On The Brink with Castle Island - Simon Forster and Duncan Trenholme (TP ICAP) on Crypto Market Structure (EP.421)

Episode Date: May 2, 2023

Simon Forster and Duncan Trenholme of TP ICAP join the show. In this episode we discuss:  - TP ICAP's journey in the crypto / blockchain space.  - The market structure for institutional cryptoasset trading.  - The future of tokenization and the types of assets that are likely to be represented on chain.  - The regulatory landscape and how this will shape the pace of building in the industry.    To learn more about TP ICAP and their strategy visit:  www.tpicap.com/digitalassets

Today on the podcast, I sat down with Simon Forrester and Duncan Trenholm, who lead crypto efforts at TPICap. TPI cap is the world's leading liquidity and data solutions provider. They connect clients to the world's financial, energy, and commodity markets. And as you'll hear in this interview, Simon and Duncan have been spending a ton of time thinking about the world of public blockchains and they've been building some products in the space. So I was excited to have them on to discuss their efforts. So without further ado, here's my conversation with Simon and Duncan from TPI. cap. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All Vies expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guest and hosts may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast. Brought down by bad mortgage investments, Lehman, which has 25,000 employees will be liquidated. The federal government loans American International Group, A-I-I-Rourational Group, A-I-I-Rournament. Brought down by bad mortgage investments, Lehman, which has 25,000 employees will be liquidated. The Federal Government Loans American International Group, A-I-I-Rour. IG $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 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 a Bitcoin. Bitcoin.

All right, Simon and Duncan, welcome to the podcast. This is the first podcast I've ever had where I almost got attacked by Yellow. jacket to start. So we're off to a good start, but I'm excited to have you guys both on the podcast. Thank you for joining. Likewise, excited to be on the show, big fans of it. So looking forward to the conversation. Yeah, thanks for having us. A good place to start, Simon, I think, would be to just have a little bit of an introduction on TPI Cap, how you guys came together and what you're doing over at TPI Cap. Yeah, great. So Duncan and myself are both being at the firm over 10 years. my background is on the equity derivative side, I joined from Societe General and Duncan joined

from the grad program in 2008, and we've worked together ever since. But TPI cap, for those that aren't familiar, are the world's largest interdealer broker. We're effectively middlemen for financial energy and commodities markets, operating in 27 countries, have 60 offices globally, so a pretty diverse network of coverage. Businesses split into four core divisions. The main one and most traditional is global broking, which consists of our bank-to-bank activity, which is where the firm really started.

We are part of the Energy and Commodities Division, which, as the name states, is focused on energy producers, covering gas, power, commodities, soft, hard, precious metals, and everything in between, quite an eclectic client base. We have an agency execution division, which is tailored to and focused on the buy side that was bolstered with an acquisition we made about two years ago with a firm called LiquidNet,

that are a big platform operator in the fixed income and equity space. And then the fourth division is parametta solutions that focuses on data and analytics. The digital assets business dates back to 2017 when Bitcoin went on its run up to $20,000. We had a personal interest, ended up being on the working group that I now CEO set up, led the working group and that morphed into a business strategy that we presented to the executives within the firm and the PLC

board. We are a publicly listed company when the business was ratified in 2019 and we've really been building since then. That's great. And maybe over to you, Duncan, what was it that got you excited about the digital asset space enough to take this role at the firm? I was a physics masters. That's what I did before I ended up at TPI, well, ICAP as it was back then. And one of the things having been a broker in a market is you build out a skill set that's very client focused and you get an understanding of the product that you're broking. But as you kind of get more established in that role, it becomes really important to develop those client relationships moving forward. What I found, and I think this resonant, with Simon as well is, you know, we started reading wider about, you know, staying more abreast of traditional financial developments, what was going on in the macro economy, thinking wider than just the asset class that we were involved in. And when I stumbled across the Bitcoin white paper, it resonated. It took me back to my university days, a bit more theoretical. And certainly having

worked in financial services for, you know, eight to ten years. at that point, one of the things that we saw on a day-to-day basis is how many sort of errors, problems, operational challenges that exist, which on the face of it, you would think financial markets are really slick and seamless. And in many places they are. But when you look under the hood, a lot of particularly post-trade, back office, middle office services is still incredibly manual. And there's this huge operational cost and burden, the organizations were kind of dealing and processing with different asset classes. And there was something in the Bitcoin white paper around having a more internet-based automated system for actually the movement of value,

