On The Brink with Castle Island - Mike Higgins (Hidden Road) on Digital Asset Prime Brokerage (EP.464)

Episode Date: October 25, 2023

Mike Higgins of Hidden Road joins the show. In this episode we discuss: Mike's career and the path to joining Hidden Road Overview of Hidden Road and the prime brokerage category The market structure for digital asset trading and settlement The launch of Route28 and the value proposition for institutional customers The regulatory landscape and the path that Hidden Road has pursued for licensing across the world Institutional adoption in 2024 Further reading:  Learn more about Hidden Road  Learn more about Route28

Today on the podcast, I sat down with Mike Higgins, the CEO of the international and digital asset businesses at Hidden Road. Hidden Road is a global credit network for institutions that provides prime brokerage, clearing, and financing across a number of asset classes, including digital assets. And we're an investor in the company. On today's podcast, we discussed the digital asset market structure. We talked about the launch of Hidden Road's new product, Route 28. We talked about where the institutional market is going and what it'll look like a year from now. This was a fun podcast, So without further ado, here's my conversation with Mike Higgins of Hidden Road. 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 and host 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 is 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 market, 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. Mike, I am excited to have you on a podcast. podcast. As an investor in Hidden Road, you would not believe how hard it is to get people from Hidden Road to come on your podcast. So glad we were able to convince you to come on. Appreciate you

making the leap. Matt, thanks for having this. We're certainly big fans of this show. Awesome. Appreciate that. And before we get into all the exciting things that are happening at Hidden Road in the trading ecosystem, let's just hear about your path and how you actually came to work at Hidden Road and what the story was. Sure. So quickly, by way and background, my name is Mike Higgins. I'm the CEO of the international businesses and global head of business development at Hidden Road Partners based in London. As folks are likely aware, Hidden Roads a multi-asset PV and clearing firm that was set up and funded by the by side. We launched that business just shy five years ago, starting with a series of PB and clearing businesses' traditional markets. Pretty early on, we were asked by our

institutional clients to extend the PD platform to support digital assets. The digital PV business was put in production about two and a half years ago. We currently clear out the material percentage of the global crypto market. But quickly, back to my background, Matt, prior to joining Hidden Road, I spent just shy of 20 years in electronic trading, multi-asset, and a bulk of that in the foreign exchange markets. I originally from New York where I started my career down in Wall Street. Then in 2009, I was transferred to London to acquire an option business. Thought I'd be home in six months, but life had a different plan, married, kids, and now permanently reside in jolly old England. I do still have my return ticket, Matt, but given it's been a few years,

it's likely expired by now. Given the regulatory approach, you should just stay over there. I had foresight early on. But after completing the acquisition, instead of moving back, I was asked to join a joint venture between Credit Suisse, Bank of New York, Mellon, and Forrex Capital Markets where I was working at the time. That was the launching of Fast Match FX, which we built into one of the largest matching engines in FX, later sold that off to Uranx.

I then went back into trading. It was late 2018 when I was thinking up with. Mark and Joe were in process of putting together the framework of what is Hidden Road. When Mark started to explain what the focus of the firm was, which was ultimately around resolving credit constraints that many trading firms are having, I was thinking what my trading hat on. I'd quickly understand that opportunity and thought I'd be a BB client. They seemed to have a different idea, which was to help me join and lead the efforts on the BD side. So wrapping up here, my role is focused mostly around strategy.

I'm in charge of the sales, marketing, and distribution for the firm globally. A big part of the role is the research and development side. Ultimately, Matt, it's through extensive listening to our clients and understanding the problem sets that we build products. We don't take the field of dreams approach and build something blindly and hope that they will come. We care about what our clients need and want and build based on that demand. And that's kept us razor focused.

