Unchained - Jesse Powell, CEO of Kraken, on Drawing a Line With Regulators - Ep.61

Episode Date: May 22, 2018

Jesse Powell, CEO of crypto asset exchange Kraken, explains why he publicly rejected then-Attorney General Eric Schneiderman's request for information from crypto exchanges, why he felt it was a publicity stunt and why Kraken, which stopped serving New York customers after New York's Bitlicense was introduced, doesn't see the market as a top priority. He also talks about why Kraken decided to stop operations in Japan after further regulations were imposed and discusses Kraken's $1 million donation to Coin Center (and its $1 million match). Plus, he gets into why he named the exchange after a Norse sea monster, the dangers of the exchange's margin trading product, and what steps he recommends everyone in crypto take to keep their tokens safe. Jesse Powell: https://twitter.com/jespow Kraken: https://www.kraken.com/ Past Unchained episode with Brock Pierce who also had a pre-Bitcoin career involving video game currency (Jesse and Brock were competitors): http://unchainedpodcast.co/this-vc-is-sure-venture-capital-is-about-to-be-disrupted Kraken's position on regulation (discussion of New York AG request and Japan + guidance for regulators): https://blog.kraken.com/post/1561/krakens-position-on-regulation/ Kraken donation to Coin Center: https://blog.kraken.com/post/1591/kraken-donates-1m-to-coin-center-with-an-additional-1m-matching-during-may/ Kraken down for 40 hours: http://fortune.com/2018/01/12/bitcoin-price-ripple-kraken-down/ Past Unchained episode on taxation of crypto: http://unchainedpodcast.co/the-tax-rules-that-have-crypto-users-aghast Kraken blog post on phone numbers being hijacked: https://blog.kraken.com/post/219/security-advisory-mobile-phones/ My article on the same topic: https://www.forbes.com/sites/laurashin/2016/12/20/hackers-have-stolen-millions-of-dollars-in-bitcoin-using-only-phone-numbers/#1d79923338ba Thank you to our sponsors! Keepkey: https://www.keepkey.com/ Preciate: https://preciate.org/recognize/ Token Agency: https://tokenagency.com/ Learn more about your ad choices. Visit megaphone.fm/adchoices

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Appreciate is building the most valuable relationships on Earth. In each episode of Unchained, P-Shechate recognizes an individual or group in crypto for an achievement, because kindness is contagious. Who in crypto will be recognized today? Stay tuned to find out. I'm recording today from the Coin Desk Consensus Conference in New York City. And my guest is Jesse Powell, co-founder and CEO of Cracken. Welcome, Jesse. Hi, Hi, Laura. What does Cracken do and how does it distinguish itself from the other crypto exchanges in the space?

Cracken is a digital asset exchange. we trade 17 assets and I'd say we distinguish ourselves with our customer service and our security. And you offer actually quite a number of tokens compared to some of the other exchanges like Gemini and Coinbase. How do you get so many on the platform? We've got a large team of people responsible for managing the token gateways, which is basically the technical work required to process transactions on those networks. We've also got a team of guys that are evaluating the tokens for, you know, listing qualifications. And when you said that one of your priorities is security or one of the ways you distinguish yourself as security, how do you do that when a lot of people talk about how, you know, these exchanges are big honeypots and they're on 24-7, 365? And especially in your case where you have multiple tokens, how do you keep the?

secure. Yeah, well, with with a lot of hard work and a lot of diligence and just being extremely careful about everything we do all the time, you know, not just at the technical level, but also at the personal level, you know, in terms of like training our people, how we operate, the length that we go to to keep things private. So that could involve creating proxy entities, to contract with our service providers, you know, to using pseudonyms wherever possible, basically trying to keep the entire operation as private as possible. Oh, interesting. So contractors don't know that it's a crypto exchange.

Wherever possible, yeah. Oh, wow. That's really interesting. That's smart. And how do you decide which cryptocurrencies and crypto assets to add to your platform? So we've got a very thorough evaluation process. We've got over 100 things that we look at. when evaluating a token from, you know, the main thing we're looking at is basically,

is this token still going to be around tomorrow and is it a scam? You know, we do some work on, you know, we try to look at like the technical merit as part of that, but the main things are, you know, we just want to, we want to protect people from, from things that are outright scams. And we also look at the technical difficulty of supporting it and continuing to maintain. the protocol. So if it's something that's very early stage and is going to require a lot of work to maintain, that might be something that we wait until a further stage of development to list. So anyway, in all, it's a very lengthy process. We spend a lot of resources to evaluate the tokens.

So we certainly haven't evaluated every token. But the ones that we do evaluate tend to be the ones that our clients are really asking us to take a look at. What is a Krakken and why did you decide on a numeric exchange after it? Yeah, so a Krakken is a legendary sea monster of Norse mythology. And I chose the name Krakken because, well, it helped that I had the domain. I had actually bought the domain years ago and years before Bitcoin. I've been collecting domains for a long time. and I thought someday I'm going to do something really cool with Cracken.

And so when we got the idea to do a Bitcoin exchange, we had a lot of ideas for names. And Cracken was always kind of my first choice. And I really had to convince my co-founder that this was a good name to use. And I liked it because it has all the harm marks of a great brand. It's short. It's easy to say. It's easy to spell. It's fun.

