Podcasts

A Conversation with R. Martin Chavez, Global Co-Head of Securities at Goldman Sachs

The following transcript is taken from episode sixteen of The Scoop, The Block’s first podcast. Listen below and subscribe to The Scoop on AppleSpotifyGoogle PlayStitcher, or wherever you listen to podcasts. Email feedback to [email protected]. This transcript has been edited for clarity and length.

R. Martin Chavez is perhaps one of the most senior technologists on Wall Street as the global co-head of securities at Goldman Sachs. On this episode of The Scoop Chavez talked about the evolution of banking over the past 20 years, Goldman’s foray into bitcoin and the reason why he thinks the Fed will end up making its own cryptocurrency.


Frank Chaparro R. Martin Chavez is perhaps one of the most senior technologists on Wall Street as the global co-head of securities at Goldman Sachs. The New Mexico native now runs a trading business that saw $2 billion dollars in revenues during the second quarter of 2019. But Marty’s worn many hats at the bank having served as it’s chief financial officer as well as its chief information officer. In those roles he drove technology to the center of the business over several years, spearheading initiatives such as SecDB and Goldman Sachs’ Marquee platform. On this episode of The Scoop Chavez talked about the evolution of banking over the past 20 years, Goldman’s foray into bitcoin and the reason why he thinks the Fed will end up making its own cryptocurrency.

Frank Chaparro Ladies and gentlemen thanks for tuning into The Scoop, we have a very special guest today. Joining us from Goldman Sachs’ New York’s offices on 200 West Street, R. Martin Chavez. He’s held many hats at the firm since he first joined in 1993 and its commodities trading unit. Sorry if I’m aging you sir but you have a wonderful story, a wonderful history at this firm and others in roles that marry finance and technology in a very interesting way. I’m sure we’ll get into that but I guess to start just because of that background, looking forward into the next 10 years you’ve seen where finance trading specifically has gone and maneuvered over the past 20 years. When we think about the technologies that are shaping financial services today we think of blockchain, we think of A.I. we think of machine learning. Looking forward Marty, how is finance going to be shaped by technology and will it continue to be tech driving the business as opposed to the other way around?

R. Martin Chavez So you certainly enumerated the important drivers for software eating the world and specifically software eating the world of finance. I wouldn’t necessarily enumerate them in that order, if one were to talk about what’s the most profound driver and there would be a few others that I would add that we’ve added for some time — open source and perhaps more technical and geeky but API’s application programming interfaces. I’ll start with the caveat that I’ve got unbelievably sharp and precise visions of the future with terrible timing. I could be off by minutes, years decades and so keep that in mind as I say what I’m about to say. But there’s a few things that I’m certain about and there’s nothing quite like being CFO of Goldman Sachs to to make one think very hard about forward looking statements and predictions of any kind. But here’s a prediction for you, there’s going to be more software in the future than there was in the past. That’s when I’m happy to predict all day long and I don’t think it’s terribly controversial. Here’s another one that might be less obvious — the old dichotomies that we usually think about, particularly in the financial system and I’ll list some of those dichotomies, all of those dichotomies are going away and it’s becoming much more complicated. As an example we used to talk about the sell side of Wall Street and the buy side and that was always confusing because the buy side asset management arms of the big sell side firms are often the most important clients of the trading arms of the other sell side firms. It was always more complex than a simple year by side or your sell side but there’s another one which might be sales and trading or how about data provider versus data consumer or market infrastructure providers such as an exchange or clearinghouse user of market infrastructure — all of those dichotomies are going away and so it’s going to be much much harder to know, is this a client? Is this a competitor? Is this a counterparty? And we all really need to start thinking more about the ways in which we’re overlapping with other participants in the financial ecosystem as opposed to, is it a competitor? Are you with us or against us? That thing needs to go away. The whole financial ecosystem is re-inventing and re-architecting itself around API boundaries and the new question that matters hugely is where are you going to be the best producer? One of the very few best producers of some service that’s encapsulated by an API and in every other place you probably need to be an astute consumer of an API service produced by somebody else. Anybody who’s not doing that is going to be missing the biggest and most important technological change in all the other tools you mentioned are important implementation tools. That’s the big picture.

