On The Brink with Castle Island - Tom Jessop (Fidelity) and Tom Chippas (ErisX) on building institutional infrastructure (EP.64)

Episode Date: April 9, 2020

Tom Jessop, the President of Fidelity Digital Asset Services and Tom Chippas, the CEO of ErisX join the podcast. In this episode we discuss:  - Today's announcement that Fidelity Digital Assets is now connecting to ErisX as a venue for procuring cryptoassets - General perspectives on how COVID-19 impacts blockchain companies - Fidelity and ErisX's respective roadmaps and plans for 2020 Learn more about ErisX at www.ErisX.com  Learn more about Fidelity Digital Assets at www.fidelitydigitalassets.com  

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Tom Chippis, the CEO of ErisX and Tom Jessup, the president of Fidelity Digital Assets. For those of you who might not be familiar, ErisX is a regulated spot in derivatives exchange for crypto assets. Fidelity is one of their strategic investors, and today the two companies are announcing an expanded business relationship where Fidelity Digital Assets will connect to ErasX as a liquidity provider. Listeners of this podcast have also heard us talk about Fidelity Digital assets in the past. And we also had Terence Dempsey, the head of product of that business on the podcast before. So this was a fun episode to connect with Tom Jessup, who's the president of that business unit, and ask him a few questions about his professional history before crypto and get

him to talk a little bit about the goals and ambitions of Fidelity Digital Assets. And full disclosure here, Castle Island is an investor in ErasX, and now I'm a former employee of Fidelity. So I'm a big fan of both these companies and both of these people. So without further ado, here's our conversation with Tom Chippis and Tom Jessup. 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 quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. So Tom Chippison, Tom Jessup, thanks so much for joining the podcast today. A lot to cover. Definitely want to spend a good bit of time talking about the ErasX and Fidelity Digital Assets announcement today. But before we do, I guess the question on everyone's mind is just how are you adjusting to this COVID-19 crisis? And we'd love to hear from both of you just in terms of what impact it's had on your business and your life most generally.

So maybe start with you, Tom Chippus. Thanks, Matt. Thanks for having us on to talk about Aresex and Tidelitigital Adidasis today. With respect to COVID-19, I don't think there's anything unique. I can speak to you personally. I think like everyone with school-age children, we've been coming to the adjustment of everyone being at home and going to their neutral corner to work, to go to school,

and what have you and generally having more time with each other, not running around, which has been great. So fortunately, I guess, nothing unique to report there. with respect to the business, I think like many folks in this space of crypto, we're using this time to try and progress on some of the things we've been endeavoring to complete this year. There's a lot of ability to focus now, a lot more efficiency of the people's time. And I think from our perspective, the move to remote working has been from a technical and operational perspective, a blip. Obviously everyone's personal situation is different,

But for us, as a modern company built starting in late 2018, we're not tied to any one location in order for us to have access to our engineering resources, production resources, operational resources. We can work fully remotely, which is great. And certainly it's been fantastic to have the support of the regulators who have lightened up a few of the rules during the strange time so that continue to operate without being in violation of things that may be under normal conditions would be an issue. So generally for us, it's as business as usual as it can be under the new normal.

How about you, Tom? Yeah, look, I agree with Tom. I think that in some ways you have to look at this as a bit of an opportunity. First thing I would say, it speaks to the importance of having business continuity plans, no matter what size organization you are, that practice and that planning really pays off when you're in a situation like this. So we've made a great transition. All of our associates are working from home.

Like Tom mentioned, we've been able to probably be a bit more reflective. focus on longer-term opportunities and ideas, given that we're sort of not on top of one another in the office. That's a positive. For me personally, and Tom can probably empathize with this, having worked at a back for such a long time, I've probably worked more from home in the past three weeks than the prior 20 years. And I think that that's obviously been a bit of adjustment for everybody, given the blurring of lines between kind of home and work. So I also think it means from a leadership standpoint, we all have to be more sensitive about some of the things people may have going on in their lives, whether it's a sick or quarantine relative or kids at home.

And so I think it's just overall been, even though called terrible overlay in terms of what's going on, I think it's been a good taskal learning experience for the organization. Tom Chibis, I'd love to get your perspective on just the kind of the startup ecosystem in general. You're interacting with a lot of blockchain-based startups as vendors and competitors. Is there much of a change in terms of the way that business is getting done or just in terms of how these companies are going to hold up in a downturn versus a traditional venture-backed company. Is there anything about kind of crypto assets and blockchain that make this better or worse for these type of companies? Well, Matt, I think with respect to how the work is getting done,

I'm not sensing a big change. A lot of the startups in the blockchain space, or those operating perhaps under lighter regulatory touch than what Eris X operates under. for them being a distributed workforce operating remotely, these sort of methods of working aren't new. If you look at some well-known companies, not startups in the space, people like Zappo or what have you, I believe they've even published their guide to remote workings, since the whole company works remote, down to the specifications for the size of your desk and the PCs you should have and things of that nature. So I think that's maybe an extreme and well-thought-out case, but for the large gap in between, I don't see any material changes as to how work is getting done.

