426 Making Crypto More Useful w/ BlockFi’s Flori Marquez

Flori Marquez is the cofounder of BlockFi, a fintech firm that provides wealth management products to investors in cryptocurrency.

BlockFi currently offers interest-bearing crypto accounts, crypto trading, and crypto-backed loans.

In the last year, Blockfi has raised an $18.3 million Series A and a $30 million Series B from investors like Morgan Creek Digital, Fidelity, the Winklevoss twins, and Valar Ventures.

Flori has spent her career managing alternative lending products, including a $125MM portfolio for Bond Street (acquired by Goldman Sachs). 

In this conversation, Flori and Aaron discuss the founding of the company, the new customers BlockFi is targeting, and why banking people across the world is challenging.

Text Me What You Think of This Episode 412-278-7680

Flori Marquez’s Challenge; Take $100 and invest in something new or different.

Connect with Flori Marquez

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Website
support@blockfi.com

If you liked this interview, check out our past blockchain and crypto interviews with Anthony Pompliano, Brendan Eich, and Joe Lubin.

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​Watson: Flori, thank you for hopping on the podcast. I'm really excited to be talking with you.

Marquez: Thanks. I'm really excited to be here.


Watson: So BlockFi  makes financial products for crypto, and that can almost be like crypto itself is thought of by some, as a financial product. But as I came across the company and as I've been kind of paying attention generally to the space for last couple of years, this  hopped out to me as particularly interesting because it just very relevant, relatable, accessible products that helped take the concept of the cryptocurrency just one layer up to, 'oh, I'm actually seeing a little bit of utility here.' So can you talk a little bit about what those products are for BlockFi?


Marquez: Yeah. So at a high level, you can kind of think of us as a Chase Bank powered by crypto. And most recently, what we're really excited about is up until a few months ago, you could only use our products if you had crypto, but now you can actually use our products with cash.


So the three things that we offer are interest accounts. So you can earn 8% on cash equivalent assets. The second product is loans backed by crypto. So the same way that you can borrow against your home, a lot of people have been investing in Bitcoin and other assets for a while and they want to access liquidity.


So we allow people to borrow against those assets so that they don't have to sell and they can access cash. And those interest rates start as low as 4.5%. And the third product is trading. So you can send us cash and buy Bitcoin for the first time. Or you can just leave that cash on BlockFi's platform and earn 8%.


Watson:  Awesome. So leaving aside the trading for a second, that, that basic functionality, like you said, Chase Bank, you know, Banks through time and Memorial have done these basic functions, right? Like I'm going to leave some money with you. You're going to get a small yield because of that. Or this is going to be the institution where I'm able to get money lent to me.
Now, the big difference is, I guess there's two differences, but the big difference is, you know, my current bank I'm getting, like, if I'm getting 0.1%,  interest, whereas this is the considerably higher percentage yield. Can you talk a little bit about how that's possible, why you're able to,  offer more?


Marquez: Yeah, so there's a lot of things that can be said about crypto, but one of the most interesting things is the ability to do more with assets than you can with cash. So the reason why we can offer such a higher yield is because we're able to take cash or other assets that are deposited through BlockFi, turn them into crypto and then relend out those assets. So we do it two ways. The first way is for stable coin. And for those of you who aren't familiar with stable coin deposits, is it's essentially like having a Venmo balance. It's not cash. It's crypto, when you want to withdraw it, we turn it back into cash and you get it back into your bank account.


So that's the simplest way to explain it.  So we take those deposits and then we make the U. S. Dollar loans with those assets. The loans charge anywhere from 4.5%, all the way up to 10%. And then we make the spread between what we pay depositors, 8%, and then what we charged borrowers 10%.  So that's how we're able to pay such a high rate.


And then with crypto assets or  with Bitcoin and Ethereum,  the majority of that yield comes from institutional trading. So banks actually have their own trading strategies with crypto now, too. And we're one of the leading providers of assets for banks that want to borrow crypto to fuel those trading strategies.


So we'll lend it out to partners like Susquehanna or Fidelity is big and crypto they'll pay us a yield to borrow that Bitcoin. And then we'll flow that yield through to our clients.


