Unchained - Robinhood CEO Vlad Tenev and Paxos CEO Charles Cascarilla on How to Avoid Another GameStop - Ep.236

Episode Date: May 11, 2021

In this discussion I moderated for Paxos, Robinhood CEO Vlad Tenev and Paxos CEO Charles Cascarilla discuss GameStop, the broken traditional financial infrastructure, and how blockchain technology may change the future of settlements. Show highlights:   why Robinhood stopped trading on GameStop and AMC stock earlier this year what both Charles and Vlad think the feasibility of T+0 settlements versus Citadel’s and the DTCC’s aim of T+1 settlements  how the GameStop scenario would have been different in a T+0 environment  what it would look like if certain markets used T+0 settlements while others still settled on T+1 why Robinhood decided to add crypto back in early 2018 how Robinhood’s crypto operations work on the back end why Robinhood does not allow users to move crypto off-platform whether securities trading or crypto will be a larger portion of both Paxos’ and Robinhood’s business model what Paxos and Robinhood have planned for the near future   Thank you to our sponsors! E&Y: https://ey.com/globalblockchainsummit  Crypto.com: https://crypto.onelink.me/J9Lg/unchainedcardearnfeb2   Kyber Network: Dmm.exchange     Episode Links:   People:   Charles Cascarilla   Linkedin https://www.linkedin.com/in/charlescascarilla/  Coindesk Profile https://www.coindesk.com/charles-cascarilla-most-influential-2020  Previous interview with Laura https://unchainedpodcast.com/chad-cascarilla-on-paxoss-partnership-with-paypal/  Blog post on the GameStop saga  https://www.paxos.com/what-lehman-brothers-gamestop-and-the-next-financial-crisis-have-in-common/    Vlad Tenev   Twitter https://twitter.com/vladtenev  CNN Article https://www.cnn.com/2021/02/01/investing/robinhood-gamestop-vlad-tenev/index.html  Tweet Thread on T+2 https://twitter.com/vladtenev/status/1356687248746455041    Companies: Paxos Twitter https://twitter.com/PaxosGlobal   Paxos Settlement Service https://www.paxos.com/securities/ https://www.reuters.com/article/us-crypto-currencies-paxos/paxos-to-launch-settlement-of-u-s-listed-equities-after-secs-no-action-letter-idUSKBN1X727M   Wall Street Journal write-up https://www.wsj.com/articles/blockchain-makes-inroads-into-the-stock-markets-1-trillion-plumbing-system-11573131600    Robinhood   Twitter https://twitter.com/RobinhoodApp Robinhood Crypto https://robinhood.com/us/en/about/crypto/ Public offering https://blog.robinhood.com/news/2021/3/23/robinhood-markets-inc-confidentially-submits-draft-registration-statement    Miscellaneous Links   Citadel on settlements https://www.theblockcrypto.com/post/95326/citadel-robinhood-shorter-settlements-congress DTCC on settlements https://www.dtcc.com/news/2021/february/24/dtcc-proposes-approach-to-shortening-us-settlement-cycle-to-t1-within-two-years    Other:   Caitlin Long Unchained episode: https://unchainedpodcast.com/caitlin-long-why-avanti-will-be-a-new-kind-of-crypto-bank/    Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto six years ago, and as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time. Sign up for my newsletter, where I will soon be making an announcement about pre-orders for my book, The Cryptopians, Idealism, Greed, Lies, and the making of the first big cryptocurrency craze. head to Unchangedpodcast.com and the sign-up for the email newsletter is right on the homepage. Today's episode is a discussion I moderated for Paxos between Vlad Tenive, CEO of Robin Hood, and Charles Cascarilla, CEO of Paxos. The discussion was titled, Why Traditional Financial Infrastructure is Broken and How We Can Fix It. It was an incredibly fun and substantive discussion on one of the biggest news stories of the year. Why the whole GameStop saga played out as it did, particularly for Robin Hood, and how blockchain technology offers hope that it could be prevented in the future. We also taught crypto adoption and get into some of the intricacies of crypto trading on the Robin Hood platform.

