Programmable Self-Custody for Crypto | Frank Hepworth

Alex: Hey everybody, and welcome to the Curiosity Code podcast. I'm your host, Alex Khomyakov, and my guest today is Frank Hepworth. He's a founder and CEO of New Market Trading, an onchain asset manager where each client's investment account lives directly on the blockchain and the firm can manage it, but it can never withdraw the money. Before that, he was a securities regulatory attorney, and he's here to talk about what it really costs to leave your crypto with an exchange or a custodian, While holding it yourself is not the answer either. And what he calls programmable self-custody and what stops a bank with millions of customers from offering the same thing.

Alex: Welcome to the show, Frank.

Frank: Thanks for having me, Alex.

Alex: Well, let's jump in. Most people who own crypto hold it on an exchange or with a custodian. Beyond the fee, what does that cost them?

Frank: Well, it costs them a lot of things and also not too many things at the same time. You can summarize it as returns and sovereignty. So the interesting thing about crypto is that it sort of inverts finance. And so in traditional finance, so, you know, finance that's not on the blockchain, if you want more access as a, as a, as a, as an investor, if you want access to stocks, if you want access to funds, if you want access to strategies, you need more and more middlemen, right? Like if you're a, a, if you're in a small town bank in central United States, it's difficult for you to get access to a private Goldman Sachs strategy.

Frank: You need many middlemen, or perhaps maybe you want access to a private deal in Silicon Valley. Like you need lots of middlemen connecting you to that, that investment. Crypto is kind of the inverse. And you'll know as a crypto investor, the closer you go to self-custody, the more access you get. Like if you use a wallet, you get the most access.

Frank: Whereas if you go to a middleman like JP Morgan, you get the least. And so it's kind of inverted. And so if you want the most access, You would just use a wallet on your computer and you would access everything, right? Sometimes you need to use a VPN, but generally you can access every crypto product there is. And why don't most people do that?

Frank: Well, it's kind of scary using a— like, I got my Ledger device here. Like, it's kind of scary using one of these things. There's a lot of responsibility with it. It's kind of easier just to use your phone. And so you'll go with Coinbase, or maybe you, you really don't even want to deal with Coinbase.

Frank: And so you go with JP Morgan. But these middlemen are restricted in what they offer you, and the price and the cost you're going to have for that restriction is you're going to have less, like, less access to investments, and that's going to cost you in returns. So for example, like, JP Morgan offers maybe like the top 100 crypto assets now, just as of this year, but the highest returning assets are not in the top 100. They don't offer you any like onchain yield products either. Coinbase offers more, but they still only maybe offer 5%, 10% of the market.

Frank: It's just going to cost you money. So that's a big cost. But the secondary reason is that it's going to cost you sovereignty as well. And for some people, this is important, and for, for other people, it's not. But the core purpose of crypto and this technology is to kind of give you some financial independence from the institutions and the state and the government.

Frank: That's kind of the core purpose of it. And for some people who recognize that, they really like the power of self-custody. They really like the ability to have the final say over their assets and their wealth. And if you're using a custodian or a middleman, you, you lose that ability. And for some people that's important.

Frank: And for other people it's not, but those are the 2 costs. It's going to cost you just straight up returns if you use these middlemen, and then it's also going to cost you your sovereignty. I think everyone appreciates the returns angle. Like, everyone wants to make more money. The sovereignty, not everyone recognizes, but for some people it'll actually be more important than even the returns.

Alex: You mentioned that, banks like JP Morgan already offering, basic crypto assets. What about liquidity pools? Are they offering them or not yet or will never offer? What's your take on that?

Frank: I am almost like, I'm not a client of JP Morgan. I'm almost positive they are not offering liquidity pools. I would be astounded if they were. It's going to take them a long time to offer that type of product. The reason is twofold.

Frank: One is technological and two is like regulatory. For example, they're going to have to integrate so many middlemen and blockchain providers into their client accounts to get them access to liquidity pools that— like, there's a reason why JP Morgan has been so slow offering crypto assets. It takes them a long time to take the crypto stuff and bring it into their non-crypto bank accounts. And so they have to rely on lots of middlemen. And so they've started using Coinbase now to get access to assets.

Frank: So that's a start, but Coinbase doesn't have liquidity pools either. And so the more likely path is that a, like a private fund will enter into liquidity pools. They'll create like an ETF-style product and the ETF would be like Bitcoin Ethereum liquidity pool ETF. And then that ETF would be sold to JP Morgan customers. And so that would be one direction where they could get the job done, but that is not on the horizon.

Frank: Maybe in like 5 years.

Alex: Got it. Let's talk about raw self-custodian solution. One thing that you wrote in one of your posts is one signature, one shot. Why is that? Why is the self-custody not the answer to effective management of crypto funds, crypto assets?

