On The Brink with Castle Island - Luke Hoersten (Bitnomial) on Digital Asset Derivatives (EP.549)

Episode Date: July 29, 2024

Luke Hoersten, the founder and CEO of Bitnomial joins the show. In this episode we discuss: Luke's background and the path that led him to start Bitnomial. An overview of Bitnomial and the products that the firm has launched to date. Perspectives on the market participants that are engaging in the digital asset derivatives market today. The future of digital asset market structure in the United States. The regulatory landscape and what is potentially ahead for the industry. How Bitnomial's licensing strategy is unlocking new product opportunities. To learn more about Bitnomial visit their website.

Today on the podcast, I sat down with Luke Hurston, the founder and CEO of Bitnomiel. Bitnomial is a U.S. regulated derivatives exchange for digital assets. In this episode, we discussed the evolving market structure for digital assets in the U.S., the impact of stable coins, and the impact of the launch of Bitcoin and Ethereum ETFs in the U.S. market. I think you'll enjoy this one. So without further ado, here's my conversation with Luke from Bitnomial. Matt Walsh and Nick Carter are partners at Castle Island Ventures.

All of these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guests may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. 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 mortgage. And the Fed is asleep.

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 into 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. Bitcoin. Luke, thanks so much for joining us today on the podcast.

Excited to talk about bitnomial and market structure. Yeah, thanks a lot for having me. Me too. So we'd love to just kick it off with a little bit about your background and the path that led you to start the company. So I had a technology background computer science and luckily got recruited into proprietary trading right out of college without really knowing much about it. I was just attracted with the technical complexity of the industry and then got thrown into some trading desks and got started on algorithm trading and that side of things and started to get my feet wet. And then in, I believe it was like 2010, there was a lot of market unrest going on. I was on the FX desk at the time just seeing where people were hedging, what things looked like on the front lines.

And there was a lot of geopolitical risk around some of the big currencies really getting inflated. And so what was interesting was where are people turning to hedge their effects exposure? It's something that you can't really get away from. you always kind of have FX exposure in one way or another, kind of like oxygen. And everybody started hedging into the Swiss franc, which pushed the value of the front way up. It respectively made their exports very expensive. And so it was damaging to their economy. They pegged the franc to the euro.

It blew a whole bunch of people's trades out. Then they ended up depeging later, blew a whole bunch of other trades out, including some big FX brokers and things like that. And I was just like, why is this the way we're managing geopolitical risk? kind of across the globe. And the Bitcoin white paper had been out at the time. Me and some other folks had been trading it for fun internally at the firm. And I started to realize the power of having underlying financial infrastructure that wasn't tied to government control. And also just some of the other mechanics of it, how quickly it can settle finally and things like that. And so in 2014, actually, when Mount Cox collapsed and Bitcoin didn't, it kept going. It was convinced,

that we needed a professional trading venue with U.S. regulation to do the same type of trading that we were doing at the firm that I was at, basically having a futures and options, leanable hedge leg that you could then go out and trade other types of basis, positions, and things in across the globe. So here we are today, kind of wrapping up our regulatory approvals and starting to launch the full vision of what that really means. That's a great background. And yeah, I remember those haywire days in the FX market. It doesn't seem like things have gotten all that much better over time. But fascinating that that's the way you came at it from.

I guess Bitcoin probably has a little bit of ways to go before it gets on that global stage. But a lot of it is probably infrastructure. So maybe talk a little bit about the way you've set up the company in terms of the venue that you operate and maybe contrast that to what existed when you first had the idea of starting the company. Yeah. I think early on, it's easy for newcomers, especially to retail. they were looking at Bitcoin and other currencies as they were coming out and trading it on a spot basis, fully pre-collateralized before you could place your trade.

Mao Gox imploded. We had something called Bitcoinica for a while where you could trade on a levered basis. I don't think people really thought about what was going on behind the scenes to offer those types of services and leverage. We still even today have large exchanges like FTX and taking everybody down with them. And that's where I think the U.S. regulation, of exchanges really makes a lot of sense. So what we built is, first and foremost, called the DCM, a designated contract market. It's a futures exchange regulated in the United States.