Plus, we take a peek at what might be coming down the pike in terms of other traditional financial players getting into crypto. I hope you enjoy this fascinating discussion. Now, on to the show. Khyber's dynamic market maker, DMMM, is the first defy protocol designed to adapt to market conditions, to optimize fees, maximize returns, and enable extremely high capital efficiency for liquidity providers. Today's episode is sponsored by EY blockchain. Ernst & Young is committed to supporting integration of the world's business ecosystems

on the public Ethereum blockchain. The crypto.com app lets you buy, earn, and spend crypto, all in one place. Earn up to 8.5% interest on your Bitcoin and 14% interest on your stable coins. paid weekly. Download the crypto.com app and get $25 with the code Laura. The link is in the description. Thanks to everyone for joining our panel, why traditional financial infrastructure is broken and how we can fix it. It's been quite the hot topic for this year here to discuss our Vlad Tenev co-founder and CEO of Robin Hood and Charles Cascarilla, co-founder and CEO of Paxos. Welcome, Vlad and Chad. Thank you. Hi, Laura. Good to see you both. Yeah, good to see you.

both too. So before we begin, I would want to get a read on the audience, and we have a poll that will kind of help us see what your background is. So for the attendees, why don't you select which of these options best applies to you and your professional background? The question is, what type of company do you work for? And the options are a fintech, an established financial services company or bank, a tech company or non-financial services tech. And then the other two options are a crypto company. And lastly, just other. So if you can make your selection now, we will pull up the results. And okay, so about half come from traditional financial services or banks. And then FinTech and other compete for the second spot at 18%.

And surprisingly, actually, the smallest percentage, well, the smallest percentage has come from crypto companies and then tech companies that are not financial services, which is really interesting. Okay, so it seems like a fair number of you will have pretty good familiarity actually with some of the meteor and, I guess, more detail-oriented aspects of this discussion. So why don't we just start with the riveting financial events earlier this year during the Game Stock Saga, which really shined a light on how the back office of capital markets really works. And at that time, as we may all recall, this was big news. Robin Hood and some other platforms did stop purchases of certain stocks due to how this decades-old financial plumbing works. Vlad, can you walk us through what happened that caused Robin Hood to stop its.

customers from buying stock in GameStop and some other of the Wall Street bets companies, just as that frenzy was reaching its height. Yeah, absolutely. And do you notice a lot more gray hairs since the last time we had a conversation? You've really been through the ringer at the last few months, I would say. Yeah, so I'd say it all started back in 2008. So 2008, there was a global financial crisis. And in the aftermath of that, there was some legislation passed. A lot of people in the audience might be familiar with it. It's called Dodd-Frank. And the aim of this legislation was to prevent some of the kind of systemic problems that led to the financial crisis from reoccurring in the future. So among several things that Dogfrank did, and I've poured over some of this documentation,

so the events of the last year gave me an opportunity to do that, whereas perhaps I wouldn't have gotten very acquainted with it. But part of it actually specified clearing house collateral deposit requirements and some ideas and some sort of rules behind how those should be calculated. with the idea being that to contain systemic risk, clearing house deposit requirements should be beefed up, and we should make sure that all of our financial institutions have capital around to deal with unforeseen circumstances. And part of what was specified was something called the NSCC clearing deposit requirement, which I won't get into the calculation, but essentially, It uses a value at risk model, which has a tendency to increase the deposit requirements in times of extra volatility. So you saw this happen in March of 2020, a little bit over a year ago, for example. And you saw it happen also in January of this year, but for very, very different reasons. I think March of 2020 was sort of a systemic market shock that affected the brand.

broad markets and you saw the major indices suffered dislocations. You know, 2021 was something that we really hadn't seen before where essentially a bunch of people on social media, Wall Street bets, Reddit had concentrated activity in a relatively small number of names. And you saw a lot of unidirectional buying activity that also had. the unfortunate side effect of spiking deposit requirements industry-wide. And Robin Hood, Robin Hood obviously had to contend with that. And we, Robin Hood Securities, which is our clearing broker subject to these, made the call to restrict opening positions in some of the securities

that were driving up the high VAR deposit requirement. Those GameStop being one of them, but also AMC actually had an even larger contribution. So I think we can argue about whether the system worked as intended. It's hard to suppose the counterfactual of what would have happened in the case that, you know, Dodd-Frank wasn't written the way it was or the var charge wasn't codified in this way. But I think what's clear from my standpoint, and I'd, I believe, I'm sure Chad agrees with me, is if you look to the future and ask yourself, you know, what's the ideal situation for the financial system we're in?

You look at the settlement cycle, you know, it was T plus five. So it took five days to settle a trade after the trade was actually matched back in the 90s to the 2000s. It took about 20 years to get down to T plus three. Recently, it went to T plus two. And so you kind of look at what the plateau. ideal of settlement is. And you have to assume it's going to be instantaneous. That's just the only way technology and progress is going to lead us. And there's a lot of things that will happen as a result of that. One of them is it would make deposit requirements obsolete to a certain

extent. Because if things are actually settling in real time and you have these transactions happen instantaneously, then there's actually no need to control some of these systemic fail-to-deliver or settlement risks because those risks would basically cease to exist. So that's why I became interested in the topic of settlement. Chad probably became interested in it for slightly different reasons, probably having to do with just general progress and innovation. but I think we're very aligned with that long-term kind of platonic ideal. Yeah, and so, Chad, do you want to elaborate on that?

