Odd Lots - Sam Bankman-Fried and Matt Levine on How the Crypto Market Really Works

Episode Date: August 5, 2021

Sam Bankman-Fried is arguably the most important and powerful person in crypto. His crypto exchange FTX just raised $900 million and is growing like crazy. Meanwhile, Bloomberg Opinion columnist Matt Levine probably knows more about market structure than any other journalist. So, on this episode we paired them up for an in-depth conversation about how crypto really works, how it's different from traditional finance, and where it's all going.See omnystudio.com/listener for privacy information.

I'm June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases, the latest actions from Congress and regulators, and the legal moves driving the markets, from corporate law to constitutional law, and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day's headlines. We speak with top attorneys, judges, scholars and policy experts to break down what the rulings really mean. We do this every weekday,

then bring you the best conversations in our daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day, and on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you get your podcast. And welcome to another episode of the Odd Lots podcast. I'm Tracy Allaway. And I'm Joe Wisenthal. So, Joe, it's been, I mean, I think it's been a kind of a tough couple weeks for crypto. We had the price of Bitcoin go down below 30,000 at one point, but it's shot up since then.

I think it's closer to 40,000. But on the other hand, we had some interesting developments around the sort of crypto ecosystem. system around the market structure aspect of crypto. Well, it's interesting because, all right, we did get this like sort of bear market. And I don't know if it's still in one because as you mentioned, it's bounced back. But unlike, say, you know, the selloff in 2018 or at the end of 2017, it doesn't feel like there's any slowdown at all in the pace of investment into this space. Like, whereas at the end of, you know, 2018 is like, all right, well, maybe this whole thing

was a bubble or a fad. This time, it feels like no one's thinking that it's like full steam ahead on various business plans and so forth, at least in these early months since the peak back in April or May. Yes, indeed. And as a sign of that investment interest, we just had the crypto exchange FTX, which we've talked about on the show before. It completed, I think it was a Series B fundraising of 900 million that valued the company at, 18 billion. So to your point, I mean, the crypto ecosystem itself is clearly being valued by investors as a future investment. 18 billion is pretty big. Right. And of course, FTCX is the exchange. We talked to the founder. It was not that long ago. I think it was either maybe like March or April. And it feels like his star, his significance within crypto has only probably like gone up like 10x since like literally like the last three or four months.

Yeah, I think that's fair. So we're going to be talking to the FTX founder, Sam Bankman-Fried, again on this episode. But we wanted to do it a little bit differently this time. So we've also brought on Bloomberg columnist Matt Levine, one of the best, probably the best financial writer out there if we're being honest. And he's going to join the conversation. And we're just going to talk about what FTX has been doing and where it might go from here. Can't wait. Let's do it.

All right. Sam and Matt, thank you so much for coming on the show. Yeah, thanks for having us. Yeah, thanks for having me. So, Sam, $900 million is, you know, a lot of money. What are you going to be doing with that? Yeah, so it's, I think we're looking good on the yacht front. Don't need any more there. But, no, acquisitions are the base answer.

And, you know, I think especially as crypto starts to bleed into the rest of the financial ecosystem, there's more and more points of overlap and potential, you know, potential collaboration. Expand what you mean by that. So when you say crypto is going to bleed more into the rest of the financial system, how much of that is, okay, we know that all of the big banks or traditional brokerages, they're like thinking about like, well, what is their crypto play? they're going to get in on this action? How much of it is, are you talking about that? And every day, there's some new announcement from like a legacy institution about something they're doing in the space, as opposed to crypto itself encroaching on areas of business, lines of business that we think of as traditional where perhaps crypto has a potential to usurp some of that activity. It's primarily so far been the former. And some of this is the, you know, sort of traditional

highly regulated financial institutions starting to tip their toes in. Some of this is also FinTech. And so, you know, I mean, when people say FinTech, they're sort of an increasing chance that they're referring to, you know, a crypto company over time. But but even outside of that, many of the definitely not crypto companies in Fed Tech, a very large fraction of those are reaching out to, you talk about like, like I imagine that you're some customer facing fintech business, right? And, you know, you don't offer Bitcoin right now. Like what, what do you think the most frequent request you get from your customers is? So he's definitely tied Bitcoin.

Matt, what's your understanding of what FTX actually does? Because, you know, Joe and I have spoken to Sam a few times before now. I think we have a decent idea. But what's your impression of it? I like this question. Exposing my ignorance question. My understanding is that FTX is like one of the biggest crypto exchange. and that it's a particularly like derivatives and structured product-focused crypto exchange.

Is that like about right? Yeah, that's pretty good. I mean, you know, we're one of the newer exchange, certainly the newest of the big ones, you know, started up a couple years ago. And more than half our volume historically has been derivatives. I think the big reason for that is basically like they're the harder products to get right. And, you know, I think a lot of the exchanges had serious issues when we started up. And those issues just became much more transparent and played a much more devastating role when they tried to manage, you know, margin and derivatives than with spot products, which are relatively simpler, although we do have a pretty wide range of products on the site.

So, I mean, I saw Sam, someone made a joke on Twitter the other day that, like, you know, you weren't even like a real player or active in the industry. like in, you know, the last bull market. I mean, I don't think that's totally true because on the last episode, you told us the story of the Japan premium, which is an incredible story and people should listen to it. But so much of your success really has come like in the last year or year and a half. And now FTCS is this huge thing. What do you explain? Like, what was it just sort of broadly? And then we'll get into like the details.

But you sort of mentioned some of the operational aspects of running a derivatives exchange. versus just a pure spot exchange. You know, in the U.S., people really know Coinbase, globally, people really know Binance. But what was it in your view that, you know, you had this thing, okay, we're going to create a product for traders? What was it that FTCS had that really allowed it to just explode seemingly out of nowhere in the last year or so? Yeah, and I think a lot of these things were things you might even just assume was true of all exchanges in crypto, but that isn't. And so one example is when you look at margining, the norm in crypto was you isolate everything. And what that means is if you want to go trade eth against USD futures, you have to go, like, buy Spot Ethereum, move it into your ETHUS futures wallet and use that as margin trade your EITS.

If you then want to trade, you know, Bitcoin against EOS spot, you have to go move that ETH out, sell it for EOS or Bitcoin. Move that into your EOS, you know, Bitcoin spot margin wallet. and use this collateral there. You end up managing literally hundreds of wallets on one venue, each of which basically only supports one product. It's this massive mini-game to manage them. He liquidated on any one of them, independent of your collateral on others.

You have no flexibility on margining. The liquidation engines were not up to the task. Like they were losing millions of dollars per day of customer assets. To failing to liquidate in time. You know, there was just like match engines fell over whenever markets got volatile. And so it was just sort of like all over the place that was like not a great customer experience. And, you know, in sort of like really significant ways. So this is like, raises a question that I have.

So you come from a sort of like high tech traditional finance background. You're at Jane Street. Yep. And like one story you could tell here is like this is about like applying sort of best practices from traditional finance to like the wild west of crypto exchanges. Oh yeah. Well, portfolio margining is. is a totally well-understood thing, to portfolio margining for crypto products.

