The Next Frontier of Finance with Roberto Sallouti* of BTG Pactual

Speaker 1 (00:00):
And so, without further ado, it is my pleasure to be able to introduce our chairman and CEO Jeremy Aire and Roberto Saluti, the CEO of BTGP.

Speaker 2 (00:18):
Thank you. Thank you.

Jeremy Allaire (00:22):
All right. How are you?

Roberto Sallouti (00:25):
Very good. I'm very happy. Heath finally has settled the discussion once and for all

Jeremy Allaire (00:30):
He has. And he's, he's, he's got the authority to do it.

Roberto Sallouti (00:34):
And, and ko, we might be the third largest fan base, not fourth, 'cause all the new kids are for meetings. He's now, as you can expect. So we're now the third. But clearly for the target market of Circle, we're definitely probably the first <laugh>

Jeremy Allaire (00:50):
<laugh>.

Jeremy Allaire (00:54):
Um, I know, uh, our partnership's been referenced today. Uh, I talked about it this morning. Uh, it's a, you know, a critical strategic partnership for, for Circle. Um, but, but with this conversation, uh, we, we will talk a little bit about that. But I, I thought maybe to start, it'd be really interesting to hear you just share your philosophy about, uh, innovation. And, uh, you know, as has been noted, you've been pushing in this area for longer than most. You've been taking risks, uh, and, and building technology longer than most. What, what galvanized that? And you're as the leader, uh, on one of the, you know, in, in a, a renowned partnership. Uh, how, how, walk us through, how, how you come to that, how you came to that and, and making those decisions to get into this, this technical, uh, innovation field.

Roberto Sallouti (01:56):
Thanks, Jeremy. So first of all, it's a huge pleasure to be here with you. It's a huge pleasure to be partnering with Circle. Uh, we're very optimistic. And the truth is, this is just, last year was our 40th anniversary. And I can say very clearly that for the first 30 years of our lives, we were very analogic. Uh, technology for us was important, but it was a support function. But then we saw how the world was evolving. And at one point in our life, we always regretted not having 5,000 branches and not having retail distribution. But then we had the whole digital revolution and smartphones becoming common, and the Brazilian Central Bank regulated the digital opening of accounts. And then we said, well, thank God we don't have 5,000 branches. This might be just a breakthrough, the opportunity that we're looking for, to close a gap that we've always had.

Roberto Sallouti (02:55):
But then at that point, this was 2000, between 2014 and 16, we used to hire a hundred, 150, 50 people a year, and we go to engineering, business economic schools, throw 150 people in the back office, see who survived. And that was it. That was not gonna work going forward. So we had to completely change our frame of mind, the talent we recruited, how we put all the people who understood technology at the center of decision. And this is what has been completely transformational for our institution. In 10 years, we went from having half a percent of our deposits being retail based, to close to 34% of them being retail based. This is bigger than some of the ba the banks that have this huge network of branches. Uh, the development of capital markets and the how you're able to distribute to high income retails across the board and the depth of crowd capital markets has been transformational for Brazil and for, for our business.

Roberto Sallouti (04:05):
So we went along those lines and we started understanding digitalization, how it worked. And, and for us, this was all new, right? I, I'm an economist. I used to be a fixed income trader. I knew nothing about technology, digital assets. And one day they came to explain to me Bitcoin, and this was in 2014 in the World Cup, right? There were some, some smart guys from Silicon Valley here. And one of my friends said, you have to meet this guy. And he tried to, Bitcoin had collapsed 50% from a thousand to 500. And the guy tried to convince says yes, <laugh> knew. And he tried to convince me that was, this was in a once in a lifetime opportunity. I took my economist with me, and of course, we did nothing right? <laugh>. So, but that put a, that, that convinced me that there's something interesting here.