We can do futures, options, other types of derivatives like that. And then as we build, we build out our own proprietary technology for the platform, and then we moved into the clearing brokerage side of things so that we could offer services onto other regulated brokers and other entities that didn't have the ability operationally. or regulatory-wise to kind of face crypto from that perspective. And then finally, just in the beginning of this year, we received approval for our own cleared-house, which can offer leveraged and physically delivered derivatives trades as well.

So what that allows us to do is control all of the technology because we built it all ourselves, underlying all of these three components of markets infrastructure, and start to innovate on what those licenses and things can do. a lot of the other businesses that are out there in this business. Well, there actually aren't that many. It's a very difficult position to get in the first place. A lot of them are using off-the-shelf technology or bits and pieces of older technology

that are just inflexible and basically hard-coded to only use dollars and treasuries and a few other types of collaterals to allow for grading. So what we're really trying to do is we're looking at the unregulated markets offshore and saying they've got a new type of product. and a new type of market infrastructure. In the U.S., we started seeing some of that new product come into our preexisting infrastructure, cash set of futures, ETFs, things like that, but that still doesn't really address what has kind of evolved offshore,

which is a new type of markets infrastructure where things work differently. They settle more frequently, their margin more frequently. There's a lot of risk because it was done in an unregulated and unoverseen way. And so I think even if the market operators didn't intend to take those types of risks, they were because they weren't bringing some of the lessons that had been learned from previous market iterations over the decades and centuries. And so that's really where we're focused is how do we take what we've seen offshore and in the unregulated space that's built on top of this new type of technology, blockchain-based digital assets, and bring them into U.S. markets in a regulated and careful manner. And yeah, you mentioned that there aren't that many folks out there that have even tried to get some of these licenses. Why do you think that is? Is that a function of the regulatory environment? Is that a function of the market just being nascent from a cast of character's perspective? Why has it gone so slow in the industry?

At the end of the day, the reason is U.S. markets are actually extremely permissive. It's very difficult to be in one jurisdiction and go trade in another jurisdiction globally, just generally. But in the U.S., for the past 200 or 250 years, the U.S. regulatory infrastructure for derivatives trading has been very permissive. Unless you're in some O-FAC ban list or something like that blocked by the State Department doing fraud or AML-type activity, you can come in and without any registration or licensure or anything come in and trade in U.S. markets. So that's something that's very powerful that I don't think a lot of people fully appreciate, that the U.S. actually has a very accepting and permissive markets infrastructure regime for trading exchange regime.

And so what that means is the exchanges have all of the regulation going into them. So the licenses are very, very difficult to achieve. And also the licenses follow the business operations as well as the business entity. So it's not just get a medallion and buy and sell these medallions. If you're materially changing the business, that license may not apply to what you're doing. So you've seen some crypto companies by broker dealers, for example, then realize they weren't using it in a way it was set up for proof to be used and so it didn't apply. It's interesting to think about the root causes of some of this regulatory ambiguity in the

U.S. And to me, one of the root causes is the classification of some of these assets. Are they commodities versus securities? And that's something that right now we don't have clarity on. Obviously, the SEC is taking one approach, but we have a market structure build. that's working its way through Congress. What do you think the impact of clarity on that issue would be for just regulated venues in the U.S.? Yeah, well, I think I see it from a different perspective, which is, and I'm not a lawyer, so this is obviously not qualifying. I think the way we view it is that everything that can be traded is a commodity, and you can have commodity derivatives

on that, and that's what the CFTC and Commodity Exchange Act regulate. It's just that some of those commodities might have additional regulation and oversight. So in the case of energy, it's regulated by the energy oversight, part of the executive branch agencies. If it's securities, it's regulated by the securities agencies, in this case, the SEC. So it has additional regulation. Securities are very special in the United States. So they have a lot of explicit law that's written to exactly explain how the two agencies interact. And so with securities derivatives, for example, you have dual regulation. That's kind of a special case. But for example, SPAT FX trading is generally not seen as a regulated activity. There are specific carve-outs,

