The Pomp Podcast - Dmitry Tokarev, CEO of Copper: The True Drivers of Crypto’s Buy-Side Infrastructure

Episode Date: June 18, 2019

Dmitry Tokarev is the CEO of Copper. In this conversation, Dmitry and Anthony Pompliano discuss the buy-side problems with legacy markets, what financial infrastructure actually entails, how custody and prime brokerage in crypto is evolving, and why LPs drive decision making in investing. -----Curious about Cryptocurrency but don’t know where to begin? Storm Play is a free and fun way to start earning in exchange for you time. Simply download, register and discover microtasks that meet your interests and be rewarded with Storm Bolts. These Bolts can then be converted and withdrawn into your favorite cryptocurrency, including Storm Token, Ethereum (ETH) and Bitcoin (BTC.).  Earn cryptocurrency rewards by playing new games and trying out cool products! Download the app to start earning crypto here! https://bit.ly/30pSxh9 (Available for iOS and Android). ----- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe.This podcast is presented by BlockWorks Group. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworksgroup.io

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Dmitry Tokarev is the CEO at Copper. In this conversation, we discuss the buy side problems with legacy markets, what financial infrastructure actually entails, how custody and prime brokerage crypto is evolving and why LPs drive decision making and investing. I really enjoyed this conversation and I hope you do as well. Are you curious about cryptocurrency and you don't know where to begin? I've got a great way for you to try. You can use Stormplay, a free and fun way to start earning in exchange for your time. That's right. You don't necessarily have to make a

financial investment to begin. You can simply download, register, and then discover these micro tasks that they present you that meet your interest and then you're rewarded with these storm bolts the bolts are then converted and can be withdrawn into your favorite cryptocurrency including the storm token ethereum or my favorite bitcoin if you go and download the storm play app today you can earn cryptocurrency rewards by playing new games and trying out cool new products it's worth a try and it's a great way to get started remember go check out storm play in the app store today. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions

of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys. Bang, bang. I am here with Dimitri coming to us live from New York City. Not actually live, but it sounds cool to say that. So I'm going to keep using that. Thank you so much for coming and doing this. Thank you for having me. Very excited to be here. For sure. So let's start with your background. You're not American, and you've got a very

unique perspective on financial infrastructure. But give us kind of the overview of how do you end up in the seat today? Yeah, absolutely. I grew up in Siberia, and as everyone in Siberia, you study either computer science or math. Where is Siberia for the geography? It's a physical crescent. It's like a five-hour flight from Moscow. It's actually closer to Beijing.

It's like a three-hour flight to Beijing. But it's in Russia, right? Yeah, correct. It's cold there. Very. Minus 40 Celsius. Minus 40 Celsius? Negative Fahrenheit.

Negative Fahrenheit all year round? No, no, no. it's like eight eight months but like it ranges how how hot does it get i guess it's a similar client climates to canada actually so it's sharp continental climate got it so like in the summertime we're talking plus 30 degrees so you know that's like you know 80 90 degrees fahrenheit oh wow you guys are real volatile there okay so it's a high volatility all right maybe i'll come in the summer i've always wanted to come in the summer when everyone wears the white jackets they went in with the 12 feet of snow perfect all right so you grew up in siberia so i grew up in siberia

kind of everyone does math halfway through high school some people thought i'm smart to go to university so i left school a bit earlier and started studying computer science and as one of my projects i actually built a trading game which was kind of like a sinusoid where you press basically up and down buttons and that way you basically make profit it's like lasts for one minutes but you know you get a result in the end and actually that's how I got interested in trading so I left uni there to go to the UK and study there like study finance and to basically get educated in trading and to become a quant and fast forwards you know six years I was a quant in a hedge fund

basically long short natural resources building all the different strategies for traditional markets but the guys from ex-Goldman team who taught me basically everything I like the fundamental knowledge that I have today I got from them which I'm very grateful for and then I decided to move and a decision was made to move into financial technologies and I partnered up with two guys who were studying asset management company to build an asset manager in the UK with technology angle so we grew that to over a hundred people or a couple of billion assets under management. And I think they've added another billion since I left.

I hope those events are not correlated. But at the same time, we had quite a large client base from Asia who got very interested in 2017 and crypto space. And we started building a product for them, which eventually we didn't launch for the lack of institutional infrastructure. And that's how we switched into crypto. All right. So hold on. You just covered a lot there. Trading natural resources. What do you mean by that? It's basically quant strategies. So I mean reverting strategies, momentum strategies, statistical arbitrage.