Watson: And that element of it is almost a more conventional business model. So it's cause I do this research and there's, you know, defy and all these new coins that are popping up every single day.


And ICO's, and it's overwhelming. It's overwhelming for so many people. But this is, I don't want to say simple, but there's a science to those spreads that have been, you know, executed and learned and iterated upon by banks for a very long time. So you're not starting from ground zero, you know, square one to build this model, it's taking something that's already been developed and reapplying it to this new space.


Marquez: Yeah, that's exactly right. And I think there's two ways to build a company, right? You can either build a technology that's never existed before, like a Facebook or an Instagram, or you can do what we do. And it's take a extremely old business model, which is banking and then apply a new technology onto it to just make capital more efficient so that you can offer your clients better yields.


Watson: Makes sense. Now, talk a little bit about getting something like this started because,  you know, there's always a source of inspiration. Like where did the idea come from? But then there's these additional challenges of, I would be hard pressed to think of a space with more regulatory obstacles then finance and banking and crypto all at once.


Marquez:  I'm glad you recognize that because I say it all the time. You don't just wake up and start a FinTech platform. That's not something you can just make up.  So both me and my co-founder had experience working in financial services and FinTech before. The idea was very basic. My co-founder had a bunch of Bitcoin and wanted to access liquidity and he was like, I need this product and it doesn't exist.


And then I knew him for a long time because we both worked in FinTech. So we partnered up and started building it. One of the things that we did that was very different three years ago in crypto was really simplified the business model and not build it on the blockchain. So a lot of companies that were started had, you know, did an ICO or built all of their technology on the blockchain.


And instead we said, let's just treat crypto like an asset and let's build a traditional FinTech platform, like any other lender, like a sofi or lending club. And just use Bitcoin, Ethereum and other assets in the same way that lenders lend against a home or a piece of art.  The challenging part about what we were doing, to your point, was that no one had done that before.


No one in crypto had said let's build a regulated financial services platform. So we were one of the first companies to go out there and start interacting with regulators and try to get licenses so that we could build this the right traditional way.


Watson: And that's another really big part of this story, which is, you know, it's a marketing principle, right?


Like you have to know who your customer or your intended customer is. And the, you know, earliest of early adopters you know, deep in a Reddit thread or wherever they may have come across this thing, is very different than either an institutional investor or just a more conventional retail investor. And recognizing how it, this isn't necessarily the solution for everyone, it is a solution for a very specific demographic that otherwise maybe didn't have a place to go.


Marquez: Yeah. And that's another good point that, you know, back when blockchain technology was first invented, most of the people that acquired crypto didn't have to verify their identity or go through a regulated process to buy it.


And a lot of it was anonymous.  Which is why it had a certain stigma. We realized that if we wanted to build a financial services platform, we would have to access debt capital to finance the loans. And the only way that we would be able to access that capital is if we had clean crypto. Right. And if we had audited each one of the individuals that interacted with our platform in the same way that a banquet, so that the people providing us financing could be assured that that crypto is clean. So we built the same structure that banks have to verify identity, and that allowed us to get licenses and build our model in a way that, you know, Took a bit more time than other blockchain companies that weren't doing any of this work. But, in the longterm it's allowed us to scale a lot larger than some of our other competitors.


Watson: And when we talk about scaling, we'll talk a little bit about like the really sizable series A and B that you guys raised, but just in terms of growth of revenue, growth of size, I think I saw somewhere that you 20 x'd revenue from 2018 to 2019, and there's a lot of, you know, heat on the space in general.


Can you talk a little bit about managing something that's growing so fast? Like I felt like I had a big year and I went from like two to four people on the team. You guys are doing something way, way, way beyond that.


Marquez: Yeah, I think at this time last year we probably had 15 people on the team and today we have a hundred employees in three different countries.


It's wild and now we're all remote,  which is even crazier. But,  yeah, it's been really exciting. I think we benefit from being the first of our kind. And so, as a company we believe in growing by making products that people want to use. And in general, free money is something that most people want to use.