for example, if you're offering that to retail participants on a leveraged basis. But it's not expected that just because something trades that it gets federally regulated unless it's trading in a derivatives contract. So I don't know from our perspective, I think leverage trading is very important and probably the most important thing markets, need to continue to grow because it doesn't require you to pre-collateralize the trade before you can even place an order. It allows you to trade in and out throughout the day and then kind of settle up at the end of the margining period to affect all the finality of all the trades. That's very different than what we see in crypto spot trading today, which is you put down

your dollar, you're then allowed to place an order that represents that dollar. They lock that up until you get out of that order, which is very limiting in terms of how quickly you can trade, how quickly you can put trades on and off. And so I think it's actually very impressive that with this pre-collateralized manner bot crypto trading has become as big as it has, but it's still very minuscule compared to what we see in other global, like you said, FX markets and things like that. We still have a long way to go before our markets are a part of that. I was having a conversation the other day with someone and really talking about what this market

looks like from an addressable market perspective for some of these infrastructure companies. And when you think of it, it's kind of fascinating that almost no banks or broker dealers are active in this market. So it looks very unlike traditional financial services markets where those entities are commanding a large volume of many of these trading platforms. Maybe talk a little bit about just that observation around the nascency of the cast of characters and where you see that going over the next few years. Yeah, I think it's not even regulation that limits the ability for larger.

institutions and brokers to come into this space. That's certainly a part of it. But I think where there's money to be made and where there's a will, there's a way. I think the real issue is risk management. These firms have robust risk committees and risk oversight programs that make it difficult for them to take risks when there are unknowns. I think when you're running a large scale business that's interacting with the financial system, you have to look at risk-adjusted returns. And FTX was, for example, a stark reminder or Genesis as a bilateral trade counter was a stark reminder that if you can't properly assess the risk, you basically have unlimited risk. And so what amount of return makes it worth it to go after that unlimited risk? It's a difficult

pill to swallow for a lot of these more robust firms. You'll see smaller firms that'll come in and throw caution to the wind and go after those types of risks. But for this industry to grow, We need more robust risk management, and that is where U.S. derivatives oversight comes in. Even though we've had failures with brokers and things like MF Global over the years in the U.S. Derivist trading infrastructure, customers have never borne a loss from that. Portfolios have been auctioned off. CME and the OCC cleared houses have managed their way out of those positions in a way that I think was, in some cases, more profitable than when they got into the position. So it's easy to forget how robust the U.S. trading infrastructure is, and it's a very unique model globally.

Most other jurisdictions are straight through processing, so the clearing house bears all the risk. In the United States, the clearing members bear that. So we actually have a decentralized risk management infrastructure. And so bringing actual crypto into those systems, not just cash settlement where it's dollars on both sides, and you're kind of betting on the ups and downs of the market, but actually, allowing crypto to move through the system is the big breakthrough that I think we're missing before larger firms can come in and properly manage that risk. That makes sense.

So I'd love to talk a little bit about some of the target customers today. And one thing I'd be very interested in getting your perspective on is just the mining ecosystem and how products and services in your category are really helping some of those businesses operate. Yeah, that's a great question. First, let me preface this by saying, we still view it. ourselves as coming out of beta for the first time ever. So we just finished off all of our licenses. We've launched bits and pieces of the markets infrastructure as we go, but we still are

launching the last piece of our infrastructure, which is the clearinghouse that we are approved for. Once we have all those pieces in place, then we're able to fully go after the market opportunity that's out there. But in preparation for that, we still are launching products. And so where we focus today is on customers that need physically delivered digital apps. asset derivatives. In the case of Bitcoin, it's easy, right? It's the producers. It's the miners, or it's lenders that have exposure or infrastructure, financiers, lending on mining rigs and things like that. These guys all have exposure to the price of Bitcoin, the hash rate, and the price of electricity, among other things. And so what we're trying to do is bring those industrial