There are a few funds actually currently, maybe like a couple of proper ones, doing statistical arbitrage in crypto space. So basically you milk statistical inefficiencies in the market. So you have, well, for example, a very standard one is GLDGDX, you know, it's like a gold ETF versus gold ETF, you know, so they have to kind of like go in the same direction together. And then there was a discrepancy in returns, like, you know, that's what you basically go long one, short the other, or vice versa. Examples like this, or one of the popular algorithms that I really liked, I mean currently

it's probably would have been called AI, but back then it was just called Kalman filter, is something, whereas you used in automobiles industry for self-driving cars a lot, it's basically your wheels have velocity and it moves somewhere, and then you have a GPS signal. As a matter of fact, those two signals are incorrect. So you have something called Kalman gain that basically coefficient that always educates itself with historical data and then puts the correct coordinates for your car so that could be applied. Because the GPS is inaccurate and then the speed of the wheel and the direction of the wheel is inaccurate but if you put those two

together along with additional software then you can get a much more accurate pinpointed position. Yeah so that could be applied to stocks that could be applied for example to Bitcoin prices that could be applied to you know all sorts of things so it's basically like you know statistical arbitrage so um smart people stuff uh i mean some would say i mean it's actually not dumb people would call it smart people stuff i mean i wouldn't call i think everyone's gonna have their own kind of like angles and understanding different parts right so got it okay uh and so let's talk a little bit you mentioned ai as like today it would be called ai back then it wouldn't be um it feels

like that term has just become like a coverall right in terms of oh it's like some software that does something that isn't one plus one equals two yeah like ai it's artificial intelligence right like how far do you think we actually are with true ai like it doesn't feel like we're really that far in progress compared to how popular the terminology is yeah um from that standpoint um obviously we're not we're not in ai business so for me it will be hard to um to sort of say how far we are in actually. Well around trading, like around trading specifically. But for example, why it is like that?

I mean, if you look in the last, for example, four years, and this is actually a fundamental problem which links to why it's very hard to build something in a large financial organization, because every time something new comes out, you sprinkle that on top of your next software project and you call it, you know, in 2015 it was big data, and then it was VRAR, then it was blockchain,

this year it's AI, next year it'll be something else. But the residual effect of that technology, we're also yet to see. So the traditional kind of cycle of technology to market, I would say maybe about four years. So we're just seeing like big data products being pushed to the market and people actually buying those, utilizing those to basically generate revenue, so create like improved operational efficiencies in their businesses, et cetera. So I think, you know, extrapolating that, I would say, yeah, So if AI is a thing of 2018, we're probably about three years away from seeing something actually having reasonable impact on how the markets become more efficient or creating value to the customers.

Got it. So before we dig into the bulk of what I want to talk about, I want to start with financial infrastructure. Right. Because we're going to talk a lot about what the problems are, what the potential solutions are, what you guys are doing, et cetera. what do you mean when you use the terminology financial infrastructure like at a high level what does that entail yeah i mean to understand financial infrastructure it's also important to understand the institutional kind of landscape because people talk about institutions institutions it's actually not like you know one particular profile that we're talking about we're talking

about you know insurance funds you know insurance funds we're talking about pension funds hedge funds mutual funds usage funds all sorts of other asset managers and all high nets ultra high nets family offices, you know, so all of them have different problems and different kind of requirements for the infrastructure in order for them to conduct business activities. When it comes particularly to hedge funds, it's very, there is nothing new that's happening today in hedge fund sector, which we haven't seen. It's the same movie that we saw 20, 30 years ago, where, you know, smart guys from Ivy League schools would come out and start managing family money, for example.

And then institutional guy would come in and say, look, I'm going to give you like 10 million tickets or 20 million tickets, but you have to basically no self-custody, no self-administration. You've got to use a prime broker and all the different requirements. And this is exactly what's happening, basically. And that is those requirements were part of risk management. It's from this. I mean, self-administration went kind of like out of the window since Madoff. Like no one just takes it. Let's go through each one of those.

I think, again, many of the people listening sort of understand the finance world, really excited about the crypto world. When you say self-administration, what is that? Self-administration is basically you verify your own net asset value, right? So you say, like, I gave you $10 million to manage. And you say, like, this month I have $10.5 million, Dimitri, and I trust you, basically. And you can, for example, if you invest in ICO on pre-sale, how would you value that ICO? At the pre-sale price, what's the reasonable market price for that to be valued? So you have players such as administrators that would basically come with the correct valuation

and then they would report NAF to the investors, to the LPs, limited partners. Basically, the playbook of a hedge fund is you need to have prospectus, which basically outlines what kind of activities can you conduct, What can you invest in what you can't invest in? What are the terms? Well, you know things like in watermark gates all of that basically, then you would need to have Administrator which we covered you need to have a custody and or a prime broker Basically sometimes primarily like, you know in the hedge fund space, you know prime broker would act as custodian For your assets as well. So then from the software side of things you need to have a PMS

