro, and today I shared my coffee break with Matthew Homer, managing member of The Department of XYZ.
Matt’s career has wound through the fintech and regulatory sectors, and his work at XYZ brings those two areas together in the field of VC. Paying particular focus to blockchain-based companies, they aim to be the “regulator in on the cap table,” providing insight to navigate the challenging environment.
On the back of Consensus 2023, I caught up with him at Fintech Nexus’ New York office to discuss the turbulent regulatory landscape of U.S. crypto.
Isabelle Castro – Hey, Matt, nice to have you in.
Matthew Homer – Good to be here.
Isabelle – Good to have you on the show. I’m really excited to talk to you. So to begin with what gets you up in the morning?
Matt – Yeah, I think what gets me really excited is that we’re at this really interesting moment in time where a lot of things have been digitized, but not a lot of things there yet digital native. And I think that’s what’s so exciting to me about kind of the new evolution of financial services that we’re embarking in. And the broader sort of blockchain crypto ecosystem is the possibility of creating truly new and digital native infrastructure. And I think like, if you look at just any number of recent examples, it’s really clear that the financial infrastructure in the United States and other parts of the world is totally, totally broken. So I’m excited about that big hairy challenge, it is very exciting.
Isabelle – I mean, yeah, when I got introduced to crypto, I was like, wow. But you’ve had a very varied professional progression. Tell me about that.
Matt – Yeah, I think that’s a very good way to put it. I have been always within kind of the intersection of fintech and regulation my whole career but from very different parts of the ecosystem. I think there’s one pattern to my career. It’s sort of building bridges across that ecosystem. So I’ve been a regulator twice, FDIC earlier in my career, and more recently, the executive at the New York State Department of Financial Services responsible for all crypto licensing and supervision. I’ve been an operator twice at a company called Quovo, which was then acquired by Plaid, where I worked. And then I’ve been on the emerging market side. And focused on how we use fintech and new technology to advance financial inclusion in that context that now I’m on the investor side. And I’m, I’m the managing member of a venture capital firm called the Department of XYZ. And we are the regulators and the cap table for early-stage founders and crypto, pre-seed, and seed. And just getting started, but it’s a really exciting time to enter the market from an investment perspective. And there are still a lot of really great founders and a lot of exciting opportunities out there.
Isabelle – Yeah, it sounds exciting, especially with your background in regulation in this environment. So yeah, cutting to the chase, where are we with crypto regulation? It’s such a mess at the moment.
Matt – Yeah, I mean, it really varies across the world. My perspective is today, mostly US focused, although there’s a lot of progress elsewhere in the world. I think, though, taking a step back and thinking conceptually about regulation, you can think about a spectrum with prohibition on one side of the spectrum and regulation, maybe in the middle, and then like a totally just sort of like libertarian, like free for all, like on the far end of the spectrum. And regulation, I think is really important in market economies. It plays a really important role. And I’m a big believer, as a former regulator, that regulation matters. And I think we need more regulation in this space.
Unfortunately, the thing for many regulators, particularly at the federal level, in the United States, they are pursuing policy of prohibition. They’re not calling it that. They can’t call it that. But I think actions speak louder than words. And what we’re seeing is efforts to prevent crypto from being part of a regulated ecosystem, which is interesting, because it’s not long ago, you know, that people in the US and all over the world were concerned about shadow banking, right, and like a shadow, kind of non-bank institutions emerge that were lightly regulated or not regulated. And what we have here is an example of regulators explicitly fueling the creation of a shadow banking sector, because they’re saying, no, not only, you know, you cannot be regulated by us, right? Like we don’t want, we don’t want you anywhere near us. We don’t want you anywhere near our institutions. So I think that you can’t have your cake and eat it too. And I think that that strategy probably won’t work. And then prohibition as a strategy generally does not work. And there are many examples from American history and sort of world history for that. So I think we’re in a difficult we’re undoubtedly in a difficult spot right now, when it comes to regulation. And again, I think regulation is a charitable word. That’s not even like I wouldn’t even describe it that way. Regulators are not regulating regulators are prohibiting, I think what gets me what gives me some hope and optimism is that the regulatory apparatus that exists is only one part of a broader system of government. Right and So we also have courts that are starting to get active on this issue. Congress that is that is, has been active on this issue will continue to be active states, you know, states, we have a dual banking system, and which provides optionality. So you have a choice? Do you want to be regulated the federal level or the state level? I’m sort of simplifying it. But that’s how the dual banking system works. And so the role of states is very important. And I think we’ll, we’ll see them also get more active over the next few years, but I think for the next is going to be difficult for at least a couple of more years, but we will, you know, that system of government I described has a way of self-correcting itself over time, I mean, typically not as like fast as people, as people would like or hope. But I think we will, I’m very optimistic that we will find an equilibrium at some point. Now, in the meantime, like, you know, a lot of other jurisdictions in the world will benefit from kind of, you know, a lapse in US leadership around this issue, but the US will eventually get our house to order.
