[00:00:01] Speaker A: You're listening to PTC point of view brought to you by preferred trust company, the preferred custodian for all alternative investments. We're here to provide retirement savers like you with the tools you need to succeed. Need a confidence boost when it comes to investing outside of the stock market? Do you want the power to build a tax sheltered nest egg that will last through your golden years? You've come to the right place. Turn up your speakers and turn off cruise control, because we're taking you on the alternate route to investing with your IRA.
[00:00:38] Speaker B: Hi.
[00:00:39] Speaker C: Thank you.
[00:00:40] Speaker B: How are you doing?
[00:00:41] Speaker C: I'm doing well. How about yourself?
[00:00:42] Speaker B: Why don't you introduce yourself to our listeners? Who are you? Where are you from? What are you doing? Just give us a quick synopsis.
[00:00:51] Speaker C: Sure. My name is Ivan Zhang. I'm CEO and co founder of Pennyworks. We're based off east coast in New Jersey, New York area. And what we're trying to do is provide a cash management alternative where we offer four to 6% yield on a daily liquid, no lockups investment opportunity. And we think that this is a good investment in our time, especially since recently we've had lots of difficulty with inflation.
[00:01:18] Speaker B: So how do we protect ourselves from inflation with your product?
[00:01:25] Speaker C: So very straightforward. A lot of folks typically have a meaningful amount of their money in savings and checking accounts. And ideally, you would hope that banks would be able to provide you some protection from inflation.
The Federal Reserve is raising rates, so maybe banks will pass that to you. Unfortunately, that's just not happening. And so what can you do about it? There's a lot of investment products out there that could generate higher yield for us. We're not trying to hit the ball on the park. What we're just trying to do is, hey, this is a meaningful offset to the impacts of inflation. High single digits inflation is definitely not good. That just means your food costs, gas costs going up a lot, and some of them a lot more, a lot faster than inflation. Right. Gas prices have almost doubled, I think, in California.
So our product is a fairly conservative way to say, hey, look, this is data liquid. If funds are not locked up, we're not trying to hit the ball out of park, but it is fairly safe because we only engage in over collateralized lending. Over collateralized lending essentially is one of the most conservative forms of lending, very similar to how a bank does a mortgage on a car or a house, except we use digital assets in the back end. And that gives us unique opportunities because digital assets are 24/7 traded liquidly, which means that we're able to get back our principle very quickly without having to go through a lot of our arduous process to collect.
[00:02:55] Speaker B: So is what you're doing considered Defi?
[00:02:58] Speaker C: Yes, defi, decentralized finance.
[00:03:01] Speaker B: Let's break that down a little bit. What does Defi mean?
[00:03:05] Speaker C: Defi so is really often said in context of related to traditional finance.
Decentralized finance is an alternative way to have financial products or financial activities that doesn't require a third party. So you can have a series of smart contracts, which are basically little businesses. You can think of it as ebays that just live on blockchain, and you can use them whenever you like. And they are able to basically serve as an escrow agent, they're able to serve as an accountant, they're able to serve as a custodian, and they'll be the ones managing the funds for you. And it only does it specifically based on the code that's written there. And it's decentralized in that sense, is that there's nobody controlling it. It's open source. Anybody can contribute to the code base and everybody can use it without any limits.
[00:04:03] Speaker B: That's interesting. So is it tied to cryptocurrency?
[00:04:10] Speaker C: So, decentralized finance is not specific to cryptocurrency. It's the idea that there's no third party or centralized custodian that's controlling the behavior of a contract. So any financial or business contract you have with somebody. So, for example, if you're doing regular business with a vendor, you have a contract. Nobody's really enforcing it. There's a piece of paper, but it's not really decentralized yet, because ideally, if it's a financial contract, somebody, let's say like a court or another legal jurisdiction or entity, is the one that is going to say, hey, look, party a has the rights to this, or party b has the rights to that. So who is the person that we're relying on to kind of be the judge in between these trades, between two parties? And in Defi, it just says there is nobody. It's just the code that sits on the blockchain that is the final decider of who gets what.
