The Wolf Of All Streets - The Truth About Institutional Crypto Adoption | Matthew Trudeau, Chief Operating Officer At ErisX

Episode Date: October 18, 2022

More and more banks and other financial institutions enter the crypto space. Matt Trudeau, COO at ErisX, a company that provides crypto derivatives to institutional investors, talks about the institutional demand for cryptocurrencies, and potential drivers of crypto adoption, and takes a look at the crypto market from the regulatory perspective. Matt Trudeau: https://twitter.com/mtrudeau ErisX: https://www.erisx.com/ ►► JOIN THE FREE WOLF DEN NEWSLETTER https://www.getrevue.co/profile/TheWolfDen  GET UP TO A $8,000 BONUS IN USDT AND TRADE ALL SPOT PAIRS ON BITGET FOR ZERO FEES! ►► https://thewolfofallstreets.info/bitget   Follow Scott Melker: Twitter: https://twitter.com/scottmelker  Facebook: https://www.facebook.com/wolfofallstreets   Web: https://www.thewolfofallstreets.io  Spotify: https://spoti.fi/30N5FDe  Apple podcast: https://apple.co/3FASB2c  #Bitcoin #Crypto #Trading The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. This video was created for entertainment. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this video constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.

For years, we've been talking about institutional adoption in crypto. I think it's hard to argue at this point that the institutions are not here. We've seen BlackRock, Fidelity, Citadel, the biggest names in finance, entering the crypto space. Well, nobody is better at talking about this than Matt Trudeau, who sold ArisX to SIBO and was one of the first to really focus on institutional adoption and products for institutions in the crypto space. How'd you end up in the crypto space? So I started down the rabbit hole, as they say, in 2014. I was at the time working for a company called IEX, the Investors Exchange,

and I ran the ventures group internally at the exchange. And we were approached by a crypto exchange that wanted to license our exchange technology. So that was, I had to understand, well, what is crypto and specifically what is Bitcoin before I could even assess the company. You know, at that point, I think the most prominent narrators were still the Silk Road and Mt. Gox. But I did some digging. I read the white paper. All of it very interesting. And as a capital markets infrastructure career professional, I thought it had the blockchain technology and Bitcoin had the opportunity and the potential to completely change capital markets. So I was hooked. Do you still believe that?

I do. Yeah. I would say that my views have probably changed a little bit. Back then, certainly blockchain, not Bitcoin, was a narrative. And my first go at building a company in the space was a blockchain-based exchange and post-trade to digitize the trading of precious metals. Thinking that moving precious metals onto a blockchain would have some of the same properties as Bitcoin, but maybe at least the downside protection that if the tech failed, you still had physical gold in a vault. It turns out that Bitcoin actually got more adoption than I might have expected back then. And I think some of the properties now in recent times are starting to show that there really is some value in having a currency that is free of any state, censorship resistant.

It sounds like you have a career in building infrastructure for nascent industries to some degree. Yeah. So from 2000, I worked in electronic trading, building electronic trading firms. At this point, I think I've launched or been a part of the team that's launched a dozen different exchanges of various kinds around the world, equities, futures, currencies. So yeah, I build infrastructure and mostly it's been startups along the way. Most recently now with a firm called ErisX, we operate a spot market and a futures exchange

and clearinghouse regulated by the CFTC for derivatives on cryptocurrencies. Recently acquired by the CBOE or CBOE, the global exchange infrastructure operator and data provider. And why would CBOE want to purchase or invest in a company like Arisex? Yeah, so CBOE was actually pretty early in the US. They were the first to launch a Bitcoin futures contract, in fact. Very famously at the exact day of the top of the 2017 bull market.

So the contract was not ultimately successful and they stopped listing it. But they had done their homework and had taken a view on the space. And they were an investor in Arisex prior to the acquisition. So they were able to follow our story and development over three and a half years. And I think it's really a pretty phenomenal statement that they've made the investment and they see a future for digital assets to the extent that they bought a company now that they want focused exclusively on that space. And we get the benefit of having a very mature global exchange operator behind us with their resources, the network, distribution, relationships with regulators. So a lot of what we've built over the last three years is very complementary to the assets that they bring to bear. And together, I think we'll build the future of digital assets for the more mainstream and traditional market players.