Which is a portfolio management system, which does the position aggregation for you and calculates like different returns for example the positions you need to have oems system which is an order execution management system which then is responsible for executing this your trades in different venues and then depending upon your strategy you would probably have data provider which is in traditional space is bloomberg for example in in crypto space different and then probably a research so there we have it so this is basically how you build a hedge fund without a one uh like without the first let's say four it's very very hard to come to your lps and say you have to invest in this or it's very hard to get anywhere with a ticket above a million you know because they will be

asking exactly the same questions they're asking you today in a traditional space and in traditional space it's very easy because you say like look i don't control the funds administrator controls the funds then my prime broker executes on these venues and i generate you alpha alpha is the return above the market so and they're happy with that in crypto space for example let's go for for example, with custody. Custody in crypto space has been traditionally associated with purely security. But on top of the security, there is also a business application of a custodian that needs to be there. And that business application is to make sure that the funds cannot be misappropriated by the fund manager.

Meaning something like, hey, you have a fund, 70% is supposed to be deployed in X strategy, Actually, 30% is supposed to be deployed in Y strategy. If I, as the fund manager, can just do whatever I want, you as the LP have no confidence or confirmation that I'm doing what I'm supposed to be doing. That's one thing. Administrator would look after that. But the other thing is also if you basically deploy from a custody to, for example, an exchange in crypto, you can just take the funds from there to your personal wallet. Nothing stops you from doing that. so that renders custodian obsolete in the equation because why would you need

a custodian if you can just you know basically you're in self-custody mode a step away so that's the problem that LPS you know they're aware of that and there's a lot on based on trust you know so this is the problem that we've been solving through the client of ours who brought this problem to us and it's the company called nickel asset management they've got 25 years of experience in investments, right? So they've seen all sorts of market cycle types of LPs and everything. They've seen good people, bad people, and everything in between. Exactly. And say, look, if this is not there, we're just not going to launch it. And, you know,

we build it and it turns out that, you know, this is something which is quintessential in this space, especially for two other types of players, market makers and funds of funds. Because as a fund of funds, you deploy capital to several funds. It only takes one fund to take your crypto. So, So, for example, you see a very kind of interesting asset manager generating like, you know, 600 percent return a month. And you're like, wow, I'm going to give him 50 grand, for example. Imagine if he takes it from, you know, Bittrex or whatever, any other exchange, for example, and disappears. Your entire operation is basically non-existent anymore because you just violated your prospectuses, you know, conditions that you would put in there that, you know, this is not going to happen. So and for market makers, it's very, very important thing.

And as this industry grows larger and larger, when you have assets deployed across 25 different exchanges and you have a problem such as generally you have market makers done automatically, right? So you fill the order book with limit orders, spread it across different exchanges. And when the liquidity dries up in one place and aggregates in another place, you have to do the reallocation. The way it happens in 90% of places today is there is a senior executive who pick up the phone call and say, could you move the funds? Now, that senior executive, in theory, has access to like 50 to 100 million of borderline untraceable asset. And, you know, if somebody approaches him and asks politely to transfer it elsewhere, you know, that is a risk, physical threat. So as this industry grows larger in size, that needs to be eliminated. Withdrawal processes would have to be covered within the same kind of predefined ecosystem

where it can move and nowhere else. So this is the important part. Because what you're basically talking about is not just rogue actors, but you're talking about people who are malicious. You are talking about people who are threatened. You are talking about people who could actually just make mistakes. They might even be trying to do something incorrectly. They type in the wrong wallet address.

right absolutely um it's not just the the bad actors yeah it is also um you know other issues that can come up and so by having what i would consider a more mature um kind of professional uh financial infrastructure it solves a lot of these problems absolutely absolutely and it's also like when coming back like general to the question like what would the lps be comfortable with right like for example you know we know the manager and they're good guys and everything and We'd be happy to give them 1 million allocation. But before we're going to see, like, you know, serious tickets coming into this, the argument, like, you know, they're good guys, it only goes, like, as far as certain ticket size. Then you just need to have a robust framework, which you know for a fact nothing goes anywhere.

And you just, like, leave the manager to generate your returns. And from what I've seen, and it sounds like you as well, many LPs, when they approach these crypto asset managers, they just have an expectation of things like there's no self-custody, right? And there's no self-administration, et cetera. And that is being solved and addressed in the traditional world. So there's an expectation of if you're an asset manager, you follow certain criteria and have certain structures. When you look on the crypto side, all of that's gone out the window historically. And so when you see it all go out the window, what ends up happening is the LPs are faced with the decision. Either they're good guys, I trust them type situation, right?