Most people hop on a Google Meet or a Zoom or whatever they're doing to get together. I don't see a lot of changes there. With respect to the operation of the business under and some of the venture conditions you reference, look, I think anyone who is considering a fundraise this year is taking pause about how they might go about doing that. Certainly the conditions aren't great. If you didn't have a strong tailwind story before COVID-19 kicked into gear, your story became far more difficult to tell now. I think that you're going to see more and more companies less likely to want to strike a price

today because of the market conditions, both for their products as well as for the ability of investors to get comfortable with valuations under the current conditions. So that might have some impact as to how deals are structured or who might participate. hey, I haven't heard yet of people being incapable of getting funding or incapable of moving forward. But likewise, you're watching this even more closely than I didn't imagine that. You and Nick see a lot more of the deal flow. But I would imagine that things are slowing a bit in those regards. But by and by, I haven't heard of anyone saying they're under extreme pressure,

being asked to liquidate or close out or do things in a fire sale way. Unfortunately, I think it's just that it hasn't been enough time for that to shake out yet. I imagine if these lockdowns to everyday life and the impact on business conditions continue much longer, much longer I would find is the next sort of 30 to 60 days, there will likely be some folks that need to make some extreme decisions that they otherwise wouldn't have had to. So it's going to be perhaps not a catalyst for M&A, but there might be some opportunities in the space for smaller players that if not for this and having more time to be. successful. They need to do something now. And that might spur some combinations that we hadn't thought

of. But that's speculation, just to be clear. I think that's probably right. I think we'll see some people start to get a lot more aggressive as they start to wrap their minds around what the duration is here. One of the really interesting things that I'd love to get both of your perspectives on is just how Bitcoin has performed and what the general thesis for this industry, how that has evolved over the past few weeks. So there's a lot of discussion about how Bitcoin really sold off as a risk asset during this big downturn that we had a few weeks ago. And more recently, it's rebounded nicely. And I think it's been fascinating to me, just the phone calls and emails that I've gotten from people that I didn't really know we're tracking this space very quickly,

but they're looking at some of these Fed interventions and saying, coming out of this, what does the economy look like? And are we in an inflationary state that I should be looking at Bitcoin and I should be looking at gold maybe? So curious just on how the underlying asset is traded. Maybe we can start with you, Tom Jessup. Just what's that story and how is that evolved? Yeah, I mean, I think it's actually not surprising, given the magnitude and the fee of the the downtraft and global markets, it really was a liquidity crisis. And so I'm sure, as you recall, there were a few days, I don't know what the exact day was where, you know, bonds, stocks, gold, and Bitcoin, pretty much every asset was moving in the same direction, which during times of crisis

happened. But I don't think anyone can say, gee, you know, Bitcoin didn't perform as expected, because in a crisis, everything correlates to one. I will say that in the days and weeks after that initial pressure, I think when it started to have more of its lack of correlation or it became less correlated than it was during that time. I think the number I'd heard was at one point, it was at a point-six correlation with the S&P, which was an all-time high. But I think in recent weeks, it's performed a bit better.

And I think the other thing is, if you look at the underlying narrative from a macro standpoint, I think Dan Moorhead and Pantera summed it up, He said something to the fact that, you know, Bitcoin was created in one financial crisis and will be proved in the current crisis. So this whole thesis about it being hard money, certainly in front of, what, 12, 15, $20 trillion in global stimulus. I think like you, like you're referring to, we've seen folks that have come back to that Maclin thesis and have under-accelerated their interest or finally perhaps think this is the time. But admittedly a small sample set. But I think there was clearly a negative story. And I think coming out of the early days of this crisis, a bit more of a positive spin.

Tom, are you seeing the same thing with your business in terms of people reaching out and maybe touching base just around a macro theory? I think that the asset generally, when I say the asset, I'm referring to Bitcoin here, I think what we've seen is maybe not the price action everyone's wanted to see back, whatever it was March 11th when we fell from $8,000 down to $4,600, or I don't remember the exact top and bottom that day, but pretty dramatic. And then we've had this sort of steady uptrend with some ups and downs. along the way. I think what people discovered is that this is something that trades 24 by 7.

And if you view this as a risk asset and I want cash, why don't I just take the first thing I consider risky that I can trade at any time of the day or night and take that off the table? So I think that there was a lot of reactionary trading going on in the early days, which makes sense if you're running a portfolio exclusively of crypto assets and you wanted to get to safety or you're running something more diversified, which I wish there are more people doing that today, and I think we'll see more and more of that. But generally speaking, whether it's Bitcoin or something else,

you're going to take that riskiest thing and most liquid thing, and you're going to liquidate it to take cash off while you sit back and figure out what you want to do next, whether that's to sit in cash, whether that's to find some other flight quality asset, whether that's to rebalance your portfolio, whatever it might be. But if you draw back far enough,

and look at a chart, it fell off the cliff there March 11th and then just started steadily climbing back up. It doesn't mean we won't have another drawdown, but I truly believe that in a strange way, the 24 by 7 access to something that's highly liquid is turning out to be an educational moment from investors that I think are finding difficult to exit certain other positions. If you have some sort of structured asset or you have some other more complicated trade on with a limited number of counterparties or in some cases, one, maybe it's a bilateral transaction of some sort. You start to look and say, well, this is pretty appetizing. I could trade this thing 2 a.m. on the Sunday because that's when I got the news on the East Coast of something happening

