On The Brink with Castle Island - Tom Chippas and Matt Trudeau (ErisX) (EP.12)

Episode Date: October 28, 2019

Tom Chippas, the CEO of ErisX and Matt Trudeau, the Head of Strategy of ErisX join the show to discuss the evolving market structure for the trading and settlement of digital assets. We discuss the evolution of this market, the regulatory landscape, and what Tom and Matt are most excited about in the cryptoasset industry.    Learn more about ErisX at https://www.erisx.com/   For more information please visit our website at www.castleisland.vc and follow us on Twitter @CastleIslandVC.

Hey, everyone. We have a great episode for you today. We had Tom Chippus and Matt Trudeau on from Erasex. Tom is the CEO of Erasex and Matt is the chief strategy officer. So Castle Island is an investor in Erasex, which is a spot in futures exchange for crypto assets. And we'll get into what all of that means. There's a lot of jargon and lingo that we define and try to make accessible. But this was a really fascinating conversation with two people who have a deep background in market structure. So if you're a fan of market structure. I think you're going to like this one a lot. I'm not sure how many fans of market structure there are, but it's nonetheless a fascinating topic. So Tom's background is that he was previously an MD at both Barclays and City and the prime groups of both of those firms. He was also

the CEO of Citadel Technology, large hedge fund, and actually comes from a background in the blockchain slash DLT space as well, having done a stint as the COO at Exxoni, which is actually where I first met Tom. Matt similarly has a background in the financial services industry. He was previously at InstantNet. He was the head of product at IEX. And he was actually the co-founder of Tradewind Markets, a company that was working on a lot of distributed ledger technology stuff as well. So we chatted about the current state of affairs for market structure.

I'd say Tom and Matt have a very specific view of where this market structure is evolving. I think it'll be interesting to keep tabs on how this goes over time. There's certainly a lot of big regulatory questions happening right now, as evidenced by the BitWIS, ETF denial. And I think anyone who gives that a thorough read will really come to the conclusion that, at least in the SEC's mind, there is a big need for some of this market infrastructure around the spot market to really evolve. And so we get into what the current state of affairs is for that. And we cover a bunch of topics.

We actually got into talking about mining and renewable energy at one point. So it was a wide-ranging conversation. Really hope you like it. And we'll take it away from here. 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 to Britain's ailing economy with a new round of constituted. 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. Welcome to the On the Brink podcast. I'm your host, Matt Walsh. And I'm very pleased to have Tom Chippis and Matt Trudeau of Eris X here with me today. Thanks for joining us, guys. Thank you.

Thanks for having us. We'd love to jump in and just start with some introductions on your backgrounds and how you got into the space and maybe leading into why you both made the leap to ErasX. Maybe we could start with you, Tom. Sure. I mean, I have a background that comes more from traditional capital markets, electronic trading and prime finance and across multiple asset classes on a global basis with an emphasis in electronic and quantitative execution. So always been attracted to market structure and new technologies. I had the benefit of taking some time away after leaving a hedge fund I was with and got into DLT and crypto and try going back into the cell side and decided that I couldn't

get crypto out of my head and was really excited to come here and really at Arsaxx as hopefully you can talk about is a great confluence of building a market, addressing a market structure, interesting tech, and really all the exciting things that come with crypto. We got to know each other when you were doing a stint at Exoni as a chief operating officer there. So you have a background in financial services and one of the very few people, I think, that has had several years of experience in crypto assets and blockchain as well. I'm post-blockchain already. Exactly. Good. And Matt, you also have an interesting background. I would love to hear what led

you to Erasex. Yeah, so like Tom, I also have a background in electronic trading. The difference maybe is for the last call it 10 years, I've been more focused on the exchange and marketplace side of the business. So part of ChaiX Global launching markets in Canada, Singapore, Japan, Australia was part of the early team at IEX launching their ATS and then eventually the fully licensed U.S. securities exchange. And that was where I got my first introduction to Bitcoin. I ran the product in Ventures teams there. And one of the deals I did some diligence on was a Bitcoin exchange back in 2014 that was interested in licensing some exchange technology. And I became very interested in it from there. I thought that some of the concepts would have some really interesting implications in the more traditional capital markets. Out of IEX, I actually co-founded a company called Trade Win Markets, and the idea there was to create an exchange and blockchain-based post-trade system to digitize trade, clear and settle precious metals. So like Tom, I took a bit of a stint more into the enterprise software side of it. And he and I met

actually as well when he was at Exxoni. And I decided when he came over here to ErisX to join him over here to see if we could build another exchange. That's really exciting. It's been great to see so many people entering this industry. And I think you both have really unique backgrounds. So let's dive into ErisX. What is ErisX? What do you offer? And tell us a little bit about the company. Sure. I mean, ErisX is an exchange in Clearing House for spot trading of digital assets, specifically cryptocurrencies, Bitcoin, Bitcoin, Cash like Coin and Ethereum. We do have a separate exchange and Clearinghouse and we'll be launching futures before end of the year. It's really a marketplace that we're trying to build that looks a lot more like a traditional commodities marketplace

