NYDIG's Yan Zhao explains how the digital asset manager makes buying bitcoin more comfortable

When Yan Zhao began working at digital asset manager New York Digital Investment Group (NYDIG), she was surprised by how many people with similar professional backgrounds to hers were interested in bitcoin. 

“One of the things that really struck me when I joined NYDIG was the incredible amount of activity and interest and investment from institutional investors from across the spectrum, many of whom are not public and have not announced anything publicly. It’s really staggering to me,” she says.

A chief reason for NYDIG’s success convincing this kind of institution to buy into digital assets is that Zhao and her colleagues have spent years working not only with those kinds of companies but, in some cases, with those exact companies. 

She began her career as an equity swaps trader at Morgan Stanley at the height of the Global Financial Crisis on the same desk as Robert Gutmann, who went on to become NYDIG’s founder and CEO in 2017.

In 2012, she joined Guttman in founding Stone Ridge Asset Management, where she had focused on building reinsurance investment products for private investors.

Zhao then joined NYDIG as president in December of last year, after a spell running another Stone Ridge fintech spin-off named Flourish. On March 10, her former employer Morgan Stanley and a handful of major insurers — including New York Life and Mass Mutual — participated in a $200 million fundraise for NYDIG.

It was also NYDIG that helped broker MassMutual’s $100 million bitcoin investment last year, and the firm (alongside Galaxy Digital) has teamed up with Morgan Stanley to offer the bank’s high net worth clients access to bitcoin funds. 

NYDIG is now fast approaching $6 billion in assets under custody. Founder and chairman Ross Stevens recently predicted that the firm would hold $25 billion in bitcoin by year-end — a punchy projection that Zhao says is based on an “extremely strong pipeline” of conversations with institutions.

“Because we came from these backgrounds, we understand what these investors are looking for, and we can speak their language and we can structure things in ways that really make sense for each of them,” Zhao told The Block.

A focus on bitcoin

Day-to-day, in her role as president, Zhao runs the company’s Platform Solutions business — an API-driven toolkit that enables banks and other companies to embed bitcoin products into a retail offering.

She is also responsible for NYDIG’s long-term strategic vision, to which she brings historical perspective.

Zhao hails from Shanxi province in China, home to Pingyao, a UNESCO World Heritage center famed for its role in Chinese economic history. A keen reader of the history of the region, Zhao explains that Pingyao is the birthplace of paper money backed by silver deposited in a bank account.

“After 400 years of having paper money between the year 1,000 and year 1,400, paper money was so inflated that it was actually banned for another 400 years,” she adds.

Zhao has even enticed her mother — a medical professional — to take an interest in bitcoin. Shortly after joining NYDIG, Zhao’s got a text from her mother asking whether she knew about bitcoin’s supply limit of 21 million. It is in part due to its limited supply that many investors view bitcoin as a hedge against inflation.

“I was like, ‘Wow, mom, you should come work for us because you literally picked the most salient fact I think about the bitcoin investment thesis,’” says Zhao.

Today, during an era of unconventional expansionary monetary policy — a trend that has accelerated during the Covid-19 crisis — Zhao’s job is now to sell the same thesis that caught her mother’s eye to institutions eyeing a share in the crypto sector’s rapid growth.

The world of cryptocurrency can be a chaotic and risky one, with hundreds of different currencies trading hands in what in many cases resembles more of a casino game than an investment market. For that reason, it may be that NYDIG appeals to institutions as much for the things it eschews as for the things it does.

For example, the firm’s primary focus is on bitcoin. More specifically, when paid to advise clients on how to invest in crypto, NYDIG feels “best about and probably only feels good about advising people to invest in bitcoin,” Zhao says. She adds, though, that they can facilitate purchases of, say, Ether — if a client has already decided to buy it.

Then there is the issue of regulation. Anchorage, a rival custodian in crypto, recently won a federal bank charter from the Office of the Comptroller of the Currency. But NYDIG isn’t convinced by bank charters.

“One of the reasons that we’ve heard other folks have looked at banking charters is really just going through one set of applications and having one set of regulators,” Zhao says. Her firm doesn’t view that as necessary.

NYDIG won a BitLicense from the New York State Department of Financial Services [NYDFS] in November 2018 and has Money Transmitter Licenses (MTLs) in most states, according to Zhao.

“We like the rigor of working with all the states individually and we think that is a tried and proven path that has worked for many, many years — whereas an OCC bank charter like this is not necessarily that,” she said.

 “(The bank charter model) is very new and novel. I think for us clients will get a lot more comfort from using their tried-and-true regulatory framework.”

The company is similarly cautious about international expansion. Zhao says that while NYDIG is “absolutely thinking about and looking at opportunities to expand internationally,” great care is being taken to ensure that such a move doesn’t compromise its regulatory standards.

On the cybersecurity front, NYDIG isn’t yet sold on multi-party computation (MPC) technology as a means of securing crypto-assets — despite the endorsement of practitioners Fireblocks and Curv by big banks and PayPal, respectively.

“Our custody solution is 100% proprietary. We built it ourselves in-house. And it’s also 100% cold storage,” says Zhao, adding that NYDIG’s technological experts do not yet believe that the benefits of MPC outweigh the risks.

And you can forget about dealing with offshore, unregulated exchanges – which Zhao says the company doesn’t trade with as a rule.

This is not to suggest that NYDIG is a somehow conservative organization. It’s in bitcoin after all. It’s rolling out many new products (including recently filing for a bitcoin ETF), planning to hire a shed load of staff with some proceeds of the recent fundraise and considering more acquisitions after snapping up analytics startup Digital Assets Data in January.

But the company’s cautious, confined approach to facilitating crypto investments seems to be resonating with institutions — not to mention with Zhao’s mother. She hasn’t bought any bitcoin yet, but Zhao is helping her to decide which of NYDIG’s products to go with.