The crypto industry is full of former regulators, usually working as legal advisers to leading companies or political lobbying advisers. Less common is a regulator serving as an investor in a venture capital firm, let alone a founding partner, with the exception of former DOJ prosecutor Cathy Hawn.
Matthew Homer, formerly senior superintendent of cryptocurrency compliance at the New York Department of Financial Services, is breaking the mold. After leaving DFS in 2021 and working at venture capital firm Nyca Partners, Homer founded his own cryptocurrency-focused venture firm, Department of XYZ, which just raised $5.1 million.
The fund is supported by limited partners who serve as advisors to portfolio companies, including former regulators from multiple agencies, as well as leading industry participants such as Compound’s Robert Leshner, Multicoin’s Kyle Samani and the Winklevoss twins.
In an interview with LuckHomer said XYZ does not seek to lead funding rounds, but instead serves as an important cap table advisory resource for startups. “When I looked at the venture space, I realized that was one of the reasons I started this fund,” he said. “There is no one who really owns the regulatory stripe.”
“We’re not going to be your biggest check, but we’re going to be your regulatory friends on speed dial,” Homer added.
Homer’s Odyssey
Homer began his career as a regulator at the Federal Deposit Insurance Corporation, an independent banking agency, in 2012, when cryptocurrency was barely on the radar of governments. He toyed with Coinbase, which launched that same year, but lost interest in the nascent technology after a failed transaction.
He served in a policy role at Quovo, which was acquired by Plaid, before returning to an executive role at DFS in 2019, where he was tasked with leading the research and innovation division. Part of his mandate will be cryptocurrency, although he has been hesitant to venture into blockchain again. “It’s part of the job,” he recalls his boss saying. “You have to own it.”
DFS has long been at the forefront of cryptocurrency regulation, having created the BitLicense program for digital asset companies in 2015. Today, the agency remains the only one in the U.S. at the state or federal level with a comprehensive oversight regime, attracting companies from Coinbase to PayPal to apply for licenses. While the crypto industry criticized DFS for its often labor-intensive approval process, lawmakers and entrepreneurs sympathetic to blockchain have since held up the agency as a model for responsible oversight.
Homer said his time at DFS made him aware of the risks inherent in other parts of finance the agency oversees, from banking to insurance, as well as the potential of cryptocurrency to provide greater transparency given its online and public nature. He served in his role during the early days of the pandemic as DFS worked to assess the impact of COVID on regulated institutions. He realized that many traditional institutions did not have quality data, but more digital crypto firms were offering a new and promising type of infrastructure.
After DFS, Homer moved into the venture capital space, starting as an executive director at Nyca Partners, a New York-based fintech venture capital firm. Hans Morris, managing partner of Nyca, said Homer helped Nyca refine its regulatory strategy despite having no investment experience. Homer wanted to get into crypto investing, something Nick wasn’t focused on, and decided to leave to start XYZ. Morris joined us as LP because of Homer’s hypothesis-driven approach and ability to provide advice on regulatory issues. “If I were an entrepreneur, I wouldn’t want my entire board to be like this, but I would want someone to be like this [Homer]- said Morris Luck.
From X to Z
Homer chose the first fund, whose size would pale in comparison to megafunds such as a16z crypto or Paradigm, partly due to data showing smaller funds outperforming larger funds, but also because he would be able to “gain access to highly competitive opportunities,” as he put it. In other words, his goal was to get larger investors to include XYZ in cap tables as a regulatory resource, especially because of the plethora of advisors with agency backgrounds ranging from DFS to the SEC.
Robert Leshner, founder of the Compound lending protocol and a leading expert in the field of decentralized finance, said that he brought XYZ to market. Serie A his new company Superstate on the advice of his lead investor. “I relied on him as assistant general counsel,” Leshner said. Luck. “He was a pretty big part of us thinking through some of the nuances of our compliance and legal issues.”
Leshner also decided to join XYZ as an investor. “He is probably one of the most influential funds of this size in dollars that I have worked with, and I have worked with the most investors in cryptocurrency and Silicon Valley.”
As other funds chase consumer applications and more speculative assets such as memcoins and pre-stage 1 tokens, Homer said XYZ will be primarily focused on financial infrastructure, stablecoins and DeFi platforms. Early investments included Mountain Protocol, a permissionless, revenue-generating stablecoin operating outside the US, as well as Superstate, which will tokenize real-world assets such as treasury funds.
Homer isn’t optimistic that the U.S. regulatory environment will improve any time soon, but he’s in a unique position to help founders navigate difficult issues in the meantime. “You can never predict where regulation will go,” Homer said. Luck“But what you can do is help founders anticipate where it can, or at least avoid really fatal mistakes.”