The whole space is a transition from analogue finance to digital finance… this is true when you talk about increased efficiency for financial product settlement and it’s also true when you talk about potential sweeping changes like un-tethering assets from any specific jurisdiction… ultimately it’s inevitable analogue to digital like every other industry.
So many people in crypto think as derivatives as a way to speculate on up-down / higher-lower… on price leveraged… when you come from legacy markets you don’t necessarily think about the front month, most of the products you’re trading have curves to them… you’ve seen Bitmex and FTX start to put duration on futures… what that ultimately creates is liquidity, because when you have market makers or traders who are able to trade on futures/derivatives non-linear or linear and the have different liquidity touch points or reasons for doing business it just creates better price discovery and more volume… the more touch-points that can be created and the more creativity you can get around it the deeper the liquidity ultimately is going to be and getting true price discovery is going to be much more efficient for the market as a whole.
This looks like the next stock market to me, do you see just a single marketplace that includes blockchain-based stocks and equities matched with crypto all in one big market?
Regulation will mean that it will take time… we can work towards something like that in the future… it will have that analogy to the equity markets there will definitely be some attrition, with so many liquidity pools worldwide… when I first got into the market my principals were telling me crypto markets is like FX 30 years ago… with all the fragmentation and liquidity I can see that… you can see from traditional markets it starts fragmented and as it matures new technology comes about liquidity gets better and begins to aggregate. I can see the scores and scores of liquidity pools worldwide either merging or even if it isn’t as small as few liquidity pools like equities (NYSE, NASDAQ, CME)… the merging of liquidity polls is the natural attrition of any new emerging market.
…or the idea of Prime Brokerage, you read all these press release where every single company in crypto now is trying to become a Prime Broker… that’s this idea… improving capital efficiency for your clients that is fundamentally going to change the way people interact with derivatives and probably start using derivatives more in the way you would use interest in markets to express views and change your time duration for various trades you’re putting on… that’s going to improve overall liquidity as well… if you have a position in legacy markets say an oil futures position on the CME trading that against a position on ICE my bank may look at the position i have on ICE or the CME and then lend me the capital to carry the position on the other… in crypto everyone has complained for so long that “say I have these two trades on a basis trade on spot vs futures and I have to move like 100 Bitcoin to another exchange and the network is clogged/slow and you get all these issues”. So solving those issues will be so valuable to the institutional clients because they’ll be the clients that’ll get the most benefit from that initially, over time that will feed down to the rest of the world as there will be better liquidity and more efficiency around price and you’ll see less instances where there’s a complete vaporising of liquidity and suddenly Bitcoin goes down to $6000 from $12,000 in