Frank Chaparro To give folks some context your current position as you’re co-head of the securities division, global co-head. When you were chief information officer of the bank something to your point that you just mentioned that you really drove forward was this idea of repackaging everything around API. I reported in 2018 when I was at Business Insider that the firm was making, I think at the time at least 60 hires for Marquee and Marquee sort of being at the center of what you guys were doing around API’s. What is the status of that in 2019? And again to your to your point before, sometimes maybe you are seconds too ahead or minutes or days or weeks. Is that the case with with API’s?

R. Martin Chavez The story of Marquee and API, it goes actually back to 2015 when we saw regulatory change and technological change and market structure change all happening at the same time. And we asked ourselves, well what’s our response going to be? The initial idea of what came to be called Marquee is let’s extend our tools and our analytics which previously we closely held thinking of them as our secret sauce let’s extend them and make them available over the web to our clients. As we did that one of the first discoveries that we had is that clients wanted and I would say are likely to continue to want a large spectrum of choices in how they’re going to interact with us. And so the idea that it’s all going to be digital, what does that even mean? I think it’s gonna be more complicated than that. I think there’s going to be people wanting to talk to people and then there’s gonna be other use cases where people want to have a beautiful user experience on their phone or on a web device. Then there’s other important use cases where our clients, customers are going to want to connect their systems directly to ours. They’re going to be consuming our API and we’re going to be producing our API. Back then, we announced it, we talked about it as an ambition. What really needed to happen for it to be a real thing was to get all of our own internal platforms in order. What I mean by that is we and I think this would be the case of most Wall Street firms had a lot of different ways to book a trade and ultimately all the trades had to be reflected in one set of books and records in the general ledger but we had many ways to book a trade. Starting off and saying we’re going to have one API for booking a trade you immediately get all the objections and concerns — you can’t possibly mean that I’d book a cash equities trade in the same way I’d book an interest rate swap derivatives trade. Yes that is exactly what I mean, we’re going to have one API for doing it and we have one API for asking questions about risk and we’re going to have one API for managing market data. And this speaks to the way that most firms and businesses grew up. It sounds great to talk about API’s but as soon as you tell somebody you’re going to consume this one API for booking a trade, you’re introducing a dependency. I think it’s human nature, everybody just wants to write all their own software and not have to worry beyond their their purview. It’s the way firms were organized so this actually required a complete reorganization of the firm to get this done. I would say I underestimated the requirement for re-architecting the entire organization of Goldman Sachs so that you could actually do this.

Frank Chaparro I mean the very basic premise of this is to to make the bank operate or rather to let the clients engage with the bank in a way that’s not too dissimilar from the way that we interact with the apps on our smartphone

R. Martin Chavez That’s the idea.

Frank Chaparro Going back to that point around the impediments, namely folks in the business, not necessarily the technologists. You said I think it was on a Harvard Business School podcast that I listened to that you’ve seen the coder and trader coalesce since you joined. You can’t tell them apart when you go out there to the floor there. They have the same roles and skill sets. Are we actually there to that point? And how did we get there?