Isabelle – These are the kind of regulatory bodies that you mentioned. Do they tend to be more positive towards crypto, or is it really kind of varied?
Matt – I mean, crypto is so new, it’s really hard to say, I would say that there are different set of incentives that exist, right? So in, you know, for example, you know, regulators in the U.S. federal regulators typically do not have a competitivity angle to this mandate. So often, people in industry will go and talk to a regulator and say, Hey, this is a big problem, or get like all these jobs that have gone to China or somewhere else, like if we don’t fix this here, regulators don’t care. I mean, that’s not part of their mandate. It’s not their mandate to make America a competitive jurisdiction. Not an explicit part.
That’s not the case in every country, in the UK, for example, things showed a lot of foresight in explicitly giving the FCA competitiveness mandate, which I think is one of the reasons why the FinTech white flight London had sort of became an initial and still is today a hub for FinTech activity. In the United States. Again, federal regulators don’t have that mandate, but some state regulators do. So in New York, for example, the state regulator here, they have a job creation mandate, they have a competitive snap mandate, they have an economic growth mandate. And so yeah, I mean, to answer your question, I think like the incentives, the mandates, the you know, the missions of these organizations vary, and you will see that impact the decisions they make on crypto in different ways.
Isabelle – OK, cool. How much of this is influenced by FTX?
Matt – I think a lot of it, I mean, FTX is, you know, it’s interesting. So, some people have described this as an FTX Hangover. And I think that is definitely true. I think that’s going to last a very long time. I was at an event last year, that had representation from kind of all the major regulators in the US, including, like, agency leads for those organizations. And they were still talking about DM and Libra. Like every one of the industry has forgotten about. I mean, we remember it, but like no one is thinking about it on a day-to-day basis about that stablecoin project, which famous Facebook famously launched. And yet regulators were still like focused on that. And I think even today, you see, you still hear them sometimes make comments about that. So if they were if if there’s like that type of a hangover for that, just imagine for FTX, where FTX was even worse, because it evolved fraud and deception. So yeah, I think it’s I think anyone you talk to it’s sort of in DC, are kind of in the policy regulatory communities would acknowledge that FTX is probably the most significant factor in kind of the, you know, the posture that exists today.
Isabelle – Okay. And I mean, Gensler, in his recent congressional hearing, tried to tie crypto to the recent bank failures. I mean, where did they fit into this? To me, they seem like more of a bank failure, like just that they have nothing to do with crypto, but because Gensler is questioning and not just him, other people.
Matt – I mean, many people would disagree with that, including people who had no more than check answer on this issue when he doesn’t regulate banks, right? He doesn’t have oversight into kind of in the same way that a Prudential regulator would. So I don’t think crypto is a significant part of the bank failures. I mean, Silvergate of course, was predominantly, you know, crypto. Still, I think for the other institutions, Silicon Valley Bank, Signature Bank, and First Republic bank, I don’t think it was a significant factor.
