Episode #66 Stephen Stonberg – Cryptocurrencies, Tokenisation, and Regulation

Stephen Stonberg is the Chief Operating Officer and Chief Financial Officer at Bittrex Global, one of the leading crypto trading platforms. Before joining Bittrex Global, Stephen held Managing Director positions with Deutsche Bank, J.P. Morgan, Credit Suisse, the Winton Group, and Goldman Sachs. He was Partner and CEO U.S. of the hedge fund Brevan Howard. 

In this episode, we talk about all things crypto. We talk about the newest trends, the latest news, what’s going on with regulation in the crypto space, and where Stephen sees regulation going. We talk about Ripple and their quarrel with the SEC. We talk about tokenized equity and leverage tokens. And of course, how to learn to get into the crypto space and why it’s an exciting place to be.

Link

https://global.bittrex.com/

https://ripple.com/

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EPISODE 66

[INTRODUCTION]

[00:00:04] ANNOUNCER: Welcome to The Wall Street Lab podcast where we interview top financial professionals and deconstruct their practices to give you an insider look into the world of finance.

[00:00:23] AVH: Hello and welcome to another episode of The Wall Street Lab podcast. My guest today is Stephen Stonberg, chief operating officer and chief financial officer at Bittrex Global, one of the leading crypto trading platforms. Before joining Bittrex Global, Stephen held a lot of managing direct position at large international banks, for example, Deutsche Bank, J.P. Morgan, Credit Suisse, Winton Group and Goldman Sachs, and he was also partner and the U.S. CEO of the hedge fund Brevan Howard.

In this episode we talk about all things crypto. We talk about the newest trends, the latest news. What’s going on with regulation in the crypto space? Where he sees regulation going? We talk about Ripple and their quarrel with the SEC. We talk about tokenized equity, that’s equity shares, but they’re tradable as tokens. We talk about leverage tokens. And of course what to learn and how to learn to get into the crypto space and why it’s an exciting place to be at the moment? So I hope you liked this episode.

And now without further ado, my episode with Stephen Stonberg.

[INTERVIEW]

[00:01:39] AVH: Hey, Stephen, welcome to The Wall Street Lab podcast. It’s a pleasure to have you here.

[00:01:43] SS: It’s a pleasure to be here. Thank you.

[00:01:45] AVH: Can you tell our listeners a bit about yourself? Who are you? What are you doing? And, yeah, what brought us today here.

[00:01:52] SS: So a very long and non-linear path. So I’ve been in crypto for about two and a half, three years, which I guess even for crypto makes me kind of OG crypto. But I’m already OG in crypto to begin with. So my background, I think most people in crypto very like 20s, early 30s, like tech background. I just come from a very different perspective. So I had a very long career on Wall Street, well, both London and New York, sales and trading. And then I moved into asset management. I worked for some big hedge funds, one called Brevan Howard, which is active in crypto. And then eventually I sort of got the crypto bug in 2017 and moved over. Now I’m CFO and COO at Bittrex Global, which is the international part of Bittrex.

I think what attracted me to crypto and why I was sort of what I would call an earlier mover, I wasn’t deterred by the crypto winter and the prices crashed. I sort of saw the long-term future for this. And it’s actually playing out, but I really believe that you would see a massive convergence between what you would call traditional financial services and I guess loosely crypto financial services. But I think crypto financial services has always been financial services. So if you’re running a crypto exchange you’re already sort of under the regulations. Just because your trades settle through a blockchain doesn’t mean it’s not a security or a commodity or some other sort of very regulated thing. So I think that sort of was my perspective on it. I don’t think that’s the perspective of everyone in the industry. But if you look at the phenomenal growth and the excitement around the space, it just reminded me of things. Imagine if you could have gotten into hedge funds in like 1980, but that was like really cool that you could charge whatever you wanted and nobody knew what that was and it was very opaque. And now that’s a commoditized boring industry, but for all intents and purposes. The people that made their money already made their money. So I think that this sort of offers the next generation that kind of like massive growth opportunity, and it’s still so early days. That’s how I got here and sort of I guess how we got here and some with Bittrex.

[00:03:59] AVH: Tell us a bit more. Like what was your decision folks? I want to go into what Bittrex is and what’s your role in a bit, but just what were the key drivers decide like, “Okay, I want to move from like –” I guess like Wall Street is not a low paying industry, right? So it’s like from a very kind of secured job to like this crypto world is opaque. I have a lot of friends in the crypt industry being entrepreneurs there, right? It’s still, as you said, very early, right? So what got you across the river?

[00:04:28] SS: Again, I think I’ve always been attracted just in my career. I’ve always been I guess what I would call an entrepreneur. I went into big boring banks, but I was always attracted to like the very entrepreneurial part of those banks. And I graduated business school. I’m dating my myself. But in ‘94. So and I got an MBA, it was at Harvard. But like then you were supposed to go work at McKinsey or like Goldman Investment Banking in New York. I went and did sales and trading in London for Merrill Lynch. Like that’s not what you were supposed to do. People were like, “Ooh! What’s that?”

And I went to London, and back then nobody knew what an MBA was. Like that was like considered a trade degree. Like you were a worker, like that was really bad. So nobody cared about that. And in sales and trading half the people on the trading floor, they were really good traders, but a lot of them, they had a high school degree and they were probably the best traders. Being a trader, it didn’t matter if you had some fancy degree and you worked at McKinsey. No one cared. So I think I’ve always been a bit attracted to opportunities off the beaten path. And I ended up doing something called international credit trading, which then morphed into credit derivatives, which became like the hottest thing before it was even.