And so far that strategy served us and our clients well. Two good examples of that is our digital business. and the launch of our swaps business called Route 28, which hopefully we'll get into today. That's great. Thanks for that background. Now, was crypto and digital assets even on your radar when you first started talking to Mark and Joe about Hidden Road? I think it was always there. Just got accelerated as our clients came on the platform and really wanted to get into that space. But Hidden Road is really a purpose-built multi-asset PBA and Clearing firm. It's said another way, Matt. It's a global credit network for institutions. We provide access

the credit across the platform. And so over the last five years, we've been busy writing a horizontal clearing infrastructure using modern technologies and techniques from high frequency training and bolted that into a clearing business. I think that's important as allows us to have a holistic, real-time view of a counterparty's risk, cross-asset, cross-products. So fully focused on PB, clearing, and margin financing. We don't have any conflicts of interest with our clients. We don't run any sort trading desks, no propositions. We certainly are at selling data. Really, we focused on innovating the onboarding process and help remove that long, opaque, arduous process of opening PB accounts that you find in legacy providers. We saw the opportunity to start in foreign exchange prime brokers a few years ago

and give our clients access to our credit to trade with all the major banks, the non-banks, and the ECNs. So in FX, we're one of the fastest and largest PBs in the space, clearing tens of billions a day. Next up was listed derivatives, but the clients came to us and asked us to build the digital PB platform. And so based on their feedback in our research, it was abundantly clear. There was a gap in that space for institutions to access the market properly. And extending our platform would ultimately help bridge that gap. And so now we're back in launching the listed derivatives side, the swaps business. But to kind of end off here, we run a global, highly regulated, multi-asset PB in clearing business.

for about 150 people globally, and again, focus on Tradfai PB and Digital Asset PB. The digital asset piece had to have been so interesting in the early days as someone that came from traditional financial services. When you first started to look at just how this works and all the exchanges and how credit works in the system, it must have been pretty jarring to just see the market structure so immature. Exactly. There was certainly an immaturity to it. But I related back to foreign exchange in the 90s pre-PB, right? Everything was bilateral. There was counterparty risk and settlement risk or Harrisout risk across the system.

And so that really limited the scale of that market and who can participate in that market. If you looked at a parallel to foreign exchange and fast forward, PB has helped that market scale. Prior to PB was around $680 billion a day in spot. Fast forward. In the latest BIS report, it was around $1.2 trillion. So the market has matured and participation brought in. And I think digital with the PB in it will look pretty similar to that. Now, what is it about PB that makes it really hard for the banks to play in the digital market? And then what's happening in the FX PB space? Because obviously the banks seem to be retreating in some cases from that market as well.

In general, prime brokerage and clearing inside of a bank is sub 5% return on invested capital. There's a number of reasons for that. It's legacy technology, and they're hit with RWA and capital charges. So structuring and spinning this out of a bank was important for the firm to do it. Specifically for banks coming into digital assets, there's a number of challenges. There's reputational issues. The banks were bailed out by the regulators in 2008, and so they absolutely are trying to stay clear of any issues there. But digital assets is currently 100% RWA haircut under B3 or B3.

And so that crushes any economic incentive for the banks that currently access the space. In foreign exchange, BB, the criteria has just kept increasing. And so some of the largest banks have puked that out, giving us the opportunity to step in that space a few years ago. It's a really fascinating approach when you just cut out the middleman in some of these businesses due to regulatory. And maybe let's go into the regulatory. I know this is a complicated business to operate from a regulatory perspective, a lot of different jurisdictions. So what's been the approach for Hidden Road on the regulatory front? Sure.