in Asia. I want to get out of this. So it's a weird sort of advertising story for the Bitcoin and its resiliency during these very, very turbulent markets. You bring up some really interesting points around the 24-7 market. And definitely that's when we saw the sell-off. I think it was around 11 Eastern time on either the 10th or the 11th, where we we started to see these cascading liquidations. And what was interesting to me is that it continues to be that price discovery is occurring on a lot of these unregulated venues. Specifically, a lot of this was driven by Bitmex and their cascading liquidations. People, you basically had funds that were blowing up that night, many of them, and some of this has been covered. So clearly this kind of venue

and the number of competitors that have come up to compete with Bitmex have gained tremendous scale and they have great liquidity in this kind of current market. Do you think that this is a sustainable equilibrium or do you think that we'll see this evolve in the coming years? Well, I think there's a couple of points to consider. The first would be the undeniable fact that that particular product, that particular market structure, however we want to describe generally the perpetuals that you see operating in non-U.S. locations, it's very popular. And it's very popular with folks who want to speculate and likewise access liquidity around Bitcoin. And the numbers are very telling. They're very popular and there's certainly plenty of, I'll use the word

copycats for conversational simplicity, but there's quite a few in the market today, some of which are raising money at valuations that are nonsensical from my perspective, but that's just one person's opinion. So I think as far as whether or not it's a sustainable equilibrium, I'll say over a long term, know. I think as the asset class matures in terms of who is buying and selling and where do things like Bitcoin end up in someone's long-term portfolio as a part of the diversified investment thesis, I just don't see these sort of highly leveraged speculators markets being the place for liquidity to be discovered. I think there'll always be a market for it at this point that's well established that there's interest, but it's definitely a bet, a speculative bet, no different than perhaps

on some other events, not just Bitcoin. The second point I'd make is that one thing that continues to be a point of interest for me is just the outright decision to ignore counterparty risk. And the retort to that from these markets to be, well, we haven't had a problem with delivering in the past. I think that's fine. You might say that given the current market conditions, it's proved that these markets will operate and be able to deliver and you won't have a counterfeit.

under-party failure, but those things are all great until they're not. And that's a sarcastic way of saying that at some point the bell is going to toll. And these markets that are operating under a very light-touch regulatory regime in one country, physically operating in another or fully diversified. And lastly, not really exposed to the audit and oversight of a trusted regulator, all those things feel old-timey and expensive in terms of time and money. But when things go really bad and there's a blow-up, that's the protections you want. And we certainly get that in the U.S. from experience, if you look at how the CFTC has managed the wind down of, say, FCMs in the past. The money's returned to the underlying investor. I don't know that

anyone can say that with confidence on some of these offshore non-U.S. markets. But I think they're to be here for a while. I think they're wildly popular. And I think that assuming that access to those products and those markets are something that everyone in the U.S. or say Europe, which have more developed systems demand, I don't know. We'll see if the demand is there. But it certainly won't go away. It's going to be here for quite some time. I think you bring up a lot of interesting points. And one question that would love to explore maybe a little bit later in this podcast with Tom Jesup is just around how regulated financial institutions think about choosing their liquidity providers and venues. But maybe a good dovetail into that is Tom Chippis, you have some news today

through ErisX about some work that you're doing with Fidelity Digital Assets that I think will get us into that discussion. So could you tell us a little bit more about exactly what you're announcing? Yeah. I mean, we're very excited having worked with Tom Jessup and the Fidelity Digital Assets team to bring them on board to ErasX for trading of spot crypto. Obviously, it's taken a bit of time for all of us to get this in place, but from a very positive sense, I think it's a great step forward for the markets and the demonstration of the type of counterparty that institutional investors and high-end intermediaries demand. I think that the go-to-market strategy for AirSX has been and continues to be different than what we see from other markets. We certainly

are very grateful for the direct retail customers we brought on to the platform, but as we've said from the beginning, our strategy is to work with high-quality intermediaries and counterparties whereby we can provide the best regulatory, operational, and technical infrastructure for the trading up-spot commodities and, of course, futures as well, and let the intermediaries be good at what they're good at, which is providing everything from advisory to execution of the services to their customers. And with our announcement today, I think it's the first step on a very long path for both organizations to start to drive the market structure into that long-term destination that is going to be better for all work. That's great. So Tom Jessup, I'd love to hear from your

perspective, just what's the driver of this move for Fidelity Digital Assets and how does Erisax fit into what you're trying to do with your business? Yeah, so Matt, I'd say the base level for us, we are really about sourcing the best liquidity for clients, coming back to what institutions want. We constantly come back to this touchstone, which is how can we have to be a lot of act as a bridge between the old and the new. And if you're a traditional institution, the crypto market structure looks very different than anything you've ever experienced before. I mean, Tom talked about pre-funding earlier, this idea that you need to open up accounts on different exchanges. Most traditional investors are used to coming to an intermediary