But I'm curious, like, I've always thought that, like, a lot of the appeal of crypto is, like, all these people from, like, backgrounds like yours who, like, work in, like, the coal lines of market structure and whatever and have, like, a list of things that are, like, this is, like, traditional financial thing is stupid, and I could do it better if I were designing the system from scratch.

And you kind of went and designed the system from scratch, right? Like, you started, like, a big exchange in a product universe that is not really beholden to any. traditional like rules or you know customs and I'm wondering like are there places where you were like like what we do here at jane street or what we do and like you know the stock market is really dumb like if i were doing it i'd do it differently where you actually went and did that at ftx totally and i do think the answer is really sort of you look at each place and you're like who's doing it right you know it's sort of like the crypto norm correct the crypto exchange norm or like the traditional exchange norm

and kind of sometimes it was one and sometimes it was the other so like some examples of where I think crypto has like at least an argument for doing it right. And I personally think they probably are. One of these is moving funds around. This is obviously one of the first things that comes up with crypto. But I at least sort of just assumed it was easy to get your money wherever you wanted before I'd ever tried to do that. But as soon as I tried to ever move money around, I realized how difficult it was. Anyone who sent an internet, like an international wire transfers immediately regrets having to do it. And then you look at like ACH and credit card payments that take months to finalize. And so either there's all these limits, huge fees on them.

There are so many roadblocks in this system because like there's two months of fraud risk there. And so just doing things like funding your account or what that even means to fund your account on traditional exchanges is like very messy and can take a while. Whereas on crypto like the goals to make it as clean as possible. And when you're sending cryptocurrencies in, that's obviously like basically instant on sort of, you know, the wire transfer time scale. But even with Fiat, sort of the emphasis is like anyone, whether you're, you have $200 to your name or you're the world's second biggest HFT firm, you can go to the website, submit KYC info, create an account directly with the exchange. And then there's like the deposit

button. And it has like as many options as possible for how you can fund your account. And so it's like a massively easier process. And you know, when when you serve in crypto, what you quickly realize is like you never want to send Fiat. That's like the hardest thing to do. And like everything think it's settled with stable coins if you can get away with it. Another thing I'll bring up is the different nature of the product. So when you think of what is like Nysia or CME or something, they're mostly matching engines. Like, you know, they sort of match bids and offers from like a few institutions against each other, but they don't do anything else in the trade process, right? There's like separate companies that do like custody clearing, AMLKYC, customer onboarding, branding,

advertising, mobile app, website, API, all of those are like different companies. And you end up with like, you know, 10 companies stacked together. And first of all, that means you have 10 rounds of fees stacked together on trades. But second of all, it means you have this really fractured experience where, you know, access to the actual ultimate liquidity in order books is basically restricted to like a very, very small number of institutional trading firms going through some prime broker and everyone else sort of has this like very abstracted away experience going through two PF firms in a dark pool and a broker, you know, somewhere in the middle. In crypto, the exchanges are full stack products. And so everything I mentioned from, you know, creating an account,

submitting AMLKYC information, depositing funds, using mobile app goey website, submitting an order, all those go straight through the exchange. And so you have like small retail customers and giant HFT firms all having the same exact access to the ultimate, you know, order books and system. And I think that creates, in some cases, a much, much more streamlined and frankly fair experience. So can I ask just on the margining idea? So one of the things you did, I think it was just in the past week or two, but you changed the amount of leverage that you allow on the platform. So I think the maximum people can do now is 20 times, which seems like a lot to me still, but like it's a vast reduction from what it was. Walk us through the thought process

on that. And would you consider changing the margin requirements as well? Yeah. So I guess maybe on your last point, we talked about changing the margin requirements. And when we talk about margin and leverage, we usually think of them as basically the same thing. Like one is just one divided by the other one. And I guess there's like initial versus maintenance, like how big of a position you're allowed to put on versus at what point your account actually starts getting liquidated. But this sort of affected both of those. And so you have to post 5% margin now on all positions. And at least in many cases, much more than that, I would serve equivalent to saying 20x leverage. The thought process behind it, the first thing is that it's actually not that big of a change for the site.

Less than 1% of the volume was trading with leverage. higher than that before. And the reason is that basically your margin requirements go up as your position size goes up. So if you want to put on a big position, you need to pose way, way, way more than that collateral anyway. And you're only able to put on really tiny positions with very high leverage. And so it's sort of by definition, not where most of the volume or open interest or users were coming from. And so it wasn't like a big part of the exchange. It wasn't super relevant to to us or to most of our users or their experience, it's also not super economically,

like useful, frankly. Like, when you talk about, you know, hedging something or having on some spread or one of the many reasons that you might want to do a margin trade, if you get down to one percent collateral left, you can't really use that to hedge something because you can get liquidated in like a print, like in like 15 seconds.

You know, markets could move enough that you're out of margin. And so it sort of doesn't make sense for any, like, long or even medium term position that you're planning to hold for any reason, you're sort of like almost definitely opening yourself up to serious liquidation risk if you get anywhere close to that amount of leverage. And it's like most of the things that I think like frankly could justify as like the more economically useful parts like don't require high like super high leverage anyway. And then the last piece is frankly like it's something that a lot of people look on as scants. Like you know when you talk about I mean reporters but regulators as well like not

that there are like specific regulations around this in most jurisdictions, but like there probably will be eventually. And it's sort of like clearly the direction the world's going in. And so sort of combining all those together, like it wasn't an important part of the site, wasn't a super healthy part of the site necessarily. It was like a part that was going to start receiving a lot of negative attention. And it just seemed like it was like it was time to get rid of it. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg, is the place to stay on top of it all. Hi, I'm David Gura.

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Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. Talk to us a little bit more about the technical. aspects of building a system in which there was, you know, as you describe it, the one wallet where everything is, you know, cross-margin, and so you don't have, okay, your Bitcoin futures wallet and your E-Futures wallet and so forth. Two things. So like, how hard is that to build? But also, we know that like with a lot of the legacy, or it's weird to talk about legacy, the legacy crypto exchanges, they tend to go down a lot during periods of high volatility, which is a source of frustration. And we see it, we've seen with Coinbase, for example, where everyone's starting to

like slam into one thing and suddenly social media is lit up. You like to point out, like on Twitter, it's like, well, FTX, another, another day of, you know, 100% uptime or whatever it is. How much are those things connected, this sort of like the difficult stress of legacy liquidation books versus and just keeping the site going up? Yeah. So the thing that really causes a story, stress there's actually the interaction between two different effects, one of which is cross-margining. One advantage of isolated margining, and one reason that some exchanges do this, is you can completely parallelize different products, right? You can just completely separately say, like, all right, there's our, you know, Bitcoin EOS market, here's our each futures. They have nothing to do with

each other. Like, none of our systems need to look at the other one. You have completely parallel margin checks, risk checks, order books, and it's easy to rent another server. Like, if you're If you could scale up your business just by buying a ton of servers, that is the easiest thing to do. And like, we would do that in a second. The problem that you run into is that doesn't increase, like, the clock speed of any one process. And so whenever you have these bottlenecking things where everything needs to feed through one process, like buying more computers doesn't help. Because there's just the one computer that's computing that one bottlenecking thing. And the worry with cross-margining is if I send an order in a Bitcoin EOS order,

book, that immediately affects the amount of margin that I have available for an Ethereum Futures position. And so you can't treat them as completely separable from each other. And you sort of have in the end this one process, which is keeping track of the master amount of margin and collateral that each account has available. And that thing has to, like every single order on every order one, has to feed through that process. And all of a sudden, parallelization is way harder.

and that means that you're at risk of that process falling over when things get busy. And if that process gets bottlenecked, you can't accept orders in any order book because you don't know if the person has enough margin court. So that's sort of like the fundamental tension that you get to quickly when you cross margin. And inherent in that is like, then you say, well, okay, how about traditional exchanges? Like, don't they cross margin? And the real answer is that, as it's back to a previous point, in traditional finance, the exchanges aren't the primary risk check.