So I’ve always sort of been what I would call a calculated risk taker. You think what’s going to be a high-growth thing? What’s well-backed? I’ve always sort of focused on things where if you’re a first mover and you have a unique skill set, you’re already going to have sort of an advantage. Like you want to be one of the 3,000 people unemployed doing M&A or do you want to be like the one person who knows what a credit derivative is? So that was sort of always how I’ve done my career. And I guess I rode the credit derivative and credit derivative wave until about 2006 and I thought already it was looking a bit toppy. And then I got an opportunity to go work – I wanted to go into the buy side. I thought back then like that was where the industry was moving. I got an opportunity to go work for Alan Howard at Brevan Howard, which is a macro and rates fund. I knew nothing about that, but it turned out to be a really fortuitous move because in 2008 the world blew up and hedge funds did extremely well. So the fund I went to was up 20% and I had sold all my bank stocks. So in hindsight I look like an absolute genius. But, yeah, again I think it was just more a calculated risk which paid off big time. And thank God I got out of banking and I sort of stayed on the buy side. Worked at Brevan Howard for five years. Worked for some other – Worked at Credit Suisse Asset Management and alternatives and did a stint at Winton, which is a quant fund.

But I think by sort of – Fast-forwarding to like crypto, already hedge funds were being – They’re very commoditized. So the guys running the big old ones who made all their money, that’s great. They already have their capital, but I think if you were trying to start out a hedge fund today, I mean, unless you’re like the most talented trader on planet earth and very lucky, it’s probably much harder or your probability of success is probably a lot lower than when the industry was new in like 1980 when nobody knew what that was and you could just – Again, they were like low-hanging fruit. And I think crypto is much bigger, has much bigger implications at it’s very early days. Again, we’ll see if longer term this proves to be a great move, but I certainly would say people thought I was nuts in 2017. And then when the crypto winter, like what are you doing? So now I think the tune’s changing. I see to be more popular on LinkedIn now that Bitcoin’s at 50,000.

[00:07:55] AVH: Yeah, I see it a lot. I think like in the beginning it’s like your fame and your popularity arise with the price of Bitcoin, right? It’s just like very high correlations between the two.

[00:08:07] SS: It’s fame or infamy. I think it sort of goes back and forth. And then we can talk a bit about, if you’re interested, in the regulatory framework and sort of what Bittrex is doing and what other players are doing in the space. I think it’s still a pretty gray area. So one can assume you’re on the criminal side of it rather than on the good side of it. I think you can’t put a broad brush on this. The industry is still very fragmented and different.

[00:08:32] AVH: Yeah, I think it’s a very different. You have to look at things very differentiated. But I want to I want to dig into that in just a second, but before that, can you tell our listeners that are not from the crypto space a bit about Bittrex and Bittrex Global. What does it mean the international business of Bittrex, right? What can we imagine with this?

[00:08:53] SS: So Bittrex is one of the oldest exchanges. It was founded in 2014. There’re three co-founders and they still own the company 100%. So I’d say that’s very different than like Coinbase or Kraken, which are much bigger now ironically, and Bittrex is bigger than Coinbase, but they took outside money and venture money, so the different ownership structures. So Bittrex is still 100% owned by the founders. The main company is headquartered in Seattle and the three founders, their background is tech, but they’re I’d say more mature. They’re in their 40s. They came from Amazon and Mcrosoft. They were running security at Amazon. So they take security very seriously and they’ve always sort of embraced that this is kind of a regulated business. So you kind of have to operate with all the licenses and everything else, right? Which is I would say more similar to Coinbase or Kraken than some of the, let’s say, foreign players who don’t have to remain nameless on the podcast, but I think have a different sort of view to that completely and just think it’s all decentralized and nothing applies to them. So I think that’s kind of where we are.

And then within Bittrex, we’ve kind of broken it into – Think of it as three companies. It’s a technology company providing services to two different exchanges. One of which is a U.S.-only exchange. So Bittrex U.S. for U.S. residents and U.S. citizens. And then the international piece called Bittrex Global, that’s for all non-U.S. passport holders and non-us residents. So that’s actually the larger part of our client base. And the reason we broke out the business that way – Again, we want to be regulated, but regulatory framework is so uncertain in the U.S. Why do you want to subject non-U.S. listing teams and non-U.S. clients to U.S regulation when there’s no need? So we do want to be regulated. So we did move the business to Liechtenstein, which is an EEA member state. So what that means is for things like banking – And they have EU passporting. It’s full like method two banking, but they have the ability to trade in the EU. So you’re effectively in the EU, which we wanted. We’re on the continent. And Liechtenstein passed a Blockchain Act, which we’re now registered under. So the business is fully regulated or supervised as the technical term. We’re supervised by the FMA under the Blockchain Act.  You can go into the FMA website and see like the companies listed.

So you have a European bank regulator that’s supervising this business under Liechtenstein law. That’s about as good as you’re going to get in crypto right now. It’s 100% clear what you can do there and what you can’t do there. And so we offer that sort of certainty to our clients of the exchange. So we have to do KYC and AML on every client. So I would contrast that to other exchanges like who – And I will name names like Binance who you can go on and get – Just try getting an account.  You can do it with an email address and they’ll tell you can trade up to two Bitcoin a day. That’s a $100,000. So the money laundering limits in the U.S, it’s ten thousand. Again, like we wish them well, but we can’t operate that way if you want to be regulated. So everybody’s got to be onboarded. So you can’t come from like an OFAC-sanctioned country. We don’t take any U.S. passport holders or any U.S. residents. And then assuming you pass our AML and KYC, you can trade – We have over like 300 tokens. We have a lot of altcoins, different pairs. I mean obviously all the things like Bitcoin and Ethereum. But I think what makes Bittrex Global a bit different, we’ve always had a lot more alternative coins. So we have a lot sort of broader and deeper offering.