Roberto Sallouti (05:02):
And we started traveling a lot. And I started, I got to meet some, fortunately, I, I got on the board of Mercado, who, Marcos is a, is actually, we went to school together. So he used to be my, my Hallmates were very good friends from, from college. And he invited me to the board of Mercado. And I said, Marcos, I know nothing of technology. He said, don't worry, we don't want you for that. We want you, because you know about Brazil. I said, well then deal, because maybe I'll learn something about this. And I met very interesting people there, very interesting people. And when I talked to these people, I said, wow, I really need to broaden my mind. Right? And I remember having one conversation, uh, with, with one of these, these, this, this person that I really, really admire and said, listen, either you wake up or someday you're gonna be here, and all the IPOs and all the DCM transactions you do, they're gonna be done via token offerings, and you're gonna have no idea what's happening.

Roberto Sallouti (06:02):
And I said, oh my God, this is true. So then Portillo had been bothering me for some time that he wanted to set up the digital assets area. I called him, I said, okay, Portillo, you have your r and d budget. Go for it. Figure it out. Understand it. Let's be a player. Let's make sure we understand, because I'm not sure how much Bitcoin is worth, but I'm convinced that there's a huge chance that the railways of the futures is of the future, of the financial system will be blockchain, this technology and the consequences. And it's very fortunate for us, because today we have a research and development area, which not only puts us at the forefront of what's going on, but is also very profitable and gives great products to our clients.

Jeremy Allaire (06:46):
That's amazing. That's amazing. Um, I, I, I'm interested maybe building off of that question, um, as you've built a client base in digital assets, um, and I think many, maybe in the room here as well, um, and you've thought about, uh, this convergence of, uh, you know, you just talked about it, right? Eventually, right? This will be the rails, uh, but this convergence of, you know, fiat, digital dollars, stable coins, blockchains, um, talk about from your perspective, why is that important? And we'll get to the partnership in, in a moment, but why is that so important? Um, what, what role do you see that playing, uh, you know, here in Brazil,

Roberto Sallouti (07:44):
Just as they were saying in the previous panel, it's so seamless to do a transaction using a stable coin that it's even embarrassing to our system. Mm-Hmm. <affirmative>. And when you think about it, and when you, when every time that I go, you fly into Rio, when you fly into, into the local airport, you, you fly by something called the, the fiscal island, Ilia Fi. And you think that there was this little island that all the trade, all the commerce that happened in the 18 hundreds in Brazil had to go through that little house. It's impossible. Today, it's more or less the same thing that I see with this technology. There are many more people that are much smarter than me, much more knowledgeable than me. Fortunately, my job now is just to show the direction. And I clearly think the wind is blowing this way.

Roberto Sallouti (08:32):
My job is to get the people that understand the currency, understand the fundamentals, and make sure we're on top of that. And this is where, let, I mean, if you ask me exactly how is it gonna be, what I don't know, right? Mm-Hmm. <affirmative>, I'm a fixed income trader. <laugh>, I, when I, when I was happy, that's what I did with my, when I was a happy guy, that's what I did with my life. But for me, this is where the wind is blowing. And this is, we need to, to, to concentrate to make sure that we don't lose the next strength. That there's a, a huge possibility, and I'm quite convinced will happen in fin in the financial infrastructure, in the financial industry.

Jeremy Allaire (09:07):
Yeah, that makes sense. Um, in terms of, you know, the, the circle and, and BTG partnership, right? We kind of choose each other for these things. Um, and, uh, clearly, you know, the, the capability of, of your firm, uh, the commitment to this space, uh, the very strong, you know, focus on doing things the right way. All these are are critical things. But what, as, as you, as an executive leadership team, thought about who to work with, uh, how, how to build a partnership, what was it about Circle that got you guys to come and do this?

Roberto Sallouti (09:50):
So, we're regulated not only in Brazil, but we're regulated across Latin America in Argentina, Chile, Columbia, Peru, Mexico. We have two now going to four regulators in the US We have three different regulators in Europe. Four if include London. So we are heavily regulated. So when choosing a partner, we could not choose the wrong partner. And why did we choose Circle to do, to take this step? And why are we comfortable announcing this publicly, globally? One circle is extremely focused on making, doing the right thing. You're regulated, you're transparent, you're audit audited, you have a robust balance sheet. The stable currency is really stable. So we're comfortable that our clients will be owning these because we will giving them access, and that's not gonna be an issue. Second thing, you guys have very robust and continue investing, uh, a lot of resources in technology. So we think we're gonna have state of the art technology to offer our clients.