participants into markets for the first time so that if there's a big blowup around the halving or big price drop. They're not forced to just dump Bitcoin into the spot markets on the spot at the worst possible price. They can more properly manage their risk around that. So those are the types of customers that are trying to come into the markets. Now, the issue is U.S. Clearing members are not really set up to handle the operational needs of a miner in the way that they are with grain or oil or sugar. They've been doing that for hundreds of years. Some of these guys, having digital bearer assets is a new type of operational risk that a lot of these firms don't know how to handle. And so it means we have a whole new distribution channel that we have to get

out there with and expand to market participants to. So that's where our clearing broker comes in and allow us to start onboarding those customers. And that's the phase we're in right now. We're just in the early days of having a new way to access U.S. markets with digital bearer assets for the first time. Yeah, you could see how this would make investing in the mining ecosystem a lot more attractive. It's just been really unfortunate that the infrastructure didn't exist yet at scale in order for some of these hedges to actually work. So investing in a mining company in 2014, 2015 was basically just a levered bet on Bitcoin to a lot of degrees with a lot of operational risk involved. That is in some way a way to measure how the crypto industry is, even today.

The stocks and the things that are freely able to trade, are those just trading for as proxies to the underlying asset they have exposure to. I mean, even Coinbase today, probably the biggest example of a publicly traded firm is more or less trades as a proxy for Bitcoin and the price of some of the other Eats and other types of assets. I think we're starting to just get away from that, but we're still very early as an industry.

One of the categories that's pretty early but shows a lot of sign of promise is just the options market. And if you look at the size of this market in the crypto context relative to other markets, it just seems a lot smaller than it does if you measure it versus spot and you compare that to the equities market for instance. So maybe talk a little bit about how you see that options market evolving. And right now I think Derbitt is probably 85% of that market any given day. So how do you see that unfolding? That's a spot on observation. I think typically we see options being a certain

percentage of futures. Maybe that's one-tenth or one-twentieth of the volume of the respective futures contracts, I think there are bit somewhere around one one hundredth of the features volume that we're seeing. Now, part of that is, I think, perps, which are more of a levered spot type product than a termed derivatives product where you can pick different points on the time curve. It's still far below where we expect to see options following. And I think part of that is just market evolution. We have basically one central counterparty in Deribit that has a lot of risk that they're managing. And I think they're doing a good job of it. They've seen their way through a lot of boom and bus cycles are still alive, but there's a lot to be said about that. But on the flip

side, they're in unregulated jurisdictions. I think they're starting to move into some jurisdictions where they'll be accepted, Dubai, where countries are making a play to attract whatever they can from financial infrastructure operations completely. But that's not the same as being based in Germany, in the EU, or being based in London and the UK, or most importantly, probably the U.S., the biggest single capital markets jurisdiction in the world. And so until you have that safety, options just have an additional layer of risk and complexity around them and convexity that's very difficult to manage unless you can trust that the contracts will be held together even through high volatility periods. And it looks like that has happened

with Deribit, but it's not the same as having the CFTC oversee that process and say that it's at least kicking the fires as they go at the very least. Now, for U.S. entities that are trying to play in this market, obviously Deribit is an inferior option to a lesser degree. So how do you see the market in the U.S. evolving in terms of the cast of characters that will try to be in this options marketplace business? Yeah, I mean, right now it's really just CME. And I'm not sure exactly what's going on, but their options volume is definitely falling off. I've noticed that they've pulled the very popular paradigm request for quote and trade reporting app from their listed independent software vendor list. So I'm not sure personally exactly what's going on there,

but there has been a precipitous fall off of volume from CME options. When we talk to options participants, a lot of them are bigger participants that are doing bilateral trades and have a physical delivery component to that. And there's just a lot of bilateral counterparty risk management that's going on. So it's happening outside of transparent markets and what we can see. So it's very hard to measure. And those guys just have very different needs than some of the cash settled derivatives options that CMB is offering. So you can kind of manage the index debasement risk that comes from cash settled futures on the front month futures contract, which are basically what trades as CME, but as you get farther out on the curve or as you get into the options

