FTX Wants to Compete With CME -- Here's Why It's a Big Deal - Ep.346

Transcript

hey y'all if you've read my book the cryptopians and want to chat about whether or not ethereum would have hard-forked without the involvement of andre tarnowski of chat roulette or how ming-chan was able to stay as executive director of the ethereum foundation despite so many people wanting her out for so long or the shocking market manipulation proposal or whether or not it matters that charles hoskinson appears to have told many tall tales then join one of my book clubs you will also get a free year-long subscription to my premium offering in which i release interviews not available elsewhere head over to bitsky to get an

nft ticket for dates and times that's bits dot ki forward slash laura shin hi everyone welcome to unchained your no hype resource for all things crypto i'm your host laura shin author of the cryptopians i started covering crypto six years ago and is a senior editor at forbes was the first mainstream media reporter to cover cryptocurrency full-time this is the april 29 2022 episode of unchained point change is the easiest way to earn passive income using crypto you can safely deposit cash or cryptocurrencies to earn up to 20 annual yield there is no lending or market risk just simple

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galaxis create unstoppable communities by issuing nfts with interactive dynamic utility traits that allow any creator to engage with reward and monetize their following today's guest is christopher perkins president at coin fund of web3 investment fund welcome chris hey laura thank you so much for having me you're at crypto bahamas this week what has the vibe been like and what are people talking about it's a great vibe here there's so much energy i feel like there's a couple of really big trends that that are facing industry right now and those are positive trends one is that we're starting to see governments policymakers regulators

starting to see that you know they're they're they're starting to support this and go on the offense it really started with the dividend executive order so that threat that thread of just you know government's trying to to see this as an opportunity not a threat is big and then you know institutional adoption uh there are a ton of institutions here trying to learn get educated and really embrace what we're seeing in crypto so super excited exciting vibe here uh some amazing speakers as well and it's just great so uh ftx is one of the organizers of the conference and that's led by sam think vinfreed and it's us arm recently rattled some financial industry bigwigs

you know a little or really a lot about that world why don't you give us a little bit on your background and then tell us what it is that sam and ftx u.s proposed yep thanks laura so i started my career as a us marine and i served in battle ramadi and then i transitioned into a company called lehman brothers which many people have heard about and i got myself into the derivatives industry and uh by the time we went bankrupt i was running our derivatives prime brokerage uh and i saw what happens when crisis hits derivatives at the epicenter of the global financial crisis uh i moved across to city the following day they asked me if i wanted a job i asked them what kind of package they had and they said it was

a really great package it's called the job and so i started the next day and the first thing that i had to do was clean up my own mess at lehman because all of my trades were defaulted and then something happened was called dodd-frank and governments around the world decided that they really wanted to regulate the derivatives industry uh and so i was put in charge of that business where we had to take the 700 trillion dollar derivatives industry from unregulated to regulated and a guy named gary gensler was my head regulator at the time and by the time i left i was running our futures business our foreign exchange brokerage business and then this clear derivatives business so i was at the heart of that now when you step back and you look at how regulators and policy makers

approached this financial crisis it was caused by centralization and the regulatory response was even more centralization and concentration and i don't blame them because there were no technology alternatives at the time and if you look back over the last hundred years regulators really needed you know central nodes that they could monitor and collateralize and regulate because that the idea of decentralizing derivatives just wasn't they didn't there were no capabilities around that and so we ended up in a world where today in the united states you're seeing incredible innovation overseas uh 90 of crypto derivatives are happening are being transacted overseas

and it's incredibly difficult for um our innovators to to adapt this centralized policy uh to to offer crypto derivatives and so if you step back even further you know what is this futures market it can be very confusing to folks but really what it does is it requires um central clearing so all derivatives have to face one central counterparty you've probably heard of it before the cme is an example whether they're by the buyer to the seller and the seller to the buyer so you create this big central counterparty and then members form around that central counterparty and really what those are the banks

and what the banks have to do is guarantee the performance of that ecosystem and so what it results in is a big centralization um and socialization of risk because if one of those members goes bankrupt and there's not enough money in the system then all those other members have to pay for it and so the system that we have today is very centralized the intermediaries to get into the system you have to use go through a member and that member guarantees the risk of the whole system and so it's a very socialized approach what the ftx folks have proposed is something that's going to change this

turn its turn it on its entire head and they're saying look we don't need to have intermediaries in anymore because we have the technology where we can open up access across markets and we can allow individuals to face the clearinghouse directly this is a major major change because it departs from that socialization um ecosystem and it is causing a humongous stir amongst you know the banks amongst the clearing houses and i'm happy to unpack it further yeah well so talk a little bit more about like who would be affected and kind of how they're reacting to this

proposal so it's been really interesting because i said earlier they're the law required this intermediation and what we call those intermediaries we call them futures commission merchants those are the banks right and you would think that if your business is the law that business would be great um but actually it's not if you look back from 2004 there were 188 intermediaries or fcms today they're only 61.