where you have producers, speculators, hedgers, investors, a whole variety of participants that bring their diversified trading views. And what we've tried to do is implement the traditional exchange and clearinghouse infrastructure, and the clearinghouse sits between the buyers and sellers. It is the buyer to seller, the seller to buyer, and assures that the transaction is actually clear and that the cash and collateral there to just really avoid any opportunity for there to be outtrades. In the history, Ares futures actually existed for nearly seven years before becoming RSX. Those products were operated under a DCM, which is the license regime for futures exchanges. DCMs are issued by the CFTC, but pivoted to crypto to service really the unmet need of having

a fully disclosed, transparent marketplace with a distinct clearinghouse from the exchange available to trade on. So pivoted to crypto, we've acquired a whole slew of state licenses. We acquired our DCO, which is the clearinghouse license for futures back in mid-July. We're working through some of the remaining requirements before launch there before we launch futures. Let's maybe just step back and define a clearinghouse and why that is an attractive piece of infrastructure for an institutional participant. Either one of you talk a little bit about why a clearinghouse is necessary, what that brings to the market, and maybe just the state of the market right now as it relates to, is there anyone out there doing clearing houses? A clearinghouse is something that's developed in traditional capital markets. I think in large part, like many things that exist in the traditional capital markets, out of experiences in the past where things have gone wrong.

So whenever you do a trade, after the trade is agreed, the buyer and the seller need to swap whatever was agreed in terms of the trade. So there's always a risk that if I give you my stuff, you won't give me the money. And so clearinghouses were developed to custody or take possession of the assets from both sides, the buyer and the seller. The clearinghouse sits in the middle. And so when you trade, you trade versus a clearinghouse, not your counterparty. There are a few different benefits to that. One is that eliminates the settlement risk. So you always know that the trade is going to settle.

It also allows you to trade with anybody on the exchange without needing to know who they are. So when you think about trading in, let's say, the U.S. equities market, when you trade on the New York or NASDAQ or any of the other exchanges, you don't have to worry about who is your counterparty because of NSCC. It sits in the middle on the back end of that, and your trade is versus the clearinghouse. So we thought that it would make sense to implement a clearinghouse in the crypto space because really today a lot of the trading is happening over the counter. And in that case, the benefits from a clearinghouse don't exist. So you have to have a bilateral credit relationship with everybody that you wish to trade with. And somebody always has to go first. So someone has to transfer the crypto assets and they may or may not get the cash.

So we thought that there was an opportunity to fill that. structural gap with something that works really, really well and has been proven in traditional capital markets. Yeah, it just hasn't been as prevalent in spot crypto markets, but we like to think we've been a bit more forward thinking in the sense that knowing that we wanted to launch futures, that is the construct for futures. There isn't some other construct. If you only have a DCM and exchange license, you have to clear the trade somewhere. So either you have to acquire the clearinghouse license or clear somewhere else. And what we wanted to do was create parity and equity between the spot market structure and the futures market structure, such that whether I'm trading

spot or trading futures, collateral can move very quickly between those two different products. And it only works in that one structure. And then all the other benefits that Matt just talked about, really we think long term will benefit the crypto market space, specifically eliminating the need for all these bilateral arrangements. You can just become a member of the clearinghouse. And you can transact, block or otherwise, with any other member of the clearinghouse. and it'll be a real boon to those that want to enter the market. That makes sense.

And I want to dig into your views on market structure and how this is evolving. But maybe before we do that, let's talk a little bit about what does it take to integrate a clearinghouse with institutional FCMs. And what have you done in that regard? Yeah, certainly, you know, FCMs play a unique role, whether you're retail providing access to futures markets for two-legged people or you are an institutional FCM working on behalf of investment managers, hedge funds, CTAs, etc. Commodity trading advisors, for those that don't know CTAs. And really what is important, and it's really something that we think about a lot here

at ARSX, is it's not just send somebody information. You have to understand their workflow, and you have to understand why an intermediary, like an FCM, is part of the workflow. So FCMs provide consolidated reporting. They manage margin across different exchanges on behalf of their customers. They might provide technology to access markets. They typically provide consolidated reporting, risk management services, really a whole penelope of services that professional traders especially demand. So you can't just spit out a file of data and say, here you go, integrate this with everything else. It just isn't going to fly. So we put in a lot of time and effort with FIS, which is a large software company that some people might know under their older name,

Sungar, but FIS is a broader entity. And they are the owners of a product called GMI. And GMI is probably the most widely used, although I'm speculating on that. So I'm happy to be told him wrong, but the most widely used back office platform for FCMs. And that integration is super critical if you want institutional participants to trade these sorts of futures. I think the legacy systems integration is something that people don't talk enough about in terms of some of the institutional barriers to entry for this market. You hear a lot about the biggest barriers being custody and regulated spot markets. When you think about the barriers and you're speaking to clients, is custody and liquidity landscape? Is that the two kind of main things that you're hearing?

What else is preventing further participation in this market right now? Custody, and I would say exchange infrastructure, were two of the fairly prominent themes of, call it 2017, 2018. And I think that when Tom and I looked at the space, we saw an opportunity to fill those gaps. And so a tremendous amount of time and money and effort has been expended over the course of the last year to fill in particularly the custody and the exchange gaps in the market. So largely speaking, I think those issues have been solved for. And now we're really talking about more some of the kinds of things that Tom just referred to in terms of meeting the institutions and providing them a low friction way to get access to the assets. So they can focus

their time and energy on the trading side of it and the investing side of it and not worry about the implementation. I would say that the newest issues are really around making sure that we're integrated into their workflow. And if you haven't had the experience of doing that before, you may not fully appreciate how important that is and how challenging it can be. That makes sense. I mean, one of the things that Nick and I like to talk about is just the various different theses for even why you'd be interested as an institution in participating in a crypto asset market. And so there's this great cartoon of the 10 blonde men touching the elephant.