So I think if PBE and Clearing is really a trust business, and part of building trust, PB needs to be transparent. They need to get audited and they certainly, Matt, need to get regulated. You need to get regulated by Tier 1 regulators. So at Hidden Road over the past five years, our team has worked hard with local regulators to get a series of entities regulated. For example, in the U.S. We're the newest FCMGCM on the CME and decades with oversight from the CEM.

the CFTC and the NFDC and the NFA. In the UK, we're regulated by the FCA, the licensed offer derivatives. In addition, we're uniquely positioned as the only credit intermediary that I'm aware of that also has a digital asset registration from the FCA called AMLD5. In Europe, our Dutch entity based in Amsterdam is regulated and registered with the AMF and also as a digital asset registration with their central bank called DMP. In Europe, that's a major advantage with MECA coming in place. In short, MECA helps harmonize the regulatory framework for crypto asset markets across the entire continent. In Asia, Singapore is our hub, currently in process of applying for a license with the MAS. But look, with regards to regulations, I think it's really needed to provide the certainty for institutions to access the digital asset space

and allow it to compete with equities, fixed income, foreign exchange commodities. My fear, though, Matt, is that we try to shoehorn this new asset class into existing, tradfying regs. And really, we have the opportunity to create something new and capture the unique nature and breadth of this asset class across defy, NFTs, stable coins, cryptocoins. And so it's early on. We're barely out of the first inning. But I do think we're starting to see regulations take shape around the world. And I'll leave you at one thought on the regs. And a good example of where we're going. The U.S. accounting body, FASB, have instructed their technical departments to finalize an accounting standard on cryptocurrency.

This is expected by the end of the year. This is huge news on an area that was previously subjected. There's no massive divergence to what's currently being done today, but the move to codify this into an accounting standard is significant as there's an expectation of institutional permanency in the space. So what's interesting about that is that it was a 7-0, if you will, my English term, unanimous board decision, and really it's the speed of the issuance. After five months of public comments, this is being pushed in production,

And so it's exactly these types of bodies and regulations that need to come into effect for the market to properly scale and to allow participation in the space to broaden. That makes sense. So maybe just going a step deeper into the digital business, I don't want to be biased, but I think this is the most exciting part of the business, at least to me, because it's just a totally wide open space. And as I see this market developing, it's just pretty clear that PB services are going to be essential and none of the banks are going to play here for the foreseeable future, for some

the reasons you talk about. And I would say there's just some very acute issues around things like exchange pre-funding and just discrete issues that are unique to the crypto space. So maybe just talk about what the problems are that you guys are solving for your customers in that digital business. I echo everything you said to Matt. So Hidden Road has been calling out two issues when we first were looking at the digital asset space. First is that there was this credit risk in the system that wasn't being valued or priced correctly or priced at all. And second, there were major challenges around the vertical integration of some of these exchanges. And so he asked about clients to come in this space was really to build institutional-grade infrastructure to allow clients to access in a

safe and a capital and a cost-efficient way. And so credit providers or prime brokers like hitting road, we're experts in underwriting counterparty risk, managing liquidity, that's liquidity on our balance sheet, pricing term liquidity, and setting appropriate venue limits. So the goal of the digital PB offering is to help institutions remove counterparty credit risk by onboarding and facing a well-known, well-established, well-capitalized, highly regulated entity, help eliminate the need to onboard and post-collateral inefficiently with dozens of exchanges and trading partners to become much more capital efficient by benefiting from portfolio margining and netting across all the digital activities, a firm with trade that's on exchanges, OTC, and now regulated futures and options.

And to simplify the workflows and remove complexities that exist in crypto around compliance and settlement and treasury and operations, et cetera. And finally, Matt, one of the goals was to improve on the legal documentation and bring that up to the level of industry standing of PB and clearing and to provide the certainty and finality of when trading and settlement occurs. You did mention Matt, and maybe I can talk a little bit if that's all right around the pre-funding problem. Yeah, that'd be great. Okay. So the structure of that market, when it was originally set up, the way we understand it, was really designed with retail in mind. So the vertical nature of these exchanges is problematic for institutions for a number of reasons. The idea that the