R. Martin Chavez It was a combination of of observing something that was happening or coalescing as you say and then also driving it, not just noting that it was going on. Here is how this coalescing began. When I joined Goldman Sachs in 93′ as what we call the strategist or strat, a term that I’m not particularly fond of but I would say the rest of the world has more or less settled on the term data scientist for for what we would call a strat. Back when I joined as a strat there was a sacred principle which was strats commit code and traders commit capital and never the twain shall meet. You could see all the reasons why that made perfect sense in a derivatives business. If the Strats are creating the model and the model is used to calculate the net present value of some derivatives position and therefore all the risk in that derivatives position you could create all kinds of mischief if you let traders write their own model commit code. It’s a very strong boundary there. As time went on and this happens all over the world yet it’s not necessarily obvious, there’s no one blowing a whistle and saying it got more complicated all of a sudden but what we started observing is that some markets had electronified and the latency time, the time between when you put in order and when you get an execution back was getting smaller and smaller and smaller. And then we had the advent of algos which are pieces of software that are putting orders into the market. Stop and think about that, as soon as you have a piece of software putting an order into the market, suddenly it’s not clear who’s committing the capital. Is it the person who’s writing that code or is it the trader who’s accountable for the risk? In the book that the code put the trade into once the order came back as an execution, it’s not completely obvious. As that evolved further, suddenly we were asking the question, well who is the person who actually knows and understands what’s going on in this book and how risk is coming into this book? And when we asked ourselves that question the hard way it became really clear that the old dichotomy of trader and strat no longer worked. We had to think of new structures, new API’s and here’s a principle that was sacred and it remains sacred: the people who were building the models don’t commit capital but there are other people who are deciding on trades that are going to be valued by the models and those people are writing software and the software and the people writing the software are the people who are committing capital. Then we ask ourselves what do you even call these people? And we went through a bunch of terms, one I really disliked was was strader which was strat and trader. I found that even hard to say. There was one…

Frank Chaparro Did you have any ideas?

R. Martin Chavez I did. I liked engineers who trade but actually we settled on what was the most appropriate name which is a trader is a regulatory construct and so we said they’re traders who code. A trend that we’re seeing now that I think is a fascinating one and you’re seeing it in the universities and you certainly see it on Wall Street wherever you have traders who code and consider any other role in the firm, we’re starting to have compliance professionals who code, lawyers who code, sales people who code, bankers who code. Coding is becoming something like writing an English sentence. This is something that people do.

Frank Chaparro As opposed to technology being sort of at the outside and influencing the the inside. It is now at the center and driving the business.

R. Martin Chavez Well I actually want to get back to something because you said that, earlier you mentioned the business and technologists and so people internally like it if you worked at Goldman I would have stopped you then especially if you were a technologist talking about what the business wanted and I would have said business, I’d looked around, where was the business? You’re not the business, who is the business? T.

Frank Chaparro That’s a paradigm shift. When you were coming up, someone I spoke to who was a partner at Goldman, I spoke to him this morning. He was a partner many years ago but he said that you were sort of known for building something along with a group of other executives called the SecDB. And what that enabled the firm to do was, you could look at the firm as a whole to price risk, seek positions and something like in the midst of the crisis, you could see your position and know exactly what was going on behind it. Talk to me a little bit about that and how that parallels with the drive of bringing technology to the center of the business.