and at the same time what happened was the amount of collateral that they've had to hold has gone through the roof it's gone from like 60 billion in 2002 to 470 billion today so what you're seeing is you're seeing the number of intermediaries come down the amount of risk going up and so we're left with a very concentrated system now the other problem that you know we've been watching is that the the central counterparties themselves they control all the collateral in the system and they calibrate it and they're supposed to calibrate it such that if somebody go goes into default then their own assets stand behind their their default that's

called default or pays that's even though it's a big socialization of risk you really need to have this concept of default or pace but what we've seen is we've seen a lot of under collateralization and we see that in margin breaches which means that the the the movement in the markets isn't enough to it exceeds the collateral that's been set so we're seeing that that as a trend and we also saw with like nasdaq omx that there have been instances as late as as recently as 2018 where the other members have had to pay so so there's some issues in the system and you know one thing that that's really plaguing these intermediaries is their legacy technology where it's very batch driven today um and and the problem here is that they really

can't keep up with the crypto markets and this is what's happening when people trade the risk immediately hits the system and but collateral isn't called by the clearinghouse it could be called from the intermediary right away but then the bank has to wait until the end of the next day to collect the collateral back and so for crypto markets right these markets trade 24 7. they can be volatile um we know that and we like it and it's a new asset class being born but it's very hard to reconcile the dynamic risk management of crypto markets with these very slow arduous batch-driven processes and so frankly the the banks are really

really struggling uh to keep up with crypto derivatives and so who stands to who stands to win here and who stands to lose i think the people that stand to win are the u.s people the u.s market participants themselves right because what are derivatives derivatives have been around for centuries they originally started by helping farmers hedge their risk for their crops right and so we're left in a situation in america where market participants you know are transacting in cryptocurrencies but they don't have a viable dynamic derivatives market that allows them to hedge their risk and so to the extent that ftx can come

in you know address those operational shortfalls they can potentially offer you know the us derivatives the u.s u.s persons the ability to better hedge their risk which is awesome for crypto markets so for that reason you know i think it's such a no-brainer to really think through now the regulators are concerned about a couple of things this model is different in that we do have this this concept of auto liquidation in futures markets but frankly you have the same concept in traditional markets because if you miss a margin call you can get liquidated but here it's more automated um and so what i think regulators are going to look at is a couple of things

number one are there appropriate disclaimers do people know you know what they're doing and and and i think that's very easy to solve for and the second thing is remember you're departing from this old system where the banks are guaranteeing it's the performance of the system and in this case ftx is saying you know we don't need those guarantees because we're gonna manage manage risk and collateralize risk in real time and to the extent there is a shortfall we're going to meet that shortfall through our own obligations which is something that kind of aligns interest if you ask me um so you know it's a big departure it's something that i think

if we're able to move forward with it it'll be very good for markets um it'll be good for us persons um the and i the other thing that i love about it is it introduces competition right when you have a new model that may be more inclusive um you know when i was running our futures business um you know there's times when you just couldn't you couldn't extend your services to to hedgers that only traded a few times a year to hedge the risk where you'd have to say listen i have to give you a big minimum because my costs are so high so i think it'll lead to a more inclusive marketplace i think it'll lead to a marketplace that's probably more cost effective because there's fewer toll takers around finally you know i think the banks are having

debates amongst themselves on the future um i think at the end of the day it's my guess that the banks will actually support uh this model because it will give them the opportunity to get involved maybe in new and exciting ways and i think it will also incentivize the legacy providers maybe to kick their technology up a gear and and again i think this type of competition and a move to real-time risk management is going to be really good for markets yeah it's incredibly fascinating um so in a moment we're going to talk a little bit more about next steps but first a quick word from the sponsors who make this show possible it's becoming clear that utility is the future of nft technology