And in terms of the exchange business, there are a lot of metaphors that we use when talking about markets that fit like liquidity and depth and whales and sharks. And, you know, the Kraken is the biggest, baddest beast in the ocean. So it's sort of the master of liquidity. So the name was really perfect in my mind. And so that's why we went with it. So it's like a Norse sea monster or something like that? Yeah, yeah, probably like a giant octopus. Okay.

Yeah, I personally had to Google that. I knew it was something in that realm, but like didn't know exactly. But no, I agree with you. It is a good name. Like one time I heard Sarah Blakely, the founder of Spanx, talking about how she, you know, became a billionaire and everything. And she was saying that she chose the name of Spinks because like she realized that a lot of great brands have the sound K in them, which was really interesting, like Kodak. And I don't remember the other one she listed, but like that was literally like she just

played around with different names until she came out with something that had a case sound in it. Wow, that's interesting. So yours says too. One other thing I wanted to ask about was who your customers tend to be like, you know, just how would you break them out in terms of who they are and then how much they account for in assets and training volume? Sure.

So we've got several buckets of users. There's the retail trader. There's the more kind of professional day trader. There's institutions. There's people that basically know nothing about Bitcoin, but it's just sort of about Bitcoin. I want to buy one Bitcoin and hold it. So we don't cater to all of those equally.

I think some other exchanges do a better job of providing that basic buy sell experience for the extremely novice user. Our target demographic is more, slightly more experienced and interested in actually doing more trading. So the whole interface and the tools that we provide are all more geared toward that. You may not have read this article, but last summer when I wrote this cover story about initial coin offerings, I had a little sidebar about a trader who used the Cracken platform to turn like $8,500 into $7.5 million in $7.5. six months using your leverage trading. Did you read that?

Yeah, why don't you describe the leverage trading product? Yeah, so margin trading is basically where you borrow money from, from the exchange to make a trade. So let's say you had like $100 on your account, you could borrow another $400 from Cracken to be able to trade with $500 in total. And there's some risk in doing that because if we ever, you know, we have, we have a formula to determine this, but if it ever appears that you might not be able to pay us back what you've borrowed, then we would liquidate your position. So we would sell everything that you had on your account to get the loan back, basically.

So there's some risk that you lose everything when you do this. You know, if you started with 100, you borrowed 400, so you bought a total of 500 Bitcoin. Well, if your total of 500 Bitcoin got down to be $400 worth of Bitcoin, you know, just a 20% drop, which we see in Bitcoin regularly, we would have basically sold the other 400 and then gotten our loan back, but you'd be left with zero. Wow. Yeah, that guy that I just mentioned, there was one moment where he nearly lost everything. And it was super, super close.

And somehow it didn't actually happen. And then, you know, he became a millionaire. But, yes, I definitely see the risk in that. And people at home don't try to do what that guy did. Yeah, definitely know what you're doing before you. you get into it. And if you're going to be trading on margin, babysit your position. And, you know, you really have to be keeping an eye on it. Otherwise, you know, we will liquidate your position if it gets too, too close to the margin level. Yeah. He basically said that he didn't leave the house pretty much

for six months except to, like, go buy a sandwich and that he was just on the computer for like 16 hours a day and then would like sleep at night and and basically just yeah was constantly like doing his trades and the second it hit some target point he would you know do a buyer or seller i don't remember all the mechanisms but it sounded intense obviously panned out for him but like i said don't try this at home people because i think that that probably is more the exception rather than the rule yeah i agree one other thing i wanted to ask you about was your background appears to be in gaming in the arts yeah what were you doing in those fields and how did you come to launch a crypto exchange yes So I've always been a gamer, but since 2001, I had a company selling virtual items and currencies for online games, like World Warcraft Gold, Piaablo Swords, RuneScape Gold, Maple Story.

We did about 20 different games, and our model was basically to buy virtual goods from China and sell them in the West to mostly North American and European clients. And it was like Chinese players that were quote-unquote mining these digital assets? the gold farmers of China, yeah, who basically guys or bots, usually bots, it would be like one guy would be supervising like 100 bots that would be playing the games. They would produce the gold or the items and then sell to us and we would resell them in the West. Interesting. So for people who did not listen to the episode with Brock Pierce, you should check that up because he talks about this business model in depth. And did you know Brock from that time? I did know Brock. Yeah, back before Bitcoin, we were essentially competitors in the same business line back then.

Yeah, it's kind of interesting. I wonder if like that experience is why people like you and Brock sort of saw the potential in Bitcoin early. Do you think so? Oh, yeah, I think so. I mean, when I read about Bitcoin in early 2011, the potential was immediately clear to me. You know, Bitcoin was solving problems that we had been dealing with in payments for a decade. You know, it was chargebacks.