exchanges are running a marketplace while also custody and the assets of its users, and it's certain instances running internal market makers is frankly mind-boggling and didn't work out too well la FDX. And so before a PB existed in the space, clients would need to bilaterally fix and collateralize and settle with every exchange and counterparty they train, making it really capital inefficient and capital intensive. So the way you address that liquidity issue is to allow third party capital into the market as intermediaries and leverage providers exactly like you have in Tradfine. But to repeat, in order to do that, the venue risk needs to be efficiently priced. And then credit providers like Hidden Road can enter that space with real size to fulfill

the role of providing capital and efficient products and services. And so PBs will help improve the capital footprint for institutions across the spectrum of trading destinations. Specifically on the OTC side, Matt, there's a huge opportunity to improve capital efficiencies there. So I'd say watch that space. Definitely capital efficiency for trading-related firms. I also wonder if just retail brokerages in the U.S. and abroad, eventually, we'll just see this is just a much better mousetrap versus having disparate connectivity to liquidity providers, having 20 different wires to settle at the end of every day. Why wouldn't you just want to have one source to handle it all for you? Am I thinking about that the right way?

I'd be spot on. If you're a retail broker, you have a fiduciary responsibility to your end clients deliver best price and best execution. And one of the ways that's done in traditional markets is by having a single credit provider that allows you to scan the market and trade on the best price. So lacking a prime broker, you need to establish bilateral counterparty risk with every one of those entities. And that may not fit your credit appetite, even though they have the best price in the market. And so accessing a prime broker ultimately will allow those retail consumers to aggregate liquidity, drive down tighter bit offering, and deliver a better product to the end user, which really is the retail consumer. That makes sense. One of the things I'm really excited

about, and I guess by the time we released this podcast, I think you guys will have gone live with this and promoted it a little bit. But Route 28. So talk about what this is, what the value prop is, how you guys even came around the insight around the opportunity to launch this product. Yeah, we're definitely excited about this one. And again, it really comes from. client demand. But Route 28's the name of our synthetic prime business that offers swaps across multiple asset classes, including equity, equity indices, commodities, FX, rates, and digital assets. The product is something that the firm has been working on since its inception. So that's close to five years. Chiefs, Matt, time flies when you're having fun, I guess. As folks are likely aware,

the market for swabs represents around 80% of global derivatives traded, which is in excess of hundreds of trillions of dollars. They're more efficient and easier to trade than underlying spot products themselves. And one of the many benefits is that swabs can easily be customized or tailored to meet a wide variety of market participants. And that's exactly the flexibility of the clients that Hidden Road are looking for. So in addition, they're highly regulated and institutions understand how to trade these things, how to book these things, how to report them, and handle them from a legal and tax perspective. So we've had constant demand from our clients to get something rolled out, but the recent motivation is actually from the digital side.

So a very quick story on it. As mentioned earlier, our digital PB business was launched to meet the demand we had from existing clients who really needed that institutional grade infrastructure to end to the space. So quickly, that business was clearing billions of dollars a day across spot crypto, perpetual swaps and futures. But with the many blow-ups that have gone on to crypto over the last few years, our clients came back to us and said, basically, enough is enough. We really need to move this into a regulated environment with a regulated product. So we started looking at how we would build this out. And it was clear that we had all the regulatory licenses to offer the regulated swaps.

We were actually set up to handle all of the reporting obligations, reporting to the repositories like DTCC and Univista. But as a BB, we really didn't have that front-end platform for clients to interface with the swaps. So the timing happened to coincide with the launch of Crossex, which is a spot crypto ECN, that HRP is the PB behind. So we called those folks and said, what would it look like if we took an instance of your matching technology, levered that with our regulatory license and offered a series of derivative products for the end clients? And so that's the origins of how Route 28 has come to be. But Matt, maybe I should dig in a little bit more around the value props, and specifically

we had a digital side? Yeah, I'd love to talk more about the digital side. It's one of these interesting categories where I became aware of perpetual swaps in the digital context with BitMax. I think they really pioneered it. And it's just fascinating to see this crypto invention, for lack of a better word, make its way into regulated markets. No, that's right.