We have fiat onboarding right now. You can come on to the exchange with euros and with dollars and we also have credit card onboarding from a whole bunch of countries. So I think that’s kind of the core offering. And then more recently I think where we’ve differentiated ourselves from some competitors, we’re offering securities tokens now. So we can’t do that through Liechtenstein because in Europe you need to be – Well, we could, but we’re not a bank. We don’t have a securities license, but we set up a separate licensed entity in Bermuda. We have an office in Bermuda as well. And in Bermuda, under the Digital Assets Business Act, they don’t distinguish between a securities token and utility token. A token is just a token. So we have launched already and we don’t offer these, again, into the EU. But for our non-EEA clients, they can onboard to Lichtenstein then sign in other terms of service for Bermuda. And we’re trading right now tokenized Tesla, tokenized Amazon. So we have tokenized representations of stocks. So they’re trading 24/7. I think to me that’s where we can talk about it. I think the industry is really going to move in that direction, tokenized assets, securities tokens, because you can tokenize anything. But because those are considered securities in the jurisdiction you’re going to sell them into, then you’re under securities laws.

So I think even the exchanges, the Binances and the sort of more aggressive Asian exchanges where they might not take the regulation as seriously. Like with securities, that is highly regulated industry. So I think even they’re a bit wary. So we’re one of the few that’s actually willing to do the securities tokens. We won’t do them in the U.S., but we’ll do them outside in a fully regulated basis. And I think it’s quite innovative. So we have a regulator utility token exchange in Liechtenstein and a regulated securities and utility token exchange in Bermuda. So we have two licenses.

[00:14:16] AVH: Oh, and you can – If you kind of do the KYC, AML, in Liechtenstein you can trade the securities token via your license in Bermuda.

[00:14:26] SS: For eligible clients who can, and not everyone’s eligible yet. So we’re not taking European union or EEA clients yet. We will. We have to then get a broker’s license to sell securities into Europe. We’re working on that, that piece. But for our non-EEA clients, right now, if you want to trade the securities tokens, you have to sign in other terms of service, become a client of the Bermuda company as well and effectively go through their KYC, which is nearly identical to Liechtenstein because U.K. was until recently EEU. So it’s all the same sort of standards. And then basically you can become a client of Bermuda as well and then you can trade the securities tokens.

[00:15:04] AVH: Okay. Interesting. I really hope that the regulation clears up here a bit, like it becomes standardized. But let’s dig a bit deeper into securities token, right? I’m really interested. How does it work? I mean, you say you’re trading them 24/7. How? For example, are they related to the actual stock price traded on the NYSE or any kind of like typical old-fashioned exchange?

[00:15:31] SS: Yeah. I think with those, and those are easy to understand before we move into sort of illiquid assets like real estate or art or sort of all these other, because you can basically – Effectively it’s securitization, which again that was the – That market boomed in the 80s. Again, like that was when somebody invented, “Oh! You could put a company in the Cayman Islands and shove credit cards or mortgages or anything in there and issue bonds.” So that’s when that market came about, and now we’re seeing the same thing just in a digital format.

So with these tokenized stocks, which again this is so new and us and FTX, which is another exchange which has issued these tokens that we’ve listed, you can buy them there as well. But here, effectively, think of these as unsolicited ETFs. So you’ve created an ETF, and here it’s of a secondary asset that already exists, but it’s not an ADR where the company is involved in issuing its own sort of wrapped piece of paper. Here it’s unsolicited. So in this case you’re buying a token. The issuer is FTX, which is another exchange. And then what are you actually buying? You don’t have any rights to the Tesla or Amazon stock. The token itself is secured on a total rate of return swap with a broker in Germany that’s physically holding the shares. So that broker has to hedge themselves. It’s their responsibility. They have to pay out the returns of Tesla or Amazon under this swap, which then creates the inherent value of the token. So it’s a derivative, but a derivative is considered a security and that’s allowed. So think of them – So the risk is Amazon or Tesla ultimately, but you’re buying a tokenized derivative. That’s how the risk is created.

And then in terms of how should they trade. So in theory, the price should be tracking very closely to the stock. And if not, that’s an interesting arbitrage opportunity, right? Then hedge funds should be piling in. So eventually there should be efficient markets. But the futures do trade even during the weekend. So I mean there are other reference points for this. I would say that the take-up of this has been very relatively small. It’s a totally new product category. So I would say it’s too early to sort of – We don’t have enough data to say how this is really behaving. I think in a year from now we’ll have a year of data and hopefully enough volume that it’s actually meaningful. But it’s trading relatively closely to the price. So it’s just when the markets are closed, crypto markets don’t close. So clients can trade this stuff around.

[00:17:58] SS: I mean you brought up an interesting point and it’s totally legit if you say, “Okay, there’s not enough data on that.” But actually do you see hedge funds moving into the market using this as arbitrage opportunities? Or is this just a theoretical from your previous –

[00:18:13] SS: Theoretical. It’s too small. So right now the liquidity is not big enough for the institutions. Like institutions aren’t going to bother with this. And why would they? They can buy the outright stocks. So I think what’s interesting for these – And, again, I think this is something broader in crypto and blockchain in general, it’s really about enabling the unbanked to get access to financial services. Use your telephone, you use an app. But I mean you can be in some developing country in Africa or in Asia and you have access to financial services. Like right now if you want to trade U.S. stocks, you can’t. You just have no access to it. A, like you have to buy the full notion, all of the stock, right? You can’t buy a fractional share.

So these are all – With blockchain, you can buy a fractional share and then you can have access to this. As long as you can pass our KYC and AML, we’ll take a client from anywhere. So a client from anywhere assuming they, again, pass KYC, AML, can then onboard, trade the tokenized version of the stock. So they’re not getting the stock. They’re getting the risk of the stock, which is effectively the same thing. They’re getting exposure to U.S. equities which they couldn’t normally get. So it’s a diversification play. They’re getting access in terms of smaller token size. And in terms of ease of traded, they don’t have to have like multiple days of settlement and all the inefficiencies which is the reason why blockchain – I liken this as the Amazon moment for financial services. What Amazon did to retail, I think crypto is doing to financial services. It’s just getting rid of all this inefficiency. It’s direct to consumer. It’s on your phone. It’s an app. It’s much easier. And the financial service industry broadly loves the inefficiency. They can charge a lot of money for keeping it so opaque and nobody’s taking them on. And now it’s happening overnight globally in a fascinating sort of case study.

