Transcript: Brian Pasfield Interview in Entrepreneur’s Action and Ambition
Action and Ambition:
Today we have with us Brian Pasfield. He has nearly ten years of experience developing financial technologies as a software engineer. As CTO of Fringe Finance, he and his team seek to unlock the billions of dormant capital tied up in cryptocurrencies by offering loans guaranteed by them. The platform aims to accept the widest range of altcoins as collateral on the market to date. Brian, thank you so much for being with us today. How are you?
Brian Pasfield:
Hey, Chase. I’m really good. Great to talk to you, and thanks for having us.
Action and Ambition:
I am a big fan of Michael Burry, and I’m interested to hear if you have any thoughts on him. Of course, he’s the famous financial investor who predicted the 2008 crash. You know, from The Big Short, I don’t know if you ever saw that movie. You may disagree with him on one of the things he mentioned. This tweet is why I wanted to bring it up. He’s very cryptic about his tweets. He said something to the effect of, “just wait until everybody sees how leveraged cryptocurrencies are.”
There were many people who were very excited, myself included, about investing in cryptocurrencies. For example, I have friends who maxed out their credit cards and made hundreds of thousands of dollars on Ethereum years ago. Given the nature of the business you’re in, my question for you is: how leveraged are investments in cryptocurrency?
Brian Pasfield:
Well, that depends on the individual. You know, it’s quite broad. Some people are very conservative. Some people just buy and HODL, as they call it, which is just holding unleveraged assets. And I think in this crazy world, that’s kind of the way I go about things.
There are very conservative ways to approach this and achieve some leverage without going too crazy. One can achieve a hundred to one ratio of leverage, but one is playing with fire, and they really want to know what they’re doing and be well protected in those circumstances.
Action and Ambition:
Sure. I know that there’s so much privacy associated with blockchain technology, so maybe the data’s unavailable. I’m not sure, but I’d be very interested to see how many. For example, what percentage of Bitcoin, or some of these more popular coins, is purchased on borrowed money? That’s just something I’m curious about because I’m thinking: if we’re using altcoins as collateral, but the altcoins are purchased on debt, then doesn’t that create a problem for the model? I don’t know.
Brian Pasfield:
Well, it’s very difficult to know if altcoins or certain coins are purchased on debt because that debt may be in the traditional finance system. And it’s difficult to correlate that unless it’s on centralized exchanges, where it’s quite clear, or can be quite clear, if there’s a correlation or at least a connection to some real-world traditional finance debt. I don’t think there’s a simple answer on that one.
Action and Ambition:
Sure. I’m not supposed to say my own question was interesting, but we’ll see. I’m excited to see how it plays out, but I do want to rewind a little bit, and I just want to ask you where your story begins, where’d you come up, where did you go to school, or did you go to school, and how did your career start to get you to this point where you are in the crypto finance tech space?
Brian Pasfield:
My background is in engineering, and I do love the tech. Many years ago, I spent a lot of time in trading and the finance space, trading commodities and gold and so forth, understanding a little bit about the financial world. And essentially, I came up with the conclusion that there’s a club and not everyone is in that club and a polite way may be to say certain aspects of it are, what’s a polite way to say it, that could be a little emotive… There are lots of opportunities to leverage financial positions. And there is certainly a lot of that and of transfer of risk in those traditional finance spaces.
So I began to look at alternatives to that. That’s why I developed an interest in things like gold and silver and having a look at macro trends. Despite what the media may have been saying on a sound bite basis, on a daily basis, in regular channels, I was looking at larger trends and such as energy and so forth, and just trying to get an understanding of how I could protect myself essentially against what was a system that ultimately wasn’t tailored particularly for my success.
I was looking at those alternatives, and then in 2013, a friend said to me: “Brian, just go out and buy a few thousand dollars worth of Bitcoin.” I kicked myself because it took me a year before I took his advice.
So I’ve been involved, and I was very interested in it, both from a technology sense and also, by just understanding to the degree that I did financial systems and traditional financial systems, that this represented an entirely new opportunity, a different paradigm, a different way of looking at things. And I think the world is slowly beginning to understand the opportunities here for financial systems that can operate in parallel or completely separately from traditional financial systems.