It was transaction fees. It was taking and making international payments. It was having a client base of kids too young to have a credit card, you know, or have any way to pay for something online. So it solved all these problems with payments, but it also solved just real problems that real people were having, you know, like kids not having a way to make payments online. Even people, like legitimate people in a country,

Nigeria, you know, you could legitimately have a Nigerian prince trying to make a credit card payment to you and you'd be like, yeah, right, you know, no way am I taking your credit card payment. But, you know, with Bitcoin, you could. And so people that have historically been ostracized or excluded from the online payments world or the global financial system now had a way to make payments and to engage. And so it was great from that perspective in terms of financial inclusion. So philosophically, I really was excited about Bitcoin as well, apart from just the practical applications. And I know at some point in there, you also worked in the arts. So what exactly happened? You were doing the online gaming business. And then how did

the arts thing fit in along with your transition to Bitcoin? Yeah. So by 2007, the gaming business was doing really well. I had some spare cash. And I had a bunch of friends who were artists. And I They were, you know, the stereotypical starving artists, you know, working out of their kitchens. You know, kind of their art studio had taken over their apartment. And I thought, you know, it would be really cool to give these guys a space to work. And I was familiar with, like, what Andy Warhol had done with the factory and there are other art centers around the country and around the world that had brought artists together in one space. and I thought it would just be great to have a place to give these people, you know, so they could get out of their kitchens and into a studio,

and also to have a collaborative environment, because I thought it would be really cool to see what happens when all these artists get together in the same space and can share ideas. And I was living in Sacramento at the time, and I also wanted to have a really great art gallery in Sacramento that could do shows like what you would see in New York or Los Angeles. and so I found this warehouse. It was about 10,000 square feet, and I did it, and I rented it out.

I had a three-year lease. I figured we'll just see how it goes. And so I put an ad in the paper offering free studio space to artists, and I would get phone calls like, hey, why are you trying to scam artists? You know, this is evil, artists of poor. You shouldn't scam artists. And, you know, eventually I had some people come by and some people that were, well, known in the community, started to vouch for the project. And so then I started to get more artists

coming in. And it was great because it was free space, I could be selective about who I took in. And I really just took people that were really serious and really great artists in the region. And I don't understand the scam part. How could it be a scam if it was free? Yeah, I don't know. I guess they thought like somehow they were going to come over and I was going to steal all their art supplies or, you know, I don't, I really don't know. Right, because they're so valuable. Or maybe I was going to steal their information. Yeah, but yeah, please don't steal from artists. They really don't have anything to give you. Yeah, well, having a lot of writer friends, I can vouch for that as well. But so then keep going with, how did you end up in Bitcoin?

So, Bitcoin, I just randomly read about in, in March of 2011. And, you know, it was, it was obvious to me that this is going to be huge. I was a little bit skeptical at first because we had seen other attempts at making some sort of a non-government currency like e-gold or the Liberty Reserve. And these things had always just had trouble with regulation. And Bitcoin kind of existed outside of that. And so I thought, okay, maybe this thing actually has a real shot. And nothing ever had existed like it before.

for. And, you know, we knew that there was a market for this because we would know that, you know, kids are trading their World of Warcraft gold for, you know, brownies at school and stuff. You know, this is like their version of PayPal. This is where they stored their value and this is where they kept their money. It was like in their World Warcraft account, you know. So there was definitely a class of people that was not being served by the traditional system. And that's just like, you know, when we think of the unbanked, we think of people, in undeveloped countries, you know, in the countryside. But really, like, it's all these kids under the age of 18 in the United States are part of the unbanked.

Interesting. You know, so there's that. But then, yeah, there is everyone else in the rest of the world, everyone without a credit card, you know, or who can't get a bank account because they don't have proof of identity or whatever. So, you know, just having dealt with payments issues in the virtual goods business for the last 10 years, you know, up until 2011, I just thought this has got such huge potential. And I really want to do something to be involved with this. And so then how did you end up launching Krakken? So at first I was dabbling in mining. And we were trying to figure out ways to get gamers to use Bitcoin more.

But I think it was just too early. And mining turned out to be just too much of a headache. And, you know, as we've seen, you know, mining has turned out to be really specialized in kind of a scale business. So we got into the exchange thing. We were entertaining the idea of doing either a wallet or an exchange. And we decided to go with the exchange after an experience that I had with Mount Gawks in June of 2011, which was, you know, they got hacked for what we're told at least was a few thousand Bitcoin back then.

And the exchange went down for about a week. And coincidentally, an old friend that I had from the high school, days. Roger Veer, who's, you know, the owner of Bitcoin.com and a very controversial figure in the community these days. Very. He, I knew him from playing Magic the Gathering with him in high school. Oh, wow. And he happened to be living in Tokyo just a few blocks away from the Mount Gok's office. And he was into Bitcoin at the time as well. And I was trading on Mount Gokx, so I was following the situation closely. And I was talking to Roger. Roger went over to to the Mount Gawks office and discovered that it was just Mark Carpellus and one other person

who he had hired yesterday, you know, who were there, like these two guys, basically one guy, you know, who had been servicing, like, the entire Bitcoin community. And he had like 60,000 users at the time. And what, do you know, what the trading volume or the dollar amount or anything at that time? I don't remember what the amounts were. The Bitcoin volumes were insane, though, right? They were like hundreds of thousands of Bitcoin a day because of Bitcoin was like,

dollar. So Bitcoin wise, it was huge, but dollar wise, I don't think it, you know, it wasn't like the numbers were seeing today, like billions of dollars traded. So Roger found like two people in the office and offered his help to Mark and Mark took it and, you know, told Mark as well that I would be willing to come out and help. And fortunately, the virtual goods business at the time was basically on autopilot. And I was able just to take off the next morning and go to Tokyo. And so they invited me out to help and I spent about a week and a half in the office at Mount

Cox in Tokyo. Just helping them get things back together. Like I wrote the press release for the incident, helped them hire a bunch of people, helped them build like a support team to answer all the tickets. And so by the end of that experience, you know, I came back to the states thinking there's got to be another exchange. We can't have the whole ecosystem dependent on this one exchange because, when Mount Cox was down, everything was down. I mean, we had no price discovery.