And I was curious if you had the same view on what the core issues were or if you wanted to talk a little bit more about what you saw as kind of the root of the problem here. I've got touched on a lot of good points. What I thought was really interesting about the GameStop issue is that it did not happen during a financial crisis. It didn't happen during a pandemic. It didn't happen during any type of real exogenous event. So, you know, when we had the last really big systemic crisis, Lehman Brothers failed. So everyone said, oh, well, you know, Lehman Brothers failed.

Of course, there was problems in the settlement system. But here, nobody failed. There wasn't even, you know, fear of a failure, like with the pandemic. This was just, you know, a lot of trading that happened. And it really exposed the plumbing of the system for what it is, a very antiquated and outdated system. And by the way, it was a really good system when it first started. I think it solved a lot of problems. It moved us off of paper.

And it moved us to a way of creating liquidity. But it did it in a way that didn't create true chain of title, true understanding of who owns what, when. And so that means that you have intermediaries that are stepping in and guaranteeing trades because moving from paper to electronic couldn't happen in as elegant a way as we could do now with modern technology. And we've, I think, reached the end of this old way of operating. That's what GameStop showed us. We've now reached the logical endpoint here, and it's time to upgrade the system. Just like we need to upgrade our roads and our bridges and our airports.

You know, we have old infrastructure all over the place. One key place we have old infrastructure is in the financial markets. And that really shouldn't exist anymore. And frankly, we know how to fix this, just like we know how to fix the problems with our bridges and tunnels. You just have to do it. And what got me interested was going back to the financial crisis and seeing how the plumbing exacerbated the problems in the system. And that's why when I came across blockchain, I said, wow, here is a way to solve these problems and upgrade and re-platform the financial system. And what I just never expected is that it would be so obvious that it needs to be done that you could have a systemic problem.

caused by the plumbing, and there would be nothing else that was going on. And that's what GameStop showed. And I think Vlad is right. In the limit, we're going to get to instantaneous settlement. But you don't have to necessarily get the instantaneous settlement to have huge leaps forward. And you don't have to stop at T1. You could be a T0 settling at the end of the day or batches intraday because, you know, it's hard for people to upgrade their treasury systems to manage real time.

that's going to not be something easy to get to. But I think Vlad is right. Like, inevitably, you'll get to that point. Technology will enable it. The systems will be upgraded. Enough participants will be able to do it that it will get there. But there's so many wins to have. And I'd love to hear, like, what Vlad thinks.

You know, if you could settle T-0 today with a market maker, how much would that impact your business? How helpful would that be for you guys? Because I think that is a key place that we can. can get to. And that's not far-fetched at all, even though it might feel like it because we're at T-2. We've done some T-0 trades. Our system can handle it. Frankly, it can handle even faster than just doing a T-0 trade at the end of the day. But you know, you want to have a product journey that we're all going on. But that journey can't take, you know, half a decade to happen or a whole decade to happen. Each time you want to, you know, shift things by a day, it needs to happen a lot

faster than that. And I think that there's ways to do it and still be backward compatible. That's really what we're trying to do. Well, yeah. So we're going to just dive right into all this T0 discussion. But first, I want to get a bead on the audience's knowledge of equity settlement infrastructure. So here we have the second poll. Again, the audience members should choose. which best applies to you. The first option is when I read T plus zero, I assume someone misspelled the word two. Second one, I've heard of T plus zero and T plus three

in reference to stock trades but don't know what they mean. The third option is I am familiar with how stock trades are settled and why T plus three is relevant. So if you can select which applies to you, then we can kind of better speak to the level of the audience. Okay, so there's some familiarity. in fact, quite a bit. 82% are familiar

and only about 18% would say that they're not really familiar. Okay, so we'll be sure to kind of carry along the people who are less familiar, but it means we can definitely dive into the details on this discussion. So in the Senate hearings, Vlad, you were quite clear about needing

T0 settlement times, whereas Citadel is viewing T plus one is a more feasible goal. and that's also the goal that the DTCC is aiming to reach by 2023. And I just wondered what your take was on that goal as opposed to T plus zero, is that just something, we don't even need to stop there at that level? And do you think we're ready to just jump right into T0 settlement times? I think it's going to be challenging.