And they're all touching different parts. And they're all saying it's a different thing. And it's never an elephant. And so in crypto, I think you have the same thing where you have some people looking at this and saying, this is a payments innovation. This is going to disrupt the visa and master cards of the world. You have others that are saying Bitcoin is digital. gold, and that's my investment thesis. You have others that are looking at smart contract platforms

and looking at how they're potentially going to disrupt tech companies in the future. I guess first question is when you speak to institutions, do they have an overarching thesis generally, or are they just looking to trade this? And second question to that is, does it even matter? I mean, do you think that there is a need to have an overarching thesis in order to spur additional participation in this market? I think actually both are likely true. And by that I mean, Some of a thesis, others are more interested in participating in what was uncorrelated, now uniquely correlated asset that didn't exist previously. So in the former, I would say that it depends who you are and what type of investment manager

you are or as an individual what your investment thesis is. Digital gold for things like Bitcoin, powering DAP platforms, really the commodity view of Ethereum, which was great to see validated by Chairman Tarbert recently. and something that we wrote an extensive response to the CFTC request information on. If you believe that DAPs are going to lead the next 10 to 15 years of service development, and they're all going to be powered by Ethereum or some other platform or some other token, then you can develop a totally different thesis there that would be very different than, say, Bitcoin is a store value thesis, which is, I think we always find an interesting

because there's certainly a lot of religion or certainly a lot of fervor, various views. The great thing about markets is that you have to have a diversity of views. And I think what we find interesting is watching this meshing of people that haven't been mining Bitcoin since 2010. And they weren't there first. And they're coming with their own views about what these tokens represent. For those on the second thing I mentioned, if it's uncorrelated or at least uncorrelated to things in my portfolio as a hedge against the movement of the dollar or gold or large equity indices or what have you, hey, that's great. And there are virtually unlimited number of models people build nowadays.

And if something like Bitcoin or Ethereum or Lykecoin or what have you fit into those models, oftentimes you don't need a thesis. The model tells you that it will work over this confidence level. And there's this much room to deploy capital against it or go and get it. So I think there's room for both. And that's just a greater manifestation of the different views to make a better market. At least that's what I've seen. Yeah, and I would say that what we're seeing is a lot of the same types of approaches that you see in other asset classes.

So you've got firms that are looking at this very long term. They're making investment in the future of open finances of thesis. You've got the systematic trading firms that are looking at this from really just a process-driven approach. You've got the market-making firms that are here to do that, which is the thing that they do well. And then there are others that look at it more as a store of value or an uncorrelated asset. And one of the things that we think is brilliant about marketplaces is that all of those use can be expressed in one place. And it creates for more dynamic, more interesting, more liquid market with greater information

reflected in the prices. And so we think that that's good. We think it's healthy to have a diversity of use and opinions about the asset. It must be an interesting boardroom because you have Joe Lubin as a member of your board is obviously prominent in the Ethereum world. You also have investors from Fidelity. You mentioned early mining. I mean, we were mining Bitcoin in 2014 at Fidelity.

So talk a little bit about your investor said in the various institutions that have invested in RASX. Sure. I mean, Castle Island, of course, in full disclosure. Being the most prominent. Being the most prominent. Definitely our favorite right now at this moment in time in this room. You're right.

I feel that we're uniquely positioned to be informed about many different facets of the market evolution that's happening. Joe, as you mentioned, is great. I think Joe's opinions are widely circulated and well-known, and I would say that his opinions are the same, whether it's him one-on-one or in public, which is, of course, great. We have investment from DRW Ventures, so Don Wilson, a very early entrant into the space. We have, as you mentioned, Fidelity. We also have people like NASDAQ in the room.

TD Ameritrade is an investor and an observer on our board. We also have large digital asset custodians like NIDIG, who's on our board. who's on our board as well too. And then we have an independent board member as well. Our independent, Chris Condi, comes from the derivative space, has built infrastructure several times over, fully understands marketplaces and the interplay between buy side, sell side, clearinghouse exchange.

So I guess on the one hand, I can say I have no excuse for not seeking and getting advice. But on the other hand, it's really inspiring to get into some of these conversations and see the diversity of it. Valor Equity Partners also in the room, and they are investors and things like Bitco, but also some other well-known tech companies that have nothing to do with crypto. So we have just a great set of backers that are unabashed about sharing their views,

but equally come to the table willing to be educated. So I think we get a lot of good input. And I think you must get a lot of good input on just market structure in general. And so that maybe will dovetail into this. I thought you wrote a great blog a few weeks ago on what the optimal market structure is for crypto assets. So let's dig into that a little bit. You call out and concluded that a central limit order book would be the optimal structure. But maybe if we could start with just what is the current market structure for crypto assets, where you're seeing now pre-eris-X launch?