Merchants could not convert their Bitcoin into dollars, which was important for them because they were paying their bills in dollars. So I thought, you know, for Bitcoin to really go mainstream, we're going to need to see in exchange, you know, more redundancy in exchanges broadly, but in exchange it's really doing things the right way, professionally putting security first, taking a very careful and cautious approach.

and working with the regulators to build bridges to the traditional financial system. And so I talked to my CTO at Lute, which was the virtual goods business, and asked him if he'd be willing to do a crypto exchange. And he was all on board with it. He had been himself writing bots for markets. And he's always been interested in trading and money and also a big believer in Bitcoin. And if not for somebody like him, I wouldn't have even thought to do it because the guy's the best hacker I've ever met, you know, the best security mind that I've ever met. And I knew that that was, you know, just coming out of the Mount Gawkes experience, security was something that we were going to have to put absolutely first and not compromise on.

And he was definitely the guy to do it. So I wouldn't have imagined doing it without somebody like that because that was the first thing that we would have to get right. When did you launch Cracken? So we launched the exchange actually in in beta in May of 2013 and then with real money trading in September of 2013. Okay. Well, I would have to say if you were mulling between wallets and exchanges that you chose the better option. Yeah, it seems so. The more lucrative one at least.

So you brought up regulation a few times and I wanted to talk about that because you recently refused to answer a request from the former now or then New York Attorney General Eric Schneiderman. which was a request to answer a bunch of questions about your business, about the crypto exchange business. What did you respond? And why did you decide to respond that way? Yeah, I saw it as more of a demand than a request. I mean, it came with a deadline of two weeks to produce this like 40 point questionnaire. And, you know, I felt like my first reaction when getting that was like, this is a total slap in the face. Like, those are the words in my mind. Turns out this guy's. actually slapping people in the face in a spare time, right? I mean, I, I, or so they say.

Yeah, so they say, allegedly. You know, when it, it came to me, I was just offended by it because we had put all this effort into New York years ago. And the, the bit license got like 3,000 plus comments on it. And what we got out of it was a disaster. And so we left New York, and we've had no business in New York since then. and this request from Schneiderman, it came out of nowhere. You know, when most regulators or government want to know something, they'll reach out privately.

They'll try to have a conversation. But this just came out of nowhere. We'd never heard from Schneiderman before. And it seems like he didn't even talk to the DFS before sending this out. It was like a total publicity stunt. You know, rather than going to get help from your own government, you're coming to, like, put this burden on all the exchanges to put. produce this. And we all produced most of this back before the bit license emerged. So

New York has this information. A lot of it's on the website and a lot of it's private. And, you know, frankly, the government doesn't have a good track record of keeping information private, you know. But wasn't that information initially collected like in 2013 or 2014 or something? Yeah. By the DFS. I mean, now it's 2018. Yeah. So some of it's been, has been refreshed. But, you know, the what does the AG have to do with any of this isn't isn't the DFS responsible for this you know and why do you need to make this public announcement out of it you know it just seemed like a publicity stunt that was devoid of any real concern because he had just gone about it I think the wrong way you know he could have had these conversations separately but to to make this public announcement like

he's the new law in town and he's going to hold everybody to task. It just rubbed me the wrong way. It came off as bullying, and I just had this smell that this guy is like a bully, you know, and I probably wouldn't have said anything, but for the other exchanges, coming forward and saying things like,

oh, this is great, we're happy to work with regulators, and, you know, we're going to respond to this, and I just felt like this is the wrong kind of attitude to have. I mean, we have to put our foot down somewhere. We can't just bend over backwards every time any random regulator in the world, you know, in this case not even a regulator, but just like a law enforcement official, comes forward and demands things, you know, on a deadline, especially from places where we don't even have service. So, you know, who is this guy? And, you know, I can't stand bullies and I can't stand hypocrites. And, you know, this guy turns out to be both. So I'm glad that I gave him the response that I did. And have you written off New York completely as a place where you'll do business? We would be willing to come back to New York. It would take probably a dramatic change to the bit license to do it. You know, right now, the United States altogether is only 20% of our business. So, you know, you can imagine what piece of that New York is and how significant we think New York is to our global business. So it's incremental revenue at this point. You know, and the question for us is,

with limited resources, should we put them into New York or should we put them somewhere else? You know, we have, you know, prime ministers all over the world asking for meetings to help them craft regulation in their countries. Why should we waste time? You know, we already wasted so much time on New York. It seems like a lost cause. But do you think that your response might have heard the chances that the bit license would be revised in a way that's favorable to your business? No, I don't think so. You know, hopefully, hopefully it sends the message that, you know, we're not ready to to give in to this bit license and that something needs to be done. And I think some people in New York have recognized that,