What prevents them from, or why did they choose, I guess, to buy basically AEROSX rather than build that infrastructure themselves when they have decades, if not centuries, long history of building those products? Yeah, there's specialty here. So markets is a knowledge that we have, that they have. Technology is a knowledge that we have, that they have. Technology is a knowledge that we have, that they have. But we built a brand new exchange platform, a brand new clearing platform from scratch to operate 24 by 7 to meet the needs of the crypto environment.

And I think with any new technology or any new innovation, a lot of times what you'll see is that the mature companies wait for a specialist who's really focused on it that does that and only that all day every day to be successful. And then they acquire the company to bring that knowledge and experience in-house, which can, you know, that can be expensive, but it also can be much more efficient and reduce the risk of distracting internal resources and things to focus on the new thing until it's a bit more mature. So having built and launched all these exchanges, are there unique challenges to doing it in the crypto space that you did not come across in the past? Yeah, so like the markets part of it is very similar. So getting the regulation and the

licenses is a long and expensive process, can be very difficult. But it's understood if you've done it before, you know what you're signing up for. Building out exchange technology is something that's well understood. Building clearing technology is something that's well understood. But what's different is you have these bearer assets that now are going to form collateral in the clearinghouse and you have to be able to take deposits and process withdrawals. And there's just a lot more in terms of the technology and controls and processes and security around And there's just a lot more in terms of the technology and controls and processes and security around that that's different from a traditional exchange.

And then I would say that something else that is a bit different is notwithstanding that all exchanges that are regulated have regulators and licenses. With crypto, our footprint is pretty broad. So we're regulated by the CFTC, but we also, for the spot market, have to have licensing or authorizations across the 50 states and U.S. territories, FinCEN at the federal level, BitLicense in New York. So I would say the complexity and diversity and breadth of our regulatory landscape is more than I've experienced at any other exchange that I've launched. And there have to be major challenges in determining which assets you can offer.

Yeah, and it's still not 100% clear. So we, in terms of assets, we've hewed pretty close to what we believe are commodities. The futures market, we want to list derivatives on commodities. And so the crypto assets that we list on our spot market today, it's just for Bitcoin, Bitcoin Cash, Litecoin and Ether. We believe that those and we feel like we've got good representation that those are commodities. But we do absolutely want to list more and certainly getting some clarity about, you know, definitively what is a commodity and what is a security will help us to be able to list new assets. I mean, even recently after the merge and Ethereum's moved to 2.0, we've heard Gary Gensler himself allude to the fact that maybe Ethereum now would be viewed as a security and

no longer as a commodity. It's an evolving environment. And as a result, we have to stay on top of things. And certainly that keeps the lawyers well paid because the analysis is shifting. But this, again, is something where CBOE operates equities exchanges in addition to futures exchanges. They have a great relationship with the SEC and certainly staff that are very familiar with the regulations. So we put out a position paper. We would like to, as an organization, be able to influence where we think regulation should logically go. We may not get everything that we want, but we certainly want to contribute to the conversation.

And having CBOE and its resources and relationships definitely helps us in that regard. Obviously, one of the most unique aspects of crypto, which you alluded to before, is it's 24-7, 365. So, look, the equities markets in the U.S., you know, 930 to 4 for the primary trading session, a lot of the technology actually that has been built and operates, even though it is highly performant, highly reliable,

latency and throughput are outstanding. They don't operate 24 by 7, they have to shut down and go through maintenance and things like that. So one of the things that I think SIBO saw with us is that our exchange platform could run 24 by 7. Our clearing platform never needs to go down. It runs in the cloud. So while the traditional exchange operators have great technology, it was not purpose built for a 24 by 7 market. And now your average retail traders obviously not flipping futures contracts on SIBO, right? You have to effectively be institutional or access it. So what are you seeing from the institutional side then? How much demand is there for these products right now? Yeah, so retail can trade futures contracts, but they typically have to be a member or a customer

of a futures commission merchant, which is an intermediary that's a member of the clearinghouse. So there's demand. And our go-to-market strategy as an exchange and clearinghouse operator was to fill the gap in the market for intermediaries who want to be able to offer crypto products alongside other traditional products, equities, options, currencies, futures. Through a common, familiar interface, through the same support mechanisms that they have today, their customer service, their marketing, their education, the crypto native exchanges acquire the customer directly. In our case, we saw an opportunity and a need to enable the intermediaries. And so that's what we built. And as we look to launch margin, so today our clearinghouse is a fully funded clearinghouse.