You know, with any change like this, you have different market participants, market makers, banks that are used to an old way of operating. And there's obviously going to be a preference of incremental progress. And things are going to have to change, whether it's internal processes, you know, procedures, technology has to be upgraded. And then there's also the unknown. What happens if we are in this world of T0 is there going to be, Lots of revenue loss. Would we lose revenue as a financial participant as a result of that transition? So I think any time there's changes like this, there's hesitancy. And so you'll see

much more of a willingness for incremental change. And I don't necessarily think that that's a bad thing. Obviously, there's been something akin to widespread agreement that T plus one is going to be an improvement over the current status quo, which is two-day settlement. And I agree with that. I think it will be a big improvement. And I think it's important for an effort that's so fundamental like this to make sure that all market participants are heard. And we bring everyone along and avoid creating new problems through the transition. But I am very happy that DTCC and CIFR, recently produced a plan to get to T plus one from T plus two. I don't think, obviously, we should stop there, but I do think it's good progress. Yeah, I did want to add in, actually, that the DTCC

did estimate that the T plus one settlement time would reduce March and collateral needed for companies like Robin Hood by 41%, which obviously is significant. But, Chad, can you also now talk about the solution that you are working on, which I know is kind of in a limited version at the moment. But why don't you describe how that works, what that is, what your roadmap is to get that out, you know, to a wider number of companies and equities? Yeah. So the way our product works is right now we're operating under a no action letter. And so that limits the amount of volume and the number of stocks that we can settle.

But we're settling live trades and have been for over a year now. And we have three participants and we've had a fourth. go live, we'll be talking about that at some point soon here. And we have others that are coming online. So it's exciting for us to be able to be showing how this technology works. And the fact that our technology isn't limited to a particular settlement cycle, it doesn't have to be T2, it could be T1, it can be T0. Ultimately, this is a bit of a choose your own adventure. Our technology is very flexible. It's up to the participants to find the agreement on what they want to be settling it. But I do think that it's possible to move faster than T1. It's possible to get

to something like T0 and to do it at the end of the day. And that's very understandable path forward that we've been laying out with participants. But just as importantly, the point of technology is not just to change settlement. There's a lot of different areas that can be improved with this technology. One of them is changing settlement timeframes, which releases capital and is more cost-efficient, but also having investor protections. One of the problems of the GameStop issue was knowing how many shares were short. And this wasn't necessarily a feature of players acting nefariously. It may or may not have been. I don't know the SEC is looking into it. But what happens is it's possible because everything has held in Omnibus accounts with unclear chain of title

for there to be excess share short, for there to be more share short than the float. But if you're using a blockchain system where you know where every single share is at all times and who the beneficial owner is at all times, you have real investor protections that don't exist today, because everything's just held in one giant omnibus account at the DTC. And this is a problem, and there's ways to upgrade this and create investor protections while creating highly liquid markets, while actually being more capital and cost efficient. What's a little crazy, and sometimes people don't know this, is that a lot of, um, brokers are really just not having their clients trade a margin. They're having them cash trade.

So they're settling with cash, but they have it in the account. They can't settle the trade for two days because that's the settlement cycle. So the broker has to put the money up for the trade. So these are cash-funded trades, and the broker is on the hook. And the capital call can fluctuate wildly with, depending on how much stocks are moving, but yet they have the cash sitting there. And so you have a very pro-cyclical problem going on where you're getting giant capital calls that flex from 15 billion at the NCC to 30 billion. Huge crazy call. I mean, who could have prepared for that? You know, no one just leaves $15 billion lying around.

So you have huge capital calls that are getting pulled in some cases, not in very transparent way. Our system, you can see all day long in real time what your margin will look like with all of your participants. So you know in real time, real time risk management, not a crazy thing to have, but it doesn't exist right now. Real time risk management, you can see that the capital calls are going up. But why should you suddenly have to have $15 billion that you have to post if you're having the cash from your customer in your account to bridge that two days? And so the whole system really, I mean, should be shifted in a different way. And that's what we're doing with our Paxo settlement system. And right now, again, this is a no action letter.

We're shifting from a no action letter. We're going to apply for a clearing agency. And when we have that, we'll be able to operate a regular way in terms of ramping to being all CCEPs, all stocks, and accepting all market participants. And so that's going to take some time, of course. But that is where we're going to be. And we're optimistically hoping that will be this year. I think that's the plan for us.