[00:20:02] AVH: Definitely, definitely fascinating. Let’s walk through an example because I really want to understand how this works. Say, I’m a farmer in Africa and it’s Sunday, right? And I’m buying even like two dollars’ worth of Tesla stock. And then the broker in Germany is issuing like a mini-mini-mini swap to give me that exposure. Or how does it exactly work?

[00:20:29] SS: All you’re doing is you’re buying a token issued by FTX, and you’re just buying a token. So the token issuer, like all the hedging and all of that stuff, you don’t ever see that. That’s just like if you bought a financial product from a bank right now like an equity derivative. Those trade right now.  You can go buy issued by any bank, Goldman, Credit Suisse, like some note linked to the performance of the DAX or the performance of oil. Like those are sold to retail all day. So and they trade publicly. So you can buy that now, but you don’t know how Goldman or Credit Suisse manufacture that. In fact they hide that on purpose because then they can charge a lot more. The more complicated it is, the more money they’re sucking out of the clients’ hands, right? But that’s not what we’re doing here. But at any rate, that’s sort of their responsibility to hedge that. Every time they issue a note they just have like a hedge.

So here the farmer is buying the token on the exchange. It’s been issued already by FTX. If FTX increases the issue size or the token issuance, then they would just do sort of a blanket hedge. Each time somebody trades two dollars, they’ll be very inefficient. So the tokens already pre-exist. So I think then they can go out and they can run the risk. So the professionals are taking care of that. But effectively you’re giving – The institutional trading is then boiled into a retail piece, which is very easy to trade in small lot sizes. That doesn’t exist right now.

[00:21:48] AVH: Okay. Now I get it. I mean, I’ve been in derivatives part of Deutsche Bank and we have issued exactly kind of those certificates. Is it the same thing then? So your German broker or the FTX, they issue, say, 1 million worth of Tesla tokens and then at this day they hedge it and then they sell it to retail investors. And then the retail investors, if I’m now the African farmer and I want to buy two dollars’ worth of Tesla, I buy it from you on your exchange.

[00:22:23] SS: Or you can buy it directly from FTX in their exchange. We prefer you come to Bittrex of course, but for those specific tokens. Now granted, there could be other issuers that come up with this. But right now this is so new and this is literally only two or three months old and we just got our license in Bermuda and FTX just created these types of tokens. So it’s a very new space even in crypto. But that same process, you can tokenize anything. So in this case we’ve talked about an existing risk that’s out there, but where this gets very interesting, if you look at the securitization market, so real estate, mortgages, anything can go, “Well, why can’t I transfer the risk in the token format?” Again, it’s liquid. It trades 24/7 not just on specific dates. And like those German Deutsche Bank certificates. They’re really only trading Europe. So what if I’m an Asian client or an African client or South American client and I want to buy those too in smaller size? So you’ve created global retail liquidity that trades 24/7 that’s much better. Like you have a much broader audience for this. So it’s great if I’m the issuer and I want to transfer the risk. And if I’m the African farmer, in your example, like I have no way of getting exposure to these types of risks before. So this is great. I can diversify my portfolio and have a more institutional looking portfolio, cutting out the middlemen, cutting out the fees and you can run it yourself on your phone. So it’s unclear to see how this will eventually all play out. But wow! This is a huge game changer and really dis-intermediating all of these overpaid bankers who no one’s going to cry for.

[00:23:59] AVH: I can really see that, yeah.

[00:24:01] SS: And I think that’s why the bank, they don’t protest too much. Oh! It’s horrible and terrible. Of course it is because it’s a huge threat, and until they get their own act together. I mean imagine if you’re running a private client business at one of these banks and you’ve told your clients like Bitcoin is rat poison. And if you look at how much Bitcoin has appreciated this year, I mean, it’s the best performing asset. I mean, it’s like thousands of percent return and they did, “Oh! We put you in our balance portfolio. Charged you three percent fees and you made 10%.” This is great. But I mean of course they have to say it’s terrible – They don’t even have a way to put this in their clients portfolio and make money out of it. So that’s the real issue. That’s why they have to trash it.

Now. Oh, it’s like the trains left the station. So they’re scrambling to put in place. I mean I just read Goldman, which had a crypto desk. They were setting one up in 2017 and then they pulled it when the markets crashed. Goldman’s now just announced they’re setting up a crypto desk. Yippee! So they sort of missed the whole wave. They’re done nothing with it. And it’s very ironic. I looked this up. Coinbase is now IPO-ing at a rough valuation of 100 billion, and that’s a like a five-year-old company. Because how much Goldman’s market cap is roughly?

[00:25:17] AVH: I don’t know, but I think I heard that Coinbase was like the three major banks, a market cap of three major banks taken together or even more.

[00:25:24] SS: Yeah, exactly. So I think Goldman’s like roughly a hundred billion. Hundred and something year old company is worth the same as this like new startup in crypto. And I think, again, you can see how hugely disruptive this is going to be. So I think it’s a completely different paradigm. So that’s a very long-winded answer, but I just think it’s so complicated, it’s so fast-moving and it is so unbelievable what’s about to happen. And I don’t think people have truly woken up to the competitive threat of this.

[00:25:51] AVH: I think so too. That’s why I definitely enjoy your long answers because I have some knowledge in crypto, right? But I’m in no means any expert. And I think most of our listeners will feel the same and I think it’s an important field. Let me take a little detour because you touched on it earlier with centralized finance versus defi. And I remember in our first quick conversation, I also at first put you in the defi category, but then you corrected me. Can you tell us a bit? What’s defi, decentralized finance, versus centralized funds and where does, for example, Bittrex and other – And I’m saying the regulated exchanges play in?