We're in the process of adding margin capability to our clearinghouse and we'll launch that hopefully early next year. There is demand from the institutional market and with our platform, it's both spot and futures on a single platform. So for institutions that are trading across both spot and futures that have the need to hedge, that need to take physical delivery in some instances, we'll be able to do all that on a single platform make it more cost efficient more collateral efficient but it sounds like the clientele will primarily be institutional and our direct clients yes so our direct clients will be but certainly uh cbo announced recently a syndication that's in process so there are a number of traditional capital

markets as well as as more uh maybe more crypto crypto involved companies that are going to become shareholders in what will become CBO Digital, that RxRx will become CBO Digital. And so some of those are retail aggregators. Some of the firms that were named are firms like Robinhood and Webull and Interactive Brokers, Tasty Trade. So they will certainly provide access to our market, to their customers, in which case retail would be able to participate. Interesting. And now we're obviously sort of in the depths of this seemingly endless bear market. Have you seen a dampening in excitement from your customers or less customers coming in? Or do you think that at that level, they're salivating at the opportunity to get in? Yeah, we get this question a lot. And certainly for those of us who've been around

the space for a while, we've been through a number of cycles. And what's different this time, prior cycles, people would try to scramble when they saw the price running up, when the interest was hot. And then when there would be a drawback, the interest would wane, it would fizzle, and then they'd move on to other things. I think this time around, there's been enough research internally, enough institutional resources committed that many are now fully committed to the space. Actually, they see this maybe as an opportunity where some of the crypto native players that had a massive head start have had to take down the sales a little bit, regroup. They're reassessing some things. Maybe they hired too quickly, those kinds of things. So now the more traditional players that were behind have an opportunity to make up some ground. So we see the commitment more so, and they're not phased, at least the firms that we talked to are not phased by the price action this time around.

I mean, it's become kind of a meme in the crypto space at the best time to build as a bear market but you basically just described it, right? You're not dealing with retail FOMO and putting out fires and a million people trying to sign up on any given day. You can actually build a product that's superior for your customers without as many distractions. Absolutely. You now have institutional commitment where they see this as having longevity and it's going to change and evolve as we've talked about. It's an evolving space. But I think the question has now been decided as to ARISX is another pretty important data point there that they do see a generational shift in the capital markets, in the infrastructure, in the assets, and the way that people interact. And so now the institutions are looking to participate.

I mean, we have what, BlackRock, JP Morgan, Fidelity, obviously, Citadel. Now, I mean, it was sort of laughable now when you think back to 2017 when we yelled, the institutions are here. Yeah, right. But now, I mean, there's no debate. These are the biggest financial institutions on the planet and they're committing wholeheartedly to the crypto space.

You're definitely seeing that. And you've seen institutions covers a pretty broad swath. So the shops that ran their own technology that were generally managing their own money were institutions, and they were in pretty early. When you think about DRW and its Cumberland division and firms like Jump or some of the other firms that are electronic trading firms, I mean, they were in pretty early, but they're also very sophisticated. They run their own technology, typically managing their own money. It's a bit different when you're managing someone else's money. And I think now what we're starting to see is the firms that manage other people's money are

starting to get more comfortable with the space. And then the firms that provide access to other people are starting to get more comfortable with the space. So when we were originally talking about institutions, we were basically talking about crypto native hedge funds. Yeah. So crypto native hedge funds, and then even maybe some traditional hedge funds that started to build out crypto trading desks. And now we're starting to see more traditional capital markets firms, whether those are brokerages or institutional investors, starting to make investments in the space. It leaves us at a very interesting sort of inflection point, I think, because people cheered institutional adoption, obviously because more participants, number go up. But that also conflicts a bit with the early ethos

of Bitcoin in the crypto space. Yeah, and I think that some of that can be preserved. So if you want to manage your own keys, you can still do that. You don't have to go through an intermediary. But if all of us that are passionate about this want to see it reach its maximum potential, that requires mainstream adoption. And to get to mainstream adoption, you have to service a pretty broad range of people that have different technical skill sets, knowledge about markets, knowledge about crypto,