The exchanges aren't, like, analyzing correlations between different assets and someone's portfolio generally. The exchanges are just processing the orders. And then you have things like prime brokers who are the actual risk check engines. They're not doing it in real time, really, at least not, like, tick by tick or order by order. They don't have to be as high throughput. They're just sort of, like, periodically checking on people's portfolios. And then you say, okay, well, why can't we take it out of this critical process?

and just check it every hour or something. And the reason is, well, what if they went bankrupt in that hour, right? Which you now get to serve this other piece, which is the fact that we allow everyone access to the site, including people who aren't like, you know, one of the five biggest trading firms in the world that you definitely have legal recourse over and they have tons of assets outside of your exchange that you can claim if they went net negative. Like, that's not how it works in crypto. And crypto, we have everyone.

And so if any account goes net negative value, you, like, realistically speaking, we might never be able to, like, reclaim that. And, you know, we just end up eating that. And so we have to be real-time monitoring the risk of all of the users. And that's sort of like one of the easier parts to accidentally get sort of bottlenecked on. Can you talk about that from, like, a perspective of your capital? So, like, you know, exchanges are sort of notably thinly, like in the traditional finance role, the exchanges are not like particularly capitalized because they're not particularly

capital intensive. clearing houses have like weird capital, you know, positions and drawing rights. And then prime brokers are giant banks who are, who are like very heavily capitalized. Like for you, like, do you have billions and billions of dollars to cover customer losses? Or is it more like you're a sort of technological situation where you can, you're confident you can blow people out fast enough that like customer losses are not your problem or am I just thinking about it wrong? No, you're thinking about exactly right.

And that's a really good question to ask. And different exchanges come to different answers that question. So let me sort of give you a little bit of a palette of like how one could answer it. One answer, which used to be very popular, is that's not our problem. That's our user's problem. And you might say what you mean? If a user is negative, you can't get funds from them. But say to respond, sure, but that means some other user is positive.

And maybe you can sort of see where that's going. You know, there are these things called. Right. The positive user doesn't actually positive. Exactly. Right. It's the clawback. is sort of like the word that people used for that.

And there were exchanges where like each week they say like, congrats, you did good trading, you get paid 86.2% of your P&L this week. You know, the other 13.8 went to bail people out. And it just happened week after week after week. There's millions of per day of losses of customers to that, which is not how you want to end up. Right. That's sort of like breaking this like seemingly really inherent, inviolable property of a future, which is that if you buy a Bitcoin future, what, like,

like whatever, something, interest rate, something, something, something. But when all of a sudden done, in the end, you have a Bitcoin, right? If Bitcoin goes up, you make, if Bitcoin goes up $10,000, you make $10,000. If you're, like, holding its expiration or whatever. But all of a sudden, if you're only getting paid back, you know, 86% of your P&L, you don't really quite have a Bitcoin. You have something that's kind of like a Bitcoin, but maybe it's only most of a Bitcoin. We'll see.

So that's, like, not a good answer. But that is an answer. And that is what some exchanges said. other exchanges gave sort of the worst answer. That's not a good answer, but it's not the worst answer. The worst answer is going bankrupt, and that's not what you want to see. But, you know, there have been some exchanges blow out in crypto, and especially the smaller ones, which gets to your point of like how much capital is actually backing these exchanges.

One of the most dangerous things about using a dinky exchange, there's sort of two scary things. First of all, they probably don't have like very sophisticated tech. So like the hacking risk is way higher. But second of all, they probably don't have a billion dollars of capital. And so if there is a loss, like they don't have anything backing that, you know? Like they have, you know, $2 million back in. If they lose $5 million, then customers lost three. Okay, so that's sort of like another bad answer.

But it's the answer you've seen on some of the smaller venues. And then you get to sort of like, how about the biggest venues? And the answer to your question is really, yeah, they do have a lot of capital backing it. Like, if you look at the actual effective amount of capital backing the books on the largest exchanges, it is in the billions. And, you know, obviously we just raised, you know, 900 or so, but, you know, we had a bunch from profits before that. And then on top of that, there's sort of, you know, effectively the equity value of the exchanges, which are, you know, well, should be implicitly backing these, you know, for sort of reputable exchange. Meaning that if you have a billion dollar loss, you can, like, go raise a billion dollars. And people are like, well, you know, they have equity.

Yeah. And so the answer is for the biggest exchanges, yeah, there is effectively a law backing it. But once you start going down in the pecking order or to wickings. where you don't trust that they would do that, that they would kind of go do whatever it took to make their users whole. Yeah, there's real risk there that, you know, if their liquidation engine isn't up to task, neither will their users, you know, be. And if you're like a big exchange with a lot of capital, like, like, empirically, how good is the risk management? Like, do you guys regularly have, like, blowouts that you don't, that you're not made whole? It's a good question.

So we, um, we, we put a bunch on the risk engine. We don't have. Big issues. Like, we've never had a day, I think, where there was, there's more money that we lost in blowouts to revenue that we made just from trading fees. So, and on most days, it's effectively zero dollars cost. So this is not like a big deal for us. I mean, it's a big deal. Think about, but like economically it hasn't been a big cost to us. So you're not doing like 125 to one leverage on big positions as third of the main reason. Right. And that's what it gets down to exactly, right? Like, are your, are your parameters good and reasonably as your liquidation? like reasonable in real time and stuff. In some cases, the answer that has just effectively been no. And, you know,

we've tried pretty hard to keep it, like pretty effective. But, you know, when you look at the biggest blowouts historically, especially back in like 2018, like is the kind of thing you, like you would just look at that and be like,

that doesn't work, right, Sam? And be like, yeah, you're right, that doesn't work. Like, it's just like,

yeah, 50 to one leverage on a $300 million dollar Bitcoin position. And you're just like, okay, that's interesting. Where volatility is like 20% of it. Exactly. It's like,

can you liquidate like 300, million dollars of Bitcoin consistently with less than 2% impact plus slippage plus movement during the time it takes to do that. Like, no, you can't. Can I ask about, I don't, I don't really know the phrase liquidation engine, but like, um, like my understanding is that like there's like a stereotype in like the crypto world where when people get thrown out of margin positions, they, it is done as like sloppily as eggs can be imagined and like prices like move right jerkily and mechanically in a way that like, you know, like I'm just, I've been thinking about, you know, we're recording this on the day of the, the Arkega's report coming out where like, you know, in traditional finance, like when a big

position gets blown out, like they don't necessarily do a good job of it, but they sort of sit down and think what is the way to liquidate this position with minimal impact to the bank? Whereas like my understanding is that at, in crypto exchanges, it's all automated and often automated in a sort of like predictable and dangerous way. Yeah, it's been getting a little bit better over time. And it's not great, I would say, for us to space, but it used to be terrible. So let me tell you some horror stories here, which are like, so here's like one really bad example that we did see, you know, back in like 2018 when, when things were really messy.