Roberto Sallouti (11:09):
And third, and which I think is the most important, and was what they were talking here previously, the fi the market is innovation, is innovating in front of regulation. And this is true about ai, this is true about social media, and this is true about stable currencies. And the fact that Circle is willing to work in a transparent and in a partnership with the global regulators makes us very comfortable, because that's exactly the same posture we want to have. So I think when you put these three things, all the state, ofthe, art, technology, robustness in, in the regular, in your regulation, audit, balance sheet, and the fact that you want to continue advancing this way, and you don't want to be the rebel in the system, and this is what makes us very comfortable in announcing the partnership. And I'll throw it back to you. Why would, why would you be so comfortable in doing it with BTG?

Jeremy Allaire (12:09):
It's a great question, <laugh>. Uh, so I mean, look, uh, when, when, when we, we look at the global expansion of the company as a whole, and, and we're, we're, um, you know, the demand for digital dollars, the demand for stable coins, the demand for this infrastructure is highly global. Um, and so we are, you know, trying to find in strategic markets all around the world, the critical banking partners, the critical distribution partners that are gonna help bring this to mainstream scale. So we're doing that in different places. And when we looked at this is, you know, last year when we looked at what are the biggest market opportunities, where is the demand for this already high and likely to be very significant in the future. Uh, Brazil was at the top of the list. Um, and, um, and so we, I think clearly wanted to find, uh, strategic partners who, uh, had a, a, a strong infrastructure, institutional infrastructure, which is really key.

Jeremy Allaire (13:19):
We're, um, we're an institutional focused company, like we're a wholesale platform company. And so finding companies that were very, very focused on that institutional footprint was key. And your position in that market as an investment bank, as a, a, a, as a asset management, uh, firm as well. Um, and, and everything that you do with major corporate entities here, it was very clearly, um, that strong focus on institutional and infrastructure. So that's critical. The second is, um, you know, you're innovating, you're at the forefront of building, uh, digital asset infrastructure, building digital asset related products, uh, collaborating with the central bank and thinking about the future of this technology. Uh, and so that's really important. Um, and, and I think, um, you know, be, this is an industry where everything is not defined, just like you said, ai, it's not defined crypto, blockchain, you know, others, it's not defined, but you're leaning in and you're willing to, you know, really work on figuring it out.

Jeremy Allaire (14:35):
Uh, and we need partners like that. We need partners that are constantly learning and, and trying to figure it out, and are, are leaning in with regulators not afraid, right? So I think that's huge in your commitment, uh, uh, to, to, uh, to, to that space. And, and then I think also, um, you know, when you think about partnerships, you get to know people. Uh, you get to know leaders, you get to know the people who are doing the work on the ground, who are making things possible. And I think the more time that we spent with the BTG, uh, team, from leadership, yourself and others, in your partnership down, it was very clear that this is a firm that has a lot of shared values, that has a, a lot of, uh, uh, shared ethics and responsibility. And that's really important from my perspective. So we look for that in, in partners, and I think we found, you know, all all of those things, uh, with, with BTG. So we're thrilled, uh, we're thrilled, uh, w uh, with, with what we've been able to put together.

Roberto Sallouti (15:38):
And, and I'm, I'm quite excited because I think it will be quite seamless for both our corporate, our institutional, and our wealth management and high income CL clients, because it, it's, it goes quite well with our banking as a service offering, with our custody offering, with our fund services offering. Uh, it, it fits very well, right? It's our cash management. So I, I'm quite, I'm also very happy that I think it will be a very seamless, uh, integration of, of putting USDC in our product platform Yeah. To our different distribution channels.

Jeremy Allaire (16:15):
Let's do it. <laugh>,

Roberto Sallouti (16:17):
<laugh>.