even as an asset. So those intermediaries can play an important role in terms of education, onboarding, giving people comfort and trust. And through that, we can get to much more mainstream adoption, which benefits everybody who is investing time and money in the crypto space. Yeah, I guess it just becomes what the definition of mainstream adoption is, right? I think that now the definition of mainstream adoption is sort of morphed into people treating it as another financial asset, like their stocks or the bonds or part of their portfolio, rather than their means

of transferring money and sort of the original reasons that perhaps cash peer to peer. Yeah, look, those two things can exist side by side. So, for people who want to have a currency that's independent of a government, Bitcoin can fill that role, which is certainly a utility of Bitcoin. Blockchain technology enables a whole bunch of new

and interesting ways for financial interactions to happen independent of Bitcoin. a whole bunch of new and interesting ways for financial interactions to happen independent of Bitcoin. So those things, I think it's not an either or. Yeah, I agree. And I think that we're also in an interesting place, obviously, with regulators. We're clearly on the radar. I think it's one of those, you know, first they laugh at you, then they fight you, then they win situations. Are you concerned at all about the tone that regulators and legislators are taking right now, at least in the United States around the space? So I'm encouraged by the amount of attention that's being paid now. And, you know,

the last couple of months probably don't help the situation. You know, there's been a number of things that reputationally for the industry aren't great. But that's where firms like Cibo Digital, Aris X, I think, have a role to play. Because if we're bringing trusted, mature operations that are compliant and we can work with the regulators and help to influence the discussion, then at least we have hopefully thoughtful regulation that ends up getting crafted. I mean, again, it's always there are tradeoffs involved in that, but that's where I think we have a role to play. I've heard a lot of people say they would rather bad regulation than no regulation. Basically, any clarity would be better than what we have, even if it's negative. Yeah, look, hopefully we end up with something closer to good regulation. But yeah, look, clarity allows firms that are very risk averse to know what they can

and can't do. Even if they don't always like the what you can do definition, at least they have clarity and they can work that into their operations. If you're risk averse and you just don't understand what your risks are, then it becomes very difficult to consider participating in a market. What do you think it will take for Bitcoin and other digital crypto assets to actually go mainstream and become a part of, I won't say everyone, but let's say 20, 30% of the investing public's portfolio?

Well, I think getting it into, getting access available through some of the traditional intermediaries that people are accustomed to, the online retail brokers in the U. That builds familiarity. There's the education piece of it. So there are a lot of people who are crypto aware, but haven't really taken the time to look into it. They see the price and they hear a lot about the volatility and speculation and the hacks and frauds and other things. If they are able to access those assets in an environment that they're comfortable with and familiar with, where there's an educational wrapper around it, I think that just helps get people more comfortable and understand why should they buy this thing

other than pure speculation about the price going up? What are the fundamental aspects of these assets that are interesting? So I think that's the main thing, is starting to get the distribution and the education into a bit more of a mature environment. Yeah, I just hope we see the education shift to the benefits and not the risks. I read the fact sheet that the White House put out, obviously, as a result of their executive order, and it seemed highly focused on educating the public about the volatility and the risk and not at all about the benefits. And then, of course, the entire document concluded with a pitch for a central bank digital currency. Yeah, I mean, look, they have to focus on the risks, but that creates the opportunity

for the intermediaries that can focus on the benefits. Of course, they have to cover the risks, but they can certainly focus on the benefits and how their offering in particular helps to accentuate those benefits. You sort of superficially mentioned in passing the problems that we've had the few months, obviously, the contagion with 3Hours Capital, Luna, Voyager, Celsius. Have you had to have that conversation with potential clients, how what you're offering is different or how that risk has nothing to do with your products? Yeah, look, the things that we've seen really are not risks that are unique to crypto. It was counterparty risk, credit risk,

quiddity risk. These are traditional capital markets risks that there's a lot of infrastructure and regulation and controls designed to try to address. For the last three and a half years, it's a company that has really set out to be compliant and manage risks appropriately with oversight. So someone coming in to verify that the risk controls that we have in place function well are pressure tested. That hasn't always resonated because people wanted to move more quickly and some of those things are inconvenient. And, you know, there's money maybe being left on the table. I would say that that tone has changed dramatically in the last few months where firms that are coming back around to us saying, hey, all those things that you told us about, that's going to be pretty important.