I think BitMex was the one who invented the perpetual swap. And it's a very attractive product for a number of reasons. Swaps, again, in general, and trapfire are a huge percentage of the market. And I think, going forward, we don't make many bets around here. at Hidden Road, but certainly we see growth in derivatives and professional swamps is one area. Let me dig in a little bit more. So again, institutional clients trade regulated products, and they need capital and cost-efficient ways to do so. So for Route 28 in digital, the client can onboard and face Hidden Roads' FCA regulated entity, or they can post a collateral and a custodian

of their choice. HRP is agnostic, unlike traditional PVs in the space, because we're not re-hypothicating client collateral. And so I don't care if the client post their assets on title transfer to Hidden Road or hold their assets in a custodian. So that's going to really help remove the counterparty risk that we see in the space today. Unlike traditional swaps, they're non-fungible between each other. And HRP is helping to standardize the swaps to create that fungibility. Meaning, if you were to buy a swap with Goldman Sachs and sell a swap to Morgan Stanley, you end up with these two non-fungible open positions. So from a risk perspective, you're flat, but you still end up with open positions that would attract margin. So again, via Hidden Road,

we're trying to net those down, since you might buy with one market maker via HRP and sell with another. But because the swap is against Hidden Road, you'd be net flat. So Route 28 allows consumers of liquidity and out properly aggregate liquidity providers and achieve tighter bid offer pricing, which ultimately reduces the execution cost. On the market maker side, we allow them to net between taker clients, plus we give them access to the underlying markets where they would hedge. So take digital. The market makers can quote to the clients via Route 28 and then hedge on the crypto exchanges or OTC via our PB. Because we see all the positions, we provide cross-margining and margin financing to market makers, making it cheaper for them to trade. Generally, as credit

risk is removed from the market and market makers become more capital efficient, they express that by offering tighter pricing, so further driving down that cost. That makes a ton of sense. So I want to go a little bit deeper on this because I actually think that this Route 28 concept is going to have a pretty big evolution on just the market structure for how digital assets get traded. And as you pointed out, this idea of having an exchange that is running a central limit order book, but it's really a traditional retail broker, but they also do custody and they

also do a bunch of other stuff, that just seems completely broken. and we've seen some of the conflicts there. Even if FTCS wasn't a fraud, the fact that they own Alameda just is a huge issue. That was the reason why a lot of sophisticated investors stayed away from it in the first place. So the first question is, how do you see this evolution playing out? What are customers actually asking for that would lead you to believe that this market structure is going to change? So there's two recent observations on how the market's evolving that.

First observation is we're starting to finally see that shift where major institutions, that are users of these crypto platforms are pricing in the cost of that counterparty credit risk. That's really hard to do on the run. The previous price pre-FTX was near zero as people were willing to pay very little to hedge that risk. At this stage, we know the risk is no longer zero, but the question really is, what is that price? Currently, it's very hard to know the right price, and it's also hard to find proxies that are helpful to pricing. Unfortunately, this massive uncertainty or strained trading activity until the community feels more comfortable that they know how to evaluate the risk and manage it. The second observation, which I think I've mentioned publicly

before, is the issues that happen over the last few years in crypto, the same things happen in Tradfai, Free 2008. So that problem is not unique to crypto. If you asked anyone whether it was conceivable, Bear Stearned, Lehman, AIG, Wachovia would all simultaneously default on a trillion dollars of net liabilities, I think the answers you would get are not in my lifetime or thereabouts. And so when this repricing of credit happens, it tends to happen subtly and usually in the absence of good information. And again, that's not unique to crypto. So ultimately to your question, counterparties are coming to terms with counterparty risk, who has seen an increase for demand for an intermediary and people willing to pay up for it. And so there's also this shift from pre-funding