Someone had, you know, a $200 million position in Bitcoin futures. First of all, it very, very strongly seemed like there's a human there clicking and that human was sometimes asleep. And so maybe markets moved while that human was asleep. And then the account was net negative by the time the human weight was. woke up. So that's like not a good start. And then, you know, you see this position is obviously underwater. And, and what they would do, you know, let's say it's 2% underwater is, you know, they place an offer for $200 million of Bitcoin futures, 2% behind the BBO. Right. And you just sit there.

And, and of course, that was at the bankruptcy price, like hoping someone would lift through the book and buy $200 million, a $200 million lit offer. Obviously that's not what happens, right? What happens is everyone sees the offer and things just like crash more, right? And it just gets like worse and worse. You know, that that's like an example of not a good liquidation engine, so to speak. Yeah, although honestly, that's better. Like I sort of expected it was like if you hit some trigger, like some automated thing just puts in market orders to sell the entire position. So we have seen that as well, which is sort of the opposite extreme.

And it's sort of like different exchanges that did different pieces of this. Like, yeah, I basically think like both those extremes are. bad, right? And the market order thing goes about as poorly as you would expect. You know, so where have things been moving over time? Like what's sort of like the reasonable system? Well, I don't know, but it's sort of like, I think you would like, if you just like had 10 minutes, write down something like better than either of those, which is like kind of a decent proxy, which is basically like, you know, what do we do? So I mean, whatever. First of all, obviously we cut off opening your position. Then if your account gets further, you know,

down in collateral, the first thing we do is we just start sending orders on behalf of your account to close down the position. it's done in an automated way. It's done like bit by bit, like basically TWOPS it. And, you know, we keep it to like a relatively low fraction of, of underlying volume of the asset. So like we don't want to be in position where like the liquidation inches 75% of global volume because then it's just like that,

like the market doesn't have time to get liquidity for that. And that's also sort of like one way of think of what happens if you send a market orders, like 75% volume for that two second period. You know, that just overwhelms. order books. And so basically sort of like chip away with that. And, and hopefully that works or it's just like Mark has recovered or go down depending on which direction their position was in. And, you know, before action, most of their position has been liquidated, like, we no longer have to liquidate it. And then we stop. If that doesn't work, like, things just keep moving

in its position. And like, the liquidation engine is like going as fast as it's willing to go in terms of like fraction of volume. And, and like the position is getting closer and closer to bankruptcy. We have, it's called backstop liquidity prior system where basically we just pass off their remaining positions in value in the account wholesale like provided to a bunch of liquidity fighters who have agreed to 24-7 like basically forcibly take on, you know, liquidating accounts. And so that's what happens when it looks like the, you know, first step of the liquidation engine wouldn't get there in time.

And the thought is they're like, you know, these market makers have well collateralized, well-capitalized accounts and then they can figure out what they want to do with those positions. It's not like perfect, but at least sort of like, you know, the goals. to sort of like get rid of the unnecessary impact, right? And like you're, you're going to have impact whenever there's a forced sale. But like at least you want to have that impact be like the correct economic impact instead of like five times that because it's done way too quickly or something. Can I ask about like order books and market makers?

Like what I'm interested in is an intuition for sort of how liquid these crypto products are. So like you have like sort of in US equity exchanges, you have the stereotype of like there are, you know, high-frequency electronic market makers. If you sell a lot of stock, the stock will go down by like a sort of predictable amount and like people are willing to step up to buy at these declining prices, a certain amount, right? Like there's there's like a certain amount of capital in the order book. There's a certain amount of like anytime the market is open, someone is there to buy. People complain that they're not as willing to sort of take risk as like the old school banks were. But like there's there's a sort of like predictable amount of liquidity. Like in crypto markets,

and particularly because they're so fragmented and there are so many products, like if you want to sell a bunch, like does the price go to zero? Like are there a lot of market makers with capital who are sort of like committing capital everywhere and kind of like trading quickly? Or is it a little bit more of like you never know where you're going to get kind of thing? Yeah. Well, first of all, it depends on the venue. You're using sort of a Dinky exchange. then like it's sometimes like, oh, who the hell knows what's going to happen, right? And you'll see completely wacky prints, sometimes go up on liquid venues. And remember, there's no wreck and mess here or anything like that.

Yeah, I was going to say, like in the U.S., like, you know, every market maker is making markets on every exchange. But I guess there's no, there's no reason to expect that in crypto. No. And so like the different exchanges, like Bitcoin USD on one exchange is like a different product from Bitcoin USD on another exchange. I mean, obviously it's basically the same thing. but it takes like an hour to turn one into the other through like transfers if you're lucky and like a day if you're unlucky. And and there's no, there's no nothing forcibly keeping those in line with each other, right? So that is one thing to note is you see divergences between different exchanges when markets are stressed.

And, you know, usually these are tiny because they're arbitrageers, but like when they're big moves, sometimes they're percents. So is that sort of like one caveat to make an, and when you talk about which exchanges you see sort of these illiquid prints on, on, it's maybe not exactly what you think. Like, it's true of the, like, dinky ones. It's also true of some of the better known ones. And in particular, and this is like a huge, huge, huge factor, any exchange that doesn't allow any leverage or margin, they're sort of competing intuitions for what would happen there, but in general, it's less liquid.

And the reason it's less liquid is like the liquidity fighters don't have any ability to margin there. And remember, this is like, these needs to be deliverables. This isn't just looking at total value. you know, let's say that someone tries to sell $100 million of Bitcoin in a five-minute period on a spot exchange with no no margin capabilities. If the market makers didn't have 100 million U.S. dollars physically custody on that particular exchange at that particular time, they can't buy it.

They just run out a dollar to buy it. And they might have another $300 million in their bank account or in other exchanges. That didn't help them buy that offer. And it might take a day to get the dollars over there. If there's new margining, that also makes it way harder for market makers to provide deep liquidity. Because again, like, it's not capital efficient for them to keep, you know, $17 billion of reserves of every plausible currency on every plausible exchange. Right. Because in the U.S. you have to, in like, U.S. equities, you need to put orders on every exchange. But in crypto to do this, you need to, like, actually capitalize, like, your maximum order on every exchange separately.