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ledger x which is kind of what enabled them to make this proposal so can you talk a little bit about that maneuver and then just generally like what this could mean for ftx us yeah we talk about it um amongst a number of market participants to operate in the united states you need certain licenses and you know spot markets and crypto some of the regulation i would say is a bit you know gray at best we're trying to figure out the right principles based uh regulatory framework but the thing about derivatives is that they're fully regulated and the law that was passed with dodd-frank you know articulated exactly how the law works so there's no ambiguity around the regulation of derivatives themselves

and when you unpack the the law and regulations around derivatives to operate you need certain licenses and the license that ledger x had was something called the dco derivatives clearing organization which is a license that allows you to be the buyer to the seller and the seller to the buyer effectively the entity that controls the entire ecosystem and calibrates risk management and so to operate you need to have that dco you've seen that other folks like coinbase purchase ferrex which is a dcm a dcm is a designated contract market it's an exchange essentially for for futures and so in order to operate in the us

derivatives market you need to put together like i call them like these regulatory legos these licenses in order to function from front to back the last license that you need to operate in today's service market is something called the fcm the futures commission merchant that's the intermediary and so exchange need a license intermediary you need a license clearinghouse you need a license and what the ledger x acquisition did it gave ftx the license to operate as a clearinghouse in the united states so it's a necessary ingredient and now they're saying okay i've got the dco i don't need the fcm because i can i can risk manage the system without it

and again i think it's very exciting and i think it's gonna it's an innovation that um could revitalize derivatives markets which have largely migrated overseas yeah and i do know so the bloomberg article that broke this news said the industry seemed concerned that the proposal could give ftx a toe hole to expand into markets for everything from oil to gold to currencies so what do you think of that concern and why don't we actually just tie it in with the fact that already cme has come out against this so you know my thesis is that these markets are coming together um you know what's a better marketplace one that settles you know on an arduous 12-hour batch cycle or one

that leverages tokens to settle in real time right and so i believe that traditional finance um and crypto at the end of the day they're gonna come together and i think in many cases crypto technology is going to eat the legacy technology but why wouldn't we want to ultimately extend it to other asset classes now you can't just race into it and i think there needs to be a lot of thought that goes into it at the end of the day you know derivatives are incredibly important from a risk management perspective and so when you move to 24-hour markets seven days a week which is happening and has happened i think unique risks could emerge like what happens if a commodities contract with a

low liquidity at two in the morning a trade gets done and it triggers you know it triggers an off-market valuation that leads to liquidations these are the types of things that need to be thought through but i think it's inevitable that the entire world is going to move to 24-hour uh seven-day-a-week markets and i think the us derivatives market is going to be part of that i mean um it just doesn't make sense otherwise you know derivatives help you risk manage dynamic risk management is what we owe to u.s persons so there's going to be a comment or there is a comment period that will end on may 11th and this wednesday the cftc announced that there would be a public discussion on on this proposal on may 25th

so what do you think this signals is this kind of standard operating procedure or does it give some indication of how likely the proposal is to pass so in my discussions with with the cftc they're very thoughtful regulator um and they're asking all the right questions and they're trying to get educated um to reach the right principles based conclusion i think when you look at that in the context of president biden's executive order and and secretary yellen's uh discussion around hey let's go from the defense to the offense and let's focus on responsible innovation this fits right in the wheelhouse and derivatives are a cornerstone of the us economy um frankly the cornerstone of our national security and so i'm very

excited about the about these public hearings about the desire to be educated to understand the opportunity and the risk my personal belief is that um i'm very hopeful and encouraged that some that we are able to move forward perhaps starting with crypto derivatives because right now the ability uh in the united states is is very limited to cash settle a couple of cash level products but i would love to to come away from these hearings with an opportunity for us persons to hedge their risk and at the time of this public discussion what will you be watching for in terms of tea leaves you know i'm really interested to hear reasons why we shouldn't move forward

um you know in my mind i i saw a comment today by one of the ceos saying you know principles-based innovation right and as i look at that the principles that were able to deliver through the ftx proposal would be perhaps you know more inclusivity it would be better risk management and so i would love to hear the counter arguments around why you know we shouldn't revitalize our futures markets because i need to understand them better to me it's kind of a no-brainer that we should embrace technology and unlock its promise while understanding the risk and come up with regulatory guard rails to make sure that those risks are mitigated so like that's really what i want to see

um and then of course um interested to see how the commissioners react the other thing to watch right is is the partisan nature of the dialogue and in my experience in talking to regulators and policy makers i actually don't see too much of it right and if you look at historical decisions made by the cftc they're typically along party lines um not always but but a lot of times i'm guessing that in this case that may not be the case and so if there's any partisan is partisan-ism that's introduced i would be that would be very curious to me because from my experience you know even if you look at like recent congressional races it's very much a bipartisan phenomena where

you know eric adams and ted cruz are agreeing that you know we need to embrace this technology so that would be something that i would watch but i i don't expect it to be partisan all right well we will have to um see what happens at that time this has been an incredibly fascinating discussion thanks so much for coming on unchained laura it's an honor uh thank you for uh i'm an avid listener so so thank you for uh the content you produce and an awesome job on cryptopians thank you don't forget next up is the weekly news recap stick around for this week in crypto after this short break it's time to bring wall street to main street coin change is democratizing access to wealth management with low risk high