So like, hey, I like this team. I think that they can do a good job. I'm willing to take the risk, and I'm just going to give them the money, and I don't care. Or what I think we're seeing now, and I think this is where you guys are coming into play, is you're getting professional LPs who say, I want exposure to the asset class. I don't care if you're a good person or not. I can't just blindly trust you. And so I am going to pull you as an asset manager into having professional, mature financial infrastructure.

right so like i'm basically going to dangle money out there as a carrot to get you to become infrastructure wise uh what i need you to become so then i can give you the money and keep in mind it was also like some of them have minimum ticket sizes so some of them are not going to give you a million i mean say like okay i can give you a million but like we have a minimum ticket size is 10 million for example and with 10 million like this is those are the conditions that you need to go through so so some of the due diligence process and like they they can't be bothered with investing like if we're talking about like large tickets like 10 million is like you know like we're seeing quite a lot like you know we can only come in with 10 million plus because otherwise it's not

worth our attention so um yeah and i think fund of funds as they're entering into the sector um and there are a few very very like smart players that are just you know launching i think it will be quite quite big because funds of funds attract larger ticket sizes they do have they basically take care of the entire due diligence process that we we discussed they go through like everything to make sure that everything is robust as possible that's why they're charging fees on top of as well so those type of players will be very very impactful got it so describe to us um kind of two more pieces of the problems with the financial infrastructure we'll get into what you're building uh the first is the traditional banking system horrendous yeah i mean this is

very i mean like kind of in in mathematical expectation this is the fundamental reason why we're in this business because it's it's something which people don't see and and people should know and um let me describe you the following scenario so you would have an asset manager and then another asset manager and they've conducted a trade say they bought apple shares i mean that sells t plus three so then the mechanics of that how what actually happened in the background like these guys have database these guys have database both of them will have sub-custodians right they would have like bank ace because custodian for that asset manager and then bank b as a custodian for that asset manager so then actually trade needs to uh the the shares need to go basically

from that custodian to that custodian so the way it normally happens it happens through swift everyone uses swift so so keep in mind four databases already in this equation so all of these databases have you know software integrators and people who maintain it and all kinds of like soft that needs to work together and majority of those parts of the infrastructure has been built in 70s 80s 90s you know so it's very very old so trade happens and god forbid somebody misses a comma in mt500 message on the swift there you have it uh trade stuck in limbo not settled now why is this important because a person at this asset manager this asset manager at this bank and this bank spent half of the week figuring out how to sell the trade.

Now, extrapolating into the entire sector, we're talking about 90% of costs of any financial institution is, well, salaries, right? Like our salaries and like, you know, all the expenses associated with human resources. So out of that, probably the most efficient places would have 40% doing that, basically. So those are the most efficient places. Now, traditionally, I always give an example of a small Swiss bank, a billion, for example, assets under management slash custody. They would have 25 people. Guess how many people would be doing this ops?

Out of 25 people, 15? 18. 18. Like roughly 18 people would do operations. And then you have like two kind of like mid-level and then you have the rest of sales, basically. So Swiss salaries are not cheap. and why is this important is that like it's not the banks that are going to save money it's like it's pushed to consumers right like it's pushed to us like we pay for that we pay

all of this infrastructure cost so we're talking about like slashing everything in half basically by implementing something like this correctly yeah so and the database maintenance and infrastructure maintenance we're talking about for example uh tier two tier three banks budget for IT infrastructure is roughly around three billion a year Wow so imagine what kind of like IT infrastructure budgets like big players are having like this is not a big player this is like tier two tier three bank right like we're talking about like billions billions and billions and billions and billions right so and and all of that can basically go away if you

have a single source of golden source of truth and that's why blockchain is important for financial infrastructure like that there you have a situation whereas you no longer need to sync up databases amongst each other you sync it up with the golden source so that reduces cost dramatically it allows you to be more competitive and more importantly it allows new players to enter into the field because for example my when I was starting my career to launch a hedge fund it would cost basically in the math would work out in such a manner that you need to have hundred million dollars assets basically

under management in order to basically pay for lights and salaries and things like that. So in September last year, when we announced our products, we were at HFM CEO Summit. The number that people discussed was 385 million. Now, how many fund managers do you know that can just leave BlackRock, Blackstone and start a fund with half a billion dollars? Not very many. It's very difficult. It's very, very difficult. So we're talking about if those infrastructure cost of being reduced then then we have a much like fairer environment for starting on competitive environment as well regulations have to do a lot with

that as well because new introduction of regulations like been affecting those quite significantly for example in Europe had method to basically which which basically for one last year with it to for example requires you to submit 80 plus fields after each trade to the regulator really yeah so all of this what the heck is in all that information yeah like you know who you like before it was four before mifid two mifid one basically it was for the four is what who you traded with yeah kind of like basic information what assets etc etc now it's like everything absolutely everything how many breaths did you take what was your heartbeat where were you sitting right did you go to the