Exactly. And this is the flip side. This is a drawback to the crypto system where I sort of described the miracle. of it, you know, earlier of like one integrated product. And so you get so much efficiency out of like, you know, you just have your funds there and you can do anything you want on the exchange. And like there are no intermediaries. Everyone can do it. You have like this, there's no like stock loan business being completely like separate in a separate company on a separate time scale from like the trades you need to be doing. You do get a ton of efficiency of this. But the flip side is you don't have one central prime broker that's capitalizing, you know, simultaneously all exchanges.

for you with the same capital. Like, you have to separately capitalize each one, which is super, super expensive, especially if they don't allow a margin. So is that sort of like one issue that you run into, which isn't an issue with overall crypto markets. Like if you're looking sort of like the like blended average Bitcoin price, that's not a huge deal. But if you're looking at like blowouts of one particular venue that is, then you can get to like, okay, sure, but like ignoring that, like let's use just average Bitcoin prices

across all major exchanges. So you're not worried so much about like, yeah, it talks if there's like, like a little divergence, but like generally what's a Bitcoin worth? Like, you know, how much is that diverge? Yeah. You know, it's better than it was three years ago. Like the market makers are massively better capitalized than they were three years ago. And so, you know, I think something you saw is like on this drop in, you know, May from like 60K to 30K, it was like very, very orderly, all things considered. Like it's a 50% drop in cryptocurrency in like a one day period. But like, and there's a lot of liquidations, but like there, there were, there weren't.

massive illiquid prints, markets remained liquid and orderly, more or less, to like an impressive extent given the volatility. Contrast that with a year ago. In March 2020, when crypto dropped from 9K to 4K in like a two-day period, there are people freaking out there that like there are going to be systematic failures in the crypto industry. And like, you know, think about, like it wasn't like archaegos people worried about. It was 2008. It was a chain of liquidations of businesses started by a few. And there are like people going around saying, we have no idea who's underwater here. Like, it could be everyone. Like, lots of businesses had basically predicated their financing strategy on the notion that it was implausible that

Bitcoin would go below $5,000. For better, for worse, that that was like empirically true. Like, look at a mining firms. They were leveraged long Bitcoin with like a bankruptcy price of like, you know, $4,500. Like, there's like huge swath of the crypto space that were like maybe in of being bankrupt at 4K. And of course, then you could have massive cascading effects. And liquidity markets was completely shot. None of the market makers had capital left to buy, even though they're obviously amazing purchases to do if you happen to have a billion dollars lying around.

And so it was just like, it was a massive nightmare and like really dangerous for the industry in a way that like this year's crash was way more orderly. And I think partially the industry has grown a lot. Partially honestly, like no one's business was predicated on. Bitcoin never getting down to 30K again. Like everyone sort of thought that might happen. Is that a way of saying that the industry is less levered than it was? Yes.

I think that's like basically right that the industry is less leveraged in percent terms. Now, I think the dollars of leverage have gone up, but so is the market cap. And the market cap's gone up faster. This is what I was about to ask because it feels like you're describing the system as being less levered and the market makers and the exchanges being better at liquidation. positions being able to do it in a more orderly way. But I feel like at the same time, so everyone always struggles whenever there's a big move in Bitcoin. And I feel like over the past few months, we've seen leverage come up again and again as a sort of excuse. Or whenever the

price is dropping, it's like, oh, levered positions are getting liquidated. Like, is there a disconnect there? Like, is that narrative of the market wrong? And then if it is, what is actually driving the price of Bitcoin? Like, if you were going to look at the past couple of months, what was the cause of the down draft? It's a really good question. So first answer is there is some truth to it. Liquidations and leverage were a cause. One of the causes of the drop from 60K to 30K.

It was just at a level, which is large and absolute terms compared to a year ago, but small relative to the capital in this space. And so, you know, there are $20 million of long positions probably that got liquidated over a week-long period during the biggest part of the drop in crypto, but the industry was able to absorb that because a decrease in price.

It caused a significant decrease in price. But it was like a surprisingly orderly decrease in price in that like people weren't blowing out. There are a lot of losses from some people, but they, you know, weren't generally going, you know, the sort of like large players in the space were very well capitalized. The systems technology had improved. So exchange downtime was less bad.

I don't want to say it's great. Like most exchanges had serious. downtime this time, but way less than, you know, a year ago when most exchanges had 12 hours of downtime during the big crash. And so the infrastructure and the liquidity in the space held up much better under the liquidations than they did a year ago, but there were real liquidations. And it was one of the contributors to the crash. Now, one thing I think is worth noting there is like they're also one of the contributors to the run up from 10K to 60K. I think that's sort of like often people sort of like want to live in a fantasy land.

where leverage can make markets go up but not down. And it's not really how it works. Like, for better or for worse, like I strongly believe that the crypto ecosystem is in a stronger, healthier position today because of leverage than it would be if there was never any leverage. I'm Francie Lacquhar, an award-winning journalist,

and I've got a new podcast, leaders with Francine Lacquhar from Bloomberg podcasts. I've interviewed everyone from Heads of State to fashion icons about the news of the moment. But I've always been curious, Who are these people as leaders? I don't think there's one right way to be a leader. Make decisions.

A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacroix wherever you get your podcasts. Sam, I don't know how much work if we're going to really talk about this, but I actually want to just ask a sort of question related to the defy ecosystem. And I know beyond FTX, you're invested in that. there is leverage exists in DFI in different ways. So someone might post some stable coin to borrow more stable coins or they might post

ETH to borrow stable coins. And then they might use that to invest in something else so that they get another token. Are we going to have to like how well do we have a handle on, I guess what I would say is leverage measures within DFI? It feels like whether we're talking about an exchange like FTCS or a traditional, traditional Tradfai venue. Like we have these sort of like concepts of like how much open interest is there and how many like long futures are out there. Are we going to have to sort of like reconceptualize how we think about leverage in the defy space where perhaps there isn't a perfect analog to some of this stuff?

And do we have a good handle on sort of like overall vulnerability to disorderly liquidations? Yeah. So I don't think we need to fundamentally reconceptualize it. I think they're very clear parallels. And I think it's like not that hard in some sense to think about. I think the big problem is that there isn't a guy who's in charge of it. When you sort of think about like, you know, how do you figure out like who's in charge of like staying on top of the risk on FTS?

Like there's a answer, right? It's like it's me, right? You know, and my team. I think when you look at defy, there often isn't an answer for who's in charge of managing it but also who's in charge of reporting it. And so I think it's just messy is the answer. Like, like, like, no one is sort of taking responsibility. And it's not obvious who would.

And so I think that there's just like a ton of untracked stuff. And like, you know, what that means is like, yeah, it's just like there's more capacity for like wacky bad things to happen because no one's in charge of making sure that when something wacky happens is the good kind of wacky. You know, we were talking about how it's been an eventful couple of weeks for crypto. And one of the things that happened, which would probably fall in the sort of negative camp, was the new SEC chair, Gary Gensler, came out and started talking about tokenized stocks or synthetic stocks and making some noises about potentially going after those. So I'm wondering, how worrying is that for you? Would you potentially consider delisting those?