Frank: Yeah, this is something that we're kind of unique in the market for saying. Other people say it, but, well, I guess we're just one of the very few voices that are saying this. Self-custody is the answer, but raw one-signature, one-shot, self-custody is a bit risk-on. So what we provide and what more people in the space are providing is programmable self-custody. So there's a difference between what one transaction can do and what, say, 2 transactions can do.

Frank: So I've got like my Ledger device right here, and I'm comfortable like showing it on camera and letting people know I've got, I've got a device because for my account with New Market Trading, my company, a withdrawal, like for somebody to take the funds out of my account, it requires 2 of these things. And the second one I've got in a bank deposit box. Now you'll think, and people will say, oh, well, are you going to have to travel to the bank now to every time you want to do a transaction? It's like, no, in our accounts to trade, you just need one, but to withdraw and take, you need 2. So with just one, I can carry it around and I can trade my accounts.

Frank: And that's all good. I can go from Bitcoin to Ethereum to USDC. It's all good. But I don't have to worry about somebody stealing this or like kidnapping me and forcing me to like withdraw my funds and send it to them. 'Cause that's going to take 2.

Frank: And the second one's in the bank so that, that, you know, it's just not going to happen. And so this is still self-custody because at the end of the day, if I really want to take control of my front, my funds, I can go down to the bank or my lawyer or whoever keeps this. I can take that second key and I can have like full custody. No one can stop me, not the government, not the banks, nobody. But for trading, which is what I actually want to do like 99% of the time with my crypto, I just need one key.

Frank: And so that's kind of the best of both worlds. You can have your sovereignty, but you don't have that risk that comes with like keeping your keys on you all the time. There's not a risk of somebody sort of like compromising your computer and then withdrawing your crypto, which would be a risk if you just had one key that did everything.

Alex: Let's talk more about the actual solution. I'd like to you know, really understand what we're talking about here. So New Market Trading, walk me through the design. So it's a smart contract onchain. You have 3 keys.

Alex: 2 of them are on client side, on your side as a customer. And then there is the third one, which I assume is on the broker side. And then there is a cap on what can leave in the day. You always have an ability to pause or remove a key. Am I getting it right?

Alex: Feel free to correct me. That's kind of my read of what you guys built. Yeah.

Frank: And I appreciate you doing the research on the company as well. Like sometimes I get onto these shows and people really don't know what we're up to. So I appreciate the research that you've done. So yeah, how it works, it's what's called a 2-of-3 multisig. 2 of 3.

Frank: There's 3 keys and you need 2 keys to do the most important transactions like withdraw funds. So NMT, my company, we've got 1 key, so we cannot withdraw funds. It's just technologically not possible, but we can trade funds. Only the client who has the other 2 keys, only they can withdraw funds. Now, in the event that a client loses a key, which would be very unlikely, but say they do, then they can contact us and we can use our one key to help them set up another key.

Frank: So they go, hey, Frank, I lost my key somehow. I didn't listen to your instructions. I've lost it. And I, I kind of need to get another key. And we'll go, okay.

Frank: So let's use your remaining key and then let's use our key. And then we're going to go and buy you like a new Ledger, like a new one of these things. And then that will be your third key and then you're good to go. Now on our side, we're going to be slow when we do this, because we just want to make sure that it's not like your brother-in-law who's trying to steal your crypto. So we're going to like make sure that we get your confirmation on email, on phone.

Frank: We're going to do like a FaceTime where we're just going to like, like give it a few days just to make sure everything is good. And at the end of that process, everything is clear. Then we're going to add in the new key. A very, very rare process that shouldn't honestly ever happen. As like, it shouldn't ever happen for a client.

Frank: The client is going to have to really like screw something up for this to even be a situation to begin with. The vast majority of clients will never even need to go through this one time. It's nice for them to know, of course, that it is an option.

Alex: So then with the third key, you trade the assets. And as far as I understand, again, based on my research, you're doing that across whitelisted protocols. Who decides what is on that list?

Frank: Yeah, the whitelisted protocols list?

Alex: Yes.

Frank: Yeah, me and my team. I believe that everything onchain, like the thing that I don't like about the legacy intermediaries is that they really restrict what their customers can have access to. And I think that is not really with the ethos of crypto. And so we do maintain a whitelist, but we're not very censoring with it. So my goal is to offer as much onchain as possible.

Frank: Like I want to offer everything. The only thing that we exclude are like clear scams where it's like an identified rug pull, there's no liquidity to the liquidity pool or the product, it really is like a— it would be, I would say, like grossly negligent of us to include it. It's like a known problematic product that we don't even want to introduce to my team or to the customers. But aside from that, I like to make it available. So like, I don't invest in meme coins.

