On The Brink with Castle Island - Hunter Merghart (Bitstamp) (EP.35)

Episode Date: January 20, 2020

Hunter Merghart, the Head of USA Operations for Bitstamp joins the show. In this episode we discuss:  - Bitstamp's history and USA roadmap - Hunter's career path in trading and how he came to enter the cryptoasset market - Market infrastructure: where we are as an industry, and what needs to be built in order to support institutional adoption ...and much more

Hi, everyone. This week on the podcast, we had Hunter Mergart, the head of U.S. operations of BitStamp. BitStamp is one of the longest running crypto asset exchanges. It's based in Europe and Hunter is leading the buildout of their U.S. presence. We wanted to have Hunter on the podcast because he has a unique perspective on market structure based on his experience in traditional finance. Prior to getting into crypto, he was a trader and he had stints at Credit Suisse, RBC, and Barclays. And prior to BitStamp, he worked at Coinbase on their institutional side of the house. Given his background, he has a great perspective on what needs to be built in order for institutional pools of capital to be able to participate in this market. We really enjoyed this conversation.

We hope you do too. And so without further ado, here's our conversation with Hunter Mergard. Brought down by bad mortgage investments, Lehman, which has 25,000 employees will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market. And the Fed is a sleek. The federal government is stepping it to stabilize Fannie Mae. and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis.

The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Hunter, thanks for joining the pod. Thanks, Matt. Really excited to be here. I really appreciate you inviting me.

So I think we're going to have a fun conversation and we want to have you on so that we could spend a lot of time just talking about market structure in your background. We've really liked some of these podcasts where we talk to people who have deep expertise in specific financial services fields and in your case trading. So I want to spend a lot of time on that today in where you see the intersection with crypto assets. But before we do, we'd love to just hear about your career trajectory and kind of what led you to BitSamp. I originally started in college as a COPSI economics double major. So I'd always kind of been interested in both markets and the intersection of technology. Back then, though, when I started looking around for internships, Silicon Valley did not exist

in the form it does today. So there weren't a lot of avenues for me to kind of get into and combine the two. So looked around and ended up with an internship at Credit Suisse and then a full-time offer as an equity trader there and ended up trading small-cap and mid-cap financial stocks during the financial crisis. Had to be an exciting. Really interesting time. Really give me an appreciation for counterparty risk, volatility, market structure, and it was an unbelievable career opportunity to be at a large financial institution

during that time. Obviously, unbelievable experience, but also tough time for a lot of folks during that. So you were a trader, and this would have been probably the mid-2000s, 2007, 2008 time frame. this was before Bitcoin was even a thing. So when did you first hear about Bitcoin and crypto assets? I first heard about Bitcoin really in 2011. I think it was a wired article talking about Silk Road, I think, and that kind of piqued my interest a little bit. I had always kind of been interested in emerging technologies, kind of given my comps eye background. So I had always been on our IRC chats as a kid and Napster, BitTorrent.

So I was always willing to kind of play with emerging technologies. So heard about it then, had even gone as far as looking into how to acquire some. But back then, there wasn't really an easy way. I went as far as kind of Western Unioning going down that path on like, I think an IRC chat trying to figure out if I could Western Union someone. Sent some money to Cox. Sounded way too sketchy, walked away at that point, but kept an eye on everything. And then I think in around 2013, 2012, 2013, Mark and injury,

and Fred Wilson started tweeting about it when Andreessen was public on Twitter. And that piqued my interest again to unbelievably smart people, have kind of seen emerging technologies. If they're interested in it, there's probably something here. So that's how I really got into it. Mark Andreessen, Why Bitcoin Matters, op-ed in the New York Times got a lot of people's attention. I remember I was sort of in that camp where I was reading Fred Wilson's blog all the time and reading Twitter. And that certainly was a big rallying cry. So along the way, you, bounced to a couple different firms on the trading side, and then you got into crypto full-time at Coinbase. That's a big leap. What went into that decision? It started kind of back in 2014.

I started thinking about long-term career, longevity of an equity trader with changes in market structure and everything. What am I unbelievably passionate about? It's markets, and it's also technology, including Bitcoin at that time. So I actually applied for a job at Itbit, which is now Paxos on the OTC desk there, which was being run by Bobby Cho. So applied, interviewed with Bobby, met a couple of folks, Chad. And it's interesting because it bit Chad and Emile, who started it, are former SAC, Steve Cohen, traders. And they were trading financial stocks during a financial crisis. And that's how they got into it. So it felt really natural. Bobby ended up never hiring anyone. And Bobby obviously left to go to Cumberland after that. But I was still fascinated, wanted to get my

foot in the door, but back then it was blockchain, not Bitcoin, and there were very few institutional jobs. So I just kept my eye on companies that were really interesting to me, like Coinbase in 2017. They posted some institutional jobs on their website, and I just applied. That's crazy. I had no idea about that backstory. It was wild, just kind of the small community back then, small group of people. And, you know, Bobby obviously has been in the space for a long time now. As a trader, were you looking at this market and saying, hey, traditional kind of cash equity markets are getting electronified and there's less of a role here for traders, whereas here's another market where there are some really big opportunities. Yeah, I think that was really going through my head. When I started 2005 at Credit Suisse, we were allowed to have prop books and we were allowed to trade firm capital. and an equity trading role was really, really fun and interesting from a risk standpoint.