Jeremy Allaire (16:18):
Um, no, it's, it's, uh, so I, I think natural foundation for, for, uh, for, for a good partnership, um, I thought it might be interesting to, to maybe zoom out a little bit. And, uh, you know, as, as I was sharing, like, we see, uh, this huge market here, uh, this innovative market, uh, that's, that's already advancing in different ways. Um, but we've had, you know, over the past 20 years this rise of Brazil. And, um, and I think, uh, yeah, I think it's very easy when you're in, you're looking inward to look at your problems. But I think I'm from the outside, I'm looking from the outside, and I see incredible, uh, incredible growth and innovation opportunity, uh, and the like. Um, I'm interested in, given your role as a leader in the financial system here in Brazil, um, I'm interested to hear you talk about the, the possibilities here for Brazil away from this, this, the technology or innovation in the financial system, but more broadly, your macro view, uh, and and, and what you see over the next decade, uh, for this country and its role in the global economy.

Roberto Sallouti (17:38):
Yeah, I think, I think you have the benefit of not having to read the Brazilian newspaper every day, <laugh>, because the amount of noise there,

Jeremy Allaire (17:45):
We have a lot of noise back home too.

Roberto Sallouti (17:48):
The noise is huge. So it's always important when you're gonna take an entrepreneurial approach or a business approach, you have to take, take a step back and look at the facts. So let's look at Brazil in the last 30 years, when I started working, it was the first day of the hell plan. We were trying to combat hyperinflation. We had a current account deficit problem. I remember that we used to make the calculations in the trading desk of how many weeks we had until we either defaulted or devalued. We had a fiscal challenge, and we had a huge product productivity challenge of these four problems, two we've addressed, and two we have not addressed. So inflation, yeah, we can debate, uh, because the expectations are not anchored because we're at 3.9 and not at three. I'm so glad we're having this discussion. Yeah, the first, the first day I was, I sat on the train desk, inflation was 80% a month.

Roberto Sallouti (18:42):
So the fact that we're having this discussion and that there's a huge fuss about it, it's, it's very, very positive on the current current account issue, we still have to deal day to day. All of you have to deal with all this effects. Regulat regulation that's outdated from the time that we had financial repression just as Argentina has today, right? Today, last year, we had a hundred billion dollars trade surplus. This is unthinkable of 30 years ago. We don't have a current account deficit problem. We have FDI, we have portfolio investments going both ways. Actually, right now, our investment platforms are so sophisticated that if Brazil starts doing the wrong thing, the market thermometer will accuse it and people will start investing offshore. And there's nothing better to keep our government disciplined than the market thermometer. So that is working. And the fact that we're integrated globally and here we're here a circle.

Roberto Sallouti (19:41):
We're talking about improving the, the FX flows. We're integrated globally, uh, on the fiscal side. We still don't want to do our, do our homework. We want to tax and spend. It's what we chose as a democracy. We can't complain, but that's what we have to pay attention to. I don't believe that will increase potential DDP unfortunately, fortunately, we have some fat to burn from the reforms we did in the previous, let's say six, seven years. But we do have a challenge there fiscally. And if I was sitting there, I think we should go and try to get the investment grade as fast as possible. That would be the best thing for our business. I think we'll eventually have that discussion. Whoever is the next government can be the same government or a new government, because I think society is maturing to that. And I think the most important thing, and probably the most frustrating one, both as a, as an entrepreneur, but also as a citizen, is that we have not worked on productivity.

Roberto Sallouti (20:44):
Our education levels of basic education are so embarrassing. Uh, yes, we, we, we are more institutionalized. We have rule of law, we have good regulation, probably compared to emerging markets, we're probably on the top side. But listen, we want to be in the top leagues. We should compare ourselves with the OECD mm-Hmm, <affirmative>, right? We want to have judicial security, public security, tax security on par with the most developed economies in the world. Why do we want to compare ourselves with the B series? If we can play in the play in the Champions League, there's nothing preventing us from playing in the Champions League other than ourselves. So I think that as a society, we should, we should try to push this, right? We should try to push that. We want to have the highest standards because this will bring investment, this will bring productivity, and these are the two places that we are. But having said that, where are we today?