which really resonated and kind of triggered a thought. And I think, I don't want to speak for Simon, but both of us thought, like, this is going to really mean something. not just as a new product, but like this technology is going to have so much application across wider financial markets. And it became something that was just so powerful that I thought, you know, was I probably hitting 31, 32. And I was like, what do I want to spend the next period of my career working on? And it just felt like, you know, this technology, what it can tackle in financial markets, that felt like a challenge and something I wanted to help and be involved in. There's so many things to your point that it can do in financial markets. And I'd be

curious what really shaped the customer demand story when you guys were putting together this business. Was it the Bitcoin story? Was it this broader tokenization play? What demand were you guys reacting to out of your customer base? I think in truth, we have always been slightly ahead of our traditional customer base. And that's been a conscious decision because mobilizing in this, This asset class is challenging. So we wanted to be on the front foot with that and have a head start. But what became clear to us quite early on that there's almost two things in parallel. One is there's this new asset class that is evolving that people have an interest in.

You know, some people have, you know, it's polarizing, you know, Bitcoin in itself still divides opinion. But it felt like there was something there and there was the start of this institutionally investable asset class. So that was kind of the first view that we took that that would continue. And if we were right about that, we knew that our clients would look to someone like TPI ACAP to be able to service them in the same way we do in rates, in FX, in equities, in commodities. And that kind of shaped our thinking in terms of how we built the business out. It led to the initial set of the business, which is more traditional covering things like the CME futures and options, an OECD. OTC derivatives. So really building a framework and a business to support our clients as they look to enter the crypto asset class. And then the second school of thinking was the technology

that underpins Bitcoin and Ether is going to have application. And we always believe that there was going to be the potential for that to disrupt existing financial market infrastructure. And that's something that we feel, to your point, there's lots of different threads here, but one that continues to resonate with clients and certainly internally is just the frequency of settlement and the cadence of settlement, right? Being able to settle something instantaneously or near instantaneously has a profound impact

on risk that builds up in systems. And I think the market is just starting to understand and realize what that is. So I guess the other bet we were making was if this technology was to have the effect we expected, we'd start to see other asset classes migrate onto blockchain. And if that was to happen, again, as much of a hedge against the disruption as an opportunity to explore, we needed to be well positioned.

And that started with a lot of market research. And there were the kind of two schools of thought that we had. And, you know, thankfully, we have been vindicated, I think, on both sides because, you know, crypto continues to grow. client-based continue to look for access points to that marketplace, but more broadly, and this is something that we're really excited to talk to you about today's tokenization, which has clearly in the last 12 months become much more tangible within traditional finance. It's no longer this abstract theoretical concept. It's very real when you have big banks launching tokenization

platforms, and you have bond issuances on public blockchain. suddenly goes from the abstract and the kind of theoretical to the very real and the very present. There's a story here about TPI cap and its place in financial markets, because if you think about some of the trends that have really shaped financial markets in recent years, you know, one of the big ones has been like the electronification of markets, where we've largely gone from these voice-based, paper ticket-based, central pits where people exchange financial products to data centers with RFQ and clubs and automated matching protocols and supported by a global fix network, etc.

Like various firms across finance have either been early or late to that type of evolution, right? And when you shift to a new technology, it allows the kind of established players to either compound their position or innovative new players. to come in a neat market share, right? And I think that TPI as an organization is an amalgamation of different businesses like ICAP, Tullet Prebun, each of those have had greater or lesser success in the electronification of markets. One of the things we've really tried to clarify and ensure our management understand is, if you want to call it, I've seen it referenced quite often as like the digitization of market rather than the electronification, but talking about post-trade upgrades,

assets moving from central ledgers, custodians and trustees, and on kind of pieces of market infrastructure and moving onto these kind of shared databases or ledgers, like where they're stored as a token rather than stored as a database entry somewhere. That digitization story is like incredibly early in traditional finance. And if you as a financial organization are willing to commit resource to that at this stage, you can get Move the Needle type returns, right? It's definitely a blue sky bet, but you can potentially meaningfully shift the narrative and direction of your business. If you want to invest returns in continued electronification, that's incredibly commoditized at this stage. And you're talking about marginal changes to

your company's performance, right? So in terms of what we're trying to take TPI cap too is this ability to, hey, let's invest heavily, in knowledge, expertise, and crypto is the test case, stroke, the first asset class on this technology. So if you want to be relevant, you have to participate in that area, learn, build infrastructure. And if you're right, and you understand what it's going to be like servicing digital assets that, you know, have smart contracts that are automated, that can settle on this like near real time basis, you have the to dramatically shift the direction of your organization. That makes sense.