R. Martin Chavez Well it says a lot about Goldman Sachs that people who came way before me including notably our CEO just retired, Lloyd Blankfein saw something happening way back in the late 80’s and early 90’s, way before I think anybody else saw it happen. And here here was the dynamic that they were observing, so well I would ask the technologists, please build me a risk management system and they go off and write some software and then they’d unveil it to him and and he’d say this is not at all what I was thinking about. Lloyd realized that they were talking past each other and so he thought I don’t know where he got this brainwave but it was a powerful one. He thought of this idea of having technologists, engineers in a different place on a different floor outside the business doesn’t make any sense because well I didn’t know how to describe functional specifications for a software engineer and the software engineers didn’t know the trading business because they were outside it. They weren’t in it. So he thought I’m going to get an engineer and I’m going to go to Bell Labs which is where you would find those engineers and we get one of them to sit right next to me and he’s going to absorb the trading business by osmosis and he’ll figure out what to build. The engineer he found is Armen Avanessians he’s still one of our partners. He’s the person who hired me. And it was Armen’s idea which in retrospect is utterly brilliant. Like all brilliant things it now seems obvious. Armen’s idea was let’s build a single piece of software and we’re not necessarily that great at naming things so we called it securities database or SecDB. We’re gonna build a single piece of software but the vision was we’re gonna put all the trades and all the positions and all the models and all the risk reports and all the time series in a place, a single place so that whenever we ask ourselves the question of where is it, we always by default know the answer — it’s SecDB, the one place where we put everything and we would now call this a platform. The term really wasn’t used back then it was incredibly ambitious. It started off with a very narrow focus of the foreign exchange spot and forward business. But even back then when I joined this team there were three engineers who worked for Armen. I was the fourth one to join, the team recruited from Silicon Valley in 1993. Even back then we thought this piece of software is going to help all of us, our traders our salespeople our leaders become excellent predictors of the present. That’s a phrase I borrowed from Lloyd. We don’t predict the future but we’re looking at the present and we’ve got this piece of software that’s optimized to ask what if/counterfactual questions. What if interest rates are not where they are now? What if they go up by a basis point? What if the price of oil goes down by a penny a barrel? How much money we’re gonna make or lose and this capability enabled us to see around corners, not predict but we could see possibilities. When you see something as a possibility and it’s out in the future there’s still plenty of time to do something about it namely hedge. When it’s already happened it’s too late to do anything about it. This cycle led to a virtuous cycle of more stable more reliable results, better risk management, better results for our clients. This is something that works so well that as Lloyd became broader in his scope across the firm he would say I’d like those strats and that software in this new business that I’ve been asked to run.

Frank Chaparro And then that has helped propel you up.

R. Martin Chavez By the time he became CEO SecDB was across the firm and yes I would say I rode that in my career.

Frank Chaparro We had you prognosticate about the future already in the beginning we have had a fun time looking at the past. Let’s let’s now turn to the present. Let’s think about some of the things that the bank is doing currently. When ordinary folks or folks who might just casually watch CNBC or something think about what Goldman is doing on the tech side, they’re going to think about Marcus — the banks foray into more retail banking ambitions which is a huge change for what was once known as being this massive white shoe place where everyone had to wear ties only. Ryan I think has some questions about about some of those ambitions. They might be worth exploring even if they don’t necessarily fall under the businesses that you run or manage.

Ryan Todd On the Marcus side I guess. What’s the sentiment internally at the bank? I know David’s come out, CEO, recently with the view that the street and other people are discounting the value that business line could bring. I just wonder if that’s kind of the same sentiment more broadly within the firm and just impacts with that business? If that feeds onto business lines like securities and that kind of stuff.

R. Martin Chavez So I like to start with creation stories so I just told you the creation story of SecDB. And so we could talk a little bit about the creation story of Marcus. It was summer of 2015 when a bunch of us Goldman partners came together, self-assembled and we asked ourselves the question, well we are a bank holding company and we have always told ourselves we are not a retail firm. Even as we told ourselves that there were plenty of activities around the firm that had a retail nature to them, we call them third party distribution. There were third party distributors who we worked with closely whose customers would then be retail customers. And so those activities had existed. But while we were telling ourselves we’re not a retail firm we never really stopped and said given that we are a bank holding company, what is the comprehensive set of things that banks inside bank holding companies get to do and for which they are regulated? And that’s all appropriate. We opened our minds to the possibility that we might engage in activities that we’d traditionally not engaged in, so doing this in The Goldman way you can imagine…

Frank Chaparro I wonder what would have been more controversial trying to push retail banking and Goldman or bitcoin.