[00:05:06] Speaker B: So is it a smart contract because there is no overhead involved? Is it because there's no third parties involved? Why is it called a smart contract?
[00:05:16] Speaker C: It's kind of a misnomer, right? Smart almost implies that you have some kind of judgment. And the irony here is that it's actually just a regular contract, but it's a contract written in code instead of a legal document. So it doesn't require lawyers to interpret, it doesn't require judges to decide on things. It's actually just, hey, look, if a happened, then b happens. So it's actually a dumb contract. But the nice thing is that it's fully enforceable because the blockchain, which has a unique property, has immutable ledger, which means that all the transactions recorded, you cannot tamper with it, you cannot fake it. So you don't need to trust that somebody is administering the contract properly. You just have to read the code and understand what it's doing.
[00:06:02] Speaker B: Well, I like that you've taken the human element out of it, because when you take the human element out of it, there's less errors.
[00:06:09] Speaker C: That's right. There's less errors because there's less judgment. And you know, I think the best example for that is even if you go, you know, on an airplane, the pilot, even though he's flown thousands and thousands of times, they have a checklist, right? It's not like they don't know what the operations are, but when you do have a checklist, it takes the thinking out of the process. It takes a potential for error out of the process, and that's how you're able to essentially get, you know, airplanes reliability, how many years in operation with tiny falls.
[00:06:39] Speaker B: Interesting. And hopefully we're explaining it well enough that individuals are understanding what a smart contract really is because that is what's behind what people are investing with Pennyworks for. Is that correct?
[00:06:55] Speaker C: That's right. So what happens is we are not making judgment calls on borrowers. We're not saying, hey, look, this person's credit worthy. This person is not.
This person has a coherent argument as to why they need money. We don't have any of that. What we have is we have these marketplaces that are fundamentally smart contracts. They serve as an escrow agent. So that essentially somebody that wants to borrow a dollar of a us dollar would put in some collateral that's worth more than that, typically significantly more. So let's say $2 worth of bitcoin. And then that way they'll be able to say, hey, look, the smart contract, you have $1 that you want to borrow. You have $2 of collateral, you're good to go. Here, we release the funds for you. That's the role of the smart contract. The other role of the smart contract says, hey, look, let's say the price of bitcoin has fallen, which is something that's happened recently. It'll fall, let's say below $1.30 of value and say, well, look, this is not enough collateral to guarantee that we'll be able to preserve the loan. So we're going to take those bitcoins, sell it on the marketplace. Let's say we sell it for $1.29, pay back the loan to us, and then we should just keep you back to change.
[00:08:09] Speaker B: So there's a certain point where the smart contract becomes smart to get out of it.
[00:08:15] Speaker C: Well, it's also, again, it's not smart. It just says, we all agree that you have to have at least, let's say $1.30 for every dollar that you borrow. So if you don't have a dollar 30, then anybody can come in and pay back the funds on your behalf, take the collateral, sell it, liquidate it, and then any excess that remains, you get to get it back.
[00:08:39] Speaker B: How has what has happened in the digital currency world affected your business model so surprisingly?
[00:08:47] Speaker C: Very little. So, ironically, the recent turmoil is actually focused on a lot of traditional lenders that are focused on crypto. So thematically, they invest in crypto related companies. What we do is we leverage the blockchain technology to do all the operations of the lending, and that is fundamentally how we are able to reduce the cost and also to reduce the risk associated with lending. At case in .1 of the largest protocols that we use is called AavE, and it has at its peak decabilions of funds. And you can also see, because it's 100% transparent, all the bad loans on the platforms, and that amount is less than 0.2% of all outstanding value. So you can see that despite the massive volatility that we've experienced in crypto, that it's actually very difficult to be able to not call back the assets, sell in time and get back to principal.
[00:09:51] Speaker B: So let's walk through pennyworks.
[00:09:53] Speaker C: Sure.
[00:09:54] Speaker B: How do you become an investor?