vault surface, that index debasement risk starts to become a bigger and bigger issue when you have big Bitcoin exposure or underlying exposure where if things really blow up or kind of debased, you know you can just hold that trade to delivery and it holds true. So that's where physical delivery can be very important when managing volatility and slippage costs and things like that. again, the markets are still in a very, very early stage where participants have not come on to regulating markets. And I think it's basically just a lack of infrastructure, a lack of institutional accessible infrastructure. Yeah, I think that makes total sense. Now, on that regulated venues point, it's been interesting to CBO and CME and their various forays in this

space. So CBO obviously had bought ERISX, so they were operating futures as well as spot have shut down the spot market. And then I saw a report a few weeks ago that CME was evaluating getting into the spot market. Do these businesses kind of make sense together? Do you think that we'll see more of this in the industry with venues operating both a spot exchange as well as a derivatives exchange? I think in properly operating futures options exchanges, it doesn't really matter if it's associated with the spot exchange because people are bringing assets from a whole bunch of different environments. They're OTC block trading it. They're mining it themselves. They're getting it through bankruptcy deals. And that's where a lot of the bigger trades and bigger block

sizes can come from. And that's where levered trading really is important because the markets can just absorb a lot more liquidity than a pre-collateralized spot market. The spot markets we have today in the U.S. despite what the size looks like are still very much retail oriented. So I think if you're really doing genuine size. It's very difficult to go to a spot market and do anything there. And that's kind of the whole point of blockchain-based digital assets in the first place, right? You can go do a trade on one venue. You can quickly transfer it to another. It's immediately recognized as collateral because it's been finally settled and then you can go trade there. Remember, CME has not really had any spot markets associated with their business up until they

bought Next and the EBS FX platform, which I think is a small piece of their overall trading business. Physically delivered derivatives, subsume the need for spot markets in the end of the day. You're not able to immediately go buy the underlying, but you can buy the derivative and then do an exchange for physical and get the underlying pretty quickly in very efficient markets. So derivatives can kind of be a superset of all of those types and consolidate all that liquidity. So I think it's a distraction to be focused on spot markets today. Yeah, that makes sense. I want to shift a little bit to just consumers of block space, If I think about who the biggest consumers are of just putting transactions on chain,

obviously stable coin issuers come to mind and that category is certainly taken off. But cryptocurrency exchanges and brokerages that are facilitating in and outbound transactions for customers, transaction fees come to mind as something that is a pain point. If you're a crypto exchange, I guess you could just pass those through to customers. If you're a stable coin issuer, maybe you can pass those through. But do you see a market structure evolving where some of these large consumers, actually try to lock in transaction fees so that they're not at the whim of just a crowded mempool on a daily basis? Yeah, definitely. I mean, look at the gray markets or the oil markets

where airlines have those same problems. Before airlines were hedging oil prices, they were just passing on the price fluctuations to the seat buyers, right? Your ticket would just be more expensive. But derivatives have this way, and hedging has this way of as soon as one airline start hedging those prices and you see some big spike in oil, all of a sudden they're able to take all of the business and their seats are way cheaper or if they can bump up their seats for a marginal amount and capture that as additional profit. So I think as soon as we start to see one or two big miners or spot exchanges, which are kind of the on-off ramp here, come in and start genuinely hedging, nobody will be able to compete with that unless they're hedging too because those costs are just

being passed on. And it's diffuse, right? If you're just buying a loaf of bread, you don't really care if the price has gone up by 20% because it's a couple cents and you have very low exposure to it as a person buying aloeuvre bread. But if your General Mills or your Artur Daniel Midlands, you've got a lot more exposure to it, that 20% can be extremely expensive to you. So I think it's two things. One, customers need to have enough exposure where the price getting passed on to them is enough to make them move. And two, some of the bigger institutional players that have exposure. And we are starting to see those guys finally come in with the spot Bitcoin and soon the ETF. Now people start to have real significant exposures to it. And they don't necessarily want

to be exposed to the up and down price fluctuations, right? There's more sophisticated exposures you can have to the up and down price movement. And so the industry is starting to evolve away from let's just hold on to this and ride it around. Instead, you've got some business where you have a little bit of price exposure. Incidentally, in the Commodity Exchange Act, we call those commercial hedgers. Now they can start to hedge that into real markets and don't get caught with their pants down on the other end of the trade when they're trying to unwind the hedge. Your hedge really looks good when the markets are going really against it. And if you try to unwind that position from a cash settled derivative contract into the underlying spot market,

