Building Crypto For Institutions

Hodl Up: Hello guys and welcome back to another episode of Hodl Up. Today we have Sylvan from SCRYPT with us. Sylvan, I'm really grateful to have you today, so thank you for joining us.

Sylvan: Thank you for having me. Thank you for the invite.

Hodl Up: Of course. Before we get into the serious part of crypto, I really want to know about your journey before crypto and how you co-founded SCRYPT. Give us a TL;DR of everything.

Sylvan: Sure. I grew up in Switzerland; I'm Swiss. Before crypto I was a professional musician. I studied jazz, I had my own band and I play the saxophone. I had a whole music life in Switzerland: I toured around and was quite involved in that scene, and eventually I made the jump to crypto. So it's a bit unconventional. What really made the difference for me was a university project about the music business, where we needed to find ways to approach a problem. My idea at the time was to use smart contracts to solve the problem of bands always ending up in long-term disputes over royalties. I thought, hey, I know this new technology a friend told me about. Why don't we set it up so that whoever contributed to a song gets a fixed percentage, and royalty payments are distributed on-chain whenever they're paid? That would stop bands from falling into disputes later on, like the Beatles and all the big names, saying "No, it was my song, it was my song." I found myself more passionate about this than about practicing my instrument eight hours a day. I realized I could open a door with so many more opportunities to learn and dive deep. I found an opportunity to move to London and help a project, more on a consultancy basis, with blockchain, smart contracts and all the different areas. I said, let's give it a try. That was the start of the journey that led me back to Switzerland to co-found SCRYPT with my partner, Norman.

In the beginning we didn't have the idea on a whiteboard saying, "Okay, this is what we're going to do." We got to know each other at events in London, started hanging out and brainstorming. We were the same age, early twenties, ambitious and eager to do something, and we worked our way through the crowd. At some point we realized we had quite interesting knowledge about where and how you can buy crypto, open accounts, what it means to own and set up a hardware wallet, and how to get access to Bitcoin and Ethereum. Hedge fund guys in London were asking us how to do that, and we were always eager to explain: "Oh, you have to open an account on Binance." We didn't even use referral links back in the day, while we were hearing about other people getting Lambos, or whatever they gave out in 2018. We realized we were missing something. We should do it ourselves: offer them a platform, a regulated interface, where we could accept their capital and manage their money. That was the starting point of what SCRYPT is today. We wanted to do it in a compliant, regulated way, not play cat and mouse with the banks and institutions that would come along. We looked at different jurisdictions to see where it was best to set up the company, and from a regulatory perspective, in 2019 Switzerland was the most forward-looking and made the most sense. So we went back to Switzerland and started there.

Hodl Up: It makes sense. To the best of my knowledge, a lot of crypto banks and neobanks are based in Switzerland because of its more crypto-friendly regulation. And I really respect that you entered crypto because of a need you had, based on your music background. As a wannabe musician myself in the past, I really respect that. Speaking of SCRYPT being a regulated interface, what can you tell us about the current regulatory trend? We saw MiCA implemented last year, and we've seen the CARF reporting framework introduced in over 100 countries. It's nice to have a uniform approach, in Europe for example, but at the same time more barriers are introduced, there's less privacy for retail, and so on. How do you view everything that's going on, not just in Europe but in the West generally and in developing countries?

Sylvan: Good question. We were early, when regulation, specifically in Europe, was non-existent. There were some vague frameworks. The UK tried something new every year, but it never really took off. Switzerland had a risk-based approach that was very innovative and forward-looking, which allowed things to happen. What I appreciate about the regulatory framework there is that whenever the regulator, FINMA, comes up with new guidance, they first issue a paper that people can comment on. We have tons of different associations, too many some say.

Hodl Up: Fair.