that there needs to be a change if New York wants to see more businesses come in. Did the Attorney General's office respond to you? No, there was no official response. There was some response, like unofficially something about legitimate businesses would love to provide this information or something along those lines, you know, as if we don't have anything better to do. you decided to exit Japan as well. And I read that you were saying that your market share there combined with the increased regulation,

where are the reasons that you decided to leave? But when you couple that, along with your response to Eric Schneiderman, do you feel like that may indicate to some people that Cracken is not welcoming a regulation? I guess it may give that impression. I think we explained that in the blog post. But we worked quite extensive. with the regulator in Japan to actually to craft that legislation and to to develop the virtual currency act. So, you know, we spent significant resources into basically building that whole industry in Japan.

You know, we're the oldest surviving exchange in Japan. And we had every intention to go through with completing the process. For a couple of reasons, we didn't get entirely through it. you know, we, I think, maybe focus too much on regulation and not enough on actually developing the business in Japan, you know, so we didn't, we didn't spend anything on marketing. You know, some of our domestic Japanese competitors did spend quite a bit more on marketing seemed to gain more traction. Meanwhile, we were distracted with the regulation side of things.

So, you know, I think what ultimately turned out to be a good thing for Japan was not necessarily a good thing for us. And in getting through the process, our global business, we were the only exchange to apply for the license that had a global business. These were all Japanese exchanges. And so the complexity of our global business turned out to be a big problem

because Japan felt like to understand really the risk of our Japanese business, they had to really understand the whole picture, like the parent company and the other subsidiaries in the organization and how everything all worked together. And that was

a substantially broader and more complicated task than just like auditing the Japanese entity. You know, it was going to be basically many audits on many entities and a lot, a lot more work. And it became even more work after one of the largest Japanese exchanges got hacked for about $500 million. So we were, you know, most of the way through the process when that happened, but that also dramatically increased the scrutiny on us.

and the FSA felt like before they gave away any more licenses, they were going to have to go even deeper than they already were. And so it just became this kind of moving goalpost situation where we felt like we had done so much work already, and now suddenly we're being asked to do even more work, and we have this global business, and we just were not prepared to, you know, there was some deadline to get all this stuff done as well,

and we just weren't prepared to divert all these resources to getting this done at that time. So I think what we'll do is, so we took a step back, you know, we got out of the process of the filing, and we decided, okay, we're just going to, we're going to re-approach this on our own timeline. We'll get out of Japan for now. You know, we're not giving up much because we didn't have much market share there. We'll take our time and work on doing all these things they want us to do, which is, you know, like audits on all these various entities. And, you know, it's not easy to get an audit in this industry. So we'll just re-approach it.

You know, we'll probably take the next six to 12 months and work through the process of getting everything together that they want it. And then we'll go back to them and see if there's still something to do in Japan. Oh, interesting. Okay. So you might reenter that market. Yeah. When I combine everything with your letter to Eric Schneiderman, a little bit the Japanese thing. I mean, it sounds like that's a more nuanced picture that involves business considerations more.

But if I think about all those things, and then last night, it was announced that you and Cracken are donating $1 million to Coin Center and also matching additional donations for the rest of the month. Putting all that together, it almost seems like you have some statement you want to make a regulation. You can tell me if you don't. But if you do, what is that statement? Sure. Actually, we've made that commitment to Coin Center even before the Schneiderman thing came up. Okay. I just announced last night, we've always been, you know, from day one, we knew that we had to engage with regulations.

later. So it's not something we're trying to turn away from at all. We've spent significant resources on regulation and trying to understand how to comply with the law, not just in the U.S., but all over the world. And we spent millions of dollars on legal counsel. So certainly not something we're trying to avoid. The Coin Center donation, I think, is a reflection of just all the great work that Coin Center is doing. You know, I'm a lot. I'm just all the time, always impressed by the work that they do. I'm always able to point regulators to work that Coin Center has done. They're thinking on the topic of cryptocurrency and the law around cryptocurrency is just work solid always.

And so, you know, having run a nonprofit myself, I know that you tend to waste a lot of time trying to raise money and not actually working on the objective, you know, the actual. thing that you're trying to do. And so, you know, we were fortunate to have a great year last year and fortunate to finally to be in a position to donate back to Coin Center. You know, they've given so much to the community and to the industry. I'm just proud to be able to support them even further. And I hope that they can do even more great work with the money. And so you don't have a larger statement about regulation?

I hope that that we're, if the regulators listen to guys like Coin Center, because I think they have a very fair and impartial approach to what should be done. You know, they're kind of defending the technology and defending consumers from the perspective of providing choice in technology and, you know, making sure that this technology doesn't somehow get suffocated before it really has a chance to flourish. So, you know, my statement to the regulators, well, I have a lot of statements. I make to regulators, but you know, I think our industry is global, and

these regulators tend to look locally, and they tend to enforce locally. And I think that governments need to look at crypto more from a, you know, it should really be looked at from like a national security perspective

because it's more than just protecting people from fraud. It's it's a technology like the internet. What would it mean to to dramatically limit the way that the internet was used? It could mean that your country

joins the rest of the world and some kind of economic revolution or it could mean you're stuck in the dark ages. So I think we need to be really careful about how we regulate crypto and make sure that we don't go too far to exclude our country from participation in this great new technology.