who aggravates liquidity and gives them effectively the market on a screen, which also has the benefit of price discovery and the chance of getting the best price in the market. And so we will continue to onboard exchanges of liquidity providers. To date, we've only onboarded OTC liquidity providers. ERIS just given, obviously, the work that Tom has done and a very talented management team with experience in traditional assets, plus the fact that it's a regulated venue, transparent, these are things that our clients are interested in. And so it was a fairly simple exercise for us to think about connecting to ERIS and sourcing

liquidity there to augment the liquidity we're getting from other sources. again, with the hope or goal of bringing the markets to our client's doorstep and disambiguating a lot of the market structure for them and putting it in a form factor that they're very familiar with. That makes a lot of sense. It's been interesting for me to watch just how this market has evolved from a structural standpoint. A good deal of volume is referred to as happening peer-to-peer on the OTC markets right now. And I suspect that there's a lot of reasons for that. I think not the least of which is that you have the ability to face off directly. The post-trade settlement process can be predefined between the two parties and that you can have that periodic netting. You don't have

the pre-funding of exchanges. But maybe also very importantly is that historically there just hasn't been central limit order books that are well regulated and entrusted in this industry. So Tom Chippis, I mean, obviously you have a dog in this fight, but I'm curious how you see Central Limit Order books competing with these OTC markets on the various dimensions that I mentioned. And do you see these coexisting in the future? Yeah. You know, Matt, if you look, at the various market structure options, and we published a piece on this on our Medium blog last year comparing OTC and Central Mid-order book. And some of these themes are repeat, but I think it's because they haven't changed. If you look at history, things like FX are

really OTC markets today. And the argument is they are insanely liquid and available at all hours and counterparties are sophisticated and have the ability to trade and get good prices. And I would generally agree with those statements when we're talking about institutions, but likewise, markets such as FX have an absolutely horrific history of behavior. I won't go into all of us here, but it's in our blog post, we go over several of the sort of bad events that took place over time. I think to put it into terms that perhaps folks that aren't as familiar with crypto or market structure might understand, when you're trading with an OTC market maker, They are profiling you and profiling your trading and profiling your order flow.

And that counterparty is determining the inflection point where the maximum pain they can extract, the highest price, won't preclude you from trading. So if you recall maybe a year, 18 months ago, there was an exquisite written about how, if you logged on to Amazon.com to buy something, if you log on from a Mac using Safari from a zip code in New York or Boston or San Francisco, the price you saw was higher than if you logged in from a Windows 7 PC using an outdated Internet Explorer from the middle of nowhere. And that's profiling.

And I don't think anyone would accept that in their personal life with a retail purchase. Why would you accept it into buying and selling of an asset as part of an investment that you're making? So these might be extreme illustrations, but they help make the point that with the OTC market makers, they're under no obligation to provide you a quote. The motivation is commercial, which I often think is a very good motivation, but you then have the burden of determining whether or not you receive the best possible price. And the price you'll be shown is going to be completely dependent upon who you are. Whereas, and in contrast to a central limit order book,

that is pure price time priority, if you've made the best bid or offer, then you're going to get the best execution. If you are the inside quote, you're the best price. You're the best price. And it doesn't matter if you're a professional with millions of dollars of equipment and technology and modeling resources behind you to come up with the best implementation for your trade. Or if you're someone who just has an idea and has conviction on a price and wants to type in that better offer, it doesn't matter. You get the best price if you are the inside price and you're the first one to set that price. That seems to us to be a lot more fair, seems to us to be a lot more transparent. And moreover, far easier to survey.

Now, with that stated, certainly there are services now that are offering a best X report, a best execution analysis across your OTC venues. And I think that's great. Anybody running any decent amount of money, either personally and institutionally, needs to avail themselves of those sorts of tools. I've closed tools and use them in my career running various trading businesses for 20 years on Wall Street, and I get the value. But there's a fundamental question here we have to ask ourselves,

is what do we want the crypto market structure to be when we grow up? And from our perspective, the central limit order book is fair. The central limit order book is transparent. The central limit order book doesn't care who you are, just cares what price and how much depth you're offering. And it doesn't forestall the implementation of convenience facilities such as block trading. So a lot of the arguments for OTC is, well, I can negotiate a block with them and get it done without impacting the market.

Great. Trading blocks are something you can do at ErisX, and there's certainly other venues. that offer it as well. It's a concept that's been around for quite a long time in futures and in equities. And it's a service we certainly offer through our clearinghouse as well. So bottom line analysis would be that I don't think you'll see OTC market makers go away. And certainly we work with some of them who provide liquidity on our market via our market making program, which is a fully disclosed and transparent program you can read about on our website. But we believe that the central lower book is a net good long term and are super excited to start

can bring other light-minded folks onto the platform that want to see that market structure succeed. That makes a lot of sense. I was not aware of that Amazon example. It makes me wonder if I should be purchasing my toilet paper the next couple weeks on my old Windows 7 machine. That's kind of a scary thought. Windows for workrooms, you get a great price.