Post financial crisis, Dodd-Frank, post obviously Lehman and Bear Stearns blowing up because of some traders taking a lot of risk that those jobs changed, became more agency, became more relationship-based, but also a lot less the risk tolerance on a lot of those desks. So for me, the job became less exciting, less interesting, and here was a greenfield opportunity to hopefully be a part of creating a new asset class. And also the market structure didn't seem like it was developed in any way, shape, or form, especially after talking to Bobby in 2014, where it was, it felt like that kind of old school trading, pick up the phone, have a conversation with somebody and where are the screens,

what's the actual right price, that price discovery. It was fun. It's a similar story that I hear even people on the custody side. You'll hear people that are coming out of a state street or coming out of a B&Y Mellon and saying we've never seen a more exciting asset to custody. Custody fees are just racing to zero in a lot of different asset classes. And here's a here's an asset class where it's not and where there's some novel challenges and everything still needs to get built. So it's similar to trading.

Yep, definitely. Let's talk a bit about BitStamp. You're the head of U.S. operations for BitStamp. This is a brand new role, brand new team. Got a brand new office here. It's really nice. Thank you. I guess I won't say where we are for obstacle reasons.

I almost said where we were. Somewhere in Crypto, Somewhere in crypto alley. But so talk a little bit about the history of BitStamp and what this new role is for you. BitStamp is the longest standing cryptocurrency exchange. We are the largest European-based cryptocurrency exchange. We were founded in 2011 in Slovenia. We were founded. We had two co-founders, Nate Kodrick and another co-founder. Nate is still currently our CEO. And the genesis and story of BitStamp was like a lot of exchanges, Nate was fascinated with Bitcoin, couldn't find an easy way to do it in Europe. So why not create his own exchange? The interesting part for us is that Nate has a legal background. So we have always been kind of driven by that regulatory and legal kind of mindset. And I think that's really differentiated

bit stamp over the years, especially from a lot of those early exchanges where like Mount Gox, it was fly-by-night kind of operation, I'm not legally responsible for something that happens, or you know, not taking some of this that seriously around the compliance. You know, we've always tried to do the right thing. We were the first exchange to do KYC, AML. We were the first exchange in Europe to be regulated by the CSSF out of Luxembourg. We applied for a bit license back in 2014, finally granted April of last year. So I think that's what's really set us apart over the trajectory of the growth of this company. The exchange lineup, if you look at it over the years in terms of the dominant market share players, BitStamp has had remarkable staying power. What do you attribute

that to? Is that the institutional first sort of build this from a regulatory compliance standpoint framework that you've operated up with? I think it's that that people feel and trust us. I think trust in this space is really, really important. I also think it's, we have really doubled down at every opportunity on the customer service experience and the client service experience and then also the underlying technology and infrastructure, really trying to build it where it can scale. And I think in 2017, 2018, we benefited from a lot of that when people were having issues with my former employer and some other exchanges that were going down and having downtime on the exchange too. We never had that. By every metric we looked at and talking to outside sources, we have the least amount of downtime during the entire time period.

So I think we benefited from that. I also think for us it's, you know, liquidity begets liquidity. We've been around as long as we have. So being kind of Bitcoin First Exchange back in 2011, those order books are really, really robust and really deep. And we have those longstanding client relationships that you can't really jump into this space and acquire overnight necessarily. I think it's a little bit harder at this point. That makes sense. So when you think about your mandate and objectives in the United States, what are you the most focused on right now building out this franchise? I should mention too. I think the surprise, one surprising note, we have four million clients globally. I think a lot of people think we're a lot smaller than that. Most days we're in the top three in terms of exchanges from an exchange volume perspective. And also, you know, we're 250 employees globally. So we're a big company. I think that that gets lost sometimes on people. I do think we kind of have the underdog story occasionally, which is good. But I think we're really trying to get our voice out there now appropriately. And that and that kind of dove. And that kind of dove.