R. Martin Chavez Well we can get to that. I would say it was more a thought experiment but it was a thought experiment that we put a lot of energy into. And so we worked with our merchant bankers and we asked them to enumerate every possible digital consumer finance activity. And there was 100 plus of those and we worked through them that summer. It was a busy summer and we had some criteria, here are a few, this is not the comprehensive set of criteria but one criterion was where is it the case that our absence of historical participation in this business activity and therefore of legacy, infrastructure of all kinds could actually be an advantage? So maybe there is a case where technology changes some of which we’ve discussed have been so vast but no one’s built a new platform for this business in years or decades and maybe this is an opportunity to skip one or two paradigm shifts and do it in a modern way. And another criterion was where does it play to our strengths?We have some sense of what our strengths were. One of them would be risk management. Another is we think we’re really good at making software and then a third was where can we have a market share in a large addressable market where that market share will be meaningful to us it will move the needle and things that are important to our stakeholders. But it doesn’t have to be a super large market share. Just some market share that’s consistent with the time and energy and capital and other resources that we’re putting into the business and so there are a bunch of criteria. When you looked at it that way you narrowed down that large set of activities and we identified one which was the unsecured consumer installment loan, all digital straight through processing to credit worthy borrowers. And that was the initial Marcus as you look at other things that we’ve done and some of the challenge. It’s all of those criteria that I enumerated nobody had built a credit card platform in the US in over 20 years. And so there was an opportunity to do it and do it in a modern way. And so I would say there’s considerable excitement if I have it. I helped in the beginnings of Marcus as a partner of the firm I care deeply about it even if that business is not in my direct line of management today and investors are starting to recognize that now we could we could ask ourselves a hypothetical question what if a Silicon Valley firm from the start of zero had built something with the same revenue and cost metrics? What kind of valuation would it get.?And that’s an interesting hypothetical question. I don’t spend too much time on it.

Ryan Todd Interesting you talked about not predicting the future but predicting the now when we look at something that in our world at The Block that’s starting to bubble up is just this macro narrative of pockets of financial stress and various markets across the globe. Do you see that impacting the business here? And like what are your overall views on the state of the macro environment whether that’s fed becoming more accommodative, recently cutting rates, signaling more cuts this year. European banking environment starting to also show signs of stress about…

Frank Chaparro What was it UBS that said there are certain high net worth clients they’d be earning negative yield on whatever they were holding with the bank?

R. Martin Chavez Well certainly a consequence of where European Central Bank rates are.

Ryan Todd The yuan devaluation and I guess this week stuff like that is, are things that our readers find interesting because they impact bitcoin. Well that’s that’s the point I want to get to is like this narrative that’s formed in our world that Bitcoin could be a safe haven asset. What do you view that whole thesis?

R. Martin Chavez This is something that I think speaks to my background as a quant and as a data scientist and again as a story from an earlier part of my career when I worked in the commodities trading business I was this strat or quantum on the oil desk. And so the clients would would always say Well Marty you’re the you’re the strat on the Goldman JRN oil desk and surely you have a view on whether oil prices are going up or down. And I would smile and say 50% chance they go up 50% chance they go down. If you’re concerned about the oil price going up you can transfer that risk to us if you’re concerned about the oil price going down you can transfer that risk to us we’re there. You’re not to be exposed either way. But it really speaks to the way we run our business here in the securities division of which I’m co-head today. So we have a simple mantra, a simple mission statement which is serve clients, assess value, build scale and everybody in our division is working on one or more and in most cases all three of those things and so it begins and ends with the clients. If the clients have risks they don’t want or want risk they don’t have, it’s our job to be there to serve that purpose. To do that well we have to know what things are worth. That’s the assessing value. And again also to do it well in a way that works well for our clients and secondarily for us. We have to do it in a scalable way which means using software and all the techniques we’ve talked about whether it’s AI, machine learning, API’s, open source. Do that in an intelligent way. And so that’s the core of our business, not predicting where things are going up or down. There’s there’s always stress happening somewhere somewhere in the system and clients have these needs and I always I’m sort of the person who looks at the headlines and talk about the talk about someone losing money and I’m always the guy who’s wondering well did the money just vaporize? Did it just disappear from the universe? Well well likely it went somewhere else. Whenever there’s a buyer there’s a seller right. And we we tend to talk about one side of the trade being unhappy and well there’s the other side of the trade. Right. So it’s complicated. Certainly we’re we’re seeing some, we’re in an interesting regime where the U.S. is the only central bank that’s got rates that are interestingly positive almost all of the others are negative or zero or near negative. And so that’s a place that we’ve been in for a little while and nobody knows really how long it will continue. There’s an awful lot of prognostication of you know everybody is almost certain that the fed’s going to cut another X basis points and and again I’m the sort of guy who looks at those things that everybody’s almost certain about and looks, sees how they performed on Backcast and and people are generally right half the time and wrong half the time.