And I think that will be a big shift for the markets because now they'll be competition for the first time in settlement. All that you said is so interesting. I actually have three different things I want to say about that. So first is for people who don't listen to my show, I did a great interview with Kailen Long of Morgan Stanley, who talked about this issue about how if you had blockchain-based stocks, then things like shorting by more than 100% wouldn't happen or that you could make it so that it couldn't happen. So people who, you know, are interested in hearing about that, you should check out of that episode. And so, Chad, I just also wanted to clarify. So for your solution, every, all, all of the stocks that you're trading and that you say could be traded this way,

they would have to then become blockchain-based stocks. They would, there would be like a tokenized version of this stock. Is that how that would work? Well, we create a backward compatibility. So, you know, today we have a full participant account at the DTC. That's what allows us to do this. We have a clearing agency, you know, will be automatically connected to the DTC and they to us. But what, um, uh, is enabled by this is a backward compatibility so that if a share is tokenized and someone isn't settling on our system and they're settling a regular way, we can de-tokenize it and it goes back. And so that's an important point. Um, we know that it's very hard for people to be able to shift processes and certainly trying to do all or nothing is not

effective. So we've deliberately made it compatible so that participants can do some of their trading in this fashion, or I should say settlement in this fashion, and they can continue to use their old methodologies when they need to. And then when you were talking about how it's a little bit like a choose-your-own-adventure type, what is the fastest that your system can handle in terms of settlement? Well, we haven't tried to do something that looked like real-time growth settlement because really all participants think that's impractable for the moment. But certainly intraday batches, you know, you could be done every couple hours. You could do three or four batches during the day of T0.

End of day T0 is what we've put out some press releases and we've done with certain participants already. So again, it could be faster than that, even than several batches per day. I think getting to real-time growth settlement's hard because you're talking about hundreds of millions of settlements. And so that requires participants to pre-fund cash and pre-fund shares so that they're in a position. And so you couldn't do that now. But imagine a world in the future where, you know, say there's a central bank digital currency, so all cash is on a blockchain, and imagine a world in which all shares are on a blockchain. Well, now things suddenly

look a lot different in terms of even what an exchange could look like, but also that could very well facilitate the type of Treasury management that would allow real-time gross settlement. But I do think that that's clearly a ways off. That is part of the journey I was talking about that participants need to go on. You can't get there overnight. But you can get there, I think, faster than the pace that we're on right now. Khyber's dynamic market maker, DMM, is a game changer in DFI, being the first protocol designed to react to market conditions to optimize fees while providing extremely high capital efficiency for liquidity providers. Fees are adjusted dynamically based on market conditions to maximize returns and reduce the impact

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So I want to kind of just walk through what the GameStop scenario would have looked like under these different types of conditions. So, you know, we can talk about T0, which is kind of the ultimate goal. But even something like, you know, Chad, what you described where you could do these intraday trades or settlement. So and either of you can answer this. But I was just curious, you know, in the case of something like this where you just have these stocks that are going up and up and up, you know, you know, Vlad, I'm curious to know what would have been. necessary for Robin Hood to put up in terms of collateral, like in a teaser environment, is it true that you wouldn't need to put up any and that what was in customer's accounts would be sufficient?

Or, you know, yeah, I'm just kind of curious to hear how you think improvements in this technology would have changed the outcome from the events this last winter. Yeah, I think it depends on the implementation. So, you know, end of day T0 would limit the collateral. to basically what can accumulate during an entire trading day. So it doesn't completely make the problem go away, but reduces it by a significant margin. If you can settle in batches intraday, and those batches are dependent on factors like the size of the outstanding net buy position, so they're kind of event-based rather than time-based, then I do believe that that would, would solve the problem effectively. And I think that there's asset classes that effectively

function like this. Cryptocurrency markets where you're converting from fiat to crypto operate basically in that way where there's kind of ad hoc intraday settlement, which you can describe as T0. And I think the defy kind of crypto to crypto trading is a good a good example of what Chad was saying earlier, what a future could look like where, you know, you have these stable coins that are on blockchains, you have different assets on different blockchains, and you can do these like cross-chain atomic swaps that effectively approximate what real-time settlement would look like. And Chad, what about you? How do you think that this world would look different? Well, I think it would be dramatically different. The way it works today,

you know, if you did end of day T0, it would depend again, as Vlad said, how is it constructed? That would probably reduce margin almost all the way because right now, you know, your margin isn't even getting posted until either at the end of the day or the next day. So you imagine if you're settling by 5 p.m. on T0, you know, that's going to probably be most of what needs to be done. So you could imagine dropping from $15 billion of capital that's needed to do guarantees because is you have a centralized intermediary that's guaranteeing every single trade to all the participants suddenly amongst themselves at 5 p.m. And you're just needing to hold a little bit in case someone doesn't fund. That's a huge improvement.

I mean, you're probably talking 90 plus percent capital savings. I'm going to guess 95%. If you did intraday batching, I think, you know, you're basically getting all the way there. And, you know, you'd still probably want to collect some margin anyways just to be extra safe. But that's not even how the system works right now. There wasn't even a trade guarantee until very recently, until the night of T1. So when we were at T3 Zedelin, the trade guarantee kicked in on the night of T1. So, you know, getting to T0 is far better than what the clearinghouse was ever doing.