details with the mission here in the U.S. for us is how do we really get our brand, which is unbelievably strong in Europe, being the largest European exchange, how do we kind of lever that into the U.S.? So there's a couple of different ways that I think about it. It's, you know, a local coverage perspective, that really, really good client service experience that people, especially on the institutional side, have with BitStamp, bringing that here. So hiring business development here, hiring client services here. Then it's also navigating the regulatory and compliance aspect of the U.S. markets, which is difficult, right? Look, I think it's getting better. We, again, have always tried to embrace regulation. And we want to, again, we're one of the few exchanges that

are moving into regulated environments because we want that. So yeah, it can be difficult, but I think regulators are starting to listen and starting to have real conversations. And that's a goal of having people here in the U.S. to really drive those conversations. We want to seat at the table with regulators. We want to share our experiences because we've been regulated almost longer than anyone else in Europe. So I think that's a huge opportunity for us. So you come from a traditional markets background. You've been a trader at Credit Suisse, RBC, Barclays. If you look at this market, obviously there's a gap between where the crypto asset market is now from an infrastructure standpoint and then versus where it needs to go in order for it to be institutional ready, such that

large pools of capital can deploy into this confidently. What needs to change here? What needs to evolve from a market structure standpoint? A lot of things still. I think we're still in the very early innings of market structure. Sometimes I think about it as, you know, if I was in my old seat as an equity trader at Barclays and I was sitting there and I wanted to trade five million bucks worth of BTC, I could just click. If I'm doing it in equities, it's a click of a button. You're done. there's nothing, and I don't have to think about kind of how that trade clears and settles. And then if it's going to clear and settle at a certain point, counterparty risk, I don't really have to worry about the regulatory landscape, I don't have to worry about the risk-wating

asset of that. That is still very, very up in the air for crypto, right, and for Bitcoin in particular. So I always think about that. How do you make it, so if a trader at XYZ hedge fund or bank wanted to just execute $5 million not as worth a BTC. How do you make it as easy as not having a brand new OMS on order management system on their screen? Can you integrate it into Bloomberg or something else? Or how do we become kind of the pipe along that path? And what do you think that is? Is that because this is a digital bearer asset where custody is a big challenge? What kind of specific building blocks would you like

to see you get put in place here over the next couple years? I think some of it stems from custody. and then, you know, you have the buzzword that, the buzzwords that everyone wants to use these days, like we need a prime broker or a real prime brokerage model. But what does that really mean? I think it kind of ties into all of that, right? How do you have companies that are big enough and have big enough balance sheet to kind of do that? You can call yourself prime broker, but if you have $10 million, you can't borrow and lend off of that. People aren't going to trust.

There's real systematic risk there. And then also from a regulator aspect, do you start looking like a bank? you need to get regulated at a bank. How do you kind of fit into that? And then also, again, from a mandate perspective, we constantly get asked, okay, well, if I wanted to do this, how do I fit this into a long, short equity portfolio? Well, is there GBTC is kind of the only option? How would I risk weight this on my portfolio? So I think it's, there's a lot of things still. One of the things that I think is under discussed, we talk a lot about some of the institutional barriers for large firms around custody, around trade-ins.

and even around just data, access to data. Like, what is the price of Bitcoin on any given day, any given minute? But the other thing I think is maybe under-discussed is just what is your thesis for entering the space? Like, why would an institution want to hold some of these things? Are they investing based on the idea that this is digital gold? Are they investing based? It's a startup type of thing. Like, what specifically gets them excited?

So you talk to a lot of these large institutions. What would you say is the prevailing thesis for what? why large institutions are starting to even dabble in this space to begin with. Well, I think the longer it's around, the more, the easier it is to tell the story, right? And it's just kind of institutional knowledge now. Wait, I thought this was going away. It's still here. And the price is still where it is. But I do think it's that kind of uncorrelated asset. And I also think the interesting part now that you're having some new companies step into the space being able to offer some sort of yield. You know, we're in a yield-starved environment

across the world. So if you can actually find an asset that might have exponential price appreciation paired with actual yield, there's not a lot out there, right? It's kind of still a little bit of a venture bet. I think that's where the crypto first kind of institutional companies think about the asset class that it's a little bit of a venture bet, but where the macro kind of institutional banking partners think about it. One, yeah, on commodity, gold. I also think a lot of, though, the banks are kind of coming at this asset class in an interesting way where we've had some interesting conversations and won't name names, but they're looking a lot of these companies in the space like us and like some other exchanges that are real revenue generating businesses with real