Frank Chaparro In the securities unit that you run like to your point you’re not in the business of prognosticating, helping servicing clients as they do their own prognostication. Making sense of what’s going on in the markets. As part of that you guys and this was an interesting story for me given my background covering high frequency trading and exchanges when I was at Business Insider but it reminded me of a headline that should have been maybe in 2015-2014. Goldman Sachs spending $100 million to shave milliseconds off of stock trades harkening back to the days of of Brad Katsuyama And your IEX and the speed races. Is this something that Goldman should have done a while ago and now we see clients like Two Sigma, Renaissance who were well served maybe by Morgan Stanley who leaned into that business. Bottom line do you think Goldman is a little too late on that?

R. Martin Chavez I would say that we were late. I don’t know about too late, the world’s always changing and there’s a continuous dynamic in any technology. Let’s talk about telephone adoption in the US. Is it a good thing to be an early adopter of mobile phone technology? Probably. Is it an even better thing to skip all the generations that didn’t work so well and go right to 4G. Probably. Whoever does that is then now going to have some legacy infrastructure when the world goes to 5G. So there’s definitely that dynamic. I would say one thing that has absolutely happened and perhaps it’s something that some predicted more with more clairvoyance than others. It could have been a constant strategic choice. It could have been happenstance it could be a mix of both. It could be serendipity. I don’t work at Morgan Stanley so I don’t know what their decision process was but certainly here’s just the fact the assets under management of the systematic funds and there are about 20 of them that account for most. Those assets under management those have tripled. In the last call it since the financial crisis. And so it’s material and their requirements around data privacy around, straight through processing, around having an integrated software stack that requires no human intervention. It’s everything from execution to matching, shaping allocation and all forms of post trade processing and happens in 35 markets and has a combination of direct access and smart order routing those those use cases are constantly evolving. And so it has actually at some level of abstraction the same flavor as Marcus. There’s there’s an opportunity right now in 2019 to do this and in a completely modern way. And so we’re excited about it and we made it a priority.

Frank Chaparro I appreciate your candidness and I think it’s something that we could probably spend an entire podcast talking about. But I’d like to move on to some other topics namely blockchain and bitcoin which is which are the two main topics around which our publication focuses. Since rumors or stories around Goldman’s ambitions in bitcoin became public. 2017 was when we first started hearing around December Bloomberg broke that story. I think one of the themes if we think about the conversation we’ve had is about looking for opportunities to service clients in the way that makes sense for them even if it’s Greenfield like with Marcus and maybe now with with bitcoin. Do you think the result of of where Goldman is now with with trading bitcoin specifically, not quite there yet? Not quite there on the custody side but trading these derivatives with muted interest. Is the fact that today Goldman and maybe other banks aren’t necessarily full throttle, is it because of client interests or regulatory hurdles or internal bank politics?