And so, we found that the more people know about the technology, the more they know, Oh, you can put as little as $10 on the platform and start earning an amazing interest rate. People just essentially convert themselves. But with rapid scale come many challenges, right? There's always the decision to balance between growth and then managing risk.  One thing that we have never compromised on is the regulatory side of things.  And we have also never compromised on building the systems to scale before we scale. So one example of that is for basically all of last year focused on building the backend systems to support hundreds of thousands of clients, even though at the beginning of last year, we only had a couple thousand. The sacrifice that we paid in order to do that was our front end. So our website today isn't nearly as powerful or sexy as the backend systems that are supporting it. But we really believe that we needed the system to manage that risk.


Before we had a hundred thousand clients making deposits every second.  So this year now that we built those backend systems, we're focusing on, you know, can we release a mobile app? Can we have a sexy website? And can we have the front end that allows people in as fast as our backend can handle it.


Watson: Yeah. And as those folks come in, one of the things that I think a lot about is you meet some of these, you know, high-level developers, or  maybe they're creating the cryptocurrency itself or some sort of novel technology. And we've talked to some of these folks in the past. And there's a high technical literacy, but there's almost another literacy in place that you have from that background in a more traditional finance field of being able to translate this stuff to an audience that, you know, understands economics, is savvy, like has a lot of experience with investing, but is, you know, to some way, shape or form treading in new grounds.


So when you think about the messaging around BlockFi, to some degree, you know, free money is a pretty solid pitch on its face. But how else have you gone about talking about this company and positioning it for folks so that they can really wrap their head around it and not immediately turn up their nose because of whether it's the anonymity or some of the other kind of more negative storylines associated with this space or just frankly people's lack of sophistication?


Marquez: Yeah. That's a really great question. So as a company, we really believe in being simple, transparent, and trustworthy in terms of simplicity. One thing that everyone in crypto was doing when we got started was, you know, speaking really technical blockchain terminology, right. You'd go on a crypto website.


And it looked like something that was built by blockchain engineers for blockchain engineers. So one thing that we focused on is how can we simplify this product? How can we make sure that when you're interacting with us, you understand exactly what the risks are, what the rates are, and that if you want to dig a little bit deeper, one thing that we've invested a lot into is extremely high quality customer service, which was also something that no one in crypto had. If you call us, we'll pick up the phone and a extremely highly trained individual will be able to answer any question that you have about the platform risks,  even how the products work. And so that kind of goes into, you know, transparency, simplicity.


And in terms of trustworthiness, I think the thing that really builds trust is twofold. One, the team. So we would never be able to build this business model if it wasn't for the executive team that we have our chief chief risk officer built and managed structured lending a bank of America for 15 years prior to joining BlockFI. So what we've done is focused on bringing executives who have built similar platforms outside of crypto and bringing that talent into BlockFi so that they can build it within crypto.


We have, you know, our chief growth officer was at Amex for decades. Our CTO has built and sold multiple companies before. Right. So we really believe in kind of bringing in experienced individuals into the space to help it grow. And the second was as a result of that, we've been able to bring in truly high quality investors and partners. Valar, who has led our series a and our series B has backed companies like TransferWise stash and 26.


So we're honored to be a part of that club.


Watson:  There is this whole class of kind of FinTech centric investors that similarly bring a network or an experience or perspective from having played in that space for a while. And.  I'd imagine also, you know, either do or don't take, at least a hand on the reins in terms of helping to steer where things go.


Can you talk a little bit about that dynamic in terms of, you know, some investors being, you know, hands-off let it ride and others really try to take an active role in the development of the company?


Marquez: Yeah, I think we're very lucky.  You'll hear a lot of founders tell horror stories about having investors or board members that are very active in a way that's not necessarily constructive.


You're exactly right. That we're lucky that our investors be it Valar or Fidelity or the Winklevoss family office. They've all built similar products and they've seen a lot of companies both succeed and fail.  I specifically have a very soft spot in my heart for Volare because both of the partners that run the investment are operators.