Roberto Sallouti (21:44):
We are an agricultural powerhouse, a mineral powerhouse, an ener, an energy, both clean and fossil fuel, uh, powerhouse. We have a 200 million people of inter internal market full of in inefficiencies. And we have a socially mobile transparent, uh, society. So I think there are a ton of opportunities right now for all of us. Brazil is so complex to deal with that for us local entrepreneurs, we probably have less competition than we should. That means we probably have higher returns on our investments than we should. I see this as an opportunity, not a problem. The fact that we're here, we're gonna live here, and we know how to deal with it. This is an opportunity. We could see this as a problem and keep just complaining. I see it as an opportunity on the business side, and as a citizen, I'm gonna do everything I can to change that, right?

Roberto Sallouti (22:37):
Even though that will probably affect the returns on the business side. But if we want to have a better country, that's what I think we all should do. So if you look at us, we continue to invest in Brazil, not only in in the bank, but we also have investments in the real economy and digital infrastructure and energy. I think there are huge opportunities there for Brazil. I think you just have to know that fortunately or unfortunately, Brazil will be volatile since you know it's gonna be volatile, use it in your favor, right? You know, it's gonna happen. So whenever things, things think that they're gonna go Argentina, you go along because it will not go in Argentina Whenever things are gonna become Sweden. We're not gonna become Sweden. You can probably go short. So that, that, that's the way we play it. <laugh>.

Jeremy Allaire (23:24):
So I have a follow up question, um, which is, you know, we have, uh, we have some of these mega, mega trends. Um, AI is obviously probably the biggest mega trend of the moment. Um, and you know, the, uh, we were talking beforehand a little bit, a little bit about it, but it seems like, you know, as people talk about ai, the discussion is about how the AI infrastructure is going to potentially consume multiples of the current amount of energy that's supplied into the world. And so we, we have a, that's a huge opportunity, right? How, how can Brazil take advantage of, of, of, of that? How can Brazil be part of the energy infrastructure of ai?

Roberto Sallouti (24:24):
Yeah, we, we hear a lot of people talking about the potential exports of green hydrogen. I actually think there's an easier way for us to export clean energy in a technology that has already exists. And, and it already is already competitive. The truth is, you cannot have more data centers in West Virginia, right? Those energy plans running on coal are at their limit, and you don't want to continue burning coal to have all the data, data analysis that you need. Brazil, I think is in a perfect point because especially with ai, and when you teach the models, you don't, you don't need latency. But we have places in the country which has 16 hours of sun, a a day sun, 300 days a year when there's no sun, there's wind. We have a transmission grid that connects the whole system. So you can use the hydro as, as the battery to compensate when you don't have purely renewable. And we could become, especially for the training of the, the AI models, a data center hub. So we, we we're working on that. We we're trying to help the, the country go this way. We think it can be, uh, quite promising. And I think this is just one of these potentials that you have to just take a step back and think outside the Yeah. Step back and think outside with the box. Yeah. It's one of the, one of the many opportunities that Brazil offers.

Jeremy Allaire (25:50):
Yeah, it's been fascinating to see the, this, the, the whole, all of the infrastructure that is now going into building out AI and all of the minerals that are going into the chips, the chips that are being, the distribution of where chips will be built and all of the strategic political implications, the energy demands. It really is a commodity powered business, even though it's about math and, and people who are, who are, uh, fundamentally doing large scale, uh, compute. But at the core, it's yet again, a commodity energy, minerals driven infrastructure problem for the whole world.

Roberto Sallouti (26:35):
Yeah. I, I completely agree. And, and this is where I think I'm a bit frustrated as, as a citizen, because I don't see government policies trying to benefit from the near shoring and, and all these opportunities which were there and we're renewing incentives for the automobile industry. Come on, that's outdated. This is thinking 30 years ago. These are, unfortunately, we don't have an educational level to be driving the knowledge based economy, but I think we can play a derivative to that in, in the businesses that you mentioned.