[00:26:33] SS: So exchanges. I work for an exchange. That’s one kind of a crypto company. There’s multiple ways of skinning a canvas. We’re not the only kinds of companies, but they’re the biggest and everyone’s heard of the brand name. So everyone focuses on the exchanges. And then you have all the projects that are creating these tokens. They list on these exchanges and they’re all sort of doing lots of different things with Blockchain. But then with finance in particular – Again, I view a crypto exchange, it’s just an exchange. It’s a financial services business. So that’s centralized. You come to the exchange if you want to buy and sell Bitcoin. You’re probably buying it from another user on Bittrex, but you don’t face them.  You’re facing the exchange as an intermediary or middleman just like you would with the bank. If you do like foreign exchange at, I don’t know, Deutsche Bank, you’re going to go and – You’re not buying dollars for euros from another Deutsche client. You’re doing it with Deutsche’s own book and then they’re facing their clients. So that’s the definition of centralized finance.

So defi, or decentralized finance, well, in that case you’re taking out the middleman. So in the case some of the exchanges who have like a DEX, or a decentralized version of the exchange, there you take out the middleman and you would trade directly with other clients, right? So if you wanted to buy Bitcoin, they would have to be a seller of Bitcoin. The exchange is effectively matching you up, but you’re facing them directly.

Now I would argue that there is some format of centralization there because the exchange is not providing a risk book for you to trade through, but it’s providing technology. And there is some centralization, and I think that’s where it’s going to be interesting for regulators when they start to look at this space. The regulator tends to look at form over substance. And so even though the substance is that technically you’re trading with another customer, they might say, “Well, the form of this actually looks pretty centralized.”

So I think some of these things are going to be a bit gray. And even if you think you’re defi, you might be actually centralized. But there are some really true defi projects out there and it’s beyond exchanges. There’s peer-to-peer lending. There’re all sorts of peer-to-peer. You’ve seen this in the real-world. You already have defi in fintech. It’s not just a crypto related thing. So that’s kind of defi, it’s just peer-to-peer, and centralized is centralized. And I think there’s a gray area in between that’s yet TBD. And that’s the risk of always being a first mover. You might think you’re operating in one space and then the regulator comes in and says, “Well, actually, we view it differently than you have.”

[00:28:59] AVH: I think there’s a very recent example of that, which we can chat about in a second. I just want to have one pressing question. If you are peer-to-peer, right? Do you still have to go to the work hand-in-hand with the regulator? Like awesome. It’s like, “Am I peer-to-peer? Am I okay. Do I need any licenses?” Or how might that affect you? And if you want to, you can bring this into collaboration with Ripple, for example, which is like just recently been charged by the SEC.

[00:29:29] SS: So I think with Ripple, that’s different. So that’s a utility token versus a security token, right? So in Europe where we operate for our utility token exchange, the EU is much clearer about what a utility token is. And for us, for each listing, we get a legal opinion in Liechtenstein which is EU, EEA that says what kind of token this is. So you don’t run that sort of risk that Ripple ran. What they did, they did what they claimed to this date is a utility token, and it is outside of the U.S. Like I think it’s much clearer for European buying that token that is what the EU would consider a utility token. The U.S. is a bit gray, and they did it and the SED is saying, “Well, actually that was just a security and you did a fundraise and you didn’t do it with the prospectus and that’s like illegal. It has all sorts of fines.” So obviously they’re fighting that cord. I don’t have a view. I’m not that involved in that, but that’s not a defi versus centralized. Which is why we’re operating Bittrex Global outside of the U.S. because we have the clarity and things that might not pass regulatory muster in the U.S. in terms of the clarity that we need, not if there’s anything on tour. That’s why we won’t do those things in the U.S. We have a like a smaller pool of tokens that we trade on our U.S. exchange to avoid this. We run into sort of two businesses.

I think this has broader implications for the U.S. They’re falling way behind. People want regulation, but they want clear regulation. In the U.S. you have 50 states, 50 state regulators, different regulators for commodities. In Europe it’s just much more centralized. It’s much clearer for real-world financial services. Forget crypto. So I think the U.S. has some structural problems that makes it harder for them to adjust to these things. So that’s what Ripple is doing.

I think with defi, it’s totally unclear. So I think, yes, you’re running bigger risks because if you’re doing it in the U.S. by the same analogy because it’s so unclear there. So the New York regulator could come after you or a state regulator or the CFTC or the SEC. You don’t know who’s going to come after you. But outside of the U.S. these projects – Again, we list defi projects. We’re very supportive of the space. We are not a defi player. We’re a centralized player. I think that answering your question, I don’t think these projects are asking that question. They’re just going ahead and doing it and then you run the risk of a Ripple, the same thing. You think you’re a utility token or you think you’re a decentralized exchange and yet you don’t know and your customers all over the world. And, remember, each country has its own set of regulators. So you run the risk of unknowingly tripping on regulations you didn’t even know about and they tend to have seven years where they’ll come after you. So I think, again, with any new industry, you always run the risk of you’re going into uncharted territory. That’s why the opportunity is there. But then there’s regulatory risk and you have the resources and the wherewithal to sort of survive it.

[00:32:22] AVH: You said quickly that you support those defi tokens. Do you do any kind of background check, due diligence, on the token so you’re listing? Because I mean I don’t know if it’s still true, but back in the last, say, crypto high, there were so many scams. So what is like the standards that a token has to fulfill a project to get on your exchange?

[00:32:50] SS: So for us – And, again, when you buy a stock from the New York stock exchange, they’re not telling you this is a great company that’s going to do well. And a lot of those companies fail and you can lose all of your money.