P&L that might have M&A, that might IPO at some point. And if they're just broadly saying at the executive level, we don't touch crypto, well, then all of these M&A fees are they just going to leave them on the table for somebody else? So we're seeing some of that, which I think is interesting too. So it's also venture funds or private equity funds coming out the space from how do I get involved in the capital structure of these companies and then kind of getting into, wow, crypto is really, really interesting. It's almost, it's kind of, I hadn't seen it until probably over the past kind of year, year and a half, but that's really an interesting conversation. You could see how that would be a big impetus for some of these firms to start getting involved. When you think about the landscape of

crypto assets out there, are there categories that you get more? or less excited about. And particularly, would be curious your view on a number of these emerging assets that have raised money through private simple agreements for future tokens or are going to convert. And are these things securities? Are they not securities? How do you see this playing out just in terms of the assets that you could even have theoretically on the platform? I will say all this from a personal, not BitStamp related, because I don't want to comment on asset listing policy or anything like that. I would say BitStamp has always been one of the most conservative exchanges. We only have five assets listed on platform. We feel very,

very comfortable with everything currently on platform, and we are exploring other assets. I think we'd like to add some down the road, but I do envision us always being one of the most conservative. I think we take that very seriously, anything we add, and we want to make sure it's high quality. I don't see us ever going out on the long tail like a lot of our competitors. And I think that will be a differentiator for us down the road, kind of that trusted aspect of the exchange. From a personal standpoint, Yeah, I think a lot of the stuff that went on in 2017, 2018, coming from an equity trading background, a lot of these structures and things looked like equity, like without the benefit of equity.

I think what's really interesting, though, is, you know, there is this demand from retail clients to participate in the capital markets. And you really, really saw that in 2017, 2018. So I think it's interesting now that the SEC is revisiting some of their thoughts around credited investing. And I almost think it's kind of because of what happened in 2017, 2018. Obviously, there were bad actors. But some stuff that might eventually have utility, if it could have been easier to make it look like a real equity product, maybe and actually go through the securities listing process or a security, you know, going to the SEC and actually

going through a reg A or reg D offering, if it was easier, I think you might have seen more people do that. I do get excited about privacy tokens and assets. I, I think personally that's what's something really interesting as cash kind of goes away. And we all give up more and more privacy every day in our lives. How do we all live in this world unless you have the ability to actually act as a sovereign individual? You're referencing one of my favorite books, the sovereign individual. The privacy coin privacy network one has been one that's continued. I agree with you.

I think it's been continually fascinating to me to watch these projects play out. I do worry a little bit that these privacy first at the base layer protocols just might not be feasible at some degree from a regulatory standpoint in the United States at a certain level where you might have banks and or regulators that just choose not to service institutions at the on ramps that allow for a Monero or a grin on their platforms. It's definitely something I worry about. And I think the implication there would be, you know, maybe we'll have to have privacy at the wallet level on other Bitcoin, for example, maybe a protocol that does not have privacy at the

protocol level, but maybe we could have it through wallet mixing and things like that. Curious if you have a standpoint on that, or is it maybe just too early to tell if that's going to play out? I think it's a really good point. I think the regulators, again, want to have the conversation, want to learn about this, want to understand what is possible with the technology, what is the difference between different blockchains. It's an educational process. What I do think is, you know, with the Thadiff travel rule and, you know, the anti-money laundering directive, five out of Europe, some of these

things. At the exchange level, it is going to be tough to see if you can really add privacy tokens to platforms and still kind of get regulators on board with it. I think it's going to be an interesting conversation. I don't have the answer there. Yeah. I wouldn't expect to have the answer. I mean, the other thing I think a lot about from the perspective of an investor is how will value accrue to privacy token networks? And if you can't audit the supply, because it's impossible to audit the supply, will those networks actually accrue meaningful market cap, meaningful value? And will people trust them as a store of value. I mean, we've seen some inflation bugs that are pretty scary. So I don't know, time will tell. I think it's some of the most cutting edge technology out there and some of the most exciting. things are going on. So I echo your sentiment there. Maybe moving on a little bit, just one of the other things that I find fascinating about this industry is we don't really have a bifurcation yet of market structure the way that we do in traditional markets. So you have exchanges. And I guess I would put BitStamp in this category of if you looked at BitStamp through the context of a conventional

market, you might think of it more as like a retail broker and not an exchange. Like there's no seat license. It's not institutional. coming in. Certainly there is an exchange there, but it's sort of combining aspects of a retail broker dealer and an exchange. And so curious what you think of that. And then secondly is the custody aspect. Some exchanges are also doing custody in house. So it's really a full stack type of suite. And do you think that this will evolve over time where we'll start to have a bifurcation where some exchanges just prove to be retail only and they'll direct flow to other venues? And also, same question on the custody side. We'll start to see bifurcation. Good questions. I think it's interesting. I do think

this space is going to get pulled apart a little bit going forward in terms of exchange, getting separated from custody, getting separated from maybe a broker-dealer type model. A lot of people obviously are making the bet that it's going to continue to be vertically integrated. I think what we hear from some institutions that we talk to, and I think it's going to become more and more as we go forward, as soon as you kind of latch on in exchange to custody, your risks compound dramatically. As soon as you add a derivatives product or a futures product to a spot exchange, your risk profile to that counterparty, that institution dramatically changes. So how willing they are to put capital use on your exchange and then from a balance sheet perspective. So as you kind of compound these businesses,