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19 plus, Ontario only. If you have questions or concerns about your gambling or the gambling of someone close to you, please go to conicsonterio.ca. Local news is in decline across Canada, and this is bad news for all of us. With less local news, noise, rumors, and misinformation fill the void, and it gets harder to separate truth from fiction. That's why CBC News is putting more journalists in more places across Canada,

reporting on the ground from where you live, telling the stories that matter to all of us, because local news is big news. Choose news, not noise. CBC News. Now it's time to recognize someone in crypto, sponsored by Appreciate. Today, we are recognizing Mike Saul, co-founder of Unboxed research, for advancing our understanding of crypto asset valuations.

In a recent article on Medium, Mike built on the work of John Feffer, Chris Berniske, Vitalik Bouteran, and Alex Evans, and added interesting layers, including timing of transactions into his calculations. Thank you, Mike, for sharing your knowledge with the rest of us. Appreciate Welcome's Unchained listeners to nominate a friend to get props on a future episode of Unchained. Just go to presheat.org slash recognize. That's pre-sheet.org slash recognize. I'm speaking with Jesse Powell of Cracken. What do you think the ideal crypto regulation looks like? Well, I think first rule is do no harm. You know, I think that

there's already a lot of regulation out there that covers crypto. I think the regulator really just needs to take care. You know, it depends on what are the public policy goals? And are your objectives already covered by existing law in some way? Or does existing law in some way impede upon the development of crypto? And, you know, if there's nothing there already in the way, I think just taking some time to wait and see how things develop, I think is the best way to go. if you can't wait and see how things develop, I think creating some sort of environment where

you can keep an eye on things like a sandbox type thing where you can have companies register and you can have a dialogue with them and you can keep an eye on them, I think that works really well. You just don't want to jump the gun and go too far because it's really hard to predict how things are going to develop. And I know you work in multiple jurisdictions Like, for instance, I think Europe is your biggest market. Is that correct? Yeah, that's right. So are there any particular regulators that you think are doing an especially good job?

You know, Europe so far has been pretty hands-off with the regulation. So I wouldn't point to anyone in particular, you know, in Europe that has, like, the perfect crypto-regulation. So far, there hasn't really been any crypto-regulation in Europe. It seems like Malta is making a play to be a crypto player. But, yeah, I wouldn't say, you know, I think. the VC Act in Japan is really the first decent example of like a comprehensive regulation. The one that you helped. Yeah. Okay. You're also the only exchange, I believe, that offers leverage trading of crypto-fiat pairs, at least here in the U.S. market. Is that correct?

That may be possible. There are some other exchanges that offer it. I don't know if they're servicing the U.S. Okay. What are the challenges in offering that? And how do you make it happen? Technically, it's a really difficult thing to do because you have to keep track of these balances and the amount of credit kind of allocated at all times and what the liquidation points are. So it significantly complicates the technology. You were taking a task for your servers being offline for two days in January for a system upgrade. And you also suffered an Ethereum flash crash due to a DDoS attack. What mistakes did you guys make that allowed those events to have? been? Yeah, so the Ethereum flash crash was not actually due to a DDoS attack. It's actually not

entirely clear that there was a real DDoS attack. It's hard to know whenever you have a service outage because of a tremendous amount of traffic. It's kind of on the scale of things. Like you don't know how much of it at least immediately is real legitimate traffic and how much of it is denial of service traffic. So around that flash crash, we've looked at all the records extensively. We've tried to determine whether somebody, it seems like somebody was attempting to intentionally cause that to happen, and we couldn't find any evidence of it. But what it looks like was just naturally, there were a lot of people that were very long ether. So they had a lot of margin trades open.

They borrowed a lot of of currency to buy ether. And then when the price of ether started coming down, there were a couple cells just in a row that kind of drove the price down to a point where you had one liquidation

and that liquidation, you know, when we liquidate we sell. So that sold. That drove the price down a little more. That caused another liquidation, which caused another and so you have this cascade of liquidations that ultimately drove the price down. a lot. And that is natural market behavior.

I mean, everything worked as it should have. And those are just that is one of the big risks in trading on margin is that you can be caught up in one of these cascading liquidations. And you might be forced to sell your position at a very adverse

price. Yeah, the same thing happened on G-Dax. And in fact, they, you know, halted their margin trading and haven't even brought it back since in general, how do you keep the exchange running 24-7-365? And how do you prevent further situations like these ones we just talked about? Yeah, so, I mean, with regard to the outage and the 24-7-365 operation,

is something that traditional markets have not dealt with, right? They're operating 9 to 5 Monday through Friday. We've got to keep it going continuously, 24-7-365. It's very difficult to do that. You know, sometimes you just need to have downtime. in the case of our two days, we basically were coming off of a many months of really having a poorly performing service at peak times, which was a really bad user experience.

And we could have done more work to ahead of time to better prepare for the transition over two. So we replaced the old trading engine with a new trading engine. That required a significant amount of downtime while we kind of switched over. and tested things before we put it back online. And in testing, we just discovered that there were some flaws in the production environment that we hadn't discovered in the testing environment. And the two environments were not identical. They were extremely close, but not entirely identical.