I saw Uniswap took them off of, well, at least the front. end of uniswap. So you can still trade them on the actual uniswap code, but you just can't do it through the uniswap website. Is that something you think the industry is just going to have to do going forward? So, right. So I think basically what what Genser said, which is frankly not that shocking is like if you tokenize a stock, it's still sort of a stock. And like, it's not like it loses all regulatory properties as soon as you tokenize it. Again, not to put words in, in his mouth, but I wouldn't be surprised if you're sort of looking at some parts of the industry and being like, that sure looks like an obviously unregistered security being offered with no

MLKYC registration or terms or conditions to anyone in the world, including Americans, and restricted jurisdictions. That's not generally how brokerages work. I think it's sort of like where, you know, roughly that was coming from. And I don't think that was a super shocking announcement. I think like, I think when you contrast it with what we have on FTX, like, it's a pretty different situation where we have like, first of all, we email KYC, everyone fully who is able to touch, you know, stocks on FTS at all. Second of all, we restrict it such that Americans can't access them, neither can a number of other jurisdictions.

We ensure that they're backed. We have an actual license from Bofin to offer the products. And it's much more like just how. how like, you know, interactive brokers are introducing brokers to them operate. And so I think that, like, Gensler wasn't saying, like, if you tokenize a stock, it makes it evil. I think, like, his point was, like, it's kind of still a stock. You know, if, like, you wouldn't have been able to offer stocks at all, like, query

whether you could offer tokenized stocks. Is the long-term goal that you are offering tokenized stocks to Americans, like, either by regulatory changes or by, like, registering as a U.S. stock exchange? Like, is this, like, a sort of, Crypto eats the financial system kind of play, or is this like you're a crypto exchange, but since Baffin will let you do stocks with your stocks? No, it's definitely the first thing you said. Like, yeah, very, very clearly that is like our goal here.

And I think that like, like there's sort of a roadmap for this in the United States, at least sort of the tokenizing part, I think is complicated in the United States. And I do think that like no one has quite issued clarity on exactly what it means in the U.S. regulatory context to have a tokenized stock. I think against her, sort of saying, like, well, it certainly isn't, like, irrelevant. Like, like, that's still kind of a stock. It's not, like, when you talk about tokenizing it, like, what does it mean for it to be tokenized?

Is it free floating? How does that work? Who's the issue? Like, there's a lot of sort of complicated questions there. But maybe just taking a step back, like, how it stocks in the first place, like, just normal non-tokenized stocks. I don't know. I mean, like, we, FGXUS did recently get a burger dealer license, like, sort of, you know,

make of that what you will. So in theory. one day rather than maybe, you know, like I have a Schwab account where I have my like S&P 500 ETF and a couple other basic things. You could, there is a day in theory in which I could just have all, I might have all that on FtX.us. That's right. And I think that there's like a lot of advantages that system because like it's sort of like never fun when you're like, oh boy, I want to go like do this thing with my money. Oh, wait, it's in the wrong pocket.

Like, you know, I, I like wanted to go buy a banana, but it was in my brokerage account. Or like, I wanted to buy a Bitcoin, but it was in my bank account. Or like, I wanted to go buy Tesla, but it was on my crypto account. And it takes like three days to transfer, you know, between those. And like, it's not a good user experience. You know, you have to have decided days ahead of time what you're most likely to want to use your funds for. And so I do think that there's like real advantages to having a single platform where, you know, for all of the most common things you'd want to do with your funds, you can do them.

And, you know, we're moving in that direction on the consumer side of the U.S. Like we have obviously crypto, we have lots of methods yet both crypto and fiat. On and off the exchange, we have a debit card that you can get tied to your FDX account, which will spend whatever you happen to have there, whether it's crypto or fiat or whatever. And so you can have your funds there. You can do your crypto trading. And you can also go buy bread and have like a brokerage or your license coming online. And so I think that is like definitely a part of the vision.

In the last time that we spoke to you, we talked a little bit about this. But basically every time someone who's sort of like crypto skeptic starts first thinking about the space, one of the first questions they always ask is about Tether. And we talked about this. And you're a, you as a, I guess, on the exchange, but also with your trading, you're a tether user. And you talked a little bit about some of the advantages of it last time. But can you talk a little bit further about the full experience of interacting with tether? Because people, you know, like people have all kinds of conspiracies.

Like, oh, the money's not there. You never actually, no one has ever actually sold their tether and gotten U.S. dollars back, so forth. Can you just talk a little bit about your experience? I guess as a tether user and customer of what happens when you use tether, when you want to redeem tether, et cetera, and how that works as a actual tether customer in size. Totally. I'm actually a little bit curious before I jump to this. It's like what, like, Matt, having, like, I'm sure there's something that you've, like, seen a lot of people chattering about. Like, what's your takeaway from what the chatter is like, and also what sort of like your kind of like summary or, like, thoughts are on that. You know, based on that. And then I can sort of dive into what our experiences has been like.

I want to be careful here. Like, Tether is, has a strange public relations strategy, I guess. I mean, like, they talk a lot about wanting to get an audit and then don't get an audit. They talk a lot about their, like, high-quality commercial paper holdings, but don't disclose them because counterparty confidentiality is very important. to them, which is not true of any other holder of commercial paper in the world. Like, you can just look at, like, the complete holdings by Cusup of every money market fund. But for Tether, it's very important that they keep it secret.

So if they were doing something shady, they'd sound like what they sound like, which doesn't prove that they're doing something shady, but it is, like, it is confidence undermining, I think. Yeah, I think that's a pretty reasonable way of putting it. I think like a pretty, pretty odd public relation strategy is, is not an unfair characterization. And I think I'm generally sort of like often sort of thought of as a tether apologist or something as maybe how some people would, would phrase it.

I certainly wouldn't necessarily want to say that they've like historically always chosen the best PR strategy or anything that sounds vaguely like that. You know, I think it's sort of a case where there's a lot of smoke, but I don't think there's really much fire. But, but I like, get, like, there is smoke and like, you know, and I think that's sort of like, what's going on. Well, for one thing, sort of like curious PR strategy, but putting that, that aside for a second, like, you know, how about creating redeeming tether? Like, can you do it? You can do it.

We have done. We've done billions. It's a messy process. Like, it works. But it's, you know, you sort of look at creating redeeming USC. And it's like, all right, like, they have their U.S. dollars in a U.S. bank account, which is the same bank that everyone else. crypto uses, takes like 30 seconds to, you know, transfer. Even like go create it.

Yeah, 30 seconds later, they're sending you the tokens. You can redeem it 30 seconds later. Like you see the funds in your account. No fees. A very, very kind of like straightforward smooth process. And I think you look at Tether and it's like, well, it's a messy process. And I think like every piece of mess in the process like makes it much harder for them to have what would look like is self-evidently reasonable process.

Like it just sort of like, you know, makes it sort of like really heightens the sense of like something weird going on. I think that that sort of like is the answer though. Is that like it is messy but but like the like the funds are there? Like we see like real legitimate inflows into Tether from a lot of places like massive ones that, you know, then lead to market makers selling and creating and sending you know real billions of dollars to Tether's bank account, you know, to create it. and, like, you know, have relationships with, like, Heather and the banks and everything else involved. And, like, everything sort of checks out in a messy way. And then you can sort of give to the question of, like, all right, well, what's their business models? Probably getting yield on the dollars.