So they really think about building businesses. And they also, I think, strike a good balance of trusting our,  experience as experts in the field while at the same time sharing knowledge in terms of key learnings that they've had from past investments.  And they're also aggressive. They like plans  that center around growing quickly, as long as it's  intelligent growth.


Watson: So what does that element of the plan look like? Where  you're already experiencing a lot of growth and we can go back to the free money concept with these relatively higher interest rates, but from a product roadmap standpoint, from a, just breaking into new markets standpoint, what's that picture, it gets painted when you're in those conversations?


Marquez: So, it's definitely a big focus on speed because the products, as we talked about before that we're making are not novel, right. We're taking an idea that has existed for centuries and applying a new technology to it, which means if. Someone had the right team, anyone could build it. And so a focus for us is making sure that we are the first to basically become a household name within this space.


In order to do that, our focus for this year is to expand within the U.S.  So making sure that as people are thinking about how to invest their own portfolio, especially right now, anyone that had a manage portfolio at, you know, Fetterman or Ally, your returns, depending on what your risk setting was, are probably not looking great.


So our goal for the end of this year is, as people are thinking about those investments, that BlockFi comes into the mix. In the future, once we figured out, you know, how can we make sure we're known within the U S, a huge focus for us as international markets.  We're actually live internationally today.


We just don't actively market the product. However, 30% of our traffic comes from overseas without us even trying.  And the reason for that is because, you know, while it's really cool that I can offer a better financial product for people in the U S. The real interesting impact that we can have is offering US grade financial services to residents in other countries like Argentina or India, where there's an unstable currency or lack of trust in the government. A lot of citizens of those countries haven't ever had access to a stable currency, let alone a savings account. And so our long-term goal is to be able to allow those citizens to just download US grade banking right on their phone and access it instantly.


Watson: Yeah. And as an outsider, that seems like the, you know, probably multi-trillion dollar pie in terms of the direction that all these FinTech startups are looking at, as people call it the under-banked or the underserved and the capacity to be the right vehicle for these enormous populations that just don't have an alternative solution. It's very easy to take for granted as someone in the US.


Marquez: Yeah. And there's two main blockers on why most startups, that claim that they're going to do that are going to have a hard time expanding overseas.  One is international transactions. So if I only deal in cash and I'm a bank and I want to open an app in Argentina, I have to partner with a bank in Argentina to be able to onboard, you know, pesos onto my platform.    Crypto gets rid of that, right? So with crypto, you can send transactions anywhere without an intermediary banker platform. So I can instantly onboard someone in Argentina,  without having to have a partner bank. And the second reason is a little bit more complex, but the entire US financial system is built on the concept of credit scores.


Credit score is maintained by third party, private companies. That does not exist in many other countries in the world. So for example, in Spain, your credit score is determined by the bank that you've worked with for the entire history that you've been banking. And if you work with Santander, and then you want to switch to a different bank, that other bank will think that your credit score basically doesn't exist.


So if you're a US company, you know, there's basically no way for you to start offering products in Spain because there's no credit score that you can access. And in Argentina or in countries where banking systems aren't as developed, it's even more complex because most people are fully liquid and don't have any credit history.


Watson: And so, because of your model of saying, Hey, you have five Bitcoin, therefore we're willing to loan you X amount, you can then I guess not necessarily rely upon some sort of credit rating system for the basis of those loans.


Marquez: Exactly.  I don't care about people's credit history at all. We don't pull it on any of our clients.


It's all asset-based right.  It's all do you have the assets to pay back this loan? If yes, we can make you alone.


Watson: Gotcha. So when I was researching this, one of, the things that I've seen before is, you know, one of the folks that have been incredibly successful in,  tech startups, like Jeff Bezos or Mark Zuckerberg, who has all these shares tied up in a company that is continuing conceivably to grow in the future. Instead of liquidating the shares, they would take loans against those shares as a way to get some liquidity and be able to buy the things they want to in the short term, while still maintaining that equity. And, you know, maybe the presumption is if I'm getting this led to me at  1%, but Facebook is growing at 10% a year, it's well worth that trade-off. Is that kind of the similar model to think about this lending that's going on?