[00:09:57] Speaker C: So to become an investor, it's very straightforward. We have a website you can go and it's a self service website you are able to sign up. We do KYC ML and accreditation as required by law. We are a reg d, five or six c security. So therefore this is something that not only you have to assert that you're a credit investor, but something that we have to check. We also are able to do it for a business entity with slightly different set of documents. And of course, we can also invest it. You can invest it through a self.
[00:10:29] Speaker B: Directed ira, gives you that tax deferred or tax free option.
[00:10:32] Speaker C: Right, exactly. So you can. And that's the beauty about DeFi and decentralized finance is that nobody is going to prevent you from doing this activity yourself. You can, and we actually show exactly which protocols we use. You can use that information and do it yourself, generate the same income, but you will not get the tax benefits because you're doing this on your own activity. It's not security, it's not in a qualified account. So you are actually learning less than you otherwise would. Furthermore, if you do this yourself, you do have to compute your own crypto taxes, and that is, if you don't like to do regular taxes, I would tell you crypto taxes are even worse.
[00:11:17] Speaker B: Absolutely. So with what you're doing, is there a way that you can ensure that there's no hacking or scam or online fraud associated with how you're generating this investment income? For the investment that I've made, yeah.
[00:11:34] Speaker C: So a lot of people, when you hear stories of people, like losses, they're regular. They're actually just scams or frauds. And so typically, people would like, for example, by accident, just send funds to the wrong address or things like that. In our platform, you do not interact with crypto at all. You don't have access to crypto. There's no way for you to buy, accidentally send, or transmit to anybody. We are the ones that are essentially administering the investment. We use enterprise grade Wallace solutions, and we've been in this space for essentially as long as the space has been around. And so what we pride ourselves in is our risk management and the scams. For example, you get an email and say, hey, look, can you click on this? And if you invest in that, you'll make a lot of money. Clearly, since the limited scope of the activities that we do, we're not subject to those kind of issues, because that doesn't apply to our business. But the other thing is, we do a lot of vetting in terms of individual protocols that we use, and we're not trying to make 50% per annum, but we just say, here is a safe and reliable alternative to a checking account, something that you can have so that you get a meaningful amount of income from that offset inflation, but will allow you to sleep at night.
[00:12:52] Speaker B: Yeah, this is definitely an offset to the inflation, because if you're going to keep your money sitting in a bank account, the interest that you're earning on, that certainly isn't between four and 6%. I think we would all agree there. So this is an alternative to parking your funds at a bank, sitting in a savings account, earning one 10th of 1% or maybe it's up to a quarter, I don't know. Depends on where you're banking, I guess. To really deploy those funds in a manner in which you're earning four to 6% with the same level of volatility, which is pretty low.
[00:13:27] Speaker C: Well, it's not even the same level of volatility, but same level of liquidity. You can get your funds back at any time. All right. That's the key part. So there are a lot of investments. Hey, you can put a CD, it's like three months, six months, nine months. You can invest in other things, a little bit less liquid, a little bit more yield. We want this to be as convenient as your checking or savings account. So you can fund it today, you can take it out tomorrow if you like, no problem.
[00:13:53] Speaker B: Okay. So would you consider that real time access to your investment?
[00:14:00] Speaker C: Yes. So, unfortunately, the slowest part of this entire operation is the traditional banking system. In the blockchain space, or investments, blocks are processed every 15 seconds, which means that we're capable to process anything within 15 seconds. And then once we have the funds in our bank account, to actually send the money to your bank account, is it through Ach or is it through a check or even through wires? Just takes hours to days.
[00:14:26] Speaker B: It's crazy, isn't it?
[00:14:27] Speaker C: That's right.
[00:14:28] Speaker B: That our banking system is so far behind the technology that's out there, it's just, it's mind boggling. It's mind boggling. You really think about it. So there certainly is a way to optimize your investments that you have in your retirement account. And maybe this is a lesson for all of us out there that are sitting with our qualified funds, our IRA cash just sitting, too.
[00:14:48] Speaker C: That's right.