Yeah, exactly. Tom Jessup, you've invested in traditional market infrastructure for a long time dating back to when you're at Goldman, leading a number of venue in infrastructure investments. So this was long before crypto assets were in existence. How would you compare the liquidity landscape and just the state of the trading infrastructure in this industry versus some of the other markets that you've invested in? And when you talk about this market, do you use any of those historical analogies that this asset class is like this other asset class back in the 80s or 90s? How do you think about it? So I would generally say I still think from an institutional standpoint, the market structure

and liquidity situation is quite immature. I mean, I think that most traditional investors would look at the numbers around daily Bitcoin trading say, gee, that's bigger than I thought. But when you talk about large institutions allocating to the space, I think we still have a lot of work to do on the market infrastructure. I believe, like Tom, that will probably be in some form of a hybrid environment for some period of time until there's clarity around who's coming into the market and what is the evolution of platforms like Erasax, et cetera. For me, the analogy, I don't think in terms of time frames, and Tom can jump in here because he's, he's got some perspective as well.

But I look at U.S. equities as an example, and I had joined Goldman in 2000, and things were still very manual. We had lots of position traders. And really between reg ATS and reg MMS, which, and I'm not suggesting, by the way, that regulation is the only way to catalyse some of this change, it really forced a couple of things. It forced innovation. So you had archipelago, which is on the first or island, the first ATSs, which kind

of presented trading in a more electronic form, reasonably easily accessible by many folks. You had this concept of law and best price to some degree. So as opposed to an investor getting a best price report and trying to figure out where they got best execution, there was a mandated rule that said effectively there's a law of best price across every ATS or exchange that trades IBM stock as an example. And I think that the combination of some of that price transparency and also electronification led to what was a pretty significant boom in trading activity between 2003-4 up until the crisis. in 08, I mean, significant orders of magnitude increases. And I think generally speaking, between the technology infrastructure, some of the existing clearing and settlement infrastructure, and then this concept of being able to look at a screen and finding a best price at any point

time made investors more confident in terms of the liquidity situation in the market and their ability to get trades done, where there's some externalities there around the implications of high frequency trading and the arms rate or all latency, yes, but net, that type of, call it rapid technological development automation plus regulations that have the effect of enforcing best price, I think did a lot to help the U.S. equities market modernize into the 21st century. And again, I think that's probably my touch point. I'm not suggesting or advocating that it's done from a regulatory standpoint, but more transparent, regulated open platforms like RIS, I think, are first step towards that in the crypto world.

That makes sense. I mean, I think Tom covered a lot of it and he and I have. Tom, you and I've joked about it, right? How did two guys that got into traditional capital markets about the same time takes along to finally meet? As you know, you just met a few years back, but I think we observed a lot of the same market structure evolutionary changes, many driven by regulations, certainly even if you look at MIFID, MIFID 2, what have you, in Europe, which drove a lot of change there, even some of the changes to research that have taken place in last few years as well. Sometimes it does take a regulatory change.

What's fascinating generally here is that because crypto started off as direct to retail, because it was the only way to get the product out and the only way to get the message out, there weren't any institutions helping to support or promote it. We just have this new fascinating evolution to look at of something that was Wild Wild West or Wildeast, how you want to describe it, that evolves and continues to be primarily retail driven. And now as institutions are coming into it, it'll be interesting to see, do the institutions demand regulatory change in order to participate? Or are they going to see perhaps that, hey, there are some just commercial best practices that we can abide by here that allow us to operate

in this asset class confidently. I think we end up with the former being some of the regulatory change being demanded by institutions or clarity, if only because of the way they operate today, without regulatory clarity, generally the risk of participation will be too high, meaning that the regulatory body, the legal body, the compliance body within these entities might be able to intellectually say, hey, you can judge the financial risk, you're the traders, you're the investment managers. But bottom line for a company like ours who's regulated already everywhere, if we don't have that clarity, we can get a lot of trouble, so just go get that clarity for us. So it's going to be a very interesting thing, and I'm sure academics will

study it years on. But there will be some parallels to the evolutions that Tom mentioned, but I also think we're going to have some new vectoring and tangents that come simply because of the origins of crypto trading that weren't there for things like equities. That makes a lot of sense. Tom Jessup, I want to talk a little bit about and set the table for the listeners around exactly what Fidelity is doing in this space. So we've had Terrence Dempsey, the head of product on the show, to talk about this a little bit. I think it's a really interesting time in place for regulated financial institutions to be looking at crypto assets. You have a lot of traditional brokerages that have slashed trading fees to zero, probably at a really tough time

when right now trading is presumably off the charts. But with crypto assets, you have an asset that commands a trading fee. It also commands a custody fee. And you have a lot of people starting get interested in it. So I'd imagine that there's going to be a lot of traditional legacy financial services firms that are looking at some of Fidelity's efforts and saying, well, we need to start getting into this game as well. So for those who might not be familiar, exactly what are you building and maybe dovetail that into some of the trade execution features because I think some people think of it as just custody. Yeah, so I think the best way I would describe it matters, we're building an institutional

brokerage capability for digital assets. So we're asset agnostic. The way we constructed our platform is that we can support over time any digital asset from native digital assets to stable coins to tokenize securities or natively issued securities on blockchains. And I think that's born out of a realization that goes back. a couple years and some of your listeners have probably heard this to other channels that the core thesis is that blockchains are a new medium for assets or a new financial operating

system and the first application that we're seeing with some degree scale and uptake is around Bitcoin, but the possibilities for this technology and finance are in some cases limitless. And so what that means is that at the base of our pyramid is the safety and salamis and safekeeping of digital assets given the unique nature of new properties of those assets, i.e. digital bearer instruments. But that is actually table. stakes. I mean, we think about this concept of a brokerage, the next layer, we're talking about institutional quality, trade execution capabilities, sourcing liquidity from multiple venues, including RSX, improving the front-end functionality around order types, algorithms, et cetera, we'll get to eventually.