And then what are we evolving towards? So some of the topics we've touched on a little bit already. Tom got into, in the earlier part of the conversation, some discussion of the early exchanges that were mainly retail focused played multiple different roles that are typically separate roles in traditional capital markets. So you've got the broker plus the dealer, plus the exchange, plus the clearinghouse, plus the custodian, all stacked into one. And those platforms, by and large, were web-based, ran in the cloud. And so again, something structurally and architecturally that's a little bit different from more traditional mainstream asset exchanges. So there was that. And then the OTC market developed as more institutions

started to come in. And so depending on it's an opaque. market, but depending on who you talk to and some of the research that's been done there, potentially more than half of the market actually trades OTC. But again, as we refer to the bilateral nature of that, those are exclusive relationships, not transparent. There isn't a lot of price discovery that's happening there in terms of something that's visible to the broader market. And some of the things that we talked about in the piece related to the information asymmetries

in those types of arrangements. So those dealers that are providing liquidity in the over-the-counter market are able to see and assess the trading needs of a variety of different participants and counterparties, and those counterparties may not always have the benefit of access to that same information. And so it can be challenging to assess where the market actually is. And when the price that one is quoted is reflective of the credit relationship, potentially the information that is known about your willingness to pay a certain price, the price that you receive isn't always actually representative of the quote-unquote fair value

of the asset. And so as we looked at the marketplace and said, you've got cloud-based retail-focused exchanges where a lot of the infrastructure has been collapsed into a single entity. You've got the over-the-counter market, and those two things may have a place or may provide some complementary aspects to the market, but a central limit order book is a tried and true model that exists in some of the most liquid global asset classes. And so when we look at U.S. futures and U.S. equities these two very prominent examples. That market structure has been tried and true there. And the exchange architecture in those asset classes is one that exists in a data center and is really optimized around the performance and reliability and predictability of the trading experience.

And so where some of the cloud-based exchanges, for example, and we actually wrote another piece, I believe it was in Coin desk, covering some of this, where the trade-off for the cloud is that it may not be as consistent or reliable in experience. And so as we look at the market structure overall, one of the questions that we asked ourselves was, to what extent is the existing market structure preventing larger institutions from coming in? And so if the underlying exchange technology and architecture

may not meet their performance expectations, if the fragmentation and exclusivity and lack of transparency in the countermarket may present some obstacles, Is there an opportunity to bring the other model, which is a central limit order book model to bear, where they can see access the market fairly and transparently, tap liquidity and bring their own liquidity into the market. And do you think that the market structure with the bilateral relationships and the OTC brokers is a function of that was just the most convenient way to get up and running and for crypto hedge funds to access this market? Why did that bilateral market start to evolve? It seems to evolve a bit organically out of maybe who were some of the early players, what was the market structure that served their interests best? And so I think a lot of time and energy and money has been invested into creating a workflow around that over-the-counter model.

And that serves the over-the-counter dealers really well. The question is, is that the optimal model for the overall market? And a lot of the theme of some of the things we've been talking about is where are the institutions and what are they coming and what are the opposite? So Tom and I were talking about the size of the crypto market relative to other asset classes, it's comparatively small. And so when you take a comparatively small asset class that has some challenges in terms of workflow integration, and then some challenges in terms of liquidity access and transparency, that puts up obstacles that maybe make it challenging for the institutions to come in. So gradually, as we've built this platform, and not only us, but others that have come into the market that come from more traditional.

professional financial services backgrounds. We've tried to knock down those various obstacles, and we think we've gone a pretty long way to getting a lot of them out of the way. I would definitely concur that a lot of the structure we see today is there because it could be put in place quickly, and the market participants were sophisticated enough that they were willing to utilize it. And sophistication is a relative term. A lot of the block trading was taking place purely phones, Skype, and all sorts of crazy things that you wouldn't expect in a modern market today. And some of it still exists. And what you've seen as a rapid investment in technology by a lot of the over-the-counter dealers to provide better technology. And they've adopted things

they've done from, say, the FX world where they stream prices out. And overarchingly, what I'd say is that there's been this mass focus over the last 12 months to optimize this particular their market structure. And what we have now is imagine a room full of market participants that are all arranged in a nice circle now and they can all trade with each other and go, okay, great, why's in the circle bigger? Well, it's because everyone's locked in a circle and you've optimized the circle. And it's not bad. It works for that group. But it's an intimidating structure for other people to enter and or for some one they just won't enter. And what we did reference in that blog post, not to imply it's happening in crypto today, but there are a lot of lessons to be learned in

history of where things have gone wrong in OTC markets, and nine times out of ten, it goes wrong because of the operator, not because of the other participants. I think there's a lot to be considered there and be thankful for that it's been completed, but we have to ask ourselves a question, as Matt said, are we not seeing institutions in purely because of this? No, but this market structure question needs to be asked and considered. Yeah, it's interesting to consider that market structure itself might be a barrier for a lot of institutions where you could get comfortable with custody, you might get comfortable with regulatory, but you might just look at this market structure and say, this isn't really set up for what I'm trying to do. Do you think that there's a world

where the Central Limit Order book version of the future coexists with a vibrant OTC bilateral market? Do you think that this is possible? I think it is. I definitely think it is and exist today. I mean, there's OTC liquidity available in other asset classes, whether it's FACS as we mentioned or equities or what have you. So it definitely can. But much of what the OTC markets have done, today in crypto can be supported in a fully disclosed and surveilled market. And one of the first things we hear is, I'm going to trade a block. Okay. Well, in futures, there's rules around trading blocks and they have to be printed within a certain period of time. And then those prints displayed. And of course, there's arguments why I don't want to display that and what would they do to price discovery. But what