Sylvan: But at least those associations take the initiative to find a middle ground between what the industry needs and what the regulator wants, and that dialogue is what's important. We realized that when we applied for an additional license as a portfolio manager in Switzerland, with DeFi as the activity, which was unique at the time. It took us two years, for various reasons, but the regulator was open to our communication and to how we wanted to structure it. I think that's what made the difference. In Europe, the positive side is that you eventually have unified regulation that you can passport to all member states and EEA states. That should be the end goal, right? However, each jurisdiction still gives you different challenges to enter. So do you have a unified approach or not? You see it in where the hubs are, where all the players get regulated. Germany, obviously, is very difficult. Malta is one, Ireland is one, France is one. But then all these other states aren't really moving forward, because there's no enforcement agency or institution to do it. And you mentioned CARF: it's total surveillance and control over anything that happens on-chain.

Hodl Up: We may as well just use CBDCs.

Sylvan: Exactly, instead of all these other tokens. It's a bit unfortunate, but on the other side, this is what regulators need and want.

Hodl Up: You mentioned CBDCs, and I want to touch on that as well. Back in 2022, when they started trending in news articles, I did some research and saw countries like China piloting them in different regions. With the rise of stablecoins, we say we're free from CBDCs, that we're safe from them in the West. But if you look at it, and at CARF as well, it's literally CBDCs issued by private issuers, who can again be legally forced to do what governments would have done with CBDCs. So I don't know. To be honest, I'm kind of scared about the future of crypto in the West, because it goes a bit against the very nature of crypto: power to the people, financial freedom and everything. But that's my time to vent, guys. Sorry.

Sylvan: I understand and I feel you, because the initial enthusiasm in crypto was that we'd create a different financial system, not the same one we used to know. Then at some point the whole community, or a large part of it, said, "We want Wall Street to be part of it." So now we have it, and we need to live with the consequences. Regulation is here. Wall Street is here. The big boys are placing the bets. It's not about how decentralized Bitcoin is; it's about how much BlackRock, Strategy and those guys are putting into their ETFs and buying, because that's currently the price mechanism. That will change in the future too. But we asked for it and we got it, so we also have to accept the consequences. Yes, the underlying ethos of decentralization and DeFi, why crypto was there, the enthusiasm, has died down a bit. And obviously we, as a financial intermediary trying to bridge both worlds, giving the TradFi world access to the on-chain world, essentially shouldn't be needed, because there shouldn't be any intermediaries anymore. That's exactly the point of being on-chain and peer-to-peer. But family offices, banks and so on still want to interact through regulated interfaces, because it's a scary world with very new technology that you need to learn and understand. That's what we navigate, and we essentially give them peace of mind.

Hodl Up: Now that you mention interfaces, I want to go deeper into SCRYPT. What changes have you noticed in user behavior over the past few years? Institutions, or whoever your clients are: how is that evolving in their eyes, and in yours?

Sylvan: Let me approach it a bit differently. We started purely as an OTC trading desk for on- and off-ramping, and out of that we developed further product verticals. Today we say we're the operating system for digital assets. Why? In the beginning we had clients using Bitcoin for payments and buying and selling more. You see it in the different cycles of the industry; you guys have been in the industry for more than five years, same as me. There was the altcoin bubble, or bloom, so to say, and we saw it in our clients' behavior. Suddenly they were asking for coins we didn't even know existed. We managed to meet their needs and had all these crazy trading pairs. But over the past couple of years, everything switched to stablecoins. A large part of our client base is payment service providers that use stablecoins for cross-border payments, remittances and those kinds of things, which need an on-ramp, an off-ramp or a conversion angle. That's where we come into play. That's the development we see. And all those fancy altcoins and memecoins, that hype has disappeared.

Hodl Up: Wait, someone actually used memecoins for settlement?

Sylvan: No. Those were obviously more speculative traders. We also serve some fintech apps with their own platforms that offer retail a universe of coins, and suddenly you have huge volumes in PEPE. But it's not because someone happens to use it to pay for a cargo ship.

Hodl Up: I've been following you for quite a while, and I've seen you grow quite a lot in recent months. Could you tell us about some of the products that differentiate you from your competitors, or new features we might expect in the coming months, if you're allowed to say?