I mean, tokenization can be such a controversial topic for people that saw the 2014, 15, 16 cycle in this industry. I remember when I was at Fidelity, we used to have large companies come in and pitch us on, hey, Bitcoin's not going to be a thing. It's just about the blockchain. And then their solution was this private blockchain where they were sitting in the middle and just took none of the advantages of a public blockchain network and just a total reintermediation play.

Not surprisingly, a lot of those things fail, a lot of the venture-funded private blockchains didn't go anywhere. This feels a lot different when we're talking about tokenizing assets, representing them on public chains, potentially. How do you guys see this playing out? And I guess the age-old question I would post you is, what are some of the key benefits of why you even need a blockchain for some of these use cases? That is a great question. And I think there's a real danger of financial markets replicating the, silos that exist in current financial markets. Like for a blockchain to be useful, it needs to be at least sufficiently decentralized,

I think. Right. And what I mean is you can't have a single operator running a blockchain because you might as all just do that on a SQL database or something like that, right? Look, I think depending on the use case, there is probably a range of blockchains that could be relevant, right? Do you want to use a fully public blockchain or do you want to use a private permissioned blockchain that has a significant number of corporate or financial entities that run loads on it? Like there may be some use cases for that where that is

the right solution for a particular product. It's interesting watching how different financial institutions are building. The problem is you need multiple participants at the same level of their own innovation journey to be able to collaborate together. And I think what we've seen over the last three or four years is in the absence of that, if you want to innovate and build as an organization, you don't have much option, but to run your own version. This next period is critical, right? Some of these blockchain platforms do have have the ability for other financial firms to come in and run nodes. The question is, are they going to want to because there's an inherent competition between

different financial firms, right? Meanwhile, you've just got this public blockchain network that continues to evolve and grow with a huge host of different actors, a huge amount of funding that's come in. And all the while that that continues to get established, built out, the services on top of it, we sometimes do think it's a little like the, for one of a simple analysis. but the internet versus intranet, it's easy to pitch the safety and security of just corroborating with a group of actors amongst an intranet. But ultimately, you've got to pay the cost of that, right? And if you've got this public utility, the internet out there, eventually firms get over their hang-ups

of security and dealing on that because at some point it just becomes part of the fabric of utility out there for you. So we're definitely at a stage where you've got some isolated ledgers being built across finance. It's unclear yet how many of them will interoperate. From what we hear from clients, clients are aware of this. They're a rare of the risk of siloing. I think they're starting to give feedback that, look, this is great, but we don't want to have to build connectivity to each one of these platforms. That's just repeating some of the problems we have in finance. And we've been heartened to see that some banks have actually issued onto public block. change. Like, that's a major step, I think.

What you said about different phases of the journey based on institution resonates with me. I mean, I remember being in some of these industry discussions where certain firms would send someone who's actually on the executive team. I mean, think about even like a square or a fidelity in terms of how senior the buy-in is at some of those organizations. At other banks, you'd have like the fourth rung of the risk department would be representing the firm in some of these groups, which kind of tells you how they think about it. It's not a priority from a commercial perspective. So curious how you guys think about that in terms of what makes a successful blockchain,

crypto tokenization strategy at a firm and how to get that buy in. I'm sure there is nuance at every firm. But I think our journey has been probably quite a common one, which is kind of this working group where you have a lot of interest and participation, different regions, different seats within the firm, some from technology, some from sales, some from trading. And that's kind of the first time the firm puts any sort of collective attention in the space. Over time, we certainly found, and it did directly correlate with the price of Bitcoin,

but as kind of markets went in and out of favor, so did the amount of interest within these working groups. But you potentially had a core group of people that were believers in what the technology might mean. And I think there's no easy quick wins, you know, it's taken us a lot of time and efforts and education internally to get people to a point where they understand what we are doing and why we are doing it. They understand what's the difference between Bitcoin and ether and the technology that underpins it and what that might mean for tokenization. So I think just the level of understanding, I think, has improved so much in the five years that we've been there