And then I think we just continue to move up the stack in terms of other ways we can participate in this ecosystem and make it, again, familiar for traditional institutions that want to save keep, trade, finance, or otherwise service assets issued on lockdowns. That makes a lot of sense. Some of those building blocks that you reference are going to be critical to unlock other opportunities. And Fidelity has one of the world's leading asset management franchises. There's obviously been a lot of talk about custodial and trading infrastructure for this asset class. But we haven't seen as much in terms of traditional asset managers get on the board and try to introduce products. What do you think needs to happen from an industry perspective in order for some of these things to happen, some of these assets to become possible? First thing I would say is that I have this visual in my head, which I've tried to think about. But a lot of people that talk about 18 will be the year of institutional crypto, 19, and now 20. And I think if you come from an institutional standpoint, it never happens that way.

You don't wake up one day and find out that there are 100,000 institutions that are suddenly allocated to digital assets. I think it's actually more of a tide than a wave and almost imperceptible unless you're kind of under the surface. We recently, I think you may recall last year we did a survey of institutions. well, we just reprised that survey this year with 3x the number of institutions. And I think that all of the indicators are pointing up into the right in terms of interest, in terms of interest in allocating. And this is what we would expect to see. It's not a catalytic event.

It's a progression. I think that in terms of what needs to happen around institutions getting into the space in a bit more vigor, I actually think it comes back to this discussion we're having right now. The number one concern that traditional investors have about the space is volatility, which obviously is a feature or a bug depending on what side of the equation you're on, I think that the more that the market structure evolves and the more traditional participants you have in the market, I think will dampen volatility to some degree. The second biggest concern I have is around market manipulation.

I mean, there's a view here that I have my own thesis as to why these assets are interesting, largely around lack of correlations, traditional assets, or asymmetric upside, i.e., more of a venture bet, kind of been proven and borne out in our research. But when they talk about implementing their strategy or allocating, they come back these very practical decisions about the market structure is difficult. I read about market manipulation. I want to work with trusted institutions to help guide me into this space. And that's part of our mission. And I think Tom would agree part of what ERISA expands for. So we continue to see movement in the right direction. I think it's just a question of time that all of these things have

to work together in concert. It's a virtuous circle in terms of what we're doing, what Tom is doing, and others are doing trying to bring this outside class to traditional institutions. And if we do that in a semi-coordinated way, there's a chance we can accelerate the movement on these folks into the space. Tom, what do you think about that from the ErasX perspective? I think a good deal of what Tom Jessup just said is going to depend on the view of the regulators and how they want to play in this market. Are you seeing progress here? Generally, yes, Matt. I'd say over a long enough time frame, yes, we're seeing progress. It's never as fast as you'd like it to be. And certainly regulators, their mission isn't to move at the speed of a startup or a new venture. They're

mission is typically around protection and things of that nature. So given that mission, oftentimes things go slower. But I think it's important to have a little perspective when we say the regulators, it's important to actually be specific because there are many. In some cases, they're overlapping. And in some cases, they may not have direct responsibility, but they stand on that decision path as to whether or not an institution can participate. So a couple brief examples. So, ErisX is obviously regulated at a state level. We have money transmission licenses, money service bureau licenses. We're FinCEN regulated.

We're an applicant for a bit license. The federal level, we have a DCM, which is the CFTC issued license necessary to operate the futures exchange and the DCO. And there's very few DCOs, which is the license necessary to operate the CFTC regulated clearinghouse. So from our perspective, we have our ducks in a row. we have what we need. But in order to participate in our markets, if you're an institution, then you have to consider your regulatory regime. And you may be a registered investment advisor

and you're dealing with things under the 40 Act and the SEC Registered Investment Advisor Act. And typically that question rotates around things such as Cost of me. And that's certainly things that Tom and the fidelity team have been addressing. You may be a broker dealer and you have to speak to FINRA. And FINRA has not really provided any guidance whatsoever around whether another broker-dealer can hold or transact in digital assets. This would be traditional broker-dealer that service both institutions as well as retail. If you're a broker-dealer, you may also be regulated indirectly by the Fed because you're part of a bank-holding company under the BHCA-F-H-E rules,

and you need to get sign-off. And the Fed isn't a homogeneous body. There's regional feds, there's the D-C Fed, and then you have a whole host of state regulators. So you may also have to go to somewhere like the New York D.F. or some of the equivalence in other states. So it depends who you are. You could even be in the derivative space.