and holding assets on exchanges to stronger demand from counterparties and exchanges, and exchanges understanding the need for viable off-exchange tri-party solutions with proper controls in place. And so really it's that separation of church and state that I've mentioned before. So going forward, you'll have a series of service riders like you have in Tradfa. Custodians, Matt, all they're going to do is hold assets. Exchanges will run matching engines and provide matching services. Marketmakers will be there to efficiently transfer risk. And PBs like Hidden Road will be there to provide credit to institutions to access the various

trading destinations in a capital and cost-efficient way. I think you're spot on about Tri-Party, and this is the part of every podcast where I go on a tangent about how the SEC is choking us off here on this point. So feel free to not respond. But it strikes me that the Sab 121 issue where the U.S. banks are not able to be in the digital asset custody business is really just making this a more dangerous market for all participants. What you really want here is for State Street and Bank of New York Mellon and some of the largest custodian banks to be able to be in this market, providing tri-party custody services. It's who most of the institutions are dealing with for other asset classes anyway. So I really

think that this tri-party thing just makes the whole industry a lot safer. I completely agree. When I think of custodians, the two names that come to my mind are State Street at Bank of New York Mellon. So in digital, you know, there is custody around holding the crypto assets itself. So I think we will see some new names come into. It would be great if the Boney's and the State Street were to adopt some of that technology and put that in their own house. But I think going forward, you know, the reality is you need to separate the function of trading from the function of asset holding and collateralization. And by doing that, that'll lead to best practices across both of those disciplines. You alluded to it earlier with FDX, mixing in a

market maker, best practices and disciplines are hard to be done when you're conflating those things. So we certainly are pushing hard to have counterparties hold tri-party to hidden road where they don't need to take our counterparty risk, as well as having tri-party solutions between us and the various exchanges. Ultimately, that will allow institutions in the space of scale and new institutions to come into the space. I couldn't agree more. Maybe shifting gears a little bit. I know you guys have a lot going on with CME. Talk a little bit about what that looks like. Obviously, CME is a player in all. sorts of different markets, including digital, actually. So talk a little bit about what you guys are doing with them. Absolutely. It's been a long time coming and a lot of hair ago. But over the last several years, we've been building an FCM in the U.S. in order to offer our clients listed derivatives,

including regulated futures and options. We were approved over a year ago as the newest FCM GCC. And we plan to start on the CME pretty soon. If you look at the list of clearing firms on the CME website, you'd see the mighty hidden road conveniently located between Goldman Sachs and HSBC. So this is a big deal. Pre-2008, Matt, I think there was over 150 FCMGCMs. There's now around 65 left. So there's certainly demand. We'll start on CME and then expand across a number of CCPs, including ICE, ICE Europe, URX, LCAX, SGX, and B3. But the value prop we're trying to bring is pretty simple. It's cross-margining and margin financing across various CCBs. and OTC markets. For example, on the digital side, we're the only one in the world that'll cross-margin and margin finance native crypto against regulated futures and options, namely

Bitcoin and ETH on the CME. That's a really interesting opportunity for institutions to scale up that cash carry trade, face a regulated PB for one side of the trade, whether that be another perpetual swap or spot trade, and trade through our FCM on the CME. That type of basis trade, exist across the other markets that we offer. And so for an exchange as an example, the largest trade there is an OTCFX trade against a front month CME future, or 10-year-on-on-the-run U.S. Treasuries against CME futures, or even complex energy where you trade CME against ice all the way down the barrel. But ultimately, those are the areas that hidden road focuses our PBM clearing is where we can add value and deploy capital against those various trading strategies.

That's really interesting on the cross-margin. Yeah, you can see that being a big deal for a lot of folks that maybe weren't able to do similar things with products like GBT and things like that over the years. Exactly. So let's talk a little bit about just what you think this market is going to look like in 2024. We're recording this. I think we'll probably sit on it for a week or two before we release it. So it's even possible that I guess we could have a Bitcoin Spot ETF in that time period. It's been interesting to see the flurry of amendments that are coming in right now. So I just saw that Fidelity amended their spot ETF proposal last night, added a bunch of things. I believe Bitwise also has amended. So there seems to be a lot of dialogue, I guess, is how I would classify what's happening on the spot product. But maybe just talk about that. Talk about what you think this institutional landscape looks like over the next year.