[00:33:01] AVH: We just had that sort of problem. Like we just had that with Wirecard. I mean –

[00:33:06] SS: Exactly, with Wirecard. Exactly. That’s like a huge company. And I actually met them in Munich before they blew up because they were offering credit card services or crypto companies. We never like actually got down the road of becoming a client. Thank God. But yeah, it’s amazing. Like they had huge offices, like massive public company, darling of the German Stock Exchange. Again, I would say that’s not your job as the exchange. What you’re looking for, “Is this fraud?” Yes or no? So fraud will be caught very quickly. We’re not going to have any Ponzi schemes or true fraudsters who just want to raise a token and like have no intention of doing anything but stealing the money. They have to go through our compliance processes and they have to get a Lichtenstein legal opinion. So a law firm is going to go through their entire project. Like where are you issuing the token from? What local legal opinion do you have? Like the token issue is in a jurisdiction. It’s in Cayman or Singapore or somewhere, right? And if that token issuer is in some like horrible place like – But I don’t know, not horrible, but something very dodgy. Like we’re not going to accept that. So already there’s like filters.

Most exchanges. Again, look at some of these other exchanges who, again, shall remain nameless. Like do they have legal opinions on their tokens? Have they done any vetting? Probably not, and we have to, because we have to comply. We are supervised by a regulator. So under the Blockchain Act, like there are rules around what we can and cannot list and we have the FMA. Like we’ll lose our license if we listed things. Again, we’re not going to catch like just bad management because that’s not our job and that’s your job as the investor. Remember, these are utility tokens. You don’t own a stake in these companies. A utility token is the analogy I’d make. It’s like a frequent flyer mile that trades. So imagine if you had a liquid market for your Lufthansa miles and more and you could sell them. That’s what a utility token is. Like it has utility at Lufthansa, but that’s not the same as owning shares of Lufthansa, right? Utility tokens is an interesting asset class in itself. They’re non-equity, but there’s an active trading market for them in their liquids.

So we do the sort of full vetting. We hope the projects will work out. Some of them, they crash and burn, and we try to avoid that. We also de-list projects. So if you list with us, you have to maintain certain liquidity and the project. You can’t just ignore your project or we’ll de-list you from the exchange as well. So we put some pretty strict processes.

[00:35:24] AVH: Okay. So this has been very interesting to like make this differentiation between utility tokens, right? And I think this is what currently probably makes up 99% of your business currently.

[00:35:36] SS: Exactly.

[00:35:36] AVH: And now the new thing are securities tokens that are issued by one of your partner exchanges but tradable –

[00:35:43] SS: Or they could be issued by a project team. It’s so new. We’ve only listed that. But we’re talking to multiple project teams that want to issue security tokens. So going back to Ripple – And so a utility token, that’s the key, right? And in the early stages of the business people just listed stuff and then exposed facto. The SEC came back and said, “Hey, hold on a minute. All these IEOs you’re doing, they’re not utility tokens. They’re actually securities.” And that’s where in the very beginning of this podcast I mentioned how there are existing laws in place. So because it settles through a blockchain, you can call it whatever you like. It’s up to the regulator to say, “Well, no. That’s a security. If you want, you can issue securities in the United States, but there’s very specific rules around how that works. What licenses you need to sell those and who you can sell them to.” And just whereas utility tokens are allowed in the U.S., but it’s sort of this new asset class. So it’s a lighter touch. It’s not as regulated. So that’s fine.  You can do it. It’s much easier for entrepreneurs to issue the tokens for exchanges who only trade those to operate because they don’t need to have the heavy burden of doing securities, which is like what Goldman Sachs does. Like you need all those sort of licenses to be a broker dealer and have massive staff, and there’s selling restriction. Like you have to have a lot of – That’s a very expensive business to be in, but the risk you run is if you do it and then you think you’re doing a utility token like in the case of Ripple where their whole company is backed by these tokens, XRP, which they clearly think are utility tokens. Those are actually securities. They have some big problems, which is why their token doesn’t trade that well. There’s this sort of regulatory uncertainty hanging over it, which is not cleared up.

[00:37:20] AVH: Okay. Basically, Goldman Sachs could now go ahead because they have all the licenses and start their own kind of Bittrex Goldman Sachs and issue security tokens [inaudible 00:37:31].

[00:37:32] SS: Or they could do –  Yes. That’s assuming – However, I would say if you don’t even know how to trade a Bitcoin or have a desk. So you have to walk before you can run. And I think almost all of the liquidity right now is in utility tokens. Remember, Bittrex has been doing utility tokens since 2014. Goldman Sachs doesn’t do anything. As of yesterday, they announced they’re setting up a desk, which means maybe in six months they’ll have it set up, right? So that means they’re not in this business. They’re like total newbies. They have zero experience unless they hire people. Again, where are you going to hire them from? Like nobody has – This is such a new market. So they have zero experience even in Bitcoin, which is the most basic commoditized. It’s like saying you trade U.S. dollars. They’re doing tokenized derivative – You have to able to, again, walk before you run. That’s running. That’s sprinting. So how are you going to do that? So, yes, just because you have a license, I mean any bank in Europe could go out and do this stuff. They’re not. They don’t even know how to do a Bitcoin. So you have to have custody, all the tech, everything else. So I think that you really need to have – And this is my personal view. You need to have an existing utility token exchange that has liquidity. You have all the functionality. Then you can add on the licensing. That’s commoditized.  You can get a broker dealer license or you can work with a partner who has that. So that’s not just Goldman. I mean, there’re much smaller more nimble entrepreneurial companies that have licenses, but you need to have the technology, because at the end of the day these are tokens and they settle in a very different way.