R. Martin Chavez Of those three, yes to the first two. Every organization every human organization has a political component to it so I’m not going to say we are we are beyond and have transcended all politics that wasn’t our concern here. Our concern is always like I mentioned earlier serving our clients and we are appropriately because people care a lot about their money just as they care about health and and several other things were appropriately regulated. And that’s a good thing and a nod to the regulators since the financial crisis and facing a vast herculean task. They’ve done an amazing job of making the system safer and sounder. We have all of those requirements. Anything we do has to proceed with the buy in of our regulators and we’re global and we have a lot of activities and so there are multiple multiple regulators and we’re only doing it because the clients want it and need it. And it’s an activity that fits within our scope and our risk appetite and our mission statement. And so we need to build things that have a little bit of a component of predicting what our client’s needs are going to want to be. It’s not as simple as clients tell us and then we build it. So we have to have some sense of where the client’s needs are needs are going. So it is in that construct that we that we thought well okay I I know know something about blockchain. For me though it’s more what I knew about it when I was a grad student in the in the late 80s and I think of blockchain underlying Bitcoin as a particular solution to a particular version of the famous Byzantine General’s Problem. You’ve got generals on a field, the communication is noisy, not all the generals are reliable. How do you get them all to agree on the strategy? On the plan? And so Bitcoin exists and that’s interesting. I’m also someone who generally thinks that blockchain especially in the case of 50% of the participants being unreliable and the communication being noisy. That might be over-engineered for some use cases. All right. So I’ve always had those questions in mind about the blockchain underlying bitcoin specifically but it was clear to us that we needed to bring in some people who know a lot about this and we needed to listen to a lot of the clients and the clients were telling us, well we’re interested in bitcoin futures and we’d like you to clear them. So that was the first thing and actually getting the regulatory buy-in, getting comfortable with that from the point of our view of our risk appetite and our board of directors that was, that was really a business as usual. Here’s how we get ourselves comfortable with a new business activity. The next level beyond that which was making markets and non-deliverable forwards, meaning they’re settled in US dollars. Referencing a price established on an exchange or exchanges of bitcoin versus USD. That was the next. That was the next activity and really is all kind of learning about the the space and learning what our clients wanted. And it’s it’s evolved in a considerable way and it’s exciting and I’m not in a position to announce anything but all I’ll say the general framework we have is what is a problem. What is a pain point in the current financial ecosystem for some kind of risk transfer activity. There’s lots of risk transfer activities there’s lots of securities out there and we give them different names, stocks, bonds, commercial paper and so on and then there’s lots of derivatives. So where is there, are there pain points? And I’ll give you an example of a classic pain point which relates to your earlier question on on low latency trading. So a classic pain point is when the execution cycle. The time between a client says I want something and when the client gets back the confirmed trade how many microseconds milliseconds seconds minutes is that and then what is the settlement cycle. The time when the security and the cash move and the big big challenge there is you always want the securities and the cash to move in the same instant. And if they don’t everybody’s concerned will I pay the cash but I never got the security right. And so we’re asking ourselves where my distributors ledger technologies of various kinds mitigate those risks and and help our clients be more satisfied with the services that we’re providing. But they really have to happen. It’s a village right. They have to happen with our clients with our competitors and and profoundly with our regulators. So as you start breaking it down and you look at securities then you start asking yourselves questions like, what kind of security? How do Treasuries actually, well let’s start with that. What is the existence of a US Treasury bond . It turns out something like ninety 99% of the outstanding volume of US Treasury securities exists not in certificate form but in book entry form. Well what what is that even? Is it a physical book? No it’s not a physical book and how long has that been digitized and you start seeing that the digitization of securities, the digitization of cash has really been a journey that’s been happening for 50 years. And then the question you ask yourself is can blockchain distributed ledger techniques get you better results or not? As an extremely active area of investigation and prototyping for us.

Frank Chaparro Well that’s one area that many people in the blockchain crypto space see as the next frontier for the digitization of cashes. Putting it onto a blockchain in the form of what we call a stable coin. What many people are calling a stable coin whereby if you’re a merchant…

R. Martin Chavez I don’t call it that but yeah.

Ryan Todd What do you call it?

R. Martin Chavez Digital fiat currency.

Frank Chaparro Fair enough.

Frank Chaparro The idea is you’re removing a level of counterparty risk right? As opposed to you will send if I’m a merchant and you’re a customer. The customer would send the fee. That’s on a blockchain and I’ll be on my wall instantly as opposed to waiting for that summon process. You’re referring to.

R. Martin Chavez Though not to be too pedantic there’s no such thing as real time or instantaneous, right? Einstein was clear on that. There’s always some latency.