Look, I think ETS are great ways for institutions to dip their toe into the space. And to have the backing of the biggest regulators in the United States supporting those will generally help direction of travel and digital assets. And so we're certainly excited to see that happen. All the news and all the Twitter updates are keeping the digital markets themselves very busy. And so I think we've enjoyed a few days of that. May it long continue and may this get pushed through. In 2024, again, we don't make too many prediction around here, but we see really two areas of growth. First is really institutional adoption of the asset class. Currently, it's dominated by retail. But like any other asset class, at scale, you'll see 70 to 72% of liquidity dominated by

institutional participants. We're starting to see the market mature and participation broaden. And so I think the audience in the space will include the larger hedge funds, asset managers, real money. And even the banks, if they're able to trade these regulated swap products, I think we'll start to see them. And so the market will start to increasingly look like the other five or six liquid asset classes with a diverse and healthy group of business. market participants. The second area is really on the product side and namely derivatives. And so we'll see growth in futures, options, NDFs, swaps, as you alluded to, Matt ETS and really structured products. But the growth of those derivative products will be executed and cleared on proper regulated

infrastructure. That's regulated exchanges, regulated custodians, with regulated market makers and certainly regulated prime brokers and clearing firms. Without having that proper infrastructure in place, I think scale will be limited. It's going to be an interesting market. I totally agree on the institutional adoption. I guess that will be accelerated if we were to get to some regulatory clarity around market structure in the U.S., if we were to get some clarity from the banks around the Sab 121.

But I guess my follow-up question would just be around, do you think we have two markets here at the end of the day where you're just always going to have these wild west exchanges popping up in jurisdictions that are unknown with maybe even entrepreneurs that are unknown behind them. And then you have this regulated lit market and it seems like there'd probably be a lot of money to trade both of those markets. But I feel like we're always going to have the Wild West part of this market to some degree. I think it will converge. I'll tell you why. In my experience, retail consumers like to trade volatile assets with leverage and that's fine. And they can lose their money trading, but what you can do is defraud. So there are a number of highly regulated,

very large retail brokers that have started in crypto and will continue to expand in crypto. So as I see those institutions really starting to market in those services, I think the retail users will flock towards that regulated environment. There's a cost to hedge your risk. And I think folks over the last few years are willing to pay that. That's the lens that we're starting to see. But the infrastructure needs to change for institutions to come into it. And so I think some of the large crypto exchanges today, they are starting to embrace tri-party. They need to work towards getting regulated and providing the transparency and audits that all consumers on their platform require both the retail side as well as the institutional side.

So we'll see how we shape up in the next few years. But ultimately, I think regulations will drive the bulk of the business onto regulated infrastructure. That makes sense. So what's next for you guys? and where can we send people if they want to learn more about what you guys are building? There's a lot of wood to chop at Hidden Road. But our focus is really to add value to our clients and investors by continuing to expand

the credit network. We measure that map by the number of products, asset classes, destinations that our clients can trade in. And so at HRP, we really like to solve problems specifically in the PB clearing and financing space. So if folks want to learn more about what we're doing or simply mind share, then absolutely reach out to us. You can organize a call with us by contacting us on our website, which is hidden road.com.

But Matt, we really appreciate the opportunity to speak with you today on this podcast. I appreciate you coming on. The market structure wonks and the listener group will appreciate this one. So thanks for coming on, Mike. Thanks very much. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island. To listen to all of our podcast episodes, please go to On the Brink-Bronk-Pestepard.

podcast.com or just click on the tab in our website. Thanks for listening.