Jeremy Allaire (27:07):
Yeah. Um, amazing. So maybe my, my last question and, and feel free to throw anything back at me as well, but, um, uh, you know, if you, if you had to imagine where the financial system could be in five or 10 years, uh, through, uh, technology innovation, through the integration of the internet into all of this, like, what's, what does that look like? How is it better You're in the capital markets business? Are capital markets better? And why?

Roberto Sallouti (27:44):
I'm not qualified to answer that question. I'm gonna ask it to you, <laugh>. I'm still an analog trader.

Jeremy Allaire (27:51):
Okay. Oh, that's, that's too easy. <laugh>. Uh, okay. I'll give you my view. Uh, so I think, um, at a very high level, if you, if you look at where we are in history, uh, and the history of the internet, I think we can draw a lot of lessons, comparable lessons, um, when, when the internet basically made it possible through the use of these open networks and open protocols to allow for anyone to publish software to a web browser, the amount of software published in the world exploded when the marginal cost of storing and moving data went to zero. The amount of data that was published in exchange in the world million X from where it was when you had open networks for communications, electronic communications that were on the internet through open software, the amount of communications in the world, million X. So you had these huge things that happened.

Jeremy Allaire (28:54):
Um, and all of those had some things in common open internet infrastructure, uh, commoditization of, of, of, of the actual infrastructure and rails that it ran on software powered so that anyone with an idea could write a piece of software to connect to this and amplify and magnify the impacts of it. And I see, I see the same thing happening here and in the financial system. And we're approaching a period in the next few years where the kind of the marginal cost of storing and moving value in the whole world will go to zero. And, and what that will mean is that the, the, the velocity and volume of economic transactions that can happen in the world will explode. And we've never, we, we will, we will look back, sort of like we look back on the analog world of communications or software that you had to install from a CD or, you know, so many things. Um, we will look back and, and say, my God. And, and so I, I believe, and this was talked about by Heath, uh, Bert on the last session, which is, um, this increasing economic velocity will contribute to global GDP growth. I think it can just

Roberto Sallouti (30:14):
The efficiencies that generates,

Jeremy Allaire (30:16):
Right? Yeah. And, and, and in a sense, right, the, the, uh, the, the, the more economic transactions that happen, the more economic activity there is, and the more economic activity there is, the more that that's creating economic value and value creation. So I think, um, the part that, if I had to say five to 10 years from now, so I think that ubiquity of, of value exchange will just be, we'll take it for granted, um, in, in on a global scale that knows no boundaries. Um, but I think the thing that is in some ways the most interesting is we've never had money be a programmable part of the internet. We've never had the ability to take economic relationships, economic contracts, whether those are in commerce or in finance or other. We've never had the ability for those to, to be, you know, run in an open global way and, and to connect economic entities around the world through that.

Jeremy Allaire (31:17):
We've never had anything like that. And so, just like when the iPhone came out, no one could have predicted the millions and millions of different apps that it unleashed and the transformation that that unleashed. No one could have imagined that. And I think in five to 10 years, no one will have been able to imagine all of the ways in which programmable money will have radically changed the utility of money in society and the economy. And so, um, uh, as one of your colleagues actually said, I have high conviction about what the future will, will look like, it's exactly how that is executed that we, we have to kind of work on together. So on, on that note, we've built our partnership. We're at the ground floor, we're putting our infrastructures together, we're putting the Brazilian financial system infrastructure together with stable coins and blockchains. Let's see what we can build.

Roberto Sallouti (32:11):
Yeah. Looking forward to that. And I think actually part of the reason the Central bank is launching drex is exactly because of what you said. Yeah,

Jeremy Allaire (32:20):
I agree.

Roberto Sallouti (32:21):
If, if the central bank was not gonna launch drex, we would launch, uh, BRLC and we, and we would dominate the smart contracts on the, on the currency.

Jeremy Allaire (32:31):
We'll see what happens. Yeah.

Roberto Sallouti (32:33):
But thank you, thank you for your trust and your partnership.

Jeremy Allaire (32:35):
Thank you. So mucho.

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