and it's kind of found a home and people now are starting to understand the difference between Bitcoin. Okay, is it, you know, we can discuss whether it's gold 2.0 or a monetary network to exchange value or whatever else, but people kind of understand

where it is compared to ether. Similarly, on the tokenization side of things, I think people are starting to understand what it looks like, but for a lot of people that have been in traditional financial institutions and trying to mobilize their firm, it's just a lot of heavy lifting,

a lot of hard yards, you have a lot of conversations, there's a lot of meetings, there's a lot of repetition, but slowly and surely, and this is really speaking from our experience, when you roll out one product and that starts to show some traction,

for us, that was listed derivatives where the CME have done a very good job and think probably will continue to do very well. I think that gives the firm confidence that, okay, we do see our traditional clients trading those products. Okay, what's the next thing we look at? Now we think about tokenization. So it's definitely a journey, but I don't think there's a silver bullet for it. I think it just takes a lot of time, a lot of patience, and a lot of effort from those that are trying to lead

to get others within the firm in a position where they still might not agree that Bitcoin has a place in the future, but maybe they understand the technology's more broad impact on financial for markets. That makes sense. So you mentioned that you're active in the CME listed derivatives market. That's a market structure that I would say is very well understood, very well codified. I would say the spot market for Bitcoin and Ether is probably a lot different. If you just look at historically how a lot of firms have been set up, you've had these exchanges that really aren't exchanges. They're kind of these retail brokerages. We've seen what goes wrong when you have an exchange that has an affiliated market-making firm running a Ponzi scheme fraud, for instance. So the industry has

had its challenges. I think it really begs the question of what is the right market structure for investors and what should we have in place. Do you guys have a view on that, how the market structure will evolve in the spot market? The industry has learned some hard lessons in the last year and a half. And I think Matt Levine's writing on Bloomberg is always really interesting. He talks about how crypto is relearning some of the lessons of traditional finance at light speed, right? Some of these things like segregation of roles and segregation of customer funds and mitigating for conflicts of interest. I don't think traditional finances by any means bright comparably to crypto. It's just they've gone through those problems before and then

you've had regulation that's implemented this and then it becomes part of the core DNA of financial institutions. So yeah, you're exactly right. And it certainly looked like there was a bit of a mislabeling of these service providers, right? They looked a bit more like broker dealers with their OTC desks and the fact that they were holding funds directly. And it wasn't segregated away. But that's also on clients because service providers provide what clients demand. And I think people were just wanted access to the asset class, right? I think now you're seeing customers and investors and larger in firms saying,

This is a prerequisite for us. We now need to know that when we're trading on exchange, that our funds are held by an independent third party custodian, right? And that there's that protection in the, in case there is bankruptcy, we know that they're segregated and they're not commingled, right? And I think that is going, and we're starting to see permeate through crypto. And that's a good thing, right? That's going to give more investor protection and it's going to lead more.

There's probably a whole cohort of different. traditional financial firms that were looking at the spot market and saying, maybe we want to be in there, but we can't enter currently because the market structure isn't fit for purpose. And the events of last year, as awful and you never like to see that happen, it's been a catalyst for change in market infrastructure. And I think that you learn or you take some of the features that exist in traditional markets and bring them to crypto markets, it's going to be beneficial for the whole ecosystem and asset class because it's going to open the spot markets for a wider participation from traditional financial firms. I think when we started looking at this space specifically around

the spot market, the many service providers that existed that were classified as exchanges looked very, very unfamiliar. And that really shaped our thinking. We are in the process of rolling out a platform to support our clients as they enter the spot market. And one of the core distinctions is that we have this kind of segregation of execution from custody, which for us didn't really seem anything but absolutely necessary, but that's not because we're necessarily forward thinking. It's just because that's how most traditional markets are set up. Had we come from a different vantage point, then maybe this concept of a vertically integrated exchange where you can do everything would make sense. But up until the damaging events