And you have to remember, the clearinghouse has never been tapped before. You had the 87 crash. You had, you know, the Asian financial crisis. You had the dot-com bust. You had night capital, you know, giant kind of blow up. any of these things never once tapped the, obviously the financial crisis to donate, never once tapped the clearing fund. So this is a huge amount of money that is being tracked. And it's, you know, that's a, it's a nice thing to have. But if it's not ever used and, you know,

I guess at some point it could be used, I don't know when. It's, but it's never has been used, even through what is, you know, the biggest crises of all. You know, when will be used, might as well move to a different point where we can release this capital. And it won't be pro-cyclical where people are getting a $15 billion capital call, and it flexes from $15 billion to $30 billion. Instead, you could sit here and be using, say, T-0 or batches, free that capital up to be used to grow businesses, to create new products, to create more trading, to create more liquidity, to do all kinds of different things, invest in their businesses. That would be a real win for, frankly, all of society. And so that's why this is such a big issue, because

That's a lot. And by the way, that's just the capital in the guarantee fund. That's not the capital on Settlement Day. Settlement Day is very long and slow. It's $30 billion to $60 billion liquidity is trapped all day long with a lien on it. So that means across Wall Street, you have somewhere like $45 billion to $90 billion to $100 billion to $100 billion of capital liquidity tied up in settlement processes. That could be really, you know, released. Where could that go? I mean, well, you could think of a lot of places $100 billion could be better. better utilized if you were getting to much more efficient guaranteeing and settlement processes. It's just, you're right. It's huge inefficiencies. So I was curious because obviously, you know, Chad, you did say that you're hoping that you're able to open this solution out to a wider group within the year. And obviously, Vlad is very interested in shorter settlement times.

So what would a market look like if there were just certain platforms that were settling this quickly and others that were settling more slowly. Like, would that even happen? Is that possible for that to happen? Or, yeah, I was just wondering, you know, how that would look. What I'm trying to say is, if the DTCC is on this track to do T plus one, and you're saying that you could potentially release this out to a larger group within the year, then, you know, what happens?

Do we just have two different systems for a while or what? Yeah, I mean, you basically have a bridging mechanism. So there's a lending market that exists today. the lending market, either on dollars or shares, could help bridge participants. So some participants were settling in T0 and they were trading to settle on T0. And, you know, you could settle on T0. You could settle on T1. You can kind of, you can put a tag in today in your trades and when you want settlement to happen.

And you can make different settlement timeframes possible just with the normal process, either through OTC trades over-the-counter trades, alternative. of trading system trades or exchange trades, exchange trades right now have to be a T2. So that would be the SEC changing them. But other trades can be other timeframes. And there are other timeframes. Participants could settle on those other timeframes, and they just have to reallocate the inventory to deal with the rest of the process of settling out at whatever the SEC rules allow.

Again, SEC for exchanges is T2. If that moved to T1 or maybe they create flexibility at T0, then all participants could have the possibility of deciding when they wanted to settle. Okay. Yeah. So it does sound like if platforms managed to get there more quickly, then that's just a huge competitive advantage. You know, it would cut a lot of costs, it sounds like. So we could talk about this so much more, but we do also have another topic to discuss, which is another big thing that's been taking off all this year, which is crypto. So when do we do the third poll, because we

kind of, again, want to see where the audience members are at in terms of their level of experience with this. So for this question, it is, have you ever purchased crypto? If so, from where? And the options are, I have never purchased crypto and don't have plants to. I have never purchased crypto, but I'd like to. I have purchased crypto via the Robin Hood app. I have purchased crypto via PayPal or Squares Cash app. And then the last one is, I have purchased crypto via Coinbase Gemini or another crypto-specific company. So go ahead and make your selection, and we will see. Okay, so more than half have purchased via Coinbase Gemini or another crypto-specific company.

The second is, I've never purchased crypto, but I'd like to. No, sorry. The second is, I purchased crypto via Robin Hood. The third is, I've never purchased crypto, but I'd like to. And then, lastly, PayPal, and then never purchased. Okay, so clearly, yeah, What we've been seeing in the news that a lot of people are getting into crypto is, is, um, bearing out also here in this discussion. The market share here, Vlad.

17% market share. That's, that's pretty good. So, Vlad, you were one of the first fintech apps to add crypto. Why did you move, make that move back then before this big, you know, interest took off in the mainstream? Yeah, we added crypto in early 2018, um, which at the time felt, felt somewhat late, but I guess now look at what's happened in the last three years. The reasons that we decided to add it was, I mean, mainly customer demand. We look at different analytics for what customers want to invest in on our platform. For example, we were seeing unfulfilled searches, so people searching for different things on the platform.