You could be an FCM, a futures commission merchant, that is NFA registered, National Futures Association registered. And you might think, oh, great, ERIS is a CFTC regulated futures exchange. I'm all set. But if your FCM is part of a bigger group that rolls up into a FINRA registered group, then you have to go back through that path. So in my darkest times late at night with an adult beverage, I float chart all these things out and it tends to look a bit more like an ink blot when I'm done. There's a lot of cross paths

and cross lines. But I think we could probably do a long episode that I pray to God, no one would listen to about where all these things intersect. But regulation is dependent upon who you are, what your role is. And even though you may have one primary regulator in your specific business, if you're part of a larger entity, as most of these broker dealers and institutional asset managers are, there could be some intersectionality that people haven't thought about, that impact when you can actually do these things. So coming back to what Tom said about, in response to your question about enabling institutions, it doesn't happen overnight. You don't wake up one day and say, hey, all the chains are off, run ahead. It's going to just

happen over time as these individual entities execute the necessary steps to get the signoffs up down, left, right that they need to to proceed. And a frog boiling in the pot is just going to be boiling one day. They wouldn't notice it. That makes a lot of sense. I want to get into a couple closing questions for both of you. And the first would just be beyond this use of blockchain to create a store of value or an option on a store of value in the form of Bitcoin. What are some of the most promising use cases that you see? And maybe I'll just start with a note just on stable coins that to me it's been really interesting to see the behavior of stable coins over the past month where you've seen a tremendous inflow into stable

coins. I think some of that is driven by risk off of the other assets. But my theory, and I think Nick has gone a lot deeper on this, is what you're basically seeing as a dollarization event in a number of countries where stable coins just present a way to get U.S. dollar exposure very easily. And some of that is a regulatory arbitrage. But I think, some of that will become a lot more mainstream. So in many ways, what I think we're seeing in real time right now, if you believe the data is dollars on blockchain becoming a real killer use case. So curious, both of your reactions to that. And if there are other kind of use cases or reasons for being excited about this industry outside of Bitcoin and stable coins that you're

actively monitoring. With respect to stable coins, I think the use case for stable coins varies to some extend upon not only who you are, but where you are. If you're a U.S. resident or you're somewhere with access to the U.S. dollar banking system, then perhaps the use case for a stable coin is the ability to settle 24 by 7. If the Fed would enable that feature, then I think the use case for those people that simply need to settle 24 by 7 starts to go down quite a bit. And certainly there's a lot of talk about a digital dollar and what that could mean. Former Commissioner Giancarlo obviously has this digital dollar project, which I'm keen to see how that evolves. But if I narrow it to, hey, I already had access to U.S. dollars. I just need to be able to settle 24 by 7. And yep,

it's great to use some of these banks that have popped up that have offered 24 by 7 movement for people on their network. But I don't want to be constrained to that network. Well, then you need the issuer in this case to enable that feature on their platform. It doesn't solve necessarily for the 24 by 7 settlement, perhaps with those institutions, not part of that system. So the related and secondary use case there would be settlement in dollar with entities that do not have access to the U.S. dollar system. And at least from my perspective, I keep trending towards that bottom line analysis,

which is the stable coin, denominated in U.S. dollars, ultimately its core purpose is providing access to the stability of the U.S. dollar, and let's just put to the side the stability argument of the U.S. dollar, it is what it is right now. Then if it's access to that, you're essentially either solving for the time problem I've mentioned, or unfortunately, individuals or entities that would not otherwise have access to the U.S. dollar are now getting it through some of these coins. And I might be oversimplifying, as there are other potential use cases as well. But I think in a developed dollar economy, which is the U.S., and I think some other countries that have dollarized or are dollarizing, which is Matt, what I think you and Nick have started talking about.

The stable coin really just becomes a vehicle to hold and to settle. I don't need a U.S. dollar stable coin to live my daily life in the U.S. or necessarily in some other places. This really is a utility. And then it's an access to the dollar for people, as I said, otherwise just plain wouldn't have it, not for the stable coin. Yeah, Matt, I would just add on the stable coin question. I think everything you said and Tom said was correct. I think the other observation I would make is you see what's happening now. You know, the dollar is incredibly strong. There's access demand for dollars offshore, lots of financial obligations denominated in dollars. There's a lot of pressure outside the U.S. given the dollar being so strong and it being a reserve currency.

And I wonder on the back of this crisis, if that doesn't hasten the development of some of these sovereign, or at least the thinking about how you could implement sovereign digital currency as a way to perhaps tilt, the global balance away from the dollar and the dependency on the dollar because I think it's having real impact in the markets right now. And then the other one I would mention in terms of use of the technology, I mean, we're still very interested in securities assurance. And I think the challenge there is not, is the technology ready for prime time? I think that coming back to what we talked about institutional, if you haven't figured out at scale how to deliver a basic set of services to traditional institutions who are also big consumers of securities, side from they're interested in digital assets, it's hard to create that kind of end-to-end workflow,

you can issue something as a token and get the benefits of the new medium because there's no downstream way to custody support or trade that. So I think that that's one to watch. I think it's more of a social and organizational problem than it is a technical problem and something we think a lot about in terms of how we can help that given the entirety of the fidelity franchise in the client segments we talk to, not just who we talk to in the digital asset business. That makes a lot of sense. You've both have been very generous with your time. My closing question to both of you is you've both been people that had tremendously successful careers in traditional finance before this. And so curious, A, what got you so excited about this industry that you decided to both spend

full time and dedicate your professional careers to it? And the second part of that question would be what advice you have for people that might be in a similar position, but a couple of years before making the leap and maybe looking at this industry and want to get involved, what advice would you have for them? Maybe we could start with you, Tom Chippus. Yeah, and now I'm going to put you in touch with my high school guidance counselor. Thank you for your compliment. For me, it's about a rare opportunity. And I almost feel as if it's lightning striking twice. Early in my career, I was very fortunate to get involved in the electronification of trading. And it sounds super quaint to say that in 2020. But if you wanted to clock back to say 2000, sending an order

electronically for electronic execution and then reporting of those executions, and the straight through processing way, we were whiteboarding that out, figuring out the right way to do that. And then layer on top of that, being involved in the creation of some of the first algorithmic training tools, things that are now just taken for granted on every execution desk, but it wasn't at the time.