Action and Ambition:
Sure. And I think that banking is just one of those things that we all sort of take for granted. Not all of us, but most people take it for granted as just a necessary part of the financial system. But if you think about it, the original purpose of a bank was to hold your paper money or gold and protect it in a vault so that no one could steal it. You go, and you make withdrawals or deposits, and they keep track of your actual money. And then it sort of shifted to, we went off the gold standard, and all the currency, at least in the United States, of course, is not backed by gold, and they don’t actually even keep any of it at the bank anymore.
Action and Ambition:
It’s all sort of digital. And it makes one wonder, why are we using banks at all then? Because they’re not guarding the money against thieves, and the money isn’t even really there <laugh> physically, in a real way. And the reason I bring this up is because we look at some of these things that are happening on a global scale with the world economic forum and digital currencies. And we saw that countries like Canada were able to shut down banking accounts and the ability to transact during some of these protests last year. Obviously, Russians are facing all sorts of sanctions. Right or wrong, there’s banking issues that are problematic for them in terms of currency transfers and value transfers. And my question for you is, do you believe that cryptocurrency is a way to just totally avoid the centralization of money and basically make banking, in the traditional sense of the term banking, irrelevant?
Brian Pasfield:
In the purest sense, there is that possibility. I think it’ll be a while before humanity progresses to that point. And to one of the points you raised, why does banking still exist? Well, it’s all tied together with all of the institutions, taxation, government, insurance, et cetera. So there are quite a lot of intertwined institutions and mechanisms and payment processes that just make all of that easy. People use it on a daily basis, and businesses and countries around the world use it daily. So, to unwind, that is a big deal.
But cryptocurrency represents that opportunity to transfer value, which is not sensible. So ultimately, and again, to one of the points that you raised, this notion of property rights being violated by various governments and institutions around the world is something that is less easily done with cryptocurrencies because it can’t simply be switched off. It’s non-custodial or, in a lot of instances, people have their own assets. That is quite a game-changer. That value transfer will be a core part of a transformation, which will begin to incorporate legal systems that will sit extraterritorially in the decentralized and pseudonymous world. But that, I think, is another discussion. There’s a bit of infrastructure and platform and capabilities that need to be established for that to happen. But inexorably, humanity will probably move in that direction.
Action and Ambition:
Interesting. So let’s take it back to what you were working on specifically. Tell me a little bit about the business that you’ve set up, how the tool works, and some of the differences between traditional lending and using this platform to do banking, or business rather, based on crypto assets as a liability.
Brian Pasfield:
Yes. Our platform is a lending and borrowing platform. There are a number of lending and borrowing platforms in the market. We differentiate ourselves, and I’ll talk a little bit about that, but lending and borrowing in the crypto sphere is about lenders staking up their, or posting up their assets to be lent out to borrowers. And our platform, as term platform implies, is a platform. Fringe Finance does not act as an intermediary. This platform, through its smart contracts, holds those funds programmatically on the blockchain. It then issues loans to borrowers. The way borrowers borrow is they post up collateral assets and overcollateralize the loan positions that they’re taking, because the market price for their collateral positions does change. And so, collateralization allows the protection of the lenders’ assets. I think that is a key point to consider, especially anyone listening here who’s interested in converting their US dollar holdings that are earning very little interest in a bank to a stablecoin. And I can talk a little bit about stablecoins and describe those, but convert that to a stablecoin and lend them out on these platforms, or on Fringe Finance Primary Lending Platform for much better yields. That is the basic value proposition and the concept behind fringe finance.
Action and Ambition:
That’s very interesting and it makes a lot of sense to me. My question to you is, if I were to lend out my Bitcoin on one of these platforms, yours included, um, would the platform or the borrower owe me the US dollar value back, or just the number of Bitcoins? I think you kind of touched on this, but I just want to make sure it’s abundantly clear. If I loan a hundred Bitcoin, does the person owe me whatever a hundred times the value of Bitcoin is in dollars? Or does the person just owe me a hundred Bitcoin back? If Bitcoin drops by 50%, do I basically just lose in that arrangement?
Brian Pasfield:
Well, it depends whether one denominates their assets in Bitcoin or US dollars, right? So if one denominates them in Bitcoin, then either a rise or a fall in price of Bitcoin is irrelevant. It just is. Yeah, well, perhaps not irrelevant, but it certainly is what it is.