bathroom beforehand or not exactly the thing is like you end up paying more software integrators that would basically implement that for you and and make sure that it all communicates it just increases cost it increases friction exactly and from the regulator standpoint it's blockchain it's blessing in disguise um it's something which can solve so many problems but it's one of the situation where i don't think that they will just come out and say guys hey we've built this you know and this is how you use it this is the github like you know let's give a bug bounty like all that like that's not how it's going to happen you need to show them how this could be used you need build the tools and show them that look guys actually for the first time in history you could

be at the forefront of you know preventing money laundering terrorist financing and things like that because blockchain is actually not a very very good you know system to to be you know money laundering like it can be traced all the way back and if you and and in traditional space you know once you have it in a bank from cash that's it like you only know like the last point of entry so For regulators, I think, and I hope, it's not going to be a quick process, we're talking about like years, maybe like five, hopefully no longer than that, but potentially it could be even ten, where regulators are able to extrapolate information that's happening and even be like, you know, preventing and seeing those trades happen in real life, flagging those, which will remove the costs from the players and, you know, create less frictionless emotions. competitive environment which benefits everyone all market participants i love it um and then there's this bridge between the engineers and financial firms and the finance people right uh they usually have very different backgrounds they have very different perspectives uh they

spend their time doing different things um they almost speak different languages right i always joke and say one it speaks the language of like github and the other speaks the language of excel yeah absolutely yeah yeah um and so they just they're working on in the same company they're working on the same problem just very different ways uh how big of a problem is that and how big of a gap is there between those two groups huge huge um to give it to quantifiable numbers like in 2015 everyone got excited about fintech remember like big data fintech fintech is going to change the world and everything and then a bunch of banks and large institutions started like projects like pilot projects or some of like not pilot like a full-scope project and 90% of

those projects failed they failed because of that reason because because of lack of understanding between those two tribes and we're talking about like top ten top five largest banks in the UK they had a project that they spent half a billion dollars on so 500 million and they didn't launch it because they couldn't migrate the database really yeah so database migration basically is a significant portion of failed launches because the project is built but then it comes to migrating and with the migration takes such a long time that the project kind of like dice half halfway through and we're talking about

like in banks and large institutions they'll realize that problem like for example top one of the top ten largest banks in the world for example today uses syntax called COBOL in their core banking system so they lost documentation to what the core banking engine does roughly in like early 2000s or like like mid mid 2000s and had to write a PHP wrapper around to understand what the core banking basically system does and COBOL been used widely in financial services and this is syntax developed developed by American military in the 70s and people who know COBOL either retired or dead

and lots of guys basically coming out of retirement because the money that people pay to patch now those systems are ridiculous. And we're actually seeing a few engineers that start to learn COBOL because we're talking about like Java consultant with getting paid the rate of about 800 pounds to 1,000 bucks a day.

And COBOL is two and a half, 3,000 bucks a day. So you can get paid 3,000 bucks a day to patch the system written in COBOL. So we're going to find the reason why it still exists is because it's such a massive machine that needs to migrate from one to another and then engineers can build it. The migration needs to be performed

kind of like with joint efforts and it always has because it's not uncommon to have like two, three, four, five years integration cycles of the software in large institutions. Doing complete from the ground up like rejiggling of the entire systems

is borderline impossible. And that's why also from where we're going with the whole financial infrastructure based on blockchain, I believe that we're not going to see a large institution coming in and saying, look, we built everything, thanks very much. It's either going to be through acquisition or it's going to be completely new from scratch. And keep in mind, the budgets of the anti-infrastructure, these guys can't afford to basically drop a billion on a company that built something. Yeah, no problem.

Like this. I mean, if we're talking about traditional space, for example, from the investing standpoint, You have like VCs that need to sell to Facebook, Apple, Amazon, Google, et cetera, et cetera. How many financial institutions can buy a startup in this sector? Like huge number. Almost all of them. All of them, exactly. So it's going to be pretty exciting to see how this will unwrap and how this is going to be integrated.

But the future of financial services is most certainly will be based on blockchain. What are you guys doing? When it comes to infrastructure. So custody was the first point, basically. We named the company, who you started it with, and then what you guys are doing. All right. So we're called Copa. So we started the company because we couldn't find suitable institutional infrastructure service providers in crypto space when we structured the fund.