it does is allow for better price discovery because the whole market knows what's happened. And I think a lot of those types of transactions could move onto a clearinghouse in exchange. They could be negotiated off clearinghouse or exchange and then printed there. But by moving then into the light, they can be surveilled. And it's something we take very seriously. We wrote a joint paper with our provider of some surveillance technology, one of them, the Ventis, about the importance of surveillance in these markets. But I would close this out by saying, you know, there's been an over-optimization of the current market structure for those that are here. And like any difficult or challenging activity, a movement to democratize or simplify participation

is often met by resistance from those that are here first. And the more we want to expand the market, those that have gotten to that point need to perhaps curtail some of the desire to hold all the information and to open it up a bit. And it means they're giving up something, maybe cost, profitability. I'm not implying that I'm blind to those things. But once everyone else in the institutional space who's not here today, day, sits down and do their homework, they're going to find acceptable custody solutions. They'll find accountants to tell them what things are worth. They'll find all sorts of services

are there, but then they're going to look at the market structure. They're going to say, well, wait a minute, I want a continuous order book, I want displayed pricing, I want to be able to print a block in a disclose marketplace. I don't want everything done in the shadows. And I think that this question hasn't seen the light of day. That makes sense. And so part of the what you talked about there is around the settlement, and this is a really unique asset in the sense that it's a digital bearer asset. And there's no concept of like a DTCC for crypto. It presents some really unique challenges. And earlier, we talked about kind of the bilateral risk of settlement in the sense of your counterparty just not

sending you the underlying asset or sending you the U.S. dollars. And so what is that current state of play on the settlement side? And you've made a bet that one version of the world around having this clearinghouse is going to play out. But, you know, how do you see this evolving just structurally over time on the settlement side? You'll make a quick comment. apropos of what we just talked about. I'm sure Matt has some, too. I would say a lot of folks, perhaps listening to this may not even be aware of how OTC settlement was done and in some cases might still being done. Literally, two counterparts would find each other, phone, Skype, what have you. They'd open up bank accounts in an FBO form for the benefit of. And then they'd open up a wallet.

And depending upon the reputation of one of the parties, it would determine who would go first. Who sends first. Exactly. Yeah. And literally you'd watch money. trickle in and coin trickle in or trickle out and you do a little more and do a little more. As you got to know the counterpart, you might change the timing, the parameters, all those things. But I don't think a lot of people actually know that's how it was done. They just assumed that some magical blockchain thing was happening when the blockchain was part of it, but it was only one very small part of it. So what I'd say is that we've gone from that sort of handmade to semi-automated to what I'll call interim improvements. So things like signature bank or

Silvergate, those are really interim improvements. I mean, everybody opening a bank account at the same bank, I'd like to think we could do something more elegant than that, but it works right now. So it's not a critique of that. It's just a state of where we're at today. I don't think in a few years' time that'll be the best solution for Fiat. And then with respect to Coin, there's been some services developed and improvements in technology there. But it's still ultimately two folks signing a bilateral agreement and doing it their way. Do you want to comment on that, The only thing I would add really is that to the extent that you trust the exchange or really the exchange that's performing the settlement, to the extent that exchanges are performing

the settlement today in many cases, if you trust that the exchange is going to keep good care of your assets, then if you're trading on that one exchange and you trust the exchange, settlement isn't so much of a concern for you. But for anybody, including more sophisticated institutions that are going to have liquidity needs that are going to require them to source liquidity across multiple different venues in a fragmented global marketplace. One of the issues that Tom touched upon is this question about treasury management. And so while settlement for an individual exchange has largely been solved, settlement across exchanges or movement of capital across exchanges is still probably one of the more interesting and common topics of conversation right now

and the industry is working towards some solutions, but that isn't something that's been definitively solved for yet. As you guys were both talking, Tom, I was remembering several conversations that we had back in probably 2016 just around how you would settle repo transactions or securities lending style transactions on a blockchain. And the barrier there at the time was always around how you would move fiat currency. And would there be a way to put fiat onto a blockchain and effectuate a settlement. A lot has happened since then. I mean, we have Tether has ballooned in terms of total addressable market, not that that would be necessarily the best solution for an institutional client, but we've seen various efforts around stable coins, around institutions issuing fiat-backed

stable coins. Is that the way that this market is going to play out? What are your views generally on stable coins as a way to effectuate a settlement? Yeah. We're solving a problem that exists today, specifically in the transmission of U.S. dollars in real time outside Fedwire hours. And no one in this market space uses ACH because you have a, it's 90 days where you can recall the transaction. So that's certainly not finality. It's a lot of blocks over 90 days. It would take a while.

It would take a while. So generally, yes, stable coins definitely serve a purpose in that regard. I think Tether didn't start out to serve that purpose. In my opinion, Tether started out to give the ability for. For people who otherwise have not access to U.S. dollar denominated accounts, access is something that's equal to a U.S. dollar and now maybe equal or no one never knows. But Tether is so enormous in comparison to the total of all the other coins, it can't be ignored. So the question really becomes if the BOE or the Treasury or what have you issue digital versions of their tokens

or things like finality get going in the institutional space or more people may know by utility. the settlement coin. Yeah. If those things take off, you start to solve for that component. And that's another piece, I think to Matt's point that there's different components here, that's another piece that could help solve for that. I think it's an interesting thought exercise to say, well, what if in Thanos-like fashion, snapped our fingers and we had US dollar as a, well, the hot new term is central bank digital currency,

which is too many letters. But if we had that today, will we be having this conversation? I don't know. I think there still be a market for a stable coin, and it gets into a longer conversation about what the attributes are of a stable coin. But specific to your question about settlement, I think the settlement use case would be solved. It wouldn't necessarily solve for some of the other issues that are more monetary theory issues about what happens in a negative interest rate environment and things of that nature. So it's a big, big, long topic. Yeah, those negative interest rate conversations are fascinating.