you can suffer a pretty big dislocation and slippage and fees and all of a sudden the hedge is completely blown out. Maybe you've hedged a little bit, but physical derivatives allow you to hedge the entirety, a perfect hedge of that contract. So just to take a step back, maybe I never mentioned this before, but our contracts are physically settled and can allow the underlying asset to be delivered. So it has everything a spot exchange does, plus everything a cash subtle futures exchange does in one market. And then what we're really aiming to do with that is what we've seen the offshore exchanges do in an unregulated fashion, which is take the underlying assets like Bitcoin, Eath as collateral, post those against, in the simplest case, a call,

covered call where you have the asset that can be delivered through the call. So it's a safer thing to write versus a uncovered call, which is very risky to write, or a short futures contract, which is delivering the asset that you have fully deposited in your account. So those are the next steps we're trying to bring into the regulated U.S. markets, and then eventually getting to the point where we can use digital assets as portfolio margin collateral, where we're starting to offset more complex types of portfolios, where there's a recognized correlation between Bitcoin and ETH and stable coins, and bring a totally new type of ecosystem to U.S. derivative trading.

That's really exciting. Now, you mentioned the Bitcoin and ETFs. What has the impact been just on the institutional conversations over the past year with these two products? I guess one live and one about to be live. I think it was a huge turning point for the industry because we went from zero to one on all these asset managers and kind of middle managers, guys who are making trading decisions, but don't really have a day-to-day voice at a larger asset management firm about what kind of operational capabilities should they build and take. on. So now that you have BlackRock out there saying, hey, we can have a wallet somewhere in our name and have a way to handle that. And the enterprise risk management controls and ITGs are all getting built out around how that works from a firm-wide perspective. Now everybody's sitting up in their seats and taking a look and saying, okay, it's fine for us to build out these types of capabilities as well. It's worth it. So I don't know if we'll see that same type

of shift with the ETH spot ETF. But I think ETH does bring something new to the table that Bitcoin doesn't have, which is the whole ecosystem around what I really think of is fixed income products on chain, locking assets, generating certain types of returns, et cetera. And it'll be interesting to see how that type of exposure is managed from that same type of asset manager who doesn't have a say, how does that person manage that type of risk. But I don't think it's going to be as big of a leap as we saw with the Bitcoin ETF. It'll be interesting on ETH because if you're a proprietary trading

shop that can touch the ETS that can hold physical ETH and get staking, which obviously you're not going to get in the ETS, and then maybe once EGEN layers at scale, there's things that are interesting about yield around holding ETH in that context. It just seems like it would

create some interesting trading opportunities around the value of ETH under certain jurisdictional and operational setups. Yeah, I mean, we kind of have that in traditional finance with strips and things where people will take a yield-bearing asset and they will break off and sell off the exposure of the variable interest rate or yield generation component and they just want price exposure to the other component. I think this is a case where we'll see a really big shift. I think Athena works in that same way. They have two tokens. One is just

the stable coin token and the other one allows you to have exposure to the yield that generates, regardless of what you think of the underlying yield generation and structure, I think that's kind of where we're going with a lot of these types of assets. There's this structure where if you don't pass yield on to the customer, it doesn't seem to be classified as a security. And so there's somebody who just wants exposure to, for example, a stable coin. But that's generating a ton of yield and revenue for somebody. They're just not passing it on to you.