[00:14:48] Speaker B: Because we have to realize that a custodian in a bank really fall under the same set of regulations. Right, banking regulations. So if you're going to leave your money parked at a custodian or a bank, they're going to invest your funds to make money off of your funds while you're making virtually nothing.
[00:15:05] Speaker C: That's right.
[00:15:06] Speaker B: So this may be a really good option for individuals to consider that have cash sitting in their IRA accounts, because this four to 6% is far greater than earning, you know, maybe a six month cd rate or whatever they're generating as far as a return to you on your funds and say you're just waiting for your next investment opportunity and it's six months down the road. If this truly is that real time access, barring moving the funds around to the bank. This could be a short term home, it could be a long term home. I know you guys have not been in operations for a very long time, but how do you anticipate individuals utilizing this investment vehicle? Is it a set it and forget it, or is it a short term bridge before their next investment? How do you see people using your software?
[00:15:57] Speaker C: So I think it's actually very analogous to savings account. So a lot of people, they have a savings account, and features of a savings account and checking are essentially indistinguishable. But mentally, there is a separation. So there's examples for people. Let's say I'm saving for a car, so $5,000 in the savings account for card. And then meanwhile, I also have credit card debt and I'm paying like 50% on it. And if some people come in, well, why don't you just use that money to pay back the credit card debt then? Now you have less debt and you could just pay back that savings account again once you have it. And part of the issue is a tool for self control. Right. Sometimes you don't trust yourself. That's like, you know what? Once I take that money out of account, am I actually going to be able to put it back?
[00:16:44] Speaker B: Yeah.
[00:16:44] Speaker C: Right?
[00:16:44] Speaker B: Yeah.
[00:16:45] Speaker C: And so logically, you want to think about this as some people use it as a savings account. So I'm going to have a very small percentage of my portfolio in there as a savings account. It doesn't have to do anything. It doesn't have to be transactional either. So it's not a checking account, but it just sits there because maybe I'm saving for something, maybe I'm waiting for investment opportunity. And what we see in practice is that people are more concerned about the ability to pull the money out at any time less than the fact they'll actually do this on a frequently basis. Right. So it's not like they're pulling in money from, you know, in ten days and putting back money and so, so forth. It's just very important for them to make sure that that funds is available if something happens. Yeah, maybe they need to replace a flat tire, who knows?
[00:17:29] Speaker B: Right?
[00:17:29] Speaker C: And so that's the optionality that you're giving away when you invest in something that's less liquid. So in financial terms, that actually has value. Any optionality you give away, are you getting paid for it?
[00:17:41] Speaker B: That's the question, yes.
[00:17:42] Speaker C: Right. And then what we're trying to say.
[00:17:43] Speaker B: Is, yes, you are.
[00:17:45] Speaker C: You are getting paid for it, or you should get paid for it. And if you're not, please consider something like a decentralized lending or other alternatives that would keep you cash liquid while earning some income.
[00:17:57] Speaker B: Yeah. So let's do a quick comparison here. So, you know, when I have my bank account, I can log into my bank account every day. I can see what's going on in my bank account. How does Pennyworks provide me access to be able to view what's going on with my investment?
[00:18:11] Speaker C: You can go on pennyworks.com. so because of the nature of our investment, you get paid every day. So you need a place to see how much you can pay. If you go on our site, you'll be able to see your interest accruing essentially on a daily basis. It becomes capitalized so that you start earning interest on interest the next day.
[00:18:28] Speaker B: Yeah.
[00:18:29] Speaker C: And also on our side, you can see how much you've earned interest day. So that will tick up every couple seconds. So you can see just, you know, down to the, the second how much you're earning. But essentially, we want to keep our product as simple as possible. We are not a bank. We're not trying to be a bank. We want you to be able to use our interface very simply. You can see the statements, but beyond that, that is pretty much it.
[00:18:53] Speaker B: Well, I can tell you when I log into my bank, I don't see my earnings every second.
[00:18:58] Speaker C: Well, there you go. Maybe better than the bank then.