And I know you've given a lot of thought to that. I mean, the other issue is just around an institution issuing the stable coin, would they be large enough to actually service a market? Would their balance sheet be large enough to effectuate that? And so then that's where the central bank issued gets really interesting. I guess if it's fully collateralized, does it matter? In theory, it shouldn't. I mean, obviously it could come up with use cases where things go wrong. But if it's fully collateralized, just fully backed by dollars, I guess. Yeah, exactly. Yeah. So let's talk a little bit about the spot landscape. I think there's been a lot to talk about

the spot landscape in recent week. So you have the SEC's denial letter for the Bitwise Bitcoin ETF proposal talks a lot about some of the gaps in that market. So they highlight a lot of the exchange activity that's happening in the spot market is off overseas. So with Bonance making up a large chunk of that, it highlights the fact that a lot of exchanges don't have surveillance sharing agreements in place. And so ErisX is quite unique from that perspective as well.

And so we'd be curious how you see this landscape evolving. Did you read the report? Did it resonate with you? Do you think that this is just a screaming called action to professionalize some of these infrastructure categories? Well, we'll hit on a couple of. There's a set of themes that seem to reemerge throughout this entire podcast as we go through these questions. The SEC looking at the spot market and making a determination that maybe there isn't enough transparency or surveillance, in the absence of surveillance agreements, if the trading is not transparent, that still creates a problem. markets like ours, again, taking a play from more traditional markets.

We thought it was extremely important to have a surveillance program and be able to stand up for the quality of the market that we're trying to create. In terms of intermarket surveillance, that might be a big ask for an industry at this stage of its maturity. The U.S. equities market, which is one of the most, if not the most fragmented market in the world, is just now still in the process of implementing the consolidated audit trail also known as the cat. And it's got a multi-decade head start on the crypto industry. So tremendous amounts of money invested. And also, by the way, there's some discussion about whether it's going to be effective or not. So that wasn't even, there was some debate as to whether the cat was something

that should proceed or not. It is proceeding. But we think a good starting place here, again, with a transparent market, fair and open access with a surveillance program, even if there isn't intermarket surveillance agreements at this stage is a good place to start. So will these exchanges that look more like retail brokerages, will these be around as this industry matures? How do you see this playing out if you look at the participants that have really gained tremendous share in that retail niche? Is a question worth pondering? Many of the existing exchanges have conflated being an exchange with being a broker. You as a individual don't go to sign up to trade at NASDAQ or Bats or what have you.

That doesn't happen. It doesn't mean it shouldn't. I'm simply saying it doesn't happen that way today. So it's a challenge when you think about the direct retail market. So we take direct customers on. So you can come to airsex.com and sign up and become a customer. But we do think intermediaries provide a lot of value, which is why we have a lot of focus on integration, some of which we touched upon.

But I think if you're focused on working with intermediaries, you tend to develop a slightly different product than you do if you're focused on acquiring direct retail customers. So I think those that have a pure retail exchange are faced with directly competing with all those intermediaries, and they probably haven't optimized their infrastructure, their rule books, their business models, and what have you. So where else are they going to compete? Well, they're either going to start to list other asset classes that don't allow for those direct customers, or they're going to end up competing with intermediaries and then become even more of a full service broker. So I think some decisions are going to have to be made.

No doubt, there's many folks that think they can have the proverbial cake and eat it too. But I think this model sets up some natural conflicts that have been solved in the past by separating some of these things because the services and the incentives, both good and bad, that exist when you combine these things, can be troubling. So we have a license to take on direct individuals for spot. Likewise, for futures. And we can do that. But we're very clear about what our plans are, spot and futures. and we're working with intermediaries, I think for others that are perhaps larger right now, they're going to be a little bit of a victim of their own success because their next move is going

to be in direct conflict with one group or another. And it'll be interesting to see how that evolves. The fascinating thing here has just been the regulatory landscape over time. And so if you remember back to 2013-14, we're talking a lot about FinCEN and money laundering. And eventually the state-by-state MSB path became a very common path for a lot of companies to March. down. Then the ICO boom comes up and we move more into the realm of the SEC and are some of these things securities. Are they digital commodities? What are they? And the SEC also getting hit from a lot of different sides, frankly, you have people that are saying you've let a lot of these ICOs just run wild, where the enforcement actions against some of the more egregious ones. You also have broker dealers that

want clarity on can they hold some of these things and can they allow access for their customers. So if you were to wave a magic wand here from a regulatory clarity perspective, are there things that the regulators, whether that be the CFDC, the SEC, are there things that the regulators could be doing in order to promote a more vibrant market here? Yeah, I mean, I think if we could have that magic wand, we'd do something pretty simple, which is could we define a digital commodity? I think by defining a digital commodity, it clarifies a lot of the questions that are out there. We'll know which rules to follow. And that's certainly we list things that are commodities. And that's where we're focused. And I suggest this not because it's super important to RASX.