And we could have, you know, the really right way to do this if you have an unlimited amount of time and resources is just to have your test environments just be identical to your production environments in every way. and you'll have like many sets of hardware in your system replicated many times to be able to do this. But we didn't have all that set up. And so we could have set all that up, but that would have delayed by several more months the upgrade. And so we thought from testing, you know, we're like 99% sure this is going to work. But when we got it into production, we started to find things. And then it, you know, it was like one of the strings you like, you pull at it and it starts to like, you just.

It revealed kind of more, more, like a deeper problem. And it took a long time, really, to, like, actually get to what the source of the problem was. And so we just couldn't bring the exchange back online. Rolling back would have been just we really needed to figure that out in production. There wasn't a way to really roll back to the old system and then, like, work out the problem in the test environment further. So we kind of just had to stick with it. We didn't know how long it was going to take. We expected it was going to take a few hours to do the transition.

It ended up taking two days, unfortunately. We definitely didn't expect it. We certainly learned a lot from it. But now that that's done, it immediately solved the problem that people had been having for months. And so I think if you ask anybody, they would say it was totally worth it to have, you know, now a fully functioning exchange, rather than kind of a crippled exchange again for months while we try to work out. this perfect test environment. And if you have to do that type of upgrade again, then are you going to build a production,

I mean, sorry, a test environment, exactly the same as the production environment? Yeah, now we have the time to do that. That's in process now. So any other major upgrade like that would definitely be tested in an environment that's basically identical to the production environment. Traders on your site don't receive 1099Ks that help them calculate their capital gains tax. Do you have a plan to offer such reports or plans to help customers in some other way with their capital gains tax preparation?

Yeah, we do have some plans in the works for providing some tax tools for people. We don't offer anything at the moment. You can export your history. There are a couple other services that do provide going to log, parsing, and tax support for Bitcoin is quite complicated, especially if you're doing margin trading. And especially if you are buying and selling Bitcoin outside of a single exchange, you have to identify what your cost basis is before you transferred it in

or what you did with it after you transferred it out so you know just the picture from one exchange may not be at all complete you really need to put together all the information from everywhere and I think that some services that provide support for all the exchanges together have a better opportunity to really provide kind of the comprehensive report that people really need

yeah and for listeners who want to to know more about this. I covered all things tax and crypto back in January, I think it was. And they indeed did say that some of these reports are misleading from some of the exchanges because you do really need to calculate it from where you bought it. So if you bought it on a different exchange, then you would need to figure out what your tax basis is from that point. You've only raised $6.5 million compared to Coinbase's $200 million. How does your strategy differ in a way that allows you to not need to raise more money? Actually, we raised more like 12.

We were probably looking at Crunch Base or something. I did. Okay. Okay. Thanks for the correction. Yeah. Yeah, we raised about 12. So we did a series A.

It was about $5 million. And then we did another round later privately. It was about another $6 million. So, you know, I guess we've been more efficient with capital. You know, coin bases explored a lot of things. You know, they're doing a lot of stuff. But, you know, they've also, there's, a trade-off for that too, right? I mean, they were they were able to continue building through

kind of the downturn in the market and that's because they had all this capital to do it. And so, you know, that has its advantages in just being able to being well positioned and being strong to be able to handle like a giant wave of growth. And, you know, maybe they might be more prepared than we were, you know, say, you know, because like the downtime is an example of this, you know, they might have had the resources to really develop all the test suite and all the stuff properly, whereas there was a period of time where we laid off half the company because things were so tight and because the market was barished. And we were just kind of in this like 2014, 2015, we were just kind of flatlined.

You know, the market wasn't growing. And that was when we really scaled back. And we were just kind of like in survival mode for like two years. Well, had we raised $100 million, we would have been able to continue to build throughout that time really toward the future, you know, instead of. being kind of behind and having to try to catch up when the next wave hit.

So, you know, I think we're very strongly positioned today, but, you know, there's something to be said just for having a giant war chest to be able to build through a downturn and not have to make cuts. Does that mean that you're thinking about taking on more funding? No, actually, I mean, we're doing so well now

that there would be no reason to take on funding unless there were some massive like $500 million acquisition or something like that that that we wanted to do. What are your revenues? I'm not willing to disclose that, but they're good. Intercontinental exchange is working on a platform to trade Bitcoin and Goldman is also working on opening up a trading operation, although they're apparently not going to be trading crypto assets directly at first. Do you worry about these incumbents from the traditional financial

services sector entering the space, or do you not consider them competitive with you? I think if those guys get in, I would consider it a massive win for the entire industry and ecosystem. I think they will open up crypto to even more users and bring it even further toward the mainstream. So generally, I think that's fantastic. As a business, you know, I don't really see it as direct competition. You know, they're going to increase the size of the pool by bringing more people in.