your risk profile changes dramatically. Can you get to a place where maybe somebody has a large enough balance sheet and can take on all this risk and get insured appropriately. Maybe, but I also think there's going to be a regulatory aspect where regulators, you know, are going to continue to look at the space and say, well, are you doing, you know, enough for, you know, client due diligence, are you doing enough for suitability? From an exchange perspective, okay, if everything you're trading is a commodity, there's, you know, from a spot commodities market standpoint, what does that look like? From a futures perspective, you want on or for futures, can you do that without a broker

dealer. I think that's going to become more clear over the next couple years. I think people are going to be almost, even if they want to stay vertically integrated, going to be kind of forced to pull things apart. Like again in traditional finance, I think the bare nature of the asset class makes things more difficult to do that. But I do think you'll start to see it. And I also think as kind of counterparties get comfortable with each other, you'll see more credit extension, more kind of that prime brokerage type model. That'll give people the ability to separate things out more. The other thing that sort of reinforces your idea that these would bifurcate a little bit would be, as some of these companies become more and more mature and they head towards the public

markets, the profile of what these things trade at on the public markets is just very different. Like the multiple of a retail brokerage is totally different than the multiple of like an ICE or a CBOE or one of these large exchange venues. And so from a corporate perspective, it doesn't make much sense to have them combined for a shareholder. Yeah, I think it's a really good point. I think where we at BitStamp, we're not really venture-backed, we're wholly owned by private equity firm. We have a very, very long-term view. It gives us kind of the ability, which again, I think differentiates us to stay focused on just being the best exchange. I think sometimes, from what I've seen and talk to people about, the Silicon Valley mindset is we need to own the entire total addressable

market. And so the total addressable market is every kind of business under the sun in finance we need to do because that's how we can get the highest multiple because you can't just be a custody business or a bank. You're going to get traded at book value essentially. So I sometimes think that's why a lot of the other or maybe some other competitors in the space or other companies are doing what they're doing because if you want to value it, it's, you know, value these companies at higher multiples, you need to do all of these businesses, or at least do something novel with them. The derivatives exchanges are also really interesting, especially the fact that a lot of money is being made on some of these unregulated offshore venues. My bias here is that I think that

this derivatives market is just going to be orders of magnitude larger than spot, potentially at some point, and will have to become more and more regulated. Do you see this as an opportunity, I guess, just for the market in general is the first question, and then is that a ever something that you would study as an expansion opportunity. Yeah, I agree with you. I think you look at every asset class market, you know, are much, much larger than the underlying spot market. I don't think crypto is going to be any different from that. What I do think is different in crypto for the time being, and we'll see how long it lasts, is the 100x leverage. That doesn't really exist in traditional markets. And there's a lot of reasons for that, right? Is that suitable for retail clients

to be trading 100x leverage? I think we, at Bits. stamp again, want what's best for our clients. And also, again, we want to maintain our regulated status. So how can we fit a derivatives product into a regulated framework that is actually going to be attractive to clients? We, I would say, are actively looking at it, continue to look at it, but we have an unbelievably good spot exchange right now. And I don't think we want to really disrupt that by introducing a product that would raise the risk profile of the exchange dramatically. But I do think there's some really, really good exchanges out there that are doing, you know, really interesting things with derivatives and technology and that settlement. And, but it's just the 100x leverage.

I don't know how long that will last, maybe in some jurisdictions, because, you know, there's FX trading in Asia that has a decent amount of leverage. But in regulated markets, we'll see. It's interesting. So Nick calls them altcoin casinos, because that's really what the product market fit is, right? You're just talking about it's a gambling website. at the end of the day. I do not want to talk about my competitors and our competitors in any way, shape, or form. But I do think, you know, the barriers to entry on some of that stuff are extremely low. And the people probably trading on that, you know, those are sophisticated financial instruments, I would say. And there should be some educational process, I think,

for some of these exchanges to do that. So talking about the regulation, and particularly coming back to some of the spot market issues. Bitwise's ETF denial was really interesting to me. It was a 112 page right up from the SEC, which first of all, I thought was great that they actually just put the time and the energy into specifically articulating some of the market inefficiencies that need to exist in order for an ETF to get approved. And one of the structural deficiencies that they called out was the lack of surveillance sharing agreements between the exchanges. is this something that is on the radar of the exchanges? Is there any sort of effort to band together to address some of these issues? I did appreciate that the SEC responded to. I think it's good

for the space to actually have, again, a continuing dialogue. You know, it's interesting. I think I talked about this with another publication slash podcast. And we had this incident in May where there was large volatility on the exchange. And we got a number of questions around that. And it's really where the market structure is right now and the way that there's GDPR in Europe around privacy and we take our clients' privacy extremely seriously, how much can you look at other exchanges and know exactly what goes on there without having information sharing agreements? At the same time, it's not really the nature of crypto to do that. And there's very few asset classes that are as global as crypto, right? If you look at U.S. equity market structure, there's really, it's an oligopoly. There's New York Stock