How are they doing that? I don't know, you know, like some commercial paper like stuff. And, you know, I think it's like one of these things where, like, if you want to try and argue about whether Tether's worth, like, $0.99 or like a dollar and a penny, I think that's, like, a pretty reasonable argument. and like I don't want to take a strong stance on that. Like I certainly don't want to like strongly argue against any any stance there. But I think that like when the argument gets like is it worth like about a dollar or like about 30 cents, like any of the answer is about a dollar. And like, you know, the reason is that it is fundamentally like basically backed by like, you know, about the right number probably more than the right number of like and a dollar like assets just in like a system which is like a little bit messy in every possible place. So they might stretch for yield, but like by buying like slightly dicey or commercial paper where they might break the buck but go to like 99 rather than that's like yeah, that that's my like.

And so I say this without knowing like exactly with their commercial papers. Like this is sort of like that that's a twist on it, which I'm just sort of inferring the details of that last piece based on like all the other interactions that serve we've had with them. They could be putting it all into Bitcoin, but that would just be sort of a strange move on their part because like they. They have like a good business putting it into commercial. Exactly. Like they've got lots of legitimate, profitable, good businesses. They don't need to do that. Also, it's unclear why they would do that.

Like, it's sort of like incredibly risky. And I think the other things, like, you get to know the people involved here. They're not like, they really, really aren't scammers. Like, it's really not like you come way dealing with them. You're like, they're selling me steak oil. And like, they're just blatantly lying about everything. And like, I'm pretty sure that like nothing is, like, that's not at all sort of like the interactions that people have with them. Did you watch the CNBC interview?

Yeah, there, is that the one with the legal counsel? Yeah. Yeah, I think they back themselves into a lot of positions where like they, they sort of like make probably basically correct claims, but ones in which they're not going to, as you said, like they don't feel comfortable elaborating. Maybe for like just sort of like, you know, ethical reasons, maybe because like the truth is like a little bit messier. than they'd like to say. But for every reason to make these claims and then like refuse to back them up. And that's like never a good look.

Although I think it is not that like there's no relationship between the claims and reality. I think it's just like one of those other cases. This might be an unfair question, but I'd be interested in your answer. Like if if the worst of the conspiracy theories were true about tether, like I don't know, say it's investing. It's investing in commercial paper, but it's investing in, like, Chinese commercial paper. Evergrand commercial paper. Yeah, exactly. And it all goes, like, bottom up, which is a rumor that's out there, of course.

And Tether collapses. What would that mean for Bitcoin and the wider crypto space? Yeah. So do you want me to take, like, the fantastical version of that where Tether goes to zero? Or do you want me to try and take, like, what I think sort of the most proximate, like, vaguely plausible version of it? How about both? Can you do both?

Let's do both. So maybe first I'll talk about that sort of plausible version. So like what if they took a third of the money that they had and put it in like sort of B tier commercial paper from China? Like B tier for China commercial paper. And and then, you know, there's sort of a run on the bank in China as looks like, you know, whatever that could happen. And it turns out that like this B tier commercial paper like 40% defaulted on average or something. something. And so you ended up with like, you know, a 12% loss of the tether treasury, right? You know, the 40% of 30% or something like that. Like, let's say that's where you ended up,

which are these like, you know, sort of like very negative but like not completely implausible outcome. What happens then? So tether sort of in some, some mystical sense is worth 88 cents or, well, it's worth it at least 88 cents, right? Like you can redeem it sort of maybe for 88 cents. you know, what's the loss? The loss, there's like 10 billion or something. One possibility, obviously, is like nothing happens, right? Like, unless people try to redeem almost all the tether in existence, like, they could keep processing.

Maybe it doesn't even comes out. Maybe it comes out for whatever we agree with the crypto ecosystem doesn't seem to care. That is, like, I think, a plausible answer, right? It's just, like, weirdly things continue on as if that didn't happen. But also, maybe there's a little bit of a run on tether. their banking partners start to get nervous. Redeeming it becomes very difficult. Maybe they don't give you a dollar on the dollar for redemptions.

Maybe they limit them, they say, look, the world can only redeem $1 billion per week total of tether maximum. And the world wants to redeem $15 billion. And so there's like a race to redeem your tethers and most people are not getting filled on those redemptions. Tether crashes down, you know, $0.85 on the dollar in markets. You know, there is a lot of people who, you know, where stockpiling tether have losses of, you know, 15%.

And then I think sort of like, you know, there's some regulatory crackdowns on stable coins. And things mostly continue on as they were before, except that like, you know, $10 billion total was lost between tether holders. Maybe they recover that eventually, right? Like if you think tether is effectively backed by the combined equity of Bitfinex and tether, then like maybe that's a, like, maybe it all ends up kind of okay. although like certainly like you know not in a liquid sense you know frankly i think they could probably

do a lot of things to try and plug that in the meantime but like that that's sort of like i think roughly how that that would end like you would see tether get sort of like repraced to like you know 10 cents under or whatever 15 cents under i don't know you know it'd be like a stock split in tether except you know where you didn't get more tethers and you yeah bitcoin tether would start trading a different price price from bitcoin usd on major exchanges that the peg would like mostly break there'd be like this absolute race for redemption, fees for a dean would go up to a percent or two. They kind of slowly get through, people make a bunch of money doing the arbitrage. It would be a really bad luck.

Regulars would crack down on stable coins in crypto in general, and life would go on. And probably Bitcoin crashes 10%, 15%, unlike the bad PR. That's like sort of roughly my guess, like how that would play out. I think he's like, would not be disastrous for the crypto ecosystem. It would be clearly bad. Now we can sort of take this other hypothetical. of like, what if it's worth zero, right? What if they, like, put 100% of it or 95% was in commercial paper of, like, one company?

And that one company goes bankrupt or something sort of equivalent to that, right? Like, what if somehow they lose the vast majority of the tethered treasury? That's, that's way worse. Like, now of a sudden you have like a $70 billion loss or whatever in crypto. I can't remember the current market cap, but like, that's the order. You know, what's that mean? Tether, like, BTC tether markets go to infinity, I guess. You know, like, like, he probably gets, gets, you know, delisted from some venues.

So there are a lot of Bitcoin tether futures out there. Now, this is kind of a fun one, right? What if you have a quarterly Bitcoin tether future and tether goes to zero? Like, what does your future expire to? Is the answer to infinity? And, like, how do, like, what's the P&L transfer there? Like, are you trying to transfer infinity tethers, each was zero dollars from the, losers to the winners on that from the shorts that belongs like okay so that that like some

exchange you would have to contend with that and there really are a significant open interest in bitcoin to other futures now if it's a 10% move maybe something a little wacky happens a lot of people thought they had a hedge and their hedge was not really a hedge um but like you still expire him just like spires to 44k instead of 40k right if it's actually going close to zero honestly think that a lot of exchanges would just sort of lie, right? They just like silently removed the T from the end of the markets and hope no one noticed. And like the indexes would mysteriously change. And then there'd be like this $20 billion of open interest in them, which was collateralized 50% by Tether from users and that Tether is now worth zero.