Marquez: Exactly.  So that's one big part of it, right? So most people that own Bitcoin think that it's going to go up in multiples,  over the next few years. And it's been proved out over the past decade.


I think it's been one of the best performing assets in the US. And the second reason is capital gains tax, right? So if you bought something at $10 and then you sell it at a hundred dollars, you have to pay depending on your state, anywhere from 25 to 35% in taxes on those gains. If you borrow against those assets at a value of a hundred, you don't have to pay taxes on a loan.


And in fact, if you're a business, the interest that you pay is tax deductible. If you're an individual, if you use those,  assets to reinvest that interest is tax deductible. So on one end it allows you to access liquidity without selling an asset that you think is going to go up in value over time. And the second is avoiding a tax burden.


Watson: Gotcha. One of the other questions that I had was there was this whole craze, like two and a half years ago of ICO's happening, new coins being launched. And it was an opportunity to, um, you know, for some really interesting projects to get launched and get funded in a novel way.


And also a lot of fraud and scams and other kind of nefarious activities to go on. Is your kind of bent or leaning as an organization towards, you know, having some ties back to more traditional lean into finance and just frankly, seeing this space to be played as making it more accessible to a broader audience.


Did that play a role in the decision to not necessarily go that route, but to go this route of doing these venture fundraises and not necessarily jumping in the pool with all that craziness?


Marquez: Yeah. And I think this ties back to. One of the key themes in how I built this company, which was when we came down to making decisions, like, do we raise an ICO or do we go the traditional funding route?


We asked ourselves, does this make sense? And an ICO, it similar to an IPO, right? A company could essentially sell shares in a future product in this case. So a lot of companies are promising to build something and people could invest in that.  And the construct in which they were using was basically saying that,  in exchange for buying that it was called a token,  those clients would then be able to redeem that token and access services later on.


We took a step back and we looked at this funding model. And one, it was very complicated. And so we thought, listen, like we're already trying to sell loans collateralized by crypto. If in addition to this, I'm asking clients to buy a token and then redeem the token to access the loan and pay interest and pan origination fee.


It's a very, high friction sell. And we thought that it would make it harder for people to use our product. And second, there was a lot of regulatory uncertainty over whether or not raising funds that way was legal. So we thought, listen, we're already a crypto startup. We don't need to take the additional risk of being under the eyes of a regulator that's upset with us. So instead,  you know, we did the traditional funding route, which takes a lot of time and it's very difficult.  But you know, we bootstrapped it and six months later we got our seed round. And it was really well-timed because we closed it right before the crypto markets crashed at the end of 2017.


And it was good timing because it gave us enough capital to kind of get through that slump and continue building our product.


Watson:  Right on. Where are some of the, assuming you weren't doing BlockFi or you're just speaking to somebody who might be listening in early 2020 that is not of a more technical skill set, but of a more storyteller sales, marketing type of skillset.


When you survey  the landscape for blockchain, cryptocurrencies, are there particular directions or spots that interest you or you point to and say, man, if we could apply some great storytelling there  it would really change things or kind of create some momentum in a positive way?


Marquez: Yeah. I definitely think that being able to tell the story of what Bitcoin is as an asset in a very simple way that doesn't, you don't even have to mention the word blockchain.  It would be very powerful, right? So,  if there was a, I'm not, I'm an operations person, unfortunately I'm not a storyteller.


But there are a lot of metaphors to kind of explain, you know, this, this is something that allows people to send stuff across the world instantly. This is the same price everywhere in every country, and you can trade it 24/7, and being able to kind of explain the power of that. Not only for people in the US but people overseas and how that can change the way that we think about financial systems.


It's why you end up with, you know, Crypto anarchists who are obsessed with it and want to burn everything down, but at a very high level, it's a very powerful asset that I do think can change things in the longterm. I think we're very early in the development of this technology.  I think it's going to be years before you see blockchain powering anything that we really interact with today.  You know, there's a version of reality where you can order your Uber on the blockchain, but I think we're very far away from that, but I think that makes it a really exciting time to invest.