I think we're pretty transparent when we talk our own book. It's definitely good for us. But I think it's good for the royal market in the sense that if we know what are digital commodities, it starts to narrow the field of what's unknown. And maybe lets other entities make better judgment calls about that. I think that'd be the best. I don't know. Well, it would certainly define definitively one category, and then we could all get on with it in that category.

There are still probably some questions that need to be answered with relation to everything that's not a digital commodity. But maybe with that definition in place, then we could focus a little bit more on the process to working through getting someplace more conclusive with whether something is a security or not, because we've already eliminated whether it's a commodity from that part of the conversation. Yeah, that makes sense. Well, sooner the better, I guess. So following up on that regulatory front, there are a lot of organizations that are starting to pop up and propose various different ways to interact with regulators as well as organized members in the market infrastructure pieces of this industry. Are you working with any of these groups? We are. There's quite a few, and some we work with informally and others who work with more formally. One of the groups that we work with formally is the Digital Chamber of Commerce out of Washington. And the Digital Chamber is plugged in across a variety of entities down there in D.C. regulatory as well as across Congress. They host a really great big day to get in front of members of Congress and talk about digital assets and digital markets. And they have a lot of really great committees as well, too, that focus in. They're very broad in their coverage, but they have committees that focus on a number of issues. Maybe, Matt, you want to comment on some of those. Yeah, I would say what we liked about that organization was its focus on education and advocacy. As Tom mentioned, it's broad-based. They cover trading and market space as well as more of the enterprise

technology space. And so we've been excited and happy to participate in some of the subcommittees and working groups that they put together around ML and KYC compliance, tax issues, tokens and securities issues. So those are the areas where we feel like are specifically relevant to us and we've wanted to participate and we've had a good experience so far with them. Yeah, it's a good member-driven organization and they have a lot of not only access to the different groups, but they have a lot of good people on staff that can help keep everybody focused, get information, and really get some results. Yeah, it's been great to see that organization thriving over the past few years. So maybe to some closing questions here. So you're both very active in terms of following what's going

on in the broader crypto asset landscape and keeping tabs on projects. You're also super active, obviously, on the market infrastructure side. And so there's probably a lot of things to be excited about on each side. But I'm curious from each of your perspectives and take your pick on where you want to go with this. But what makes you the most excited about this industry in general over the next few years? What are you most excited about? I'll go first. So I would say that my excitement is still really grounded in some of the things I was excited about back in 2014, which is that you've got these new technologies and capabilities that didn't exist in human history before now, or really even if some of the concepts existed, they couldn't be practically implemented.

And suddenly now they can and they are. And so understanding my own biases and having spent a career working in traditional capital markets, I can't help but to look at it through that lens. And the part that I'm really excited about is you've got this whole new industry, this new set of people, this new set of really interesting dynamic, ideas and how can you commingle those with the stuff that we've learned and built in traditional capital markets to create some sort of merger of the two. And it's unclear to me at this very moment when we think about the bringing together of the traditional capital markets with the new

and emerging crypto markets, where that trajectory heads from there. Does it end up the market takes more of a lean towards traditional capital markets where some of these new technologies and capabilities move into and get grafted onto the traditional markets and really get brought to bear in that context, or do the traditional capital markets move ever further into more of what we know is the crypto world today? Or is it some sort of even blend of the two? And the fact that I don't know which future, though you can envision multiple of them, is the part that's really exciting to me because it gives us an opportunity to participate and hopefully help create that future.

Yeah, well said. I would say I'll make two observations. One, a very basic one. I think the ease of access to digital assets and the ability to manage them and incorporate them into your personal or institutional investment portfolio is just that ease is getting easier every single day. And it's really great to see that we're finally seeing the value of the quantum of effort that's been put in by so many people for a long period of time. So that excites me. I think more broadly long term, we're watching some fascinating dynamics play out that can only have never played out before. I'm the first one to say a lot of the stuff has happened before, looked at history to be informed and then apply it to where we're at today. And I do think that applies in most instances. But what I referred to about being excited, things not happening before, technologies are being created that are beneficial to the mining of Bitcoin, let's say. But they also are having knock on benefits to just how data centers are operated, higher efficiencies, less use of power for cooling, these sorts of things. The search for cheap power is being driven by the fact that I can monetize power in a cryptographic

hash. So for all of the various forms of cajoling to get people to do good things for the environment, unfortunately, in my opinion, most people start to pay attention when they can make and or save money by engaging in that. And what things like mining of coins are doing is driving people to find more efficient uses of energy. I mean, we used to flare methane out of fracked oil wells out in the oil sands and what have you. Well, now some of that's being piped into gas turbines that are piker plants to run mines. They used to burn off into the atmosphere because it was too expensive to move the methane. Now it actually is used to produce and secure a financial network. So when I look at this, it is the Manhattan Project. It is the moonshot. It is always, it is always,

these sort of massive technological leaves taking place, but in a completely decentralized way. No one's telling anyone to go do that. Economic incentive is driving so much of it. And in a decentralized way, you're having people create technology. They're going to make data centers cheaper to operate, put more density of compute power in them without drawing more energy, if anything, drawing less. So there's a whole plethora of societal changing and technical changing things happening as well that's happening right before our eyes. So this is a topic that we could do an entire podcast on, and we probably will, just this idea that we did the FUD dice a few months ago. So the fear, uncertainty and doubt dies. And we put all the reasons why Bitcoin is going to fail.