Frank: I think meme coins generally are dumb and like a loss-making activity. But I like to make it an option to our customers. Like, I, I trust my team and my customers to decide what's right for them. And so if they want to go on meme coins, that's cool. We're not going to just like black that out just because maybe it's just because, because I've given my opinion on it.

Frank: So it's a whitelist and me and my team maintain that whitelist.

Alex: Right. Let's talk about withdrawals. It's 10% per day. Why 10%? Why not more?

Alex: And what does it buy the client in a bad week?

Frank: Yeah, so basically, we want to reduce the risk that one of the keys that a client will have with us is their email. And so their email alone isn't enough to do a withdrawal. So the client has 2 options. So option 1, they can use their, their 2 keys. So let's say their email and their, and their hardware device to withdraw funds from their accounts.

Frank: And there's nothing we as a company can do to stop them. That it's, it's, their technologically preserved right to do that. And there's nothing we can do to interfere it. Even if our company went away, they can still use their 2 keys to go to a different interface. And still access the smart contract on the blockchain to take their crypto.

Frank: So we truly do not have custody. It is just a smart contract on the blockchain.

Alex: And this is not capped by 10%, right? If I want to do this as a client, or it is?

Frank: If they have both keys, you can just withdraw everything. And so I really don't like them having both keys at the same time. I really want them to have just access to their email, which is one key, and then another key, like, give it to your lawyer or give it in the bank deposit box. We say to put it in your bank deposit box. And so then the question is, of course, like, okay, then if one of my keys is in my bank deposit box, how am I going to withdraw?

Frank: Like, I need both keys. So we will help you withdraw, but we're just going to do it slowly because we never know if someone has compromised your email. We've already had 2 incidences. We've got a lot of clients, but we've had 2 incidents where a client's computer has been compromised. They've like lost their password.

Frank: And someone has access to their computer and they never emailed us, but we could imagine a scenario where that hacker takes over their computer and they go, hey, Frank, it's me, the client. I want to withdraw some funds. Please withdraw everything right now. And we would go, that seems kind of weird. We've got a long relationship with you and now you just want to withdraw everything.

Frank: And because the client always has the ability to override us, to go get that second key, and withdraw all of it if they really, really want to. I think that gives us license on our side to be really cautious when we assist with a withdrawal. And so we're very cautious when we assist with withdrawals. It'll kind of feel like a bank, which, a lot of people hate because the banks can make it a real pain. But what is really different between us and a bank is that you can override us.

Frank: With a bank, you can't override. They have your money. With us, you can always go and get that second key. And withdraw all your funds. And so on our side, we're just going to go nice and slow.

Frank: And that is, of course, for their protection.

Alex: I love the design, by the way. It's very elegant. I really appreciate what you guys built. Now that we're clear with the technical aspect, let's talk about client or business aspect. Who is your client today and what were they doing with these assets before?

Frank: Our client today is a higher net worth individual. On the, on the lower end, they're going to have maybe $50,000 in crypto, but the average will have at least $100,000 in crypto. They, they've gone to their advisor at JP Morgan or wherever, and they've asked them like, hey, I've heard about this crypto on YouTube or whatever. Do you know anything about this? And they're like, not only do I not know anything about that, we don't even have it.

Frank: So not our thing. We don't, we don't do that. And then they'll then either go to Coinbase and try and do it themselves, which isn't a very fun process because like crypto is actually a pretty savage market. It's open 24/7, a lot of sophisticated, smart investors in it. And if you're just like running your business or you're just not doing it 7 days a week, just kind of like trading on Coinbase is actually a pretty difficult way to do it.

Frank: Or the third option is that they will go and buy a device like this and they'll self-custody, but they're terrified. Like, they don't like using computers already, and then they know that self-custody is important and they get the benefits, and they've got concerns about the banks and the governments and institutions sort of like gating them from their money. So it's— that's why they got into crypto to begin with, and it's why they have a Ledger, but they hate using this thing. Like, it's scary. They know that if they send the money to the wrong place, it's going into the ether.

Frank: And so that's basically the 3 types of people that we help. And then, yeah, they come to us and we sort of give them our solution. And for them, it's very hands-off. We're looking to— like, our belief on our side is that all assets are going onchain onto the blockchain, and this onchain economy is going to grow and grow and grow. And people, we'd like to work with people who also believe that, and they want somebody to help them build that wealth as this economy grows into the years ahead.

Frank: So we're not really like a short-term solution. We're definitely trying to be working with people who are looking for like a long-term, ideally lifetime-style solution.

Alex: Frank, what's the first question they usually ask you?

Frank: Honestly, it's like, can I trust you guys? Which is a fair question. It's crypto. There's like so many scams. And especially when it comes to like asset management, people are so used to like a huge brand like JP Morgan or Goldman Sachs, this brand that's been around for a century or more, and you can really trust it.