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recap bitcoin is now legal tender in central african republic the central african republic cer a country home to 4.9 million people has adopted bitcoin as legal tender within its borders according to the afp news agency car president faustine archangel tuadera signed a law legalizing all cryptocurrencies and recognizing bitcoin as legal tender this week finance minister ayerve nboda was proud of the country's move he explained to bloomberg there's a common narrative that sub-saharan african countries are often one step behind when it comes to adopting new technology this time we can actually say that our country is one

step ahead cer is the first country to legalize bitcoin as legal tender in africa and the second in the world joining el salvador notably the cer news came during the same week that former bitmex ceo and noted analyst arthur hayes made the case for the doom loop in his most recent article arguing that bitcoin adoption at the country level would lead to a one million dollar price per coin he wrote flags meaning nations will pursue a savings policy mix that includes storing commodities and purchasing gold bitcoin the fact that usd and eur assets are not part of this mix combined with entrenched real goods and energy inflation puts the doom loop

into motion the doom loop will usher in one million dollar bitcoin and ten thousand to twenty thousand dollar gold by the end of the decade elon musk is buying twitter here's why that's important for crypto twitter is set to go private after formally accepting a 44 billion dollar bid from tesla ceo elon musk the news was announced in a press release tuesday with the twitter board unanimously approving the deal that will see every shareholder receive a payout of 54.20 per share while there are still some details to be worked out before the elon deal officially goes through the news had some instant implications for the crypto market and could have far-reaching effects as well just as i did in a

bulletin newsletter this week let's break down three ways musk's bid for twitter is noteworthy for crypto first as usual musk's action pumped the price of doge with the monday news release pushing the meme coin up by about 20 before coming back down rather quickly dogecoin fanatics are most likely excited about the news as musk recently showed interest in doge tipping a twitter native feature furthermore tesla accepts doge for certain merchandise setting a precedent for musk to utilize the currency at his companies speaking of tesla the electric car manufacturer and the musk led spacex holds btc on their balance sheets adding twitter to that list does not seem crazy

especially considering the app has already integrated lightning payments musk made it clear that eliminating bots will be a priority for twitter under his leadership this will be a major user experience upgrade for crypto twitter as imposterbot accounts frequently scam new or unlucky users via phishing links and private key ploys on that note i'm personally interested in how crypto tools like zero knowledge technology could be used to help authenticate users fidelity bitcoin 401ks are on the way fidelity investments will allow clients to add bitcoin to their 401k retirement plans later this year the firm announced on tuesday employers will be able to cap

bitcoin savings at 20 of an employee's account there is growing interest from plan sponsors for vehicles that enable them to provide their employees access to digital assets in defined contribution plans and intern from individuals with an appetite to incorporate cryptocurrencies into their long-term investment strategies said dave gray head of workplace retirement offerings and platforms at fidelity investments in a press release crazy stat according to coindesk's research ceruli associates estimates the fidelity held around 2.4 trillion dollars in 401k assets in 2020. that's nearly triple bitcoin's market capitalization

the michael sailor led software firm microstrategy is at the front of the line for fidelity's offering and announced on tuesday that it plans to offer employees access to bitcoin via fidelity 401ks microstrategy looks forward to working with fidelity digital assets to become the first public company to offer their employees the option to invest in bitcoin as part of our 401k program tweeted sailor in related traditional finance meets crypto news stripe announced a new pilot product with twitter for ticketed spaces and super follows to support payouts in usdc over polygon goldman sachs says it is exploring the tokenization of real assets via nfts coindesk reports that matthew mcdermott

global head of digital assets at goldman sachs said we are actually exploring nfts in the context of financial instruments and actually there the power is actually quite powerful so we work on a number of things he said at the financial times crypto and digital asset summit on wednesday paypal ceo dan shulman said that the firm needs to double down on digital wallets because that is where the future of the industry and the future of paypal is going vitalik seems optimistic about optimism optimism the third largest ethereum layer two by total value locked fourth if you count polygon announced plans for governance this week called the optimism collective optimism