Watson: Yeah. And just frankly, to be learning more about it, just to be paying attention to it and see something start at a kind of more seedling stage and then eventually blossomed down the line and have that context is really powerful.


Flori, this has been awesome. I'm really excited to see BlockFi continue to blossom and you guys continue to operate and expand.  Anything else that you were hoping to share today that I didn't give you a chance to?

Marquez: You know, I think that this is a really interesting technology. I would just tell listeners to not be afraid to dabble into something new.

And one thing that I definitely encourage people to do is to think of any questions that you have about our platform and email it to support@blockfi.com, just because we have excellent client service and they also love tough questions. So please keep them on their toes and send them something interesting.

Watson: Awesome. I'm going to link the supportive blockfi.com email for folks in the show notes who want to check that out. Any other relevant links or digital coordinates, where we should be pointing people?

Marquez: You know, we have @TheRealBlockFi as our Twitter handle, I'm @FounderFlori feel free to send us a message we love hearing from you. And definitely please if you're struggling with just a lot of cash in your checking account, which to your point pays you 0.01% or something insane right now, you know, let your money do your work for you.  Check out BlockFi, check out other solutions.

Watson: Right on before I realized that there was one thing I wanted to ask you about, before I have you issued the closing challenge to the audience, this is not a pawn shop.

This is a financial institution, but I was wondering if you could tell the story of early on in the conversations with regulators, why it was originally confused as a pawn shop?

Marquez: Oh, man. Yeah. So. Early on we were the first people to ever go to the state of California and try to get a lender's license. And the regulators, when we first applied were really confused about why a lender would want to take custody of an asset.

Right? So when we lend to someone, they give us their Bitcoin, we give them cash. When they pay back the cash, we give them back the Bitcoin.  The regulators were like, well, when you lend against a car, the client can still use the car. So why would you take the crypto away? If you're taking something away, then you're a pawn shop.

And they actually told me that I had to get a pawnshop license. I really wanted to get the business off the ground. So I looked up how to get a pawn shop license. And the answer is you call a police department. So I called the Sheriff's office in San Francisco and I talked to a police officer and he actually knew what crypto was.

And told me that because crypto was not a physical asset, there was no way that I could be a pawn shop. So I had to go back to the regulators and, you know, for the next nine months, get more lawyers involved so that they could speak lawyer speak to the regulators,  and kind of outline why since Bitcoin is essentially like cash, the only way that we can lend against it is to take custody.

And nine months later, The regulators actually apologized to us, which I don't think happens very often. And they were like, sorry, it was our bad you're right. You're not a pawn shop. Here's your license.

Watson: Wow. That is such a good story. I mean, that's like the, the lore of a company right there and the grit, frankly, to operationally get something off the ground.

Marquez: Yeah. I mean, you don't want to find yourself on the phone with a police officer when you're starting your company, but we do what we have to do.

Watson: Right on. So before we let you go, Flori, this has been fantastic. And I'm so excited for people to check out and learn more about BlockFi, but, I want to give you the mic one more time so that you can issue an actionable personal challenge to the audience.

Marquez: I think that there are really interesting investment opportunities right now. You were talking about oil on your last episode. And my personal challenge for listeners is to take a hundred dollars and put that money to work.

Watson: Right on. I love it. Take the challenge, try something new.  And the nice thing I found, I've taken that challenge personally, a couple of times, and even in the instances where it doesn't work particularly well, there is a learning from if you're all of a sudden now, You know, investing in oil or crypto or whatever the thing may be the skin in the game to pay closer attention to it.
And the learning that comes from that additional attention,  is kind of a way to turn it into a win-win or at least a win slightly less loss.

Marquez: Yeah. I mean, one, one that I did,  I wasn't willing to buy any plane tickets just yet, but I did buy some Delta stock.

Watson: There you go. I dig it.  Well thank you so much for coming on the podcast again.

Marquez: Thank you so much for having me. This was fun.

​Watson: We just went deep with Flori Marquez. Hope everyone out  there has a fantastic day.​