Frank: And so it's fair to be skeptical. And yeah, that person is just going to have to decide like, do I trust this guy? Do I trust this company? Do I trust the returns? All of which are verifiable.

Frank: Like, you can even, you can even see the assets we're managing on the blockchain. So it's all easily verifiable. But if you're looking for that Goldman Sachs, JP Morgan style brand with 100 years behind it, you can go with that brand and they're definitely not going to scam you, but they're also not going to help you make, really make any money in crypto. It's going to be like a long time before you can before they'll get you access to the stuff that, that we get, that we have access to. And so that's, that's usually the first thing.

Frank: But, you know, we've got a pretty long track record. My first company in crypto is in 2022, so, we've got a decent track record. So that's the first question, but then people do a bit of research and they, they, they know they can trust us.

Alex: Totally makes sense. I'd like to, get back to the discussion of JP Morgan as an example, not necessarily JP Morgan itself, but just an example. And what I'd like to ask is that I had a guest here on a podcast a few episodes before, and he spent years building a blockchain infrastructure. And his argument was that the value goes to whoever owns the customer relationship. Not to whoever builds the rails.

Alex: When we first spoke on our intro call, you answered on speed that incumbents are slow to integrate onchain products. What about reach? So if a bank offers something similar to their 50 million existing customers, what stops them from doing that?

Frank: Well, there is no law of physics that prevents them from doing that. Just kind of in the same way that there's no law of physics that prevents a university from using all of their data to create an LLM. But it's just sort of like, what battle do you want to fight and what is your specialty? And I think that these institutions, they've got a lot of money and they've got a lot of interest in making sure that they integrate this asset class. And so they, they very well could.

Frank: And it could be the case that these institutions are the best providers, like 5, 10 years from now. I just doubt it. And I don't see how. They're at a technological disadvantage. And there are companies like ours that are, that do like, do not have the cost and the burden of the off-chain infrastructure.

Frank: And are building our services like natively for this asset class and for this infrastructure and also AI native. So for example, your previous guest, he said that the, the person who owns the relationship, what, what did he say? The person who owns the relationship captures the value, I'm guessing. Is that what he said?

Alex: Yes, yes, exactly. So the point is that, banks like JP Morgan, they have millions of clients, so they can use whatever technology is out there and just offer to their clients and leverage that.

Frank: Yeah. Yeah. The answer is maybe. That assumes that the assets of the future are always just going to be a plain, like a plain stock or Yeah, it just assumes that it's going to be stocks in the future and that's it. But if you take a look at what's happening onchain right now, there are a lot of things that are happening and that are taking place that don't fit so neatly within the, the infrastructure that JP Morgan currently offers.

Frank: Now I think this is what's going to happen. I think most people will be okay with what with just what like JP Morgan is providing. And that's certainly currently the case. Like you don't see people like abandoning JP Morgan just to like invest in crypto differently, but I don't know if I am trying to like position this firm. And in fact, I know I'm not trying to position this firm to take down JP Morgan.

Frank: It's just that, for a certain type of investor who wants to be early and basically on the edge when it comes to crypto and maximize the returns they're going to make with maximum protection and sovereignty. Basically the person who really believes the same thesis that we do, that the world is going onchain and you want to make, you want to make as much money as you can from that bet, then we are the service for that person. But like most people I know and all of my family and most of my friends don't have this thesis that the world is going onchain. Like they just don't think about it or care about it. And so for them, their relationship with their bank is completely fine.

Frank: They'll get the Bitcoin ETF and the Ethereum ETF, and that is completely fine. But at NMT, because of how we're— because of our architecture, like, we have access to over 10,000 assets, 5,000 yield products, and most things that are being created onchain. And if I said that to some of my family, they're like, I don't, I don't care, Frank. I don't care, just as long as you're healthy and happy. But for our clients, they care about that a lot.

Frank: Because they want to make sure that they're in the right spot as this market continues to grow. And so for that person, we are the right service.

Alex: Yeah. Love the separation you made. I think it makes total sense if you think about it and needs of different types of customers and the level of education, if you will, on the crypto world. That's a great way to put it. Well, Frank, I appreciate a lot the conversation.

Alex: It's been great to learn about the solution that you guys built and the benefits it could offer to the clients in crypto investment world.

Frank: Nice. Thank you, Alex. Yeah, I appreciate you listening to my responses and asking the right questions. Not everyone can do that, and it takes time to prep like that, so I appreciate it.

Alex: Oh, thank you. Thank you. I'm flattered. Well, for the listeners, thanks for staying with us till the very end. Don't forget to hit the like button, subscribe to the channel, and leave your feedback or review on the podcast platform you're listening to this to.

Alex: And see you in the next episodes. Bye-bye.

Frank: Bye, everyone.