Ryan Todd The fed is looking to change that by 2024?

R. Martin Chavez Instantinaity doesn’t exist

Frank Chaparro That’s that’s true. That’s true. We could talk about what the Fed’s doing or stable coins. But what’s your impression of things like what JP Morgan is doing on what JPM coin and do you envision the bank here doing something similar? Is there even value in that product?

Ryan Todd Wearing a CFO hat.

R. Martin Chavez I’m not wearing that hat. [laughs]

Frank Chaparro You know we don’t need to pick on your specific competitor but just share an idea.

R. Martin Chavez Yeah. So let’s start with the short story. Okay so years ago venture capitalists that I’m close to with in Silicon Valley said Marty I’d like you to talk to the CEOs of a couple of my my bitcoin companies that I’ve invested in. And so I greed and I was talking to one and this is this is some time ago. And those are interesting conversations actually. One of those CEOs gave me three bitcoin. He just sent me three bitcoin a long time ago when it was actually kind of hard to get your hands on some some bitcoin and I still have those three bitcoin haven’t I haven’t done anything with them. But the other CEO was interesting in a different way. So I don’t know what year this was it must’ve been very very early days of Bitcoin and I said one of my, I tossed off one of my throwaway remarks, I said I am highly confident that the Federal Reserve will one day digitize the U.S. dollar. And it will be a cryptocurrency that is the Federal Reserve issued fiat US dollar. And to me that seemed self-evident. Maybe it’s because I I read Leviathan in prep school and I’m always remembering what legal tender is right. What is legal tender. Have you considered what that even means. What does it mean when a U.S. dollar says on it this note is legal tender for all debts public and private. It means well it has a very specific definition which is if I owe you a dollar and you and I are within the jurisdiction of the United States of America and I give you one of these notes that is legal tender for all debts public and private. And if you refuse it in settlement of your debt then in that instant you have forgiven the debt. And the forgiveness is backed by the might of the sovereign and its monopoly on the use of force within its jurisdiction. That’s what legal tender means and so I wouldn’t wouldn’t forget all that and and I think whether you look at some of the early days of bitcoin whether you look at some more recent efforts that have been in the news I think to forget the sovereign and to forget Leviathan is a huge mistake. So I said this to this CEO this is going to happen with the USD. And he said with equal certainty that will never happen. I’m very careful about using words like never happened. So I asked him why will that never happen. And he said because no engineer who is any good will ever help the Federal Reserve do that. And I highlight that story as an example of the the east west divide. That’s right that someone might think that in some part of the country. Doesn’t make a lot of sense to me. But of course I’m someone who’s been playing in both coasts and so when I look at all of these things whether it’s the stable coin you mentioned or the one that Facebook has been talking about I’m always thinking about legal tender and the sovereign and fiat and Leviathan and I’m thinking that anything that happens has to be consistent with that reality. And there is a very long history starting in the 60s with the early days of the fed wire of the digitization of money and people have written treatises and vast volumes on what money is. Right money can be a big boulder that you bury in the ocean. Apparently there’s a Polynesian island where they do that right. It can be lots of different things and so there is an evolution. I’m really interested in what the next evolution is going to be and whether blockchain not as an end in itself but as a tool can solve some problems that people have. I think it can. As to what form it is going to take exactly and what some call a stable coin or this stable coin versus some other stable coin. I have some views but I think if you listen carefully to what I just said about my earlier prediction of where the USD is going to go. I don’t know with the Federal Reserve is going to do I look at their recent announcements and I think it’s all consistent with that statement.

Frank Chaparro And they’ll want to be the only ones in the in the in the ballgame.

R. Martin Chavez There’s some other central banks.

Frank Chaparro Thank you so much Marty. We appreciate you coming on the show sharing your thoughts sharing your stories and we hope to talk to you again soon.

R. Martin Chavez Absolute pleasure thank you.

Frank Chaparro Thanks so much.