[00:19:01] Speaker B: Yeah, maybe. Definitely something that individuals should look into and consider. I know I got quite the education today on it myself, so I truly.
[00:19:10] Speaker A: Appreciate that you're listening to PTC point of view, brought to you by preferred trust company.
[00:19:21] Speaker B: I'm going to switch gears a little bit on you.
[00:19:23] Speaker C: Sure.
[00:19:23] Speaker B: I think we've hammered down on what you guys do and how you operate and what the purpose is and the risk tolerance and all of those things. So hopefully our listeners have been able to gather some of that information. We'll utilize that to do a little bit more research about Pennyworks. But do you mind if I take a minute? Since you've been in the industry as long as you have, what is your opinion on what we are seeing right now as it pertains to cryptocurrency?
Why has it become volatile right now?
[00:19:58] Speaker C: I mean, I think right now it's a bit unfortunate. Right. You have some early innovators in this space that are essentially young companies. And the challenges you're having right now, for example, with FTX is very basic lack of internal controls. So it's not specific to crypto, but it's just that they are running a crypto exchange, and because of that, a lot of people are impacted. So some say over a million accounts. So in the near term, there's definitely challenges in terms of the perception that people have with crypto or blockchain technology, or maybe they're just bundling the whole thing together, right? Yeah, if you think about it, maybe ten years or 15 years ago, in the time when we had the Internet at the beginning. Oh, yeah, that's how people get scammed. Right? Because the Internet is not safe. You wouldn't want to move your money. With the Internet, it's easy to lose information or get hacked. Now they're saying the same thing with blockchain technology. So crypto doesn't fundamentally make people more or less likely to get hacked. Right. You can always send your money to the wrong place, and that happens with cash and checks every day as well. But in terms of the ecosystem, because we're able to enforce a lot of operational and perfunctory financial operations, you can imagine that that should dramatically reduce the cost of providing those financial services over the long term.
[00:21:16] Speaker B: Yes.
[00:21:16] Speaker C: The challenge is that since financial services are typically highly embedded into a regulated activity within just about any, you know, developed country, that the take up is much slower than the process it would otherwise be for the Internet. Because the Internet, the moment you connect to the Internet, you can build your website. There's very little regulations or limitations what you can do there, as opposed to, because of the blockchain technology, you're able to move value. Right. So the Internet moves data, blockchain, news value. Unfortunately, in the United States, when you're moving value, that falls under the domain of securities law. And so the way that the regulators in United States view this is a very binary, this is a security, and then this is not a security. But because we're operating a blockchain and it's just fully programmable, you can create a continuum of features that are more or less security like. And because these are programs, you can change them over time so they can be more or less secure like over time.
[00:22:17] Speaker B: Yeah.
[00:22:17] Speaker C: So you can see that there's just no good way to deal with that. Even if you had an ability to label things as a security or non security in real time, which we do not. So will we eventually get there? The hope is yes. And maybe it's another country that develops more, you know, innovative or flexible regulation, or another case in point is bitcoin spot ETF's.
I think a lot of custodians are able to hold bitcoin for their customers in cold storage or a very conservative way.
But if somebody wants to just buy bitcoin on their brokerage, ideally you wouldn't have the ETF. Oh, look, what does the company do? It just buys bitcoin and holds it. We do not have that in the United States. It's actually not legal to have bitcoin spot ETF. We have one where you can buy bitcoin futures, which is the intermediate way to get that exposure. But when you do, that introduces a lot more costs, because in the futures market there's funding costs, and that actually makes it so that the total return that you get from holding that is worse than just holding bitcoin. So will there be a day where we'll see some of these basic financial components that already exist in other countries? I should hope so.
[00:23:35] Speaker B: Hope so too. I hope so too. It's time for us.
[00:23:39] Speaker C: Yes, we're behind, and that's why we're trying to do our part to make this more broadly available, make people understand the benefits of it. It's not all just a scam and what we can do to build the next phase of innovation.
[00:23:53] Speaker B: I can't agree more. Let's see here. What do you think is next for centralized bank policy?