Exchange and NASDAQ. It's pretty. easy to, for a regulator here, we have hundreds of exchanges in the world. And so I think information sharing, it probably will end up happening because regulators either through FATF or something else, they're going to mandate it, they're going to figure it out. And if you're going to want to get Fiat in or out of the system, you're probably going to have to go through that. But in terms of a broader regulatory body to kind of come together and say that, I don't know if it's, it can really be driven by the U.S. because you have all the Asian exchanges and then other exchanges. And then other changes globally that you'd have to get everyone to buy into it somehow. So it'd be really,

really tough. But it's on all of our radars. We have a market surveillance team based out of London, and we take all of it extremely seriously. One of the bit license requirements is, again, to kind of make sure that we're monitoring market manipulation. And I do think, if you look at the U.S. capital markets, I think that's a good thing. We have such deep and robust capital markets here because there are rules and regulations, and we try and create a level playing field. I think, well, I said BitStamp, we don't trade in our own exchange. We don't have an OTC desk. We want to create a level playing field for anybody that is trading on our exchange.

So we should take market manipulation seriously because of that. It's good business. Agreed. I mean, to me, there's sort of two issues that the SEC is going to have to confront here. One is just it's unrealistic that the entire market would come under surveillance, right? And there will always be unregulated exchanges. And by the way, in other asset classes where we have ETFs like gold, there are exchanges happening all the time that are peer to peer that are not under surveillance.

Maybe that's not the best analogy. But this is, to your point, a global asset. So I think on that point, there's maybe a threshold that needs to be considered is what percentage of the market needs to become regulated at the spot market in order to satisfy the regulator. But then the other question is, are we going to see an SR? emerge within that regulated portion of the market and have guidelines and frameworks for how these venues operate. Are we too early for that? I've seen a few efforts to put things in place

on that front. There's definitely a couple groups trying to go down that path. I think you need stakeholders from every part of this industry. So it can't just be exchanges kind of doing that. You need the prop shops that are trading. You need the custodians to be involved in that conversation. that's the only way we're going to move forward. And I still think there's a couple players in this space that are trying to own everything, which makes it a little bit difficult to try and get consensus. Or if they're not willing to kind of move the dialogue forward, it's hard for everyone else to kind of be involved in that conversation.

So I'm optimistic that we're moving in that direction. I'd like to see us come up with some solutions rather than something pushed down, down our throats essentially. I also worry, though, a little bit that if we kind of being crypto-first companies can't figure this out, the regulators will try and just push this towards the oligopoly players in traditional asset classes. Obviously, there's only a couple companies in the world that run the vast majority of exchanges now. If we can't figure that out, this asset will probably just, potentially just trade on a couple of those exchanges or traditional players. And I don't think

it'll get to be as big as it could be, just because it will, I think it'll stifle, you know, innovation and how we're thinking about a lot of this stuff. tend to agree with you. I think that there is a big opportunity to get it right from the outside and not wait until some of these larger firms enter and actually start to gain the market share. Maybe staying on the regulatory environment for one last question on this part is what are some of these key challenges that are facing the exchanges these days? Obviously, state-by-state money transmission has sort of been the path forward for a lot of U.S.-based venues, but what other regulators are you interacting with? What are the challenges that are faced by a spot market exchange?

Yeah, I think, at least from everything I've heard and read, I do think it seems like the SEC and CFTC are starting to figure out how they want to view this space. I do think it sounds like, you know, again, from listening to Heath, who's the CFTC commissioner, it sounds like they want to bucket anything that is not specifically said to be a security or would be a commodity first. Now, I don't know if that'll eventually lead to some safe harbors for certain exchanges. or broad exchanges around certain assets that have been deemed or that aren't deemed securities, it's still pretty gray there. But I do think the SEC and CFTC are really trying to move the conversation forward, which is good. I think we're not at this point where FINRAs that involved because there's very few kind of crypto first broker dealers because there's very few things that are securities.