The way it works is a lender will stake or deposit their US dollar-pegged stablecoins, and they will receive that back. They can withdraw that back at any point in time. The platform puts it all into a pool. So there may be a number of borrowers who borrow those assets that the lender places into the platform. So it’s not a one-on-one contract. As a lender, I deposit onto the platform, and I begin to earn whatever the prevailing interest is at that point. And then, whenever I wish, I can withdraw my assets, and I have my original assets back plus any interest I’ve earned at that point.
Action and Ambition:
Wow. And it sort of makes the question, what’s the point of using a bank at all? It does seem like a much more lucrative, financially sound thing too. And one thing that’s very interesting to me about this is that, before cryptocurrency, I didn’t see a lot of peer-to-peer lending. I’m sure it’s always existed in different states, there are different laws in the United States, for example. Still, it’s really sort of unique that blockchain technology and these cryptocurrencies have allowed individuals to participate in lending in a way that really only banks were doing before.
Brian Pasfield:
Correct. It is permissionless financial services and not only lending as available in the decentralized finance space, but a whole host of other financial services, insurance, futures, synthetics, options, a whole host of things there and parametric insurance as well, which is all quite interesting. So there is quite a breadth of financial services available. And in our roadmap, Fringe Finance will be progressively servicing a number of those markets. Our first release product is variable interest rate. The demand and supply side of the borrower versus the lenders on the platform will dictate the interest rates. For example, if there is a lot of borrowing demand, and we anticipate with our platform because we are targeting a particular market of crypto borrowers who otherwise can’t easily deploy or obtain loans for their TCO assets, we anticipate they will provide or be willing to pay a higher interest rate. If we’re oversubscribed, that means the interest rate will rise, which will attract more lenders to the platform. This dynamic is built into the smart contracts and will allow the market to find the sweet spot that satisfies both the lenders and the borrowers.
Action and Ambition:
Are the variable interest rates applied to, um, existing loans or just to, to ongoing loans as they come in. If I borrow money at a low-interest rate and after six months, the interest rate changes, does my interest rate on the loan that I still owe change, or is it fixed?
Brian Pasfield:
It does change on the variable interest products, and the market is quite broad. So people will determine the marginal utility of taking out a loan, and if variable interest rates increase, then they may look to pay part of that back. When variable rates reduce, they’ll quite potentially look to increase their loan positions. So there a number of factors come into play, and it depends on individual circumstances. Of course, that from a lender’s perspective also is an interesting dynamic, because those variable interest rates will attract lenders more or less to the platform depending on those prevailing rates.
Action and Ambition:
Okay. That makes sense. And so, um, let me ask you this from a borrower standpoint. I guess it’s from a lender standpoint too. They’re sort of symbiotic in this relationship, right? How do you vet the borrower to ensure confidence? In the traditional banking system, we have credit scores, there’s algorithms, asset analysis, to determine whether or not a borrower is credible and likely to pay back well. How does this new way of doing lending verify the borrower’s credibility?
Brian Pasfield:
It’s quite simple. It is overcollateralization on any loan position.
A borrower places up collateral, and it might be twice as much or 80%, more or 50% more, depending on the volatility of the assets they’re posting up as collateral. That is one of, or part of the stability mechanisms that maintain the stability of the platform and protect the lenders.
The lenders don’t lend to any individual borrower, it goes into a pool. They’re lending assets, and then the smart contracts simply issue loans from that pool to overcollateralized borrowers. The platform knows that those borrowers are good for it because there are more assets in collateral than the loan they take out. So a rational actor will repay that loan rather than lose their collateral.
Action and Ambition:
Is the collateral always in the form of cryptocurrency?
Brian Pasfield:
Yes.
Action and Ambition:
Well, I was just gonna ask you, why doesn’t the borrower just sell their crypto then? Then they don’t have to be overcollateralized in the borrowing environment.