The superintendent for the New York State Department of Financial Services, where I worked previously, explicitly said under oath in front of Congress that Signature Bank’s failure was not related to their crypto activities. What I do think I mean, I do think that, like some of these failures are a result of concentration risk of banks focusing on too narrow of a client segment. I think. And I think there’s a lot of blame to go around for that, including regulators. I think regulators have made it difficult for banks to serve new and novel sectors of the economy. So what happens when you have a policy posture like that? It means, like fewer institutions are going to do it, fewer institutions do it. That’s those become institutions that serve the whole sector. And you have you have concentration. And so, for example, you know, earlier this year, the Prudential regulators Federal Reserve, OCC and FDIC put out some joint statements that are making it difficult for banks to serve this space, that is going to lead to concentration risk. 100%. Sort of, by definition, and so I just I hope that we’re learning lessons from what’s happening, that, you know, banks need to be able to serve a broad segment of clients for stability purposes and cutting them off for certain clients does not achieve that objective.
Isabelle – Yeah. I mean, how do we move on from this? Like, the crypto banks, if crypto isn’t getting banked, and they’re going somewhere else? That’s not a solution. You said so yourself? How do we move on then?
Matt – Well, I think in the short term, you know, peep founders are sort of collecting as many bank accounts as they can get, right? It’s sort of like trading cards or whatever you want to get, you want to collect them. You want maybe a couple of regional banks, maybe you want a credit union, and maybe you want a couple of foreign banks, I mean, so that’s what’s happening is that people are trying to get as many banking relationships as they can.
And there are different types of banking relationships, like the most basic is just having a bank account for payroll purposes, right. But then you also have FBl, banking, right? Where you can hold customer funds and accounts on their behalf. And you’d have like merchant services and payment payments, sort of related services. And so, you know, banking services are a spectrum. And I think like, we need to recognize that enabling a legal company to have a bank account, to hold their own money to pay their employees is not inherently any more risky for crypto than any other sector. So I think we’re probably at the nadir of like, difficulty of getting a bank account, if I had to guess, and I think I think it will become easier over time new institution, new banks will not new, but like banks, Will. They’re already banks that are trying to sort of eat up the kind of market share that SVB and others had.
So some banks will serve the space. But I think, yeah, I mean, I wouldn’t be surprised to if there’s some legislation or some pressure in Congress to make it a law that you cannot discriminate, you know, who you pick, as a client solely based on the, you know, the sector of the economy they operate in. So, yeah, I mean, I think it’s gonna, it’s gonna take a while, but I do think like, we will, you know, I think 18 to 24 months from now, like, probably be talking about this less.
Isabelle – Okay. And I mean, before this, you did see regulators and crypto entities kind of engaging, kind of, that’s what you saw, FTX was one of them, obviously. But that’s now not happening. It seems important part of it right, like to get them to understand. How can crypto entities still engage with regulators, even though the environment is not really perfect for right now?
Matt – Yeah, I think it depends on the stage of the company. I think companies still want to engage it, it sort of depends on the regulator, right? So like, three years ago, if you had asked me, should you go in and meet with a regulator proactively, like when you’re rolling out a product, I would said absolutely. Right. It doesn’t matter, like the regulator. Now, I think the answer is most people would give is that it depends, right?
Like it depends on who the regulator is, which I think is is is unfortunate. But I think, you know, certainly like growth stage Company. Is they have no choice like, but to engage the regulator, if you’re already a regulated entity you have to. And I think for them, you want to engage, like, often like regulators don’t like surprises, right. So if you’re already regulated, you want to be talking with your regulator. I don’t know, weekly, bi-weekly, at least monthly. And you want to be previewing for them your product roadmap.
When I was a regulator, one of the most effective things that for me, and probably for the companies that some companies would do is they would come in and meet with me and like a quarterly or biannual basis and say, here’s our product map for the next 1824 months. Like we just want you to have full awareness and what we’re building, you can ask questions now you can ask questions as you go along. But we don’t want there to be any surprises. I think that’s a very effective strategy.
Isabelle – Okay, cool. How much of a hit do you think innovation is taking in the US now?