Our customers are asking us, our regulators are asking us, and we can be frustrating at times where others are running a little bit more fast and loose. Nice change, but it would be nice if we could have come back around to that without so many people having to lose so much money. But it sounds like you won't be giving any $700 million uncollateralized loans for people to buy yachts. No, our chief risk officer would have a conniption if we propose something like that. I don't even, it's, you know, listen, when it's happening, it all seems so normal and it's already in hindsight by only a few months. I don't understand how that happened. You know, there is, I think it was Dick Folder, somebody who said when the music's playing, everybody's dancing. Another example of that, you know, there's a peer pressure to just go along with the crowd. And again, for three and a half years, resisting that and focusing on integrity and controls and risk management has been challenging at times because, you know, commercially, there is a cost to doing that.

But again, we wanted to build something sustainable with longevity that would be here into the future that people could rely upon and trust. And there's a cost to doing that and one that we were comfortable with. You talked about in your previous life attempting to tokenize precious metals, basically put them on the blockchain. Do you think that we'll get to the point where we tokenize everything and that's how we trade? I think for record keeping purposes, a lot of things could go on a blockchain and there's some value to that. I think maybe there's one of the things I see pretty commonly is a misconception that just tokenizing something

makes it more liquid. And there's always a demand question. So really, whether it's gold or art or real estate or whatever you want to put as an asset on the blockchain, a fundamental question is what is the demand for that from the end market? If it's just about record keeping, fine, there's utility in that. If it's about creating liquidity and price discovery, then I think there are other factors that go beyond just tokenizing assets. I mean, I think for a lot of people, though, you see what happened, obviously, with GameStop and Robinhood and 48 hours to clear those trades and Robinhood wasn't liquid enough to even fill those orders. That's, I think, why a lot of people think tokenizing it and, you know,

exchanging directly would eliminate some of those problems. Yeah, look, I mean, gross settlement has some benefits. I mean, there's settlement certainty, but there is also some benefit to having credit in the mix. And when you look at a clearinghouse like the one that we operate, having default financial resources, that's a model that's worked pretty well and has evolved and been refined over hundreds of years. So gross settlement does have some benefits. It also removes credit from the equation. So fully funding things can be inefficient from a capital standpoint. So there are definitely trade-offs.

Do you think that we get to the point where basically the offerings in the crypto space infrastructure is as robust as everything that we see in TradFi and other markets or are we already there? I don't think we're already there. Just know, just in the news in the last couple of days, there was a story about Winter Mute being hacked. And, you know, look, they're regarded, I think, as one of the more sophisticated players in the space. So what that highlights to me is that there are new risks that are being introduced.

So there's some risks we talked about, whether it's counterparty credit, liquidity. Those are risks that exist in traditional markets. But not this. And then now you've got this new risk that's introduced here. So as we've seen in traditional markets, when something blows up, then there's a postmortem and there's something, regulation or technology or controls that are implemented to prevent that thing from happening again. And I think we're just seeing the crypto market learning. And as these new risks emerge, there will be controls that get put into place to prevent them. But no, I don't think we're

quite there yet in terms of the maturity, just because we're only not even really, yeah, we're not 15 years into this. You know, capital markets have had five centuries. And we also know that humans will just repeat the same greed cycle once again and build. I mean, it blows my mind, like I said, yet again, just looking again and build. I mean, it blows my mind, like I said, yet again, just looking back at it. I mean, you know, crypto was obviously created as a alternate option that from legacy systems, and we effectively built 2008 again, but with worse rails and less regulation. So one of my favorite books is a book called Reminiscences of a Stock Operator. And, you know, having read read that and just realizing that many of the same practices

that existed 100 years ago are the same today. The technology is a little bit different, but the same types of market manipulation and fraud and other things that you want to try to prevent in markets, those things haven't changed. It's just how they get implemented has. So there's definitely an aspect of that too too, where we just keep repeating the same cycle. And it's a cat and mouse game between the regulators and the people who would act maliciously.

Well, hopefully we get some sensible regulation, at least a little more maturity in the next cycle. But thank you so much for taking the time and for everything that you're building. I look forward to seeing what you guys build in the future. Absolutely. Thanks for having me. Hey, thanks.