Brian Pasfield:
That’s an excellent question. For borrowers, there are a number of personas that come into play. They can be individual altcoin holders, or they can also be altcoin projects with millions and millions of dollars worth of their altcoins as part of their treasury. What they will want to do is, we have a number of partners who are very interested in posting up their altcoin as collateral so that they can take out stablecoin loans from lenders to operate and pay for continued investment in their project. At the same time, they still maintain exposure to the upside of their token. That is the key aspect here. People who own the altcoin tokens hold them for a reason, because they’re passionate. They passionately believe in the value proposition of the particular project to which it’s related, and they don’t want to lose the exposure. Our Fringe Finance platform is a perfect opportunity to deploy those assets while they are waiting for the upside.
Action and Ambition:
That’s fascinating. And the other aspect of that, too, is if you are an altcoin project and you need liquid financing to continue the project, you don’t want to sell your altcoin in mass because of the slippage, right? If there’s a massive sale of the altcoin it could be actually harmful to the project, right? So if you put it up as collateral, then it doesn’t actually show up on the market as a sale.
Brian Pasfield:
Correct. That is one of the key things our partners are interested in because it effectively locks up the tokens so that they’re not on the open market. And therefore, there is less supply of those tokens on the market. That is good for the project themselves because it maintains the price and it minimizes the volatility. It is also as good for the altcoin token holders out in the community because there is greater demand for those tokens, and for them, it’s even more worthwhile to continue to hold and seek the upside of those tokens.
Action and Ambition:
Okay. So let me ask you this. And some of my questions may be stupid, cuz this is all just brand new. I’m just trying to learn too, but I want to ask you whether or not there’s a gaming of the system vulnerability. Let’s just say, for example, I’m a bad actor in the situation and I want to try to see if I can game the system. So I form a limited liability company as they’re called in the United States. I start an altcoin project, and I produce millions of these altcoins, which are worth perhaps fractions of a penny. Right. Can I then put them up as collateral for a loan on your platform and then just never pay the loan back? Sort of game the system by making the market look like my altcoin is worth however many fractions of a penny, put up trillions of them as collateral, take the cash, and just never come back. How do you protect against that?
Brian Pasfield:
Okay. We have a number of mechanisms, both built into the platform and also our vetting process.
Before we list a token on our platform as an accepted form of collateral, some of those vetting processes include who the people are, what’s the project all about? How decentralized is it, are individuals having control on the supply of the token? Does it have a fixed supply? Cryptographically, we can determine this just by looking at the blockchain and the token they’re using. Also, what have they done before, what’s their roadmap, are they delivering on it? So there are a number of sniff tests that really come into play there. And then additionally, we list tokens that will have a solid price feed. So it needs to have good representation in exchanges, either centralized exchanges or decentralized exchanges.
But in aggregate, there are a number of factors there that form out listing criteria. And it essentially sniffs out projects and ensures that when we do list something, it’s gone through those various sniff tests, due diligence. Our willing partners who haven’t necessarily achieved that scale as of yet, will we work with them and maintain dialogue so that we see how they’re progressing. And that helps also validate that they’re moving in the right direction and that they’re good actors. So yes, any industry has bad actors, and there are various ways to sniff that out.
Action and Ambition:
Absolutely. That was a great response. Thank you for answering that question. I do want to make sure that we share or where everybody can find you, and follow your brand. How can people actually sign up for your platform?
Brian Pasfield:
Well, fringe.fi, as in short for Fringe Finance, is the place to go. On the platform at the moment, you’ll find our whitepaper that describes our offering. You’ll find our links to our social media and our Medium articles and a whole host of information. Basically more information than anyone really should know is all available there.
We will be going live within several weeks on the mainnet. We have completed the audits for our smart contracts, and we’re finalizing the configuration and finalizing all the technical aspects to move that into the mainnet. We’re quite excited about this, and this is a key time for us and the beginning of our delivery of the roadmap.
Action and Ambition:
Well, congratulations on your launch, and thank you so much for coming on the Action & Ambition podcast. It was an honor and a pleasure to have you. I’m very excited for you and your business.
Brian Pasfield:
Thank you very much. It was great to chat with you.
About Fringe Finance
Fringe Finance is a decentralized money market designed to unlock the capital spread in crypto assets regardless of their capitalization and supported network. With a next-generation DeFi lending & borrowing ecosystem, Fringe aims to unlock the dormant capital from traditional financial markets and all-tier cryptocurrencies.
Read our whitepaper, join our Telegram or follow us on Twitter!