will now be operated by two distinct groups the token house and the citizens house as its name implies token house will be run by the soon to be airdropped op token which will govern the optimism protocol via on-chain voting this is more or less industry standard with citizens house optimism is trying something new the l2 plans to use soul-bound nfts or nfts that are non-transferable to allow non-token op holders to decide how future revenue collected by optimism is used the plan has ethereum co-founder vitalik buterin excited possibly the biggest attempt at non-token holder-centric dow governance so far excited to see where this goes he tweeted

as for the token 20 of op is set aside for public goods funding 25 for an ecosystem fund core contributors will receive 19 investors 17 and 19 of the op supply is allocated for air drops with 5 being air dropped soon in the first season over 250 000 addresses met optimism's round one airdrop criteria a 34 million dollar smart contract error acoutars a much anticipated nft project headed by digital artist and former major league baseball player micah johnson underwent its initial drop with a faulty smart contract leading to 34 million dollars worth of ether being

locked away from both creators and purchasers two smart contract errors were found shortly after the drop started though aku developers denied anything was wrong the first was rectified after a hacker froze and unfroze the refund capability of the akutar mint however the second error which miscounted the number of nfts necessary to unlock funds proved fatal and led to 11 539 eth or 34 million dollars being locked into a smart contract i'm so sorry i'm so sorry to the aku family i care so deeply about the aku family i let you all down and i'm so sorry wrote johnson on twitter since then the aqua team has refunded affected users and successfully

finalized an airdrop of the nfts despite the shaky drop the 15 000 piece collection holds a floor price of 1.9 eth on openc a tale of two cities new york passed a law looking to pause new non-renewable energy-based proof-of-work mining the new york state assembly passed a law that would place a two-year moratorium on the approval for new mining operations utilizing the proof of our consensus algorithm and powered by non-renewable energy furthermore the bill would prevent existing operations from renewing their permits this could stymie new bitcoin and ethereum mining in new york if the law passes in the state senate and if many of these miners don't use renewable

energy of the total hash rate in the us 19.9 percent is housed in new york fort worth the first mining city on the opposite end of the spectrum lies fort worth texas which is set to become the first city in the united states to start mining bitcoin in a pilot project through a partnership with texas blockchain council the city will be maintaining three mining rigs in a climate-controlled location in city hall 77 million dollars in btc will be donated to ukraine in fiat earlier this week it was reported that finland was considering ways to donate up to 77 million dollars worth of seized bitcoin to ukraine notably there was disagreement about whether the bitcoin should be sent over

the bitcoin network or whether customs should cash out the bitcoin and donate the resulting fee on on thursday it was confirmed that finland would be doing the latter and will give coinmotion and tesseract to crypto firms the 1890 btc by early summer for them to sell for euros which will then be donated to ukraine deus dau down 13.4 million due to a hack deuce finance a defy application was exploited with the hacker getting away with 13.4 million dollars according to coindesk the hacker utilized it with a specialized 143 million dollar flash loan attack to artificially inflate the value of assets borrow funds and make a profit after

selling this is the second exploit in 2022 for deuce time for fun bits whoa edward snowden played a role in the birth of zcash the founding of zcash a much covered story that involved six participants breaking up a private key controlling the ability to mint tokens in a plan called the ceremony just got a little bit crazier the publicly known zcash founders have so far included zuko and nathan wilcox coin center's peter van valkenberg security engineer derek hinch and bitcoin developer peter todd who each went to great lengths via overseas flights burned equipment tin foil and air-gapped computers to make sure the

ceremony was completed without a nefarious hacker gaining access to the key controlling the supply of zcash however until this week it was not known that rounding out the group of sex was the famous whistleblower and former u.s defense contractor edward snowden stone's involvement in the 2016 event occurred three years after the u.s charged him with espionage and was done under the pseudonym john darberton however according to snowden it was not the opportunity to invest but his interest in zcash technology which is privacy focused and helps users off escape blockchain transactions through dark pulls which led to his involvement as long as it is clear that i was never paid and had no stake it was just a

public interest thing i think you can tell people wrote snowden thanks so much for joining us today to learn more about chris and coinfund check out the show notes for this episode if you've read my book the cryptopians and want to chat about whether or not ethereum would have hard forked without the involvement of andre tarnowski of chatula how ming-chan was able to stay as executive director of the ethereum foundation despite so many people wanting her out for so long whether or not it matters that charles hoskinson appears to have told many tall tales and the shocking market manipulation proposal and much more then join one of my book clubs you will get a free year-long subscription to my premium offering in which i release interviews

not available elsewhere head over to bitsky.com to get an nft ticket for dates and times that's b i t s dot k i forward slash laura shin unchained is produced by me laura shin without from anthony yoon daniel ness mark murdoch shashank and clk transcription thanks for listening you