And, you know, right around that time period, we started getting a lot of unfulfilled searches for cryptocurrencies. And so we started looking at it. And then also it became clear that particularly in that phase of the cryptocurrency market, people were predominantly interested in it as an asset, less so as kind of a medium of exchange to power. transactions. And the use case of cryptocurrency as an asset to diversify your holdings is very much in line and was in line with what Robin Hood's core competency was. So we thought we could do something really, really special for customers, make it work very well, and at the same time sort of fulfill the customer demand. You know, we've been very proud of the product that we've built. And so how does Robin Hood's crypto operation work on the back end? When someone

buys Bitcoin or another crypto asset in Robin Hood, where are those coins coming from? And then when they sell them, where are they sold? And also, what is your revenue model for the crypto trading? Like, do you just make a little bit of money on the bidask spread? Or how does that work? Yeah, it's structured similarly to our equities and options business. I mean, different market makers, but it is analogous. So we route customer orders through market makers, and then those market makers go and source liquidity through a number of different exchanges and market centers, and, you know, we obtain the coins and sell the coins via them. And the revenue model is also similar. We collect rebates from our market makers on crypto transactions.

kind of similarly to how it would work in an equities or options transaction. Okay, so it's the payment for order flow model as well. Yeah. Okay. Yeah, and I mean, you guys just published a blog post saying that you saw 6 million new crypto users on your platform in just the first two months of 2021 compared to 401,000 in a single month in 2020. However, I'm sure you're well aware on Twitter I see it.

A lot of people are wondering, you know, why is it? that when they buy crypto and Robin Hood, can they not withdraw the crypto to their own wallets? When do you think that you'll be able to enable crypto purchasers to move their assets off the platform? Yes, the wallets question. No, I've been hearing that one a lot lately. So I guess to the rationale, why we didn't launch with wallets to begin with back in 2018. And it was a consideration. Certainly, we were kind of debating. internally, whether we should hold the launch and give people the ability to transact or put it out there without kind of withdrawal and deposit capability. We decided that there actually is a

very significant use case, especially for people that aren't particularly technology savvy and they don't understand how public private keys work. Because it's kind of like using a password manager. I don't know if you guys use password managers. Maybe you do, but if you've tried to explain to someone who is, you know, not a computer scientist or a technical person that they should have their passwords and this thing and have a master pass phrase and everything should be sort of buttoned up in that way, it's the right thing to do. And it's obviously great for security. but you've just dropped the number of people that are going to that are going to kind of go through with this by a significant portion. So we were optimizing for making it as easy as possible to do what the majority of people wanted to do,

which is to get exposure to these assets with the lowest possible cost. And that's really kind of the pillars of Robin Hood's product experience. We want to give people the lowest possible cost we can give them. and we also want to have the best customer experience that's just like it just works. And so I think we've accomplished that. And now with the scale and load that we're dealing with, we've been staffing the crypto team pretty tremendously. And we've committed to doing this.

We want to deliver wallets to people. And we want to do it as safely and as expeditiously as possible, while balancing just sort of the demands of a surging business that needs high-quality customer support, service availability, and reliability. So we'll get there, but it's not as trivial as sort of like flipping a config file, and all of these millions of customers can suddenly move their coins around. Yeah, yeah. And from my understanding of this business, I think also making things fraud-proof is, really, really important in this kind of scenario. So I'm sure that may play a role. Absolutely. Yeah, I've said repeatedly, Robin Hood takes safety extremely seriously. It's our top

value. We're a safety first company. And that means not just protecting customers, but making sure that we protect the broader financial system and we work with our regulators and other counterparties to protect the system that their transactions rely upon. Yeah, so we're kind of running out of time, but since we started a bit late, I'm going to take two last questions quickly. Both of you have businesses that are pure crypto and that they involve the selling of the assets themselves. But you also have these businesses on the securities trading side, which could be potentially disrupted by blockchain technology. So I was curious, just if you were to project out, you know, maybe five years or pick your number in the future, which business do you think will be a bigger business for each of you? which business meaning crypto or stock trading will be a bigger business for us? Yeah, yeah. Well, as bullish as I am on crypto, it's hard for me to imagine that crypto could have the same market cap as U.S. stocks, which I think it's like $45 trillion at the moment. And that says U.S. stocks.

That's not bonds or whatever, other types of securities. I think that will always probably be a bigger asset class than crypto. But on the other hand, crypto has the possibility to really increase very significantly. And it's captured a lot of enthusiasm. And right now, the spreads are quite wide on it. So people are making a lot of money on it. I think the whole point of Paxos is we're not trying to pick winners. We're trying to be the infrastructure.