I don't think the financial was ever in a position where somebody wanted to give their yield to spend me else basically for free. But it just shows you how important market access is and how inaccessible the traditional markets are for a lot of different folks. Oh, completely. So you kind of hit on where I was going next around stablecoin. So just the fact that something like tether can exist at scale and not pass through the interest shows you the unbelievable demand for dollars internationally. And so you're starting to see dollars as a savings vehicle pop up in all sorts of different countries and remittances. are doing great, all these businesses that are powering stable coin remittances from U.S. to Mexico,

other jurisdictions seem to be growing like a weed. What is the impact on just traditional financial services with the advent of stable coins? Do you see this being a category that becomes interesting to exchanges? And I'm particularly curious if settlement is something that could eventually be addressed via a stable coin. Absolutely. Absolutely. I think right now, settlement at scale works with correspondent banking relationships, which in a very simplified term or explanation is, I have a bank account with you with a whole bunch of money in it. You have a bank account with me with a whole bunch of money in it. And instead of transferring money back and forth every hour, every day to settle up, we just net out between each other's bank accounts and those kind

of float around. And that's also kind of the way overnight repo works. We basically agree to pledge treasuries to each other at discount rates and then get them back later. And that represents kind of the risk and the price associated with not actually settling up or moving anything around. So we're moving from a world where we have a lot of value and collateral cash tied up in limbo, trillions of dollars tied up in limbo. And we're going to a point where you don't have to have that stuck in limbo anymore and at risk of disruption or deeper issues, like when the Treasury has liquidity issues with respect to overnight repo.

And so now we have a system that can just, be settling up all the time where transactions are finalized. But at the end of the day, they're still risk in there. We just shifted it over to the manager. We don't have an FDIC claim on the treasuries that Circle is holding on behalf of the USC anymore. They're still risk in the system. We're still exposed to treasuries and asset managers at the end of the day. And I think that's why it's so important for a stable coin bill to come across and actually get approved into law. I think it's a really big systemic risk to the system right now, and we're lucky to have large players that are trying to do right by it and manage that appropriately. But banks also don't

hold your dollars as dollars. They hold them as treasuries along the curve. And the deeper into deficit, they get into selling those farther dated treasuries, the more and more of the discount of being forced to sell them at, they're becoming under collateralized for something that's supposed to be 100% collateralized. Stable coins have that same issue. And it's still, a peg at the end of the day. So I think that's why there's room for stable coins and that type of risk and exposure and final settlement without the FX exposure. But then there's also still room for tokens that have their own inherent value and can move around without that kind of underlying asset management risk. They're both important. Yeah, I think you're spot on with

the stable coin bill comment because if stable coins are going to be used at scale for settlement, you don't want these things trading based on the credit risk of the issuer. That just makes no sense, right? Like your city group coin is going to trade at a discount versus your JPMorgan coin, right? Like, that just won't work. We're kind of getting back to old school bank notes before it was federalized. Each bank has their own note that you go get to prove that you have gold in their vaults. And are they fractionally holding that gold or are they holding it 100%? We're kind of back to private entities doing bank notes. Yeah, the Wildcat era. Yeah. So, Luke, this's been great. Maybe talk a little bit about what's next for Bitnomail.

You guys have been hard at work getting these licenses and products up and running, but what's the next year look like? Yeah, so the big thing that we pulled off most recently is we became the first company approved by the CFTC to have a derivatives exchange, a derivatives clearing house with margin and physical and cash settlement capabilities, and then a clearing broker as well. So now that we have all three of these licenses to have been launched the exchange and the clearing brokerage, We're going to be launching the third license, the clearinghouse, over the course of the rest of the year here. And then we now have the ability to make changes within the confines of the Commodity Exchange Act and the CFTC regulations, make changes to the system where it could be something simple, where the technology is just hard-coded and limited. It could be something very big. And so we're going to start rolling out more and more types of assets that we're listing as well as change. the way exchanges work in the United States to make them less risky and more competitive

with some of the unregulated offshore exchanges. That's awesome. Well, where can we send people that want to learn more about the company? You have a careers page. Where can we send people? Yeah. Go to bitnomiel.com. And if you look at the footer of the website, there's a careers page there if you're just

in applying. We're hiring. So, yeah, hit us up. Appreciate you coming on the podcast today. Yeah. Thanks for having me. Really great. Thanks for listening to another episode of On the Brink with Castle Island.

To find out more about Castle Island, visit castle island. Visit castle island.vc. To listen to all of our podcast episodes, please go to On the Brink dashpodcast.com or just click on the tab in our website. Thanks for listening.