So unless, again, you've broadly said everything that is crypto outside of Bitcoin and meath as a security, again, it's kind of a question of how do we fit into this landscape. I think people would like a little bit more guidance. I know SEC and CFTC have been kind of hands off around that, but I do think it's starting at least in their talks they're giving and presenting at conferences, starting to get a little bit clearer. So I still think those are going to be the two main regulatory bodies, at least that, you know, the vast majority of us are going to be interfacing with. It's interesting you bring up FINRA. I think a lot of the critiques that I hear around FINRA is around their inactivity on the security token front, where you have a lot of broker

dealers that would like the ability to hold these assets that are explicitly securities. And then what is the definition of custody for a security token? And what does possession and control look like in the context of a broker dealer? My understanding is that that's really where some of these firms, these startups, and also existing broker dealers are just struggling for clarity. I guess my question, though, for people would be what name a couple security tokens that are interesting that you would want to trade, right? And I think about it a lot, like from a broker dealer perspective, okay, let's say tomorrow everyone in the space has a broker dealer license

and you have FINRA registered folks. What are you going to trade? What is going to be interesting and what does that revenue model look like? I think a lot of these are pretty low liquidity. they have some have decent liquidity because just because there's a retail component of it because they aren't registered maybe. But the ones that are are trading kind of in a small cap, midcap, stock kind of perspective where it's a couple trades a day. How do you make money on that? Is the spread going to be wide enough? I don't know. It's kind of, it's pretty interesting. Well, so I'll take the other side of that, not because I'm a security token fan. We're not, we're actually not actively investing in the security token space, primarily because I think

a lot of the benefits will just be around efficiency gains and a lot of the benefits will accrue to the existing intermediaries, just in the form of lower cost, lower cost to potentially execute, certainly lower cost to custody potentially, and just quicker trading and maybe have greater visibility on those networks. However, you know, I think the reason why we don't have good issues out there is primarily just because we don't have clarity on what it takes to put one these things. So there's really no, I think the way that people will start to care is if the next the next Uber, and maybe that's a bad example, but maybe like Coinbase, for instance, what if they were to go public with a security token? All of a sudden, you'd have a lot of asset

managers that are immediately trying to instruct their back office on how do we hold this thing, how do we participate in this, how do we fractionally own it. I mean, you saw that with overstock, Patrick Byrne and team over there trying to force people kind of, you know, some ways to hold this token and get bought into the ecosystem. I thought it was a really, really interesting proposition. And I think to your point, you know, if you had some of these exchange tokens that kind of look a little bit and feel a little bit like securities in some ways, you actually had them go through the process and actually had well thought out revenue sharing and agreements, et cetera, with the token holders, you know, that would get people interested for sure. So that goes back,

though. You need high quality assets. You need high quality kind of structure around this to incentivize people get involved. So I would say I wouldn't rule us out thinking about doing something like that at some point too. I think if you're going to be in the space, it would be interesting to eat your own dog food in a lot of ways in terms of, okay, you're in exchange, list your own asset on it. It would be really cool. This kind of goes back to, I have a lot of people that occasionally will reach out and just ask, they work at large financial firms, for instance, and are trying to figure out how to get their firms interested and exciting about crypto. And I was incredibly fortunate. Nick was incredibly fortunate that we worked at Fidelity where senior leadership

just really got this right away and was open. The whole firm was very open to exploring. But one of the things I often tell people that are reaching out from asset management firms is just prepare your firm, paint the picture of what this is going to look like when someone does a digitally issued security for the first time. And you're going to have to figure out how to buy it. And so you're going to want to have education on public-private key cryptography. And you're going to want to have people that deeply. understand back office integrations, actually learning about blockchain networks. And yeah, it's not the most exciting stuff in the world. But maybe if you can start to figure out some of that, then you can

start to figure out how to buy Bitcoin and how to buy Ethereum and push that forward in the context. So I think these type of things have the benefit of getting talented people at big firms just engaged with that, which I think is super important. I think that that all makes a lot of sense. I also think that in terms of how you kind of navigate that landscape, it's kind of what you saw in 2017, 2018, that there wasn't much and then everybody wanted to be in. Everybody wanted a bit stamp account, let's say. And so you want to do the work now, the hard work, and learn about the space, get people prepared. And also, I would say from an institutional perspective, this is what we've seen some of, too, is we're encouraging people, if you're thinking about it,

you have it, you have the ability to do it, open up an account, even if you don't use it. Anytime soon, that least you have an account just in case we get into that exponential growth phase. where, you know, we hit 20,000 again, and everybody wants to open an account. These are manual processes. We're talking about that a little bit earlier. So it's there will be an onboarding queue that will be, I'm not trying to create FOMO here, but it's almost do the work now. If you even have an inkling that you believe in the space or want to be involved in the space

from an institutional or even retail perspective, do it now. There's no real cost, right, outside of a little bit of time and effort. That's exactly right. I mean, we both know Dan Madishowski formerly of Circle now of CMS holding. and he's talked about that, is that Circle had all of that infrastructure built during the last run-up. And so they were just really well positioned at the time. And similar thing will happen this time. Those who are prepared and piped into the custodians and piped into the exchanges, the OTC venues, the order routers.