A token’s a token, right? A utility token and a securities token, they can both be ERC20 like based on the same exact technology platform, same smart contract. What’s different? How a regulator sees that token. So how you sell the securities token? The information on the clients? That’s just a selling procedure. That I can learn, the exchange can learn. I think it’s much harder for the banks to go and figure out how to run a token exchange and talk to token teams, and like that’s going to take them years to figure out. So I think they’re very far behind in this sort of process. And self-selecting because they just called it rat poison for five years, right? Rat poison squared I think was what Warren Buffett called it.

[00:39:42] AVH: Before we move on, could you quickly define ERC20 tokens?

[00:39:46] SS: They’re just Ethereum. I mean you can use there’s different protocols or blockchains you can use to issue your token on. ERC20, which is Ethereum, is the most popular and widely used right now. So it could be Stellar or Tron or other things. But if you looked at two tokens and I told you one of them is the securities token and one of them is a utility token, the tokens themselves, it’s just they look identical in terms of the technology that’s behind them. And the way you would trade them, move them around wallets, nothing changes. Except, because one’s called a security, that’s just some outside party telling you, “Oh, that’s a security,” a regulator, they’re whim. Okay. So what you thought was – I have two iPhones. Like one’s now a security. Okay. But there’s still both iPhones and they work the same way. It’s just if I’m selling you this iPhone, I can just sell it to you. But if I sell you this one, that’s a security. So I need a broker license. I need all sorts of – I can’t sell it to everybody. Maybe you’re not allowed to buy as much if I haven’t like done this sort of – So it’s a selling process differential as opposed to anything fundamentally different, which I don’t think most people understand this. I spend a lot of time on the phone now with token teams explaining if they want to do security token. It’s not rocket science, but it’s regulated in most – Unless you’re an exchange that’s really adopted regulations already on the utility side, you’ll never be able to get a regulator to let you come and do the security stuff, which is even more regulated.

So if you’re one of these rogue exchanges that does what it wants on utility tokens, forget – Certainly go and offer securities tokens, but then you’re running a whole another level of regulatory risk, another set of regulators that can come after you.

[00:41:21] AVH: Let’s dig a bit into the technology.  You mentioned Ethereum, and I mean everybody that knows bit about crypto knows it’s like a very, very well-known, widely used blockchain. Is it the blockchain that you’re using for your securities token? Or are you using your own? Are you using a different one?

[00:41:42] SS: So we’re not a token issuer. We’re just in exchange. So the token issuers – So right now the FTX issue tokens. Those are ERC20 tokens. I’d say it’s the most popular protocol. And then for us it’s easy to list those. There’s a few other protocols that we as an exchange forget that if it’s utility or security token because it’s irrelevant, right? So which protocols do we allow? And some of the larger ones like Stellar, you can come and issue like a Stellar token already. That’s an improved protocol. But if you come to us and say I have my own protocol, that’s an integration and we have to then do a ton of work to make the exchange, be able to trade those types of tokens or some of the more esoteric ones we haven’t integrated yet. So you could use those protocols but it will take you a lot longer to get your token listed. It’s sort of square peg square hole. Like the square hole right now is ERC20, but it doesn’t work for everybody. So right now there’s very high transaction fees with ERC20 because Ethereum prices have gone through the roof. Remember, Ethereum was designed to be just like a token protocol and smart contracts. It wasn’t designed to be an asset in itself that would have huge speculative values. So it’s had some interesting knock-on effects.

So at any rate, it’s a lot of information to throw at you and your listeners, but I think that’s how to think of it. Like sort of what’s the most common contract that people use? If you’re going to try to do something completely new, maybe it’s better not to try to innovate the contracts as well. Keep it simple stupid the, the kiss principle.

[00:43:10] AVH: Yeah. So maybe like in terms of old-term fashion like ERC20, Ethereum blockchain is like the underlying technology. Like say maybe Swift for payments, right? There’s like multiple payment systems, but nearly every bank in the world is using Swift. So basically you put your new token issue on Swift because every bank already has a Swift connection, right? So it’s really easy for them to translate. If you now want to integrate like, I don’t know, Alipay or whatever, every bank has to like move to Alipay. In maybe Europe, that’s not very common. So what are – Now I know we are digging deep into the rabbit hole, but what are some upcoming interesting kind of Ethereum attackers if you wish to comment on that? I’m really curious.

[00:43:56] SS: So I think what’s interesting – And, again, for people who really understand the space. So I think I don’t like talking about competitors, but it’s so big and out there. So I mean Binance, which is one of the largest players in terms of volume. But, again, it’s a lot easier to have a lot of clients if you don’t KYC anybody. Again, I think the regulators will not tolerate this especially Coinbase is now becoming a publicly-traded company. And then you’ve got American shareholders and a competitor when their largest competitor doesn’t do any KYC. I can’t see how the regulators allow that unfair playing field, because then you’re hurting retail investors in the stock. So that’s kind of high-level regulatory.

So Binance has their own chain they’ve come out with that’s competing with Ethereum. And what’s interesting, the Binance’s own native token – If you were watching the markets when Ethereum was going up, the Binance token went up because people were starting to use the Binance chain and they have projects now. So imagine if like Bittrex in addition to offering you a listing. If I offered you a competitor Bittrex chain, and obviously there’s some inherent conflicts of interest there which we won’t even go into. With that, we have zero plans to do this. It’s interesting they’ve done it. But then you have sort all sorts of conflicts. So you have the exchange that’s offering you preference to projects that use its own token. Then it’s its own chain is linked to its own token that it’s issued. And then it runs all the trading and watch trading and market manipulation. I mean, there’s always – Again, I’m not accusing them of anything, but if I were a regulator, I would sort of look at these massive price run-ups, which just happened to be at the time when – If you look, Bitcoin’s price keeps going up. Ethereum’s kind of been capped out, and that’s also partly because the largest exchange that has its own competing protocols trades all these assets. It raises a lot of interesting questions. So I’d say that’s where this starts to get very esoteric, very interesting. But the market is still relatively small. Remember, only five percent of planet earth is trading crypto right now. So it’s pretty small market penetration.