Matt – I think I mean, it’s a significant hit. I’ll give you one indicator. So for a while, FCA started this trend of having innovation offices, right, and they had project innovate. And really, I think, inspired before this, in an earlier part of my career, I was focused on kind of innovating within a regulatory environment and helping regulators in the US and kind of in other markets think through this. And, you know, there was this trend where every regulator wanted to have an innovation office. And under the Obama administration, it started actually, so it’s not a political thing, right. And you had federal Prudential regulators and other types of not just Prudential, but the CFPB, and others that stood up innovation offices.
Unfortunately, now, a lot of those innovation offices have been de-emphasized. Or they’ve been sort of layered, like deep within an organization, or they’ve been rebranded. So I think it’s, I think it’s unfortunate that that’s happened because regulators themselves need to innovate, right? I mean, like, I think one of the one of the things that been so shocking to me about these bank failures is if you look at some of the reports that regulators have released, they’re not really talking about how do we use data, machine learning or AI, or just technology to better supervise institutions. Like is there a way to supervise institutions in a totally different manner, but is like totally, like much more effective? That’s not like the ton of these reports, there are ton of the reports is, we need more people. So we can do it the same way. We’ve always done it. And to me, that’s just not a great,
Isabelle – Great point. It doesn’t sound like it. So reg tech, maybe, is the next big thing.
Matt – Absolutely. Yeah, no, it will. I mean, it’s sort of like an inevitable thing, right, just because you can’t continue to supervise, like a market that is digital native using kind of the practices of the past. So when I was at NYDFS, we did a tech sprint. And we brought in companies, we brought in academics who brought in kind of like a broad swath of people from the community to develop reg tech solutions that would benefit us as a regulator, give us better data, more real-time data, but also benefit industry participants by making it easier for them to meet kind of those regulatory requests. You have not seen those type of efforts from federal regulators.
You know, in the last year or so there were some previously, but it’s really, it’s really slowed down, which is, which is unfortunate. I think the big lesson, I mean, innovation is sort of, in some ways, it’s a meaningless word, right? Because, like, it just means doing things differently. And, like, it can be good or bad, right? It really just depends on, the product. And so I think that, you know, what we’re seeing also is just probably a maturation of, you know, how we think about innovation, not just innovation as good or innovation as bad. It’s that, you know, it can be either. And, but yeah, I do think there is sort of a broader tech lash, right, as people have called it toward big tech. That is, I think impacting other other segments. Ironically, I think crypto and blockchain, you know, could be, you know, an antidote to like, a lot of the problems that regulators and policymakers see in big tech.
Isabelle – Okay, let’s hope that they understand this. So, the regulatory environments in different locations, I know you focus on US, but you know, you got the MiCA that’s kind of causing people to at least talk about moving overseas. Is that viable? And what would that do to the global landscape for crypto innovation, even for maybe even fintech innovation?
Matt – Yeah, it’s definitely happening. I mean, when I was a regulator, I would always discount these threats. So IT companies would come in and say we’re gonna move, and we’re like, sure, whatever. I mean, you’ve got family here, kids, whatever, like, are you really just going to pick up the move?
They’re no longer idle threats. I mean, it’s happening. But it’s not like a light switch. It’s not like, Okay, I’m in the US today, tomorrow, I’m gonna like, move the whole company, but you’re already seeing companies shift their priority. And they’re kind of attention to other markets. That’s absolutely happening. Coinbase, Gemini, and others have announced offshore products. So I think you’ll continue to see that you’ll see companies, I think what companies want is optionality and redundancy. So they don’t want to place all their bat all their eggs in one basket. And so you are seeing and will continue to see geographical diversity in terms of the places they operate, but also geographical diversity in terms of where they get charters and licenses.