of 2022, I would say this concept of segregated custody was really quite, you know, it wasn't something that people indexed for in terms of importance. Fast forward to the end of last year and moving into this year. And, you know, to Duncan's point, we are seeing the market coalesce around this kind of off-exchange settlement solution, which allows for mirroring of assets that are held at an independent custodian. And that's something that we always believe was imperative for our institutional clients to move in. And we still think there's probably only about 5% of TPI clients that are active in the space. And one of the big reasons they're not is because of the lack of appropriate market infrastructure or suitable market infrastructure. There's also

regulation which hasn't been clear and continues to be challenging. And that's very dynamic. But without the appropriate level of infrastructure and without the appropriate regulatory oversight, it would always be difficult for TPI Capp's traditional clients to move in. And yeah, it's very difficult to be part of an industry where you see that unfold in real time, as we all did. But hopefully it puts us in a stronger position for this next chapter that's being written. It is kind of a chicken and egg on the regulation front, isn't it? Because part of the reason why some of this infrastructure doesn't exist at the custody and exchange level yet

is because there isn't clear guidance in certain jurisdictions, particularly the United States, it's around who oversees the spot market for some of these things. There isn't a clear way to take a token and have it sufficiently decentralized over time through a safe harbor. You have the CFTC and the SEC arguing about the designation of certain assets. And so from where I said, it seems like there's a lot of folks that are probably interested in building some of this stuff, interested in getting some of their customers involved in it. But the regulation and the lack of clarity is actually what's holding back some of these initiatives from a capital formation point of you. Yeah, I would agree with that. I also think if you look at the demographic of clients that have

been in crypto, right, it's been a question of risk appetite, right? I mean, early, from TradFi, early participants were market makers, hedge funds, prop shops in general, right? In general, if you're not trading customer money, you're trading like the firm's money or you're doing it with partner money, right? You can afford to take or have a wider risk appetite, right? And there were such outsized returns dealing, getting involved in crypto and bringing your traditional strategies to crypto, that it's a question of risk appetite and dealing on exchanges that were virtually integrated. It was a risk-reward kind of type assessment. I think, you know, when we talked and a big theme in crypto maybe two, three years ago, was the institutions

are coming, right? You know, for the more conservative financial institutions, so, you know, asset managers, banks, you know, I think that their risk appetite was probably less. And, you know, maybe that's one of the reasons why many of them hadn't entered the spot market yet, right? And I think that now that regulation is evolving and getting to a point where we have clear regulation, coupled with if you want those other participants within traditional finance to enter the spot market, then there are certain structures and market infrastructure, things like this segregation off exchange settlement, which are an absolutely prerequisite, right? And that's what's going to bring in these new participants. It's kind of an interesting vantage point because I'm sure you guys see this too, but you sort of have

two different sides of the equation. So you have regulation, which is going slow, but there are bills out there. There's a market infrastructure bill that could be getting its way into the House of Representatives here pretty soon. That would be an enormous catalyst for just institutions, really starting to invest more heavily in the space because their customers will be demanding it, have been demanding it. And just getting clear rules of the road would be great. The other side is just the technology. And so, Duncan, to your point on sort of the private versus public, some of these layer two roll up, some of these ways that you can actually have private networks that just periodically timestamp down to public chains, the innovation and the scaling, just the past

couple of years has been pretty extraordinary, I would say. So you have this kind of convergence where, I think some of these big ambitions that maybe didn't work on price past technology cycles because the chains weren't scalable enough, but also just the regulatory environment wasn't there. I think that's changing pretty quickly. Yeah, I think that's right. I mean, we think about this a lot our side in terms of what is the investor rationale for entering crypto, right? And I think that the more we see the investment into crypto as a byproduct of doing something else. the better. And what I mean by that is investing into Bitcoin or Ethereum based on, look, this is a great technology. It's going to have huge application. There's going to be price appreciation.