You were explaining to people how to do the math for volume weighted average prices, much less coming up with algorithms and code to do it. So for me, I got to see the evolution of the introduction of those tools into equities, options, futures, and the creation of these electronic trading tools, and then the complete changing of how broker dealers operated and service their customers and access to the markets. As Tom had mentioned earlier, you had all these position traders, and I won't get into some of the things I heard as I walked past some of them to the desk early in my career,

them say, I'm never going to use your machine. Then now they couldn't do their job without that machine. So for me, that was just being a witness to that seminal change. And part of that seminal change was tremendously fulfilling. I see the changes that the introduction of Bitcoin and crypto assets, I see those changes as being equally, if not larger themselves, not just structurally for the reasons we've talked about 24 by 7 trading and things like this, but also the concept of a non-sovereign store of value and the concepts of the straight-through processing

possibilities that Tom is just alluded to with tokenized assets, these feel to me like that moment for my career 20 some odd years ago with even bigger potential for more change. And I actually feel really grateful that I'm getting a second opportunity to be part of something like that. And then to quickly answer the second part of your question, I find it very difficult to dispense life advice, since everyone's life is very unique and has its own factors. I think what I would say is that if you're in more traditional asset classes or not even in financial markets today and eyeing a leap into this particular industry, you need to, of course, be financially prepared for what that could mean because there's a lot of risk with

a wave of a wand. A lot of this could be erased overnight. I don't think that will happen, but it's theoretically possible. But you need to have quite a bit of mental stamina and good support because you're going to have some really down days and you're going to have some really up days. I mean, I can tell you that the journey nearer sex is one that we definitely this drive as a roller coaster and we joke about are we going up the hill or the thrill of going down the hill and ultimately we know where the ride's going to take us but not everyone's up for the ups and downs along the way you really have to have that gut check moment and decide that you're willing to deal with us otherwise you're going to get frustrated and probably not be a happy person to be around you have to

decide if the people around you we're going to want to deal with you then so that's the best advice I can give you in that regard that's a great perspective how about you tom yeah So it's interesting. My first interest in the space was really more from the macro standpoint. Our CTO at the time, it sent me an article about Bitcoin, probably in 14 or 15. And I read it, and I had hard money argument just popped to my head. And then given that I'd worked more on the technology into finance for so many years, I started digging it to the underlying technology and really opened up Pandora's box of what are other applications. But like Tom, I think he raised a really interesting point.

For me, there was a lot of pattern recognition as well because I was part of the same change that Tom described, but from a different perspective. Tom was the person building the capabilities and developing product for clients and building businesses. And I was investing in a lot of the market infrastructure that you've benefited from some of those regulatory changes we talked about earlier, but also the interest that Tom and others had in called modernizing

how certain assets were traded. So then I quickly, whether it's a history rhymes, it doesn't repeat. It was like, okay, I kind of get this. This is very transformational. And that's when I went down the rabbit hole. and then the most interesting thing I've probably worked on in my career. In terms of advice, I mean, as someone who's worked at a big financial institution and did a brief since the startup and it's now in another big institution,

I would say to people, don't underestimate the power and the value of the seat you're sitting in if you work at a big institution. I mean, what we're doing is fidelity, even though it's hard, is order of magnitude easier than if we were trying to do the same thing without the support of a bigger organization. And so that I think sometimes people who transition out of finance, there's always like the shiny object outside of finance or the trade from a personal standpoint. I think you have to be prepared that it's a very different way of working, a different risk profile for people who admittedly are risk takers on trading desk, which they are at the different type of risk profile. Paraphrase Tom, it's the highest of highs and the lowest of low.

So I think that folks thinking about the transition need to mentally prepare themselves, that it's exciting and interesting and it's tangential. or aligned to what they were currently doing, but it's a much different work environment. That's a great place to leave it, and that makes a ton of sense. So why don't we actually just close out with a quick call to action on where folks can follow your various companies and stay in touch? So Tom Chippus, where can people learn more about RISX? Sure, a couple options, arsx.com, our medium channel at Arisex insights, or on Twitter, ErasX Digital, and, of course, Facebook, LinkedIn, and all those other sorts of

name's that's great. How about Fidelity Digital Assets? Yep, Fidelity Digital Assets.com and at digital assets on Twitter. Well, thanks so much for both of your times. Hopefully the next time we get together, it's in person and not on a Zoom hangout. Appreciate you both making the time. And it's an exciting announcement on the partnership together.

So best of luck with the partnership. Thank you. Thanks, Matt. 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.