And I don't think that they're going to be as agile as we are. And, you know, I don't think they're going to be able to evaluate and add tokens as fast as we can. I don't think they're going to be as understanding of what the market really wants. You know, we've got so much institutional knowledge. You know, we've been in the space for so long now. You know, the company is nearly seven years old. I think we really understand what people in the crypto space want. And so, you know, I think, you know, I think.

we're better able to provide service to them. And so I think we've got a strong competitive edge there. You know, I think I think, you know, if NASDAQ starts trading crypto, that may be the first stop for new people coming in. But I think as they develop more interest in understanding that maybe they'll come over to us for more kind of specialized services. And you recently hired Steve Hunt, the former CTO of Jump Trading, which is a high-speed training firm.

And obviously, you know, as I mentioned, we're seeing this converging. of traditional Wall Street and crypto. So how do you think that will play out? What direction would you like to take the company in the next few years as the ecosystem evolves? Yeah, so actually we've hired quite a few people out of traditional financial firms lately, and we're seeing even more interest coming in, like a lot of people coming in from traditional finance and Wall Street who want to work at Cracken.

Just reaching out to you cold? Yeah. Oh, wow. Yeah. I mean, it's really surprising. It's completely the, you know, completely the, opposite of where we were like five years ago. So I think it's really exciting. And I think we'll see more of that. And I think that, you know, this is maybe another reason why the traditional

players may have a harder time getting into the space because, you know, their best and brightest are leaving to go join crypto companies now. So, you know, I think it's great for the crypto companies to have, you know, what traditionally had been, you know, I don't come from the world of financial services, and neither does my co-founder. And, you know, having those people with that institutional experience come into Cracken and teach us everything that they know from that world is really great. I think it's going to help us professionalize and, you know, help further build those bridges to the mainstream. And so when you think about, like, how this is going to develop with both sides kind of coming together, how would you like to position Cracken?

I hope to continue on with the original mission, which was to really be a professional compliant service that people can look to and trust and is seen just as capable as any of the traditional financial institutions out there that people trust and can rely on for the crypto exchange. All right. Last question, which is sort of like tips for listeners. I know that you think security is a big focus, and you have also written a number of blog posts that talk about how people should secure their coins. What tips would you give people for securing their crypto?

Yeah, well, you know, the hack that everyone is getting hit with these days is the mobile phone hijacking. And we have a blog post about this and how to secure your mobile phone as well. But, you know, we see mobile phone numbers are stolen and that's used to get access to email accounts. and the email account needs to get access to everything else. So that I'd say is the prime problem. I'd say like use two-factor on everything. Don't use SMS for two-factor. Try to use a UBKee or Google Authenticator.

Try to keep your involvement with crypto private as much as you can. You know, don't advertise all over your LinkedIn profile if it's not necessary, you know, that you're into crypto because the hackers are, they're scouring LinkedIn and they're scouring Twitter, and this is how they build their target list. for people to go after. Keep as much personal information about yourself and your family off the internet as possible. I know that this has come to light more recently with all the Facebook stuff, but really, you know, most people have just revealed everything about themselves online.

And, you know, service providers are still very far behind in how they handle security. You know, they'll ask you questions about your personal life that are available to the public on Facebook. you know, like, what's your mother's made a name? Well, I can just go to your Facebook account and see what your mom's name is, you know, and then answer that question. And that's like a security question, quote unquote, you know. So, quote unquote. People, I think, need to just take more care of their privacy online. And we're seeing how much this really matters now with, with how the data is being used against people. Yeah. It amazes me that you said that the most common attack factor is still the phone hijacking one because I wrote the article about it too and that came out like a year and a half ago.

So it's kind of sad that I think people are they haven't, I think they haven't taken it seriously. You know, it's something like if it hasn't happened to you or someone you immediately know, you just don't, you think like, oh, that's not going to happen to me. I'm not a target or whatever, you know, but they have their list and they go down it. And in some cases, people even have called their phone company to ask them to put security codes on it, but you call him 100 times and you just get that one agent. You know, there's most, most of the time there's not like a technical impediment to doing this. It's just like the agent is supposed to follow the notes on the account.

And one in a hundred times, you get that agent that just doesn't read the note and he does the change and then you're screwed. Yeah. Yeah, this happened to Ryan Selkis last week. Yeah. We both surmised that maybe it has to do with his appearance on my show where we criticized XRP, but who knows, it's not clear. But, yeah, his phone number was stolen, and then his Twitter was hacked. But he got everything back as far as I understand.

But you're right, that, you know, they impersonated him and they probably tried a bunch of times, but it was somebody in, like, a foreign country that went into a store. Yeah, we've seen, yeah, people showing up with fake IDs to stores as well. So it's not just calling online. Wow. Okay. It's very brazen. All right.

Well, on that sort of depressing note, it's been great having you on the show. can people get in touch with you or learn more about Cracken. Thanks for having me. You can follow me on Twitter at Jess P-P-O-W. And they can go to Cracken.com or blog.cran.com for more information about the company. Great. Well, thanks for coming on Unchained. Yeah, thanks for having me. Thanks so much for joining us today. To learn more about Jesse, check out the show notes inside your podcast episode. New episodes of Unchained come out every Tuesday. If you haven't already, rate review and subscribe on Apple Podcasts.

If you like this episode, share it with your friends on Facebook, Twitter, or LinkedIn. Unchained is produced by me, Laura Shin, with help from Elaine Selby, fractal recording Jenny Josephson, Rahul Singareti, and Daniel Ness. Thanks for listening.