And so ultimately, if I'm wrong and crypto is the biggest, great. And if I'm right and stocks are the biggest, great because we're working on both of those. And so our goal is we're infrastructure, so we don't have to know exactly which asset's going to be the right one. And what I want to make sure is that whoever wants to build a business to serve those end customers has an easy way to do it. And so if we do that successfully, then whatever asset class perhaps emerges even that we don't even know, we can also service too. I generally agree with that from a sort of direct-to-consumer business standpoint. You know, we want to make sure we're there offering the types of investments that customers want to invest in. I think from a technology standpoint, we are likely to see greater convergence.

So, you know, whether you have some of these traditional financial assets being tokenized or through synthetics, There's a lot of really interesting work happening in the synthetic space. Blockchain technology is likely going to penetrate the traditional sphere a little bit more. And you'll see some convergence between these two things. So if you can't beat them, join them, answer. All right. And lastly, what's next for each of your companies? Bloomberg did report that Robin Hood has filed to go public, although I'm expecting

Plaid is likely not able to discuss this. And Chad, PayPal did, or was reported that PayPal may be launching a stable coin, which is clearly in Texas's wheelhouse. And you also recently told the block when discussing your $300 million raise that you thought you could add one customer the size of PayPal this year, but now you think you can add three to five. So what can each of you tell us what is next, tell us about what is next for your companies? Well, I'll just say I can't talk too much, obviously, about any public offering. But I can say that we've got a lot of work ahead of us. We want to make sure we continue listening to customers, both crypto and securities, equities and options. And we've been growing the team to try to meet all of the demand and make sure.

we continue to innovate. I think innovation in the space is accelerating and it's going to be increasingly important to kind of meet the demands of the people. Yeah. And what I'd say is what's driving that growth for us that you were just talking about, Laura, that you mentioned, where maybe we could add one person the size of PayPal and I think we could add three to five. Is this move from early adopter to mainstream? We were talking about a lot and it's happening far faster than I could have imagined. And that's part of the reason why we raised the capital is because we wanted to use this as a chance, take advantage of the chance here. That is this window of opportunity to really invest in our business, take advantage of what's happening with many large firms coming

into the space. I'm really surprised at how it's really shifted, I think partly because of PayPal. And obviously, you know, Vlad and Robin Hood are really early and often. And, you know, crypto, but PayPal really created, I think, a shift where people were afraid before PayPal and they were afraid after PayPal, just for different reasons. Afraid to be first and now afraid that they're going to be left behind. And there were obviously early adopters that blazed the trail that got PayPal comfortable, and I think Robin Hood is clearly one of those. And now that's creating a knock-on effect.

And that knock-on effect is something that we're seeing because of our position as infrastructure. And we're seeing that where firms want to come in and have a turnkey solution to be able to buy and sell crypto, but also, you know, be able to send and receive, as Vlad was talking about. You know, that's a complex thing. We do that for customers. And then they also see this as a way to be able to add all kinds of different assets. And ultimately, you have a crypto native asset is really a blockchain native asset. And then you have non-native blockchain assets that we're helping to put into a blockchain world. because replforming the whole system into a blockchain-based world is going to be hugely transformative.

I just imagine if every single asset in the world today was sitting on a blockchain, what would the financial system look like? I mean, it's almost hard to fully do that thought experiment. It changes not just issues in the plumbing, which is what we're doing, but issues around exchange, issues around getting loans, issues around how people can have access to the financial system that they otherwise wouldn't. So there's so much that's going to happen here. And it's exciting to see mainstream companies decide that they want to be part of this ecosystem because that's what attracted me to it 10 years ago.

And, you know, I think we're just still in the first out of the first inning. There's only been $80 billion of assets that have been tokenized. It's basically dollars for crypto trading. You know, we're barely even started here. Imagine what this will look like when you get to, you know, real, real mass adoption. Yeah, I love it that you sent that. Because actually that was going to be a question, which I had to leave on the cutting room floor because of time. But I was curious to get you guys to kind of expound on what that world would look like because I am fascinated by that question.

But anyway, thank you both so much again for giving us your great insights. Thank you to everyone who joined our discussion. I think we're going to have to wrap up this really scintillating panel. Thanks so much for joining us today. To learn more about Vlad and Robin Hood and Chad and Paxos, check out the show notes for this episode. Sign up for my newsletter where I will soon be making an announcement about pre-orders from my book, The Cryptopians, idealism, greed, lies, and the making of the first big cryptocurrency craze. Head to Unchained Podcast.com and the sign up for the email newsletter is right on the homepage.

Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Ness, and Mark Murdoch. Thanks for listening.