And we did structure a fund. Basically, we went prospectus, administrative. Everything's done. We started to look out for custodians, found wallets who then didn't realize they were custodians. then they basically changed their branding to custodians but then I was trying to explain to the guys like look, I can't pay you withdrawal fees I'm charging $330 management performance fee

which is already like should be illegal but clients are happy to pay for it because their assets go like 100% every two months or so but I can't pay you withdrawal fees, that's insane so anyway, long story short we didn't launch the fund, we shut it down

because we couldn't find, infrastructure decision was made that it's an opportunity, right, so inefficiency equal opportunities so we we started building uh custody um for buy side players like we just like spend our careers being um so we built custody product we build it um a little bit different uh we didn't build it in such a manner like you know this is crypto this where it's stored yep crypto on our custody platform is stored basically because it's it's not like a gold bar you don't need a mountain to store it like it's stored uh using cryptography so in mathematical expectations so you don't have to have somewhere stored at all points in time

because it creates unnecessary vulnerability and then we threw it off basically completely offline no connection with online there and just sits there when you design transaction we use basically optical error gapping so it generated QR codes to pass information between devices so then we started developing this and we built a framework called walled garden which which solves that problem of having a predefined ecosystem of execution venues where a manager can transfer the crypto and nowhere else, and which gives a massive comfort to LPs. Basically, they say, we don't have access to anything, you know, COPPA is handling,

COPPA doesn't have access to anything, no one has access to anything, but it works. And the Wall Garden framework basically went live earlier this year, like in January. And then we also looked into OTC market and we started looking that everything is kind of like settled bilaterally. And you know, whereas it's all exciting to have like smart contracts, selling the trades and everything that doesn't exist yet. And today it's not uncommon to see a trade being settled in two weeks. So I mean, it's just crazy.

I mean, we're talking about T plus three, T plus two inefficiencies and we're talking about like within the crypto community, people discussing like how to scale the, you know, process you know the blocks instead of like you know 20 minutes into seconds but trades are settled back in two weeks so that's that's great so we built um a settlement framework and clearing framework for institutional players so they can settle basically uh through us and the development of all of that is basically exactly what people are used to in traditional space for example prime broker uh and prime brokerage service is going to be super important in the space because People can utilize the tool provided by prime brokers to use their capital that's been given to them by LPs more efficiently, i.e. generate more return, i.e. more money coming into the space.

So it all kind of makes sense. And we're talking about margin funding, lending, borrowing, repos, reverse repos, collateral re-hypothecation. So all of these terms, I mean, I know that it might be confusing for some of the audience. But those are basically the tools where, you know, for example, you can borrow with a promise to buy it back at a certain price later at a certain date. It allows us to create different strategies, different hedging strategies where, you know, if you win it on one leg, you're not going to lose it on another leg. And, you know, things like collateral rehypothecation is, for example, whereas, you know, you store your funds with the prime broker and then those funds are being lent to someone else. you're getting a cut off those fees that they charge basically a borrower on the other side so all of these parts of infrastructure is super important and um it's still early days i mean it's

it's uh institutional space is ridiculously small um that's uh we have a lot of interests kind of like you know and obviously you guys on your sides with big institutions but you know how careful they are how like you know um takes six to twelve months to get somewhere and um the first kind of group of people that, the one I was like, the crypto funds. And there are probably 20, 30 like crypto funds out there in the world with proper strategy, institutional background, understanding how to conduct investment activity. And these guys were going to dictate basically how the sector is going to grow because they are the contact for their LPs and LPs have all the money which they basically take from Goldman and put into them, you know. That's the game.

Yeah, exactly. Absolutely. Talk a little bit more about how the LPs drive decision-making. Absolutely. I mean, so we covered that a little bit in terms of, you know, who are current LPs and what kind of tickets they're writing. But as part of the due diligence for some of our clients, most of our clients, they basically ask, who's your custodian? What is the walled garden framework? How it works?

So we end up talking to them. And we end up talking with them. As the custody provider. As the custody provider. Yeah. It's a new space. Because they want to make sure that how this works. Make sure you're real.

Exactly. You're doing it right away. Exactly, exactly. And these are very, very sophisticated guys. And it's not a matter of like, you know, whether they want to invest. It's how much they want to invest because it's a risk return for them. So they weigh the risks by conducting the full due diligence of a cycle, et cetera. And keep in mind, like, execution venues today are places like, you know, BitMEX, et cetera, et cetera.

So they're also… Not exactly the most institutional-friendly places. Exactly. But it's a true reflection of the crypto space today. So at least, you know, we have kind of that's that's it's basically super efficient, you know, in terms of like where we are, what we're doing, etc. So, you know, going forward, it's either these guys will adjust and make sure that they tick all the boxes for institutional guys to have the flow from them or someone else will do it. You know, someone else will like, you know, here, UK, whatever, wherever, like, you know, we'll sit down, build the exchange, probably regulate it and then, you know, get the flow. So, but it's good to see like many, many companies like coming into the space and providing all of these different services, like driving efficiency even forward. So it's, I think it's a good thing. Where do you think we still have to improve, right?