I mean, this is a lot of benefit. Yeah. It's where you get real alpha, right? If you're a buy-side shop, I think, you know, and what we've seen to, I'm sure Dan spoke to this, but the operational efficiencies, you know, again, if you can really figure out how to move cash fast and how to move coin fast, and you can generate real alpha still. I think it's not as much as it was back then. But if we got, again, into the dislocated, globally dislocated exchange, you could have arbitrage

opportunities, but you need to be set up to actually take advantage of those. One of the things that's most exciting to me right now is the talent that's flowing into this industry, not only from the technical side, but from the market side. people like you that are coming from traditional backgrounds and getting into the space. Are you seeing this? You talk to some of your former colleagues. Are they starting to dabble in crypto? Yeah, we definitely see it. I mean, through the hiring process here in the U.S., we had a lot of folks from traditional finance applied for a lot of jobs. And so the talent is here. I do think, at least for the traditional finance, sometimes it's more driven by price action. So I get more

questions for the past couple days. When you get better price action, or it's in the headlines again as a macro hedge, people get more interested. I wish some of it was more from the intellectual standpoint. And I do, you do get that, but that's kind of what we look for in hiring. And I think that's what a lot of the folks in the industry look for, that it's coming from a place of I'm really interested in the technology. I'm interested in the market structure, not just purely, you need to generate alpha, especially if you're a hedge fund manager, but from a job perspective, I think it's all of those things you kind of want to see. But we are seeing unbelievably talented people want to get into this space. But it is an interesting space because it's either there's the five-person crypto-first kind of

startup, or there's the BMith is in the space kind of, you know, like some of the other exchanges that have a thousand-person teams. And none of them have really gone public yet. So what is kind of the comp structures look like? And then what does the career trajectory growth look like? And then you have other companies that looked like they were doing unbelievably well, you had an unbelievably talented people go to them, gravitate towards them, and then kind of imploded over the course of, you know, six to 12 months and where all those people, do they go back to traditional finance sometimes, do they want to stay in the space? I kind of, this was before my time, but it feels at least reading a lot of books about Silicon Valley during the bubble, feels a lot like that.

Like we're in the trough of disillusionment right now in the Gartner hype cycle. And the people that are really invested, interested for the right reasons, want to be in the space or staying in the space or gravitating towards space. And people that were only in it for Bitcoin 20,000, probably not as interested right now. But again, I think if we got back to all-time highs, you would see a lot more people banging you down the door. I couldn't agree more with what you're saying around having to be passionate about it. I mean, when we were talking to people back in 2014-15 when I was at Fidelity and we'd be talking to people about joining the team, you could almost ask a couple qualifying questions with the intention of figuring out if they follow the Bitcoin subreddit,

which was back then was one of the only places that you could get news. And it's kind of like, okay, well, if you're not actively reading about this stuff, you're going to have a hard time here. Because this is something that if you're very passionate about it, you're going to be much more productive and you're going to understand what's going on a lot more. And so having those type of people that have that background that you need and then are just super passionate about it is really where the magic happens. Yeah. And I would say at every one of these companies seems like at least the conversations in my experiences, these are unbelievably challenging jobs and businesses, right? The market structure is not there. It's not just jumping in. Oh, I was an equity trader. I can go trade crypto or just go start hedge fund. There's operational and you're creating the market and you have to be

creative and you have to be involved. And as you said, passionate. So it's, it's the, they're taxing. But they're fun. They're fun. If you're passionate, Matt, they are fun jobs. To me, it reminds me less of the dot-com bubble and maybe more of 1993, where there's so much stuff being built and we don't really know what the killer app is going to be. And the browser moment hasn't happened yet. And there's just a ton of exciting stuff, which is why I'm so excited to see what you're building here with BitStamp USA. And so where can people find out more about BitStamp? Where can they follow you guys? How can they get involved?

I think our website, BitStamp.net, is probably the best place. We have a Twitter presence. we're on LinkedIn as new jobs pop up we'll be posting them there i think you're going to see a lot more out of us we just hired a new u.s marketing lead i think we're going to be a lot more vocal in the space going forward but i also think we're going to stay focused i think that's that will be how we differentiate ourselves going forward trying not to do a thousand different things not that well we're going to try and do a couple things really really really well and i think that's been in our DNA and it'll stay in our DNA and yeah and i'm always open to coffees in new york if anyone wants to reach out to me that way.

Awesome. Well, that's a great place to leave it. Thanks so much for joining the pod today, Hunter. Thanks so much, Matt. This has been another episode of On the Brink with Castle Island Ventures. To learn more or to subscribe to our newsletter, please visitcastleisland. And a big thank you to all of our listeners, except those of you who believe in the underlying blockchain technology, but not cryptocurrency. You know who you are.