And a flashback to Dungeons and Dragons service. Yeah, exactly. Exactly. And I think we're up to three versions of the dice. So there's a lot of fear, uncertainty, doubt in this market. But one of the things you often hear from people is that mining is wasteful and we're going to melt down the planet. Nothing could be further from the truth in terms of what we're actually. The facts on the ground are that this technology could be the biggest thing for renewable energy that we've ever seen. So you reference this pipe to crypto effort. I think this is a category that is getting a lot more attention over the next couple of years, where you have vented methane going into boxes that are just mining Bitcoin.

And it's a way to stay on the regulatory. Securing a financial network in driving the use of resource that otherwise would be pollutant and wasteful. And other instances driving the discovery of cheaper power. Being safe in the moose has written some great stuff on this. I think it opens up possibilities that are very difficult, even for those of us in the space, to wrap our heads around. So I think it's just super exciting to see all of this taking place because we're going to see a revolution of energy here because the cheaper the energy becomes that's more profit.

And that will drive people to do the right thing more often than just being shown facts that, hey, do this and it's better for the environment generally. I think people should do good things that make sense. But that's not the way the entire world works. So let's have these other incentives and we're seeing it played out in a decentralized way. It's really cool. It is really cool. I mean, basically what we have is a huge competition where let's say that the cost to mine Bitcoin is $0.5 cents a kilowatt hour.

If you can mine it for cheaper, then you can have free money. And so you're seeing radical innovation on ways to drive down that cost in a more redoable way. We're all going to have pebble reactors in our backyard. We might. We might. So closing question, we get a lot of young people trying to break into this industry. we also have a lot of people that are probably listening that are from legacy finance that are looking to make a career switch. So you both have made a career switch pretty radical one over time to get into this industry.

What's the best advice that you would give to a person that's looking for their way to break in? Sure, I'll go first. So I guess I would ask two questions of myself. I would say to myself first, how much of my career are willing to devote to this opportunity, whatever this opportunity might be in digital assets in the crypto space? because very few things are going to happen in a short period of time. You might be devoting several years. And depending what you think your career track is, missing out on the first five years out of college could be problematic.

I think over the long term, most people look back and say, it didn't matter, I could have started later. But certainly I'm conscious that if you're graduating and you're on a very particular track, be it law, medicine, whatever it might be, there's very specific tracks you have to follow into a lesser degree in other disciplines. So you have to ask yourself, how many years can I take out of my schedule to give this a go? And maybe it'll be my entire

career, but sometimes life has a way of changing your plan. So you have to decide how many years. And the next thing I'd say is, where do you want to be? Because the conflation of crypto and digital assets is really problematic for those trying to enter the space. Being involved in markets, so creation of digital assets, or what we're doing here in the trading, clearing, and settling of digital assets, tools in the use of investing and trading and buying and selling digital assets, those are markets-oriented jobs. Those are very different than enterprise technology jobs, such as building blockchain-based systems or market data platforms or what have you. I don't see enough people thinking about it this way. They assume it's just one big pool, everybody jump in,

but those are two very, very different careers. If you look on Wall Street, being a trader is a very different job than being someone who architects market data platforms. They're related and they work together, but they're two very different job tracks. So I think those are the two questions. How long and be a little bit more specific about what interests you? And maybe you don't know yet. You're going to have to try them both out, but then go back to question one and give yourself more time. That makes sense. I think that Tom hits on a couple of really important points there. I might overlay on top of that, what is your risk appetite? There's risk in any new job joining a company. So picking the right company with the right people, there's always a

risk in terms of the fit and the chemistry with the people, in terms of where that company's positioned, whether it's going to execute well. There are a lot of exogenous risks. So we all collectively face an ecosystem risk. So not everybody's at the same level in terms of being up the learning curve on all of this stuff. And it's possible that some participants in the market might never get there. So is that a risk that you're willing to take? There's regulatory risk. There's technology risk. So there's a lot of things right now that are still a bit of a work in progress. And so you have to have, I think, a fairly, you have to assess your own personal risk appetite. And then maybe you're related to that if you think that there's some risk here. And by the way, the reward on the other side

needs to be commensurate. And I think that for people like Tom and I, we clearly see and believe that there is a massive upside to this. And so we've made this particular bet. In terms of the point that Tom made about, let's say that five years or how much time you're willing to assess, this is something that I think about and probably applies more broadly, not just So maybe a little bit of general life advice, or at least the way that I think about it, is when you look at however you spend your time, is it subject matter that you're interested in? Do you find the work challenging and rewarding? And do you like the people that you're working with? Because if all of those things are true, then if it turns out that any endeavor is unsuccessful after a period of time, will you look back and say that that was time well spent and it was worthwhile, even though it wasn't a success?

and did I learn something useful from the time that I spent? That's great advice, and that's a great place to close it out. So where can people find out more about ErasX? And go to ErasX.com or the ErasX Insight Blog on Medium. That's great. Well, Matt and Tom, thank you so much for joining the podcast today. Thanks for having us. Matt, thanks for having us.

This has been another episode of On the Brink with Castle Island Ventures. To learn more or to subscribe to our newsletter, please visitcastleisland. And a big thank you to all of our listeners, except those of you who believe in the underlying blockchain technology, but not cryptocurrency. You know who you are.