What are the next kind of steps and then what's the future of kind of custody, prime brokerage and other financial infrastructure for the crypto industry? I think it's always like, you know, I've got a technology finance background. And I think where the most stumbling blocks always are, it's when you try to build something straight away for 2035. and like it's like you know you build a a wheel like lamborghini wheel and like bring it and there's like a cart outside you know so it's like i think those components should kind of like be stacked with each other in such a manner that we have mvp and we move to mvp 2.0 etc etc and then we have alpha beta and blah blah blah and we basically go with what works today what solves the problems today rather than the solving hypothetical problems and somewhere somewhere

down the line in the future so then I mean that's what we're doing that's what's what's some of the other players are doing in the space so I think it's it's so when you know everyone got excited like end of institutions coming next year like we were that institution we're like this is not happening like we can't like they want the desire was there but the infrastructure was yeah exactly so we're now seeing first proper institution launches like from q1 this year like that's the bigger ones pulled the plug when when but also by the way what was blessing in disguise is when Bitcoin went from 6,000 to 4,000 we saw

basically so our conversations like 50 50 50 chance basically that you're gonna sit down and have a proper conversation with potential clients or or you would have a conversation of like somebody who's managing like you know twenty thousand dollars and like the guy bought bitcoins like in 2010 and now he's a fan manager uh so and for us like it eliminated all of them basically so the guys who stayed there who stayed in the sector they know exactly what they invest in they know exactly how they invest in exactly how to communicate the investment strategy the tourists went away yeah sorry the tourists exactly went away yeah tourists yeah correct yeah absolutely and that was absolutely

great like so everyone kind of like who went through this and by the way no one was kind of like second guessing it like everyone just like kept doing what they're doing and they're like okay we're like on target to launch that and then you know all the variables aligned all of the you know money I lined up let's do it and then people do it so it's great to see the first kind of like conduction happening sure what um before I finish up I always do rapid-fire yeah questions what do you think is the most important company in crypto um I think it's not one company I I think it's a consortium, and I think it's when it comes to spreading the word and the media.

I think media in… Oh, interesting. You think the media is the most important. Absolutely, because without the media, we wouldn't see the responses. Like, regulators wouldn't care. Like, some other players wouldn't care. Like, some people wouldn't be thinking they're missing the boat. Some people wouldn't spend the time.

So it's kind of like content, and it's like, you know, you create liquidity. Like, you're a market maker, and then there's, like, on the other side, there is a taker. And then, you know, people have to react to it. And it's like the media is basically a liquidity provider of information. Exactly. Exactly. It's a really interesting way of looking at it. And liquidity is basically is the key. Liquidity is your oxygen.

So and then the space, for example, we probably would people would just dismiss it and say, OK, well, no one cares about it. But when, you know, you have like Cointelegra, Coindesk, Bloomberg, you know, FT, you know, everyone's basically writing about it. You kind of understand, OK, well, it's time to look into it. Yeah, that's a really good answer. What about regulation? What one regulation would you change or improve if you could? It depends on which kind of place we're talking about.

So everyone's got all sorts of things. So, for example, in this country, I would say Howie, definitely. Okay, U.S. Howie test. Yeah, and just generally judging things by the way they were done. Because this market has been in existence the longest, right? But judging like the same way as we would be judging like activities like, you know, 50 years ago, it shouldn't be the case. In the UK and Europe, I would say RDR. So RDR is basically what you can sell to retail clients because retail ends up with a subpar product.

And which have been basically, they basically invest in the market with like effective 5% fees. And they don't invest in complete rubbish, which is good, which is what regulators try to achieve, but they also can't invest or they can't sell them the product, which could be interesting and not rubbish. So specifically with security tokens and different parts of the infrastructure coming to them, that needs to be adjusted.

And Asia, man, I mean, it's Asia. Principal, agent, trading, never heard of it. It's like, you know, people taking retail clients for a ride, like, everywhere. You know, so principal trading is like, you know, market making and agent trading is basically. So in Europe, it's illegal. You know, in Asia, everything's possible. So, yeah, I would say a little bit more maturity

in terms of the regulations would be nice there. Yeah, it's pretty crazy. What's your most controversial thought? What do you believe that a few people in the crypto community also believe? yes this is something which is from the crypto community i think it's that the drive of institutional adoption is going to come from finance and not from engineering the so you're saying that the institutional adoption is going to come because we become smarter and more mature on the finance side not the engineering correct yeah correct i think engineering is there like

we have so much already out there that like we could ever wish for like and and for finance it's just a matter of at least adopting parts of that currently and obviously in the crypto community it's predominantly engineers community and uh and engineering community it's common belief that you know like screw finance and you know like you go to different conferences and it's guys are discussing how do we do this how do we do that and the majority of the like 80 percent of questions already answered by the regulator like they have a playbook for that so uh yeah got it makes so that makes sense what's the most important book you've ever read um i would say extreme ownership ah jocko wilnick yeah absolutely big fan uh read both books uh i'm a big kind of fan or i have lots

of interest in companies cultures and how to build companies culture and human psychology And I believe with that approach, that's like a life hack for building efficient teams that get results. And I think since the guys were in the military, the cost of a mistake was not like a delayed launch in six months. The cost of a mistake was a human life. Changed the game. Exactly. Completely different. So we read it, like the whole team read it.