And the exchange you would have to choose between taking a massive loss or doing a massive clawback or, you know, it would be. be a mess. In other words, like, like a Tether, like a Bitcoin Tether future is implicitly a Bitcoin USD future. And when Tether stops being USD, they just sort of say, well, we really meant it was a USD future. That's like my honest guess about what would happen on some venues. Like, and, and, but of course, that doesn't solve. It's an interesting question because it's like, if you are like taking a position on Tether, are you implicitly taking a USD position or are you implicitly betting on the credit risk. And the answer is if you're taking a tether USD future, like a USDT gets USD future position, you're clearly taking a credit risk position. But if you're putting on it.

Yeah, but if it's Bitcoin tether, it's probably Bitcoin dollar. Exactly. No one is using that. Not no one, but like 90% the open interest is trying to bet on Bitcoin, not tether. On this note, and I want to just talk a little bit, make sure we get a little bit more to some of the interesting products you have on FTX. There is like, you have like this, it's an inverse or there's like a short tether, is it a short tether future or like a 3X short set? Yeah, we're both.

Yeah. You both, but actually like that's been a fantastic performer because, or what is it, like a 3X long tether thing that's just been like this straight up on? Yeah, the 3x long tether position,

product I think he's done pretty well. And that's just because basically harvesting premium from all the people that are betting on tether's collapse. Like explain that product. I think it's basically right. So like right now, I look at the tether. So we have on FTX,

we have a, USDT against USDA future. It's, you know, a cash settled future on the USD price of tether. And so this is explicitly a credit risk product. And, you know, and then you can ask, what is it trading at? So spot USD to USD is currently 999 at 1. So it's trading at a dollar. And there is millions of dollars bid on both sides of that one basis point wide market.

Now you look at the quarterly tether futures. So these are features expires. in about two months, September 24th. And they're currently, there's $40 million of open interest right now on these on FTCS, and they're currently trading 40 cents under. So you're trading at 9960. What that means is that like, you know, the market, if you wanted to read it this way, is pricing in, you know, 40 bips per month or per two months, so 20 bibs a month of credit

risk in Tether. Every month that Tether doesn't crash, like everyone who thought it was my money. betting it was going to crash, like bleeds a little bit. And everyone who bet that it wasn't going to crash gains a little bit. And not surprisingly, like, the world is divided into two people, not three people. The people are the people who think it won't crash and the people who think it will. There aren't people who think it's going to go up to $2. It's like a massive bowl on the price of $10.

Like $1 for $1 for, and so because of this, like, no one is like trying to buy this up above a dollar. Like the wars between the people shorting it at a dollar and the people who are longing it below a dollar. So it's going to settle below a dollar almost certainly, with some caveats we get to. Actually, there's some weird market dynamics. But, you know, because it always creates below a dollar, basically, and it never has below now. Right. And so like, just, you know, think this is a prediction market, right? Like, every year. Like CDS on Tether. Exactly. Every year that Tether doesn't default, like, that's a little bit of a Basing update against

the, like, Tether is going to default philosophy. And it's a little bit of an update towards the, like, Tether is worth a dollar philosophy. Um, so if, you think about a CDS, right, 20 bibs per month, that's what, that's like two and a half percent a year that this is trading under, you know, is that, first of all, it's not an insane number, right? If this is a 20 percent, double Bish or something. Yeah, that's right. You know, if this were trading at 20 percent under, that would be an insane number. Like, that's the kind of thing where, like, it's been five years and Heather hasn't imploded, like, already your, your, like, your thesis is not looking so good. Like, at two and a half percent a year, I think that's too big of a discount, but like, I could be wrong on that, you know. It's certainly like, you know, you can't look at history and be like 2% here is obviously too big of a discount. I would say that's tight versus their PR. Oh, yeah, absolutely. Right. This is sort of, and that's sort of what's going on, right?

Like, it's sort of trading halfway between their PR on the one hand and the fact that people successfully redeem it on the other hand, right? Yeah, I think that like if you have like some experience in Tradfai, like, the fact that people have successfully redeemed it for some like single digit number of years is like only so encouraging. Yeah. And I don't want to frame that as like, this should make you infinitely encouraged about it or anything. And I really don't want to push back into people who think it should be at a 2% per year discount. Not saying necessarily agree with them, but like I don't think they have a crazy position at all, right? The thing I want to sort of push back into the people who think it should have like a 30% per year discount. You know, this is like just not worth anything like a dollar position, which like I think there's a lot of evidence that that position is like not really right.

Whereas I think when you get to the question, like should this be worth a dollar or like a little bit less? Think of his commercial paper, right? Like, what should Tether's commercial paper trade at? You know, it's sort of a synthetic commercial paper, commercial paper, whatever.

You know, and the answer is like, I don't know, yeah. You know, sort of like, eh? I could tell we could talk about this for like another hour and a half, probably. But I know Matt has to go because the RK Ghost report is calling him and I have to go feed

a puppy. We should try to, maybe we should make this like a regular catch up that we can do every once in a while. That would be fun. I would do that. I would love to do that. Yeah, this was, this was a real treat. And thanks to both of you for coming on and absolutely would love to do it again.

Yeah, this is super fun. I'd totally do you. Great. Yeah, me as well. Thank you guys. Thanks, guys. Well, Joe, I enjoyed that conversation. It was nice to catch up with Sam, as always. And I am very curious to see what he does with $900 million.

One thing that struck me was his sort of vision for the ultimate end state of the exchange, like this idea of centralizing all your money in one place, not just for your investment. So you're investing in stocks and crypto, but also for payments. That was pretty intriguing. Yeah, I thought that was really interesting. And I, you know, it really does speak to the scope of the ambition. But again, you know, here's someone or here's an exchange that literally. nearly almost nobody had heard of a year ago,

and now it's one of the most powerful players in the entire world. So it's like, oh, you're kind of skeptical, like, betting against it. And, like, would it shock me if a bunch of Americans had, like, their, you know, SPY, ETF and TLT and all that and FTX, US one day, based on the trajectory and not. I also thought that was like a really good episode just because, like, you know, a lot of these, like, crypto conversations, you know, they could be a little bit like, It was just nice to sort of like strip away or get past some of the whole conversation about what this is all for, which is again another. But also just like how it really works.

And I think learning a little bit about just like this idea of like how crypto like collapses a lot of this stuff, like whether it's the clearinghouse and the exchange and the broker, it's all sort of flattened into one. And thinking about the implications of that was very interesting to hear Matt and Sam sort of riff on these topics about. Yeah. Also just weird to hear Matt. Levine, of all people, referred to the financial industry as tradfai. I was not, I was not ready for that. But that kind of shows how far we've come. The one other thing I would say is, I still think there's an open question around Tether. And we are certainly not done discussing it on the podcast. So we're going to have to dig into that one a little bit more, I think. Yeah. I mean,

it's like, it's interesting that I was surprised because just having followed Sam and his colleagues and even last time, I got some answers to questions, but now I have more questions. Yeah. So we'll have to do another. We'll collect all our questions and get back to the listeners. Shall we leave it there? Yeah, let's leave it there. All right.

This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. Follow our guests on Twitter. Sam Bankman-F-F-Urude. He's at SBF underscore FTX. And follow Matt Levine on Twitter at Matt underscore Levine. And be sure to follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening. can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed.

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