Sylvan: Sure. That's always the key question, right? What's the differentiating factor? There are many players out there with a trading desk, some better in some ways, and there are players that focus on a specific niche. What we try to do is give a single point of access, where regulation and compliance are a key moat for us. We also have regulatory setups in Europe; MiCA is a need-to-have, not a nice-to-have. We've operated for seven years, we haven't lost any money, and we haven't had any fines or problems with regulators. We've done our job diligently, and I think that creates the element of trust that institutional clients are looking for. That's the basis we've built the company on. To answer your second question about new features: at the moment we're focusing on DeFi asset management. Tesseract just made an announcement about fully segregated vault creation. We already do that; we just haven't shouted it from the rooftops yet, but there's something there as well. We try to be innovative where we can, within our regulatory guardrails, and adapt it to the industry, so that a family office is interested and it's still cool.

Hodl Up: I think you just gave me an idea: some sort of stamp for companies that have been around for, say, more than five years. That would make differentiation easier, because it does make a huge difference for a company like yours, which has been around for quite a while, hasn't had any regulatory issues and has been quite transparent. That should be the whole selling point in itself.

Sylvan: I would love to have the stamp. Please make it happen. When we started, it was just me and my co-founder, and obviously you need time to prove yourself. We bootstrapped. We did it all ourselves, with no external funding. We needed to prove first that we could do it. Once we got to that level, started hiring a team and got a bigger client base, we realized we actually had some product-market fit, a business model that works, and it became a business. Fast forward seven years, and the conversations with the same institutions we spoke to five years ago are completely different, just because we survived. Of course growth helps as well, but just being around still, in this industry, means you've done some things right.

Hodl Up: Now I want to go more general, because we're in a bear market but you're still growing. There should be a cheat code, a script you're following, and I want that alpha. How do you keep building when most companies are laying off everyone and basically dying?

Sylvan: For real. It wasn't always the case. We made some good financial decisions to preserve our capital, and we always wanted to keep our people on board rather than let them go because we saw no other way. There was a time when we were also looking at how much runway we had left, but I think that's a normal startup journey. How to answer it... One of the key things that solves any of your problems is sales.

Hodl Up: Exactly.

Sylvan: Mark Cuban says it, and all the other famous guys say it: if sales work, you have no problems. Even in a bear market where everything is down, some of your clients will be less active, but your total number of clients is higher, so you still have a good baseline. That lets you use those periods to keep investing and building. It also helps that we've raised capital along the way. That gives us some comfort and decision-making power to say, okay, we keep investing, we make additional bets, or now is the time to double down and come out stronger when the bulls come back. So it's a mix: making the right decisions from a company management perspective, which isn't always the case but you learn from it, and having a good sales pipeline that keeps the lights on.

Hodl Up: Okay guys, if you want your business to work, hire good salespeople. We're terrible salespeople. To wrap it up, I really want to know what you think will happen with regulation in Europe, and in the West in general, over the next 5 to 10 years. I think the East isn't that unified on regulation at this point in time.

Sylvan: From my perspective, America is laying down the rails now with the GENIUS Act and the other bills, and I think that will spill over to Europe as well. Europe has its framework and will keep refining it. I hope passporting becomes easier and that there's more uniformity across all member states, so it doesn't matter where you got your MiCA license. Right now certain jurisdictions have a different financial reputation, but it shouldn't matter, because MiCA is MiCA. Perception and reality are two different things, though. Switzerland will adopt different regulatory setups, because they realize MiCA is slightly stronger and they need to catch that wave too. That's the consolidation there. Africa is a new space where a lot of jurisdictions are starting to come up with frameworks. So the development I see over the next five years is more unified regulatory setups.

Hodl Up: I just hope it doesn't become dystopian. That's basically what I'm hoping for. All right, thank you very much for joining us today. We look forward to seeing you grow and having you on the podcast again, virtually or maybe at another conference. Thank you again.

Sylvan: Thank you, guys. It was super fun.