Interesting opportunities for what would be deemed market manipulation in the traditional world, but unclear what it will be called in crypto because we don’t know which regulator? When they’re going to – This stuff is moving so fast and that’s so complicated that if you’re not even a market insider you wouldn’t even understand this, let alone some regulator. And if you saw the GameStop hearings and some of the esteemed members of the U.S. congress, I doubt you would really understand this podcast or the conversation we’re having. This is just moving so fast. I don’t know how they’re going to really come to grips with this.

[00:46:34] AVH: Maybe I should send them the podcast. So I guess a small intro, step-by-step guide to understanding all this. But I think this is actually bringing me to the last topic of today, right? I was actually really surprised, five percent already. I think five percent is already for like the state we are at is like fairly big if you just compare how huge this market is. But let’s say people want to get into the industry, right? What would they have to learn? What skills would you look into into a hire that you are making? Or what resources should people learn to start in the industry? I mean, all the big banks are probably going to start hiring soon, right? What are skills that one needs for just –

[00:47:18] SS: I think if you want to get involved in the industry, look, I mean if you haven’t bought any crypto, I would say go on to any of these exchanges, become a client. I mean that’s how you’ll see how their onboarding process works. How does KYC work? It’s all done through digital means, which is a whole other conversation. It’s very interesting because if you’re having this many clients. You have a lot of people you have to onboard. It has to be done digitally, which is actually safer and more accurate than the traditional ways banks do it ironically. So you don’t actually compromise the integrity of the data. It’s actually better data that you’re capturing, but obviously on a higher volume basis. So I would say encourage. If you’ve never done it, go on board to an exchange.  You can trade ten dollars of Bitcoin. It’s not going to get you much, but you’ll buy a piece, and then you can see how does this work. How does a wallet work? Try to move some of it around. So it would actually encourage people just play around with it and just do it in a small amount of money that is not going to make a dent in your savings to see how this works. It’s not rocket science, but it all sounds – I call it very specific language, which is what they use in financial services. They have all these crazy terms like Bermuda call options so they can pay themselves more and make it sound more opaque. But once you understand what that is, “Oh! That’s what that is. Okay.” I mean, wallet addresses and all of this stuff. It’s just a new set of language to describe the movement of money and the movement of tokens around. So I would get up to speed on that.

And if you’re interested, I think the biggest hiring right now in most of these companies where they’re under staff is in tech. So unfortunately if you’re a banker, it’s going to be the tech people unfortunately, which they’re winning anyway. There’s a massive demand for technology in the programming side. But on the other end, as we start to move more into financial services and this becomes like securities business, I think people who understand that business and the selling process, that’s not going to change. So those skills will be useful, but you won’t be selling a traditional equity that trades through Euroclear. And like the way that you bake the cake will change. So you’ll sell it the same way, but the baking process is going to be completely different. You’ll have to understand talking to a token team. I mean, they’re not your typical – It’s not like Walmart’s issuing stock like some boring old company. You’re going to be talking to these crazy technology companies that are issuing their tokens, right? So you have to understand how to deal with a completely different type of client on the issuing side. And then the manufacturing process is very different. It depends on you who is this token going to? Where are you issuing it from? What licenses? And it’s global on day one. Typically equity offerings tend to be very regional and you hear you’re going global. So you have to figure out a whole new sort of way of doing things.

And I think there’s a subset of people that were probably like me in financial services. If you’re sort of an entrepreneur and attracted to kind of the new stuff, then you’ll love this. But I think if you just like, as we would joke, clipping coupons and hanging out and just getting paid because you work at a bank, like, sorry. Your days are numbered and fast. And those people shouldn’t probably like apply for a job because they won’t like this or do very well.

[00:50:17] AVH: Yeah. They should just hope that the revolution comes after they go into retirement.

[00:50:23] SS: Exactly. Exactly. That’s a good way of looking at it.

[00:50:27] AVH: Stay open just to try it out. And I think it’s good. I’m going to have one of the next interviews is going to be about AI in finance. So it’s the same here, right? At the beginning it’s going to be a lot about technology, technologies, but I think in the end everything where you sell, the skill is the same. You just need a understanding of what’s happening in the background.

[00:50:50] SS: Yeah. Yeah. I would sum it up. At the end of the day, you’re selling products to people. So that doesn’t change. These are products you’re selling to people. But the fact that we have new technology – but remember, I mean pre 80s, there were no computers. I mean, “Wow! Like PCs. That revolutionized finance.” And you could do spreadsheets. They used to do them on like an HP. So I think this isn’t new. This type of disruption it’s just a different type of disruption and a different technology, but it’s the same set of issues. And guess what? The industry not only did it not shut down in the 80s when IBM and the Max came out. It boomed. So I think this can be hugely beneficial to the industry. So look, the trains left the station. You’re either going to get on or not. And those who do I think will benefit greatly from it.

[00:51:34] AVH: Perfect. Yeah. Thank you. I learned a lot. It’s been really interesting. We haven’t had a crypto episode in the longest time I guess, which is also crypto episodes from the Wall Street Lab also increase with the Bitcoin price. So we are not better than anybody else out there. Thank you so much for coming on the show. This has been a great pleasure. And yeah, thank you for giving us all those insights.

[00:51:56] SS: Thank you for having me and thanks for listening. It’s a complicated space. But for the folks who take the time, they’ll benefit greatly from it.

[OUTRO]

[00:52:05] AVH: Hey, again. This is Andy. I hope you enjoyed the episode. If you did, please leave us a five star review on Apple Podcasts or wherever you get your podcast from. Share the episode with your friends, with your colleagues and everybody that is interested. And if you want to reach out, feel free to drop us an email, a message on social media. And I look forward to hearing your thoughts, your comments, your feedback. And thanks again for listening. Have a great day.

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