The thing is that, like, if you want to serve US customers, you have to be licensed in the US, like, you can’t just get, you know, an offshore, and maybe you could serve some like some, you know, institutions or whatever, right, if they also have, you know, subsidiaries or whatever set up wherever you are, but like, if you want to access to the US market, and I suspect it’s true for like, a lot of other markets, you still have to, at some point, you know, have licenses in those markets. I think it’s it’ll be really interesting to see, as jurisdictions compete, to attract companies, who wins. I think smaller jurisdictions, you know, are much more agile, they can come out with very robust, like comprehensive, strong regulatory regimes. But what is that? What markets does that get you access to? And it may get you access to some things, but if you still want access to big markets, like the EU and the US, like, you can’t really avoid going in the front door.
Isabelle – Okay. Okay. And as a VC investing in this kind of area in this environment, what are your strategies?
Matt – Yeah, it’s great question. So I think anytime there is, I think it’s a great time to be an investor in this space, actually, for a lot of reasons. Right. I think the venture is all about vintages. This year, next year gonna be great vintages I suspect. Valuations are down. A lot of the noise from the space is gone. Founder equality is I see a lot it’s very, like a lot of continue to be a lot of strong founders, new founders, kind of the space companies have big companies in the space that have done layoffs like those people are going to be some of them are going to be great founders. Right. So I think it’s sort of like the ideal, there’s always there’s no better way to attend to the market. My strategy is very sort of differentiated and unique strategy with the Department of XYZ. Our value proposition to founders is that we want to be the former regulators on the cap table to help you make smart regulatory decisions. We’re not going to replace like a general counsel or CCL for you. But we’re going to help you kind of navigate this world and be like the former regulators on speed dial that can help you. And so far, I think, I think founder it resonates like founders, smart founders know they need that.
Isabelle – I can imagine it’s like, perfect. Right now. All right. So what is your advice to crypto businesses trying to move within the space right now?
Matt – Yeah, I mean, it’s hard to kind of give general advice. I mean, it really depends on the company. I mean, I think one is you look for opportunities in a changing landscape. I mean, that’s like I think any again, anytime there are regulatory changes, there are rule changes, you can find opportunities. I think even if you think about partnerships, I think partnerships are going to be incredibly important. It’s gonna be very hard to get licenses and charters in many jurisdictions right now. And so to the extent that you can partner with institutions that already regulated, if you are engaging, regulated activities, I think that’s very important, because that can help you sort of, you know, weather, weather the storm. But, yeah, I think it’s just like remaining optimistic and solving real problems. I think if you’re solving real problems, then over the long run, I think you’re gonna be fine.
Isabelle – Okay, that’s a very positive way to kind of end the conversation. But before you go, you have your curveball question. If you were stranded on an island, with only one book and one music track, what would you want to be stuck with?
Matt – That is a great question. One book and one, we’ll start with the music track. It’s the soundtrack for Hamilton, and maybe that’s a little cliche or New York City, but like, I just listened to that non-stop just got the right amount of grit and like i mean, you need that if you’re on a desert island, right you need to be motivated. Yeah, right, and I think that that that without gives you a lot of motivation.
And then what would I pair that with? I would pair it with… I’m gonna dodge the question a little bit I would pair it maybe this is too much of a New York question answer too I would pair it with an entire year of New Yorker magazines. Nice because you just have like a lot of variety. Right? And, probably, something for every mood or challenge you’ll face on that island.
Isabelle – Okay, perfect. I’m now imagining you walking through New York with the Hamilton soundtrack in your mind the whole time, a true New Yorker. How can people get a hold of you?
Matt – That’s the only question I didn’t prepare for. Now, the easiest way to find me is on LinkedIn. You can find me, Matthew Homer, or on Twitter @Matt_Homer.
Isabelle – Okay, perfect. Well, thank you so much for coming on. I really enjoyed talking to you. And yeah, have a really good rest of your day.
Matt – Thanks. Great to be here.
Isabelle – As always, you can chat with me on my LinkedIn or Twitter at @IZYcastrowrites. But to access great daily content, check out Fintech Nexus on LinkedIn, Twitter, Facebook, or Instagram. You can also sign up for our daily newsletter, bringing news straight to your inbox.
For more fintech podcast fun, check out the website, where you can find more fascinating conversations hosted by Peter Renton and Todd Anderson.
That’s it from me. Until next time, enjoy your downtime.