We read both books, and it helps. It helps big time. Yeah, I think that's a very unique perspective on the world of just, hey, you're responsible for what happens, right? Yeah, absolutely, absolutely. Aliens, believer, non-believer, think they're real? I think an infinite amount of universes, everything's possible, right? Everything or anything? Yeah, absolutely.

Both, right? You think we'll discover alien life before you and I die? That is also impacting how much we're going to live, right? by how long we're going to live. Good answer. So I think it's kind of like, you know, it comes from both sides, how to estimate. Let's say that we've got average life 75 years.

Probably. You're in your 30s? Yeah. Yeah, right, so call it another 35, 40 years. I think we'll discover some form of life, bacterias and you know or that would be already uh that that is the thing it was something but again you know this is like me speculating zero knowledge about it so my opinion on this you know i wouldn't value it spoken like a true risk management yeah exactly uh what one question

do you have for me to finish up um i think i think it would be interesting to to ask you is is when do you think the next financial crisis is going to be? And since last created Bitcoin, what do you think is going to come out of the next one? Man, everyone is asking me something related to this lately. So next financial crisis, I'll say, I'm going to give a really safe answer of next five years. One's going to happen.

It just doesn't go up to the rate forever. I don't think it's another 10 years of this type of market, but I also don't think it's like tomorrow right so like is it a year three years I have no clue I tend to just say that like I want to be I want to hope for the best but be prepared for the worst type attitude so that's on the timing and then how Bitcoin will will come out of the next one so Bitcoin was prayed during the financial crisis last financial crisis would come out of the automation automation yeah i think uh i think a lot of these financial crisis and just issues

in general in the financial system can be solved with software and automation yeah um and if you look at bitcoin bitcoin is like the automation of money right or the the kind of software backed of money and um i think that we'll just see it not just be money this time i think coming out of the next one it'll be a much more automated system and ultimately it's because uh when you have automation and more kind of software based systems uh you can just prevent a lot of bad shit from happening right absolutely and so yeah depending on just like what the cause of it is and it's always you know hindsight's 2020 um but i do think for bitcoin specifically uh i keep talking about this perfect storm right kind of you know late sec uh late first half next year you're

going to probably get some interest rate cuts you might get some qe you're gonna get the bitcoin having uh and you're paying attention to u.s politics we got a you know a president who's conducting trade wars on twitter so um you kind of have all these things coming together uh that'll be interesting to see how they all interact and i tend to think they're bullish for bitcoin yeah um but again we've never seen bitcoin perform in a down market or you know all the kind of traditional stuff so that that's one piece the second thing is um i just see us starting to get serious about automation and software in finance when there's another like kind of sober moment right and so it kind of takes you to get hit by it hit in the

head with a two-by-four yeah till I pay attention yeah and I think some sort of recession or you know financial crisis would would do that to us and then once that happens I think people will start paying attention and kind of get their act together right interesting by the way I could be completely wrong it makes And so it's just, you know, an idea. Yeah, you have next year. Next year is going to be definitely, I mean, it's very well described. If we get interest rate cuts, QE, a move towards modern monetary theory and the Bitcoin having all at the same time, I'll see you later, man.

There is one more event. It's like rocket fuel. This year, China has three celebrations and they can't afford the financial crisis this year. But next year, it's going to be over. so the the market there i think is also like yeah i mean it's all gonna it's all coming together it's all coming together yeah and and look and i'm always whenever i talk about this stuff i'm always very careful to say like i do not want a financial crisis to hit uh they're incredibly painful incredibly bad for people a lot of people get hurt yeah right um and so we should do

everything we possibly can to avoid this stuff uh i just unfortunately think that there's people asleep at the wheel yeah right and no matter how much ui or anybody else yells and screams about this stuff uh it's coming down the pipe right and and so as investors the uh the the job we have you know that we're tasked with is to be prepared for this stuff and find ways to make money regardless if the market's going up or down yeah um and so all we can do is kind of call out what we see yeah makes sense so listen man i appreciate you doing this uh i'm glad that you guys are building um kind of professional infrastructure for the space it is much needed um obviously the institutions cannot come in and then refuse to come in until the stuff's in place.

So the work we're doing is incredibly important. And we'll have to do this again in the future so that we can get an update on how things are going. Yeah, absolutely. Thank you for having me again. For sure. Are you curious about cryptocurrency and you don't know where to begin? I've got a great way for you to try. You can use Stormplay, a free and fun way to start earning in exchange for your time. That's right. You don't necessarily have to make a financial investment to begin.

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