Therefore, we want to hold some of it. That's great. Likewise, we have volatility strategies and there's volatility in crypto. So therefore, you want to apply those to crypto. That's also great. But for crypto to really scale, I think one of the prerequisites is that, that it gets used for some form of economic activity. You know, we sit in the energy and commodities unit at TPI cap, right? And you've got, you know, huge desks that rate and do price discovery on like spot, energy, oil, and they hedge with participants off the back of it. And that's a byproduct of refineries that are producing oil or commercial firms that require oil for the activity that they're doing,

maybe transporting goods from one place to another, right? When I read stories about, say, airlines that are issuing NFT tokens to their user base for some reason, and off the back of that, they need a corporate treasury that instead of just holding FX for managing their business across different jurisdictions, that actually needs to handle crypto so that they can manage their NFT issuances to the clients. Those are the sort of use cases that I think are really important for this asset class to truly scale. Likewise, we sometimes hear of think electricity producers like renewable, energy producers that are when there's no demand from the grid, they've got spare electricity, they're mining Bitcoin off the back of that. They have requirements to enter the spot market

to sell Bitcoin and they're seeing that as a way of converting spare excess electricity into some form of value, right? I think seeing the crypto ecosystem and the technology and the application that it has actually being used for some form of economic activity, like we still haven't even got into that at large scale. And I think as you do that, the amount of participants to the market that are going to need to trade crypto or hedge themselves through derivatives is going to be huge comparably to what we have in the market now. Yeah, there's no doubt about that. I mean, you just think about the first wave of Bitcoin miners back in 2013, 14. They all went out of business because they weren't able to hedge risk. And so they were just, yeah, it was a bad

business model. That's changing. I mean, there's now the ability to hedge these things in a pretty interesting way. But I think that'll extend to chains well beyond even Bitcoin, where you think about an exchange or custodian that's spending quite a bit of money on just transaction fees on some of these networks and probably would want to lock in some price certainty there. And so, yeah, I think the use cases for derivatives here, we're probably just scratching the surface in terms of where this is going. Yeah. And I think also if you think about what's happening with C-Bs, BDCs around the world, right? Do you see a parallel FX market spin up quite possibly? And what does that mean in terms of financial institutions and the global FX market? How does that react or adapt

to this new variation of currency or instantiation of currency to the market? But I guess if you look at the internet, right, it took a long time before you had the applications that we now think of as the mainstay internet applications. There was lots of other things that needed to fall into place and be developed, whether it was GPS or on a phone or other things that enabled those really successful applications that we all kind of utilize in our day-to-day living. It feels like there's a kind of confluence of things happening across the space that are coming together that maybe take us into the next chapter where it does become more meaningful,

starts to deliver on some of the promises that as an industry we've continued to talk about. But coming back to one of the points you made earlier, Matt, regulation is always a bit of a laggard relative to technology innovation, right? And the regulators have a very difficult job. And technology continues to evolve and iterate at breakneck speed. It feels like the regulators are now in certain jurisdictions, starting to really get the head around this technology. and what it means and how it could be regulated. Things like, you know, we're fortunate. We're a UK headquartered company.

We have continental Europe is a big business within the firm, and our home there is in Paris. And if you look at what's happening both in the UK and in Paris and more broadly the European Union in terms of the EU-DLT pilot regime, you know, they give firms like TPI CAP a framework to really start to experiment with this technology and tokenization, without those things, you know, you can't really do anything. So that's a really key piece of a jigsaw that's starting to come together to allow firms to really more seriously engage in the space and look to build products and services and new infrastructure.

So it's really interesting seeing all these things start to come together at a similar time. Yeah, yeah, I totally agree. I think that framework is the most important. Well, that's a good dovetail into just the product. So maybe you guys could just talk about what you've launched so far, what the ambitions are here with the platform that you guys are building. Yeah, happy too. I think we've always tried to, like if our thesis and long-term strategy is, you know, many financial products trade on blockchain or DRT, but we're not sure on how long that will take because it isn't a straight path to that becoming the common way of trading and settling across the industry. how do you manage some successes in the short term whilst building for that long term future? And we've tried to take a kind of staged approach of if we were thinking about most of our clients,

our thoughts were originally that we need to manage and stage our approach into this asset class and help ourselves deliver and have some successes in the short term. So we were thinking about like when our clients come to this asset class, The first thing they'd like to do is get some price appreciation. They'd like some exposure to the asset class. But in terms of how they do that, potentially they want to go with financial products and routes that they already use in traditional asset classes. And that's where the CME was important.