[00:24:00] Speaker C: I think that's a very good one. I actually talk about this for delve into on a regular basis, because this is the time where in the phase of the economy right now, where we are at a pivotal phase. So the Fed hike started hiking aggressively in the beginning of the year. And the expectation is that they want to have a very clear message that they're bringing down inflation. So regardless of what they do, they have to have a very harsh rhetoric to go along with it. So that people have a credible belief that the Fed's primary priority is to reduce inflation so that it comes back down 2%. Having said that, you can't just do this single activity by hiking three to 4% without hurting a lot of businesses. So mortgages rate have peaked above 7% at some point. A lot of the metrics that we see in terms of economic activity is coming down very quickly, which means that people are now concerned whether the Fed will overshoot.
And it's reasonable that they have that concern, because when inflation was rearing up its head last year, the Fed was helped. This is going to be transitory, trust me, it's going to be okay.
If it didn't work out the first time, and that was not even that long ago.
People are probably also doubting their ability to make sure that they adjust their policy fast enough for soft landing. So I think the market expectation is for at least another hike, 50 basis point, maybe another hike there after 25 basis points, or maybe they'll stay flat. So that has less certainty. But the idea is that they've clearly messaged since the last hike in November that they are going to be much more data dependent, and the markets took that as positive, which means at some point they will have to stop, whether that is within three months or within six months. I think that's still up in the air. But if you think about it in terms of the more medium or longer term view, that means that we will have a clear path forward after that. And that might be that rates will stabilize. It might mean that, okay, rates may be not coming down to 3% anymore, but at least we know that we'll have a stable environment in which we operate with, and that will be very important for businesses. Anything where you can give more security and stability, that's going to help business grow faster.
[00:26:26] Speaker B: Absolutely.
[00:26:27] Speaker C: I think one thing that people haven't talked about that's a little bit less economic, but maybe more developing slowly is the changing relationship between the advanced economies and trade ties.
So some of this aspect of it, you can already see the United States have imposed limits on transferring technology to China. And so over time, you can imagine we receive a lot of benefit from globalization, and that actually translates to a fair amount of deflation. Right. Because things kept getting cheaper and cheaper. And so that has been a tailwind for us for the last 20 or 30 years. So it's not an immediate concern. But you can see that in the next 20 to 30 years, that's no longer going to be the case. Increasing balkanization of these high end technologies and trade barriers will make things cost more. So, independent of this recent battery inflation that we're seeing, which we're fighting with higher interest rates, it's possible that we may have longer term, more higher levels of sustained inflation. So maybe not 2%, but maybe closer to three or 4%. Now, that's up in the air, how we deal with it, and it's more a long term consideration, but that should probably factor in for our long term investors that are planning for their retirement, that everyone does expect this recent bout to come out. But what's going to look like in five years, ten years? And so there might be other things you can do to insulate yourself from some of those shocks.
[00:28:00] Speaker B: It sounds like you have found a risk averse way to utilize the mechanisms that are out there and provide an investment vehicle, a stable investment vehicle for individuals that are, you know, sitting on some cash.
[00:28:14] Speaker C: Yeah. So we're trying to be the first step, you know, a very conservative step out.
[00:28:19] Speaker B: Yeah, it's very conservative.
[00:28:20] Speaker C: And the hope is that in the future, more and more of these steps will be built out and everyone will have a suite of these options to choose from.
[00:28:28] Speaker B: Yeah. Well, thank you so much. I really appreciate your time today and educating us about something many of our listeners probably don't know anything about, but now they do. So thank you very much for your time and being with us today, and hopefully we'll have you on again.
[00:28:43] Speaker C: Thank you very much for having me. Pleasure.
[00:28:45] Speaker B: Thank you.
[00:28:46] Speaker A: Thanks for joining us for another episode of PTC, point of view where retirement savers meet alternative investments. Know someone who's struggling with their retirement strategy? Tell them about our show. Can't wait for the next next episode. To learn more, visit our
[email protected], or give us a call at 888992.