It's a platform. It's cash settled derivative products that many or most financial firms already have access to. So that's a route where, you know what, the lift to enter crypto there is quite small or smaller for financial firms. because you've already got the plumbing in place to deal on the CME. So we kicked off with a sort of a broken desk globally that can provide a layer of price discovery for larger size trades, block trades, you know, option strategies that aren't on screen. And we thought that that would be a sensible place to enter the market, build some

relationships with the early firms that were in crypto. That's a market that in the last year has seen a lot of growth because, you know, as the crypto market went through down, downturns, people started questioning which platforms they were dealing on, right? And if it's offshore, it's unregulated, it's, you know, it holds your funds. Some of those derivative platforms in crypto look like a bigger risk than they did prior to the downturn, right? And I think the CME had been a net beneficiary of that, as there's been a bit of a flight to quality across to those products. So that's where we started. And then we figured once our clients were accessing derivatives in crypto, they'd quickly want to be able to facilitate spot, but through a fit for purpose kind of

structure that suits them. And that's where our upcoming exchange fusion digital assets, which is going to be based out of the UK, we got our FCA registration last November, and we have this relationship with Fidelity Digital Assets, who act as our independent, third-party sort of settlement and custodian. Crucially, with that, clients have their own direct relationship with Fidelity. So they have a custody relationship with Fidelity, but Fidelity enable some of those assets to become available for trading at TPICAP, but they never leave custody at Fidelity. And then what we'd like to do is as we build this settlement product, which we've called Fusion Clear, which is interacting with digital custodians. So we're going to work with

multiple digital custodians. And that's all about how do you get the digital custodian can manage private keys. They can interact with different blockchains. They're that kind of gateway to these different networks. And if we can run exchange matching within the framework of regulated venues, which is what we do globally, we can then repurpose that internally for other asset classes. You know, we think we're a large percentage of equities, rates, credit, most asset classes, and they trade on a variety of methods, whether it's voice, i.e. brokers talking to each other

and clients, whether it's RFQs, clubs, dark pools. There's a whole mix of protocols for matching clients. And ultimately, we don't think that's likely to change because at that level, you're just, you know, you're matching a product and then it settles down. And instead of setting, settling through the traditional settlement infrastructure that exists in finance. We think it's likely to settle through sort of digital co-sodians on chain. The caveat to that is defy, right, where you're actually seeing that trading layer being done on chain, right? That's super interesting.

I think it's very frontier. I think there's some challenges there. Like when most public blockchains are optimized for throughput rather than frequent of blocks, you know, you've got this a once a second block time. You know, if you think about wholesale institutional finance, electronic trading, you're talking about microsecond round times, order event management between different bids offers, etc. Like, until a blockchain can process at that speed, can you really, I mean, look, for retail peer to peer trading, you know, if you're getting matched and your bid and offer is getting managed on a second by second base,

I think that's largely okay, assuming there's some consumer protection around front running and things like that. But to do institutional trading, I think the technology isn't there yet. But do I envisage a world where you can do automated market makers can be used amongst larger participants? Yeah, I think that's possible, right? I think you need to manage the pool. You need permissioned pools. You can't just have anyone providing funds. and the Russia-Ukraine war was a huge reminder of that, right?

When sanctions come in, you know, and you've got marketplaces with different participants, like if you actually want to affect sanctions against certain counterparties, you can't have a un-KYC'd pool, right? Because you don't know who's in there and who you're trading against, right? So, but that's something like at TPICAP, we're watching with interest, right? You know, there's this huge amount of innovation in defy. And, you know, it's now on regulators' body of work, right? Like, different particularly EU are looking at how do we bring standards to defy and how do we

help that become orderly in effect so that you can fit within financial regulation. But yeah, interesting space, that one. It's incredible. You guys are really at the forefront here. So I'm excited about what you're building. It's really exciting to hear about the exchange and the partnership with Fidelity. As we wrap up here, where can we send people to learn more about what you guys are building and to get in touch?

We are both on LinkedIn, which I know is a very trad-fied platform for communication. In terms of the business, it's digital assets at tpicap.com. If people want to reach out directly into the firm, and I know Duncan is a little more active on Twitter than I am, so I'll let him provide his handle. Yeah, it's actually tpicap.com forward slash digital assets, but it doesn't matter too much. You'll find it searching for digital assets at TPICap.

Yeah, Duncan Trenome on Twitter and on LinkedIn. You can find us. Yeah, feel free to reach out. Happy to discuss further what we're doing. That's great. Well, thanks so much for joining us today on the podcast, guys. Thanks. 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 dashpodcast.com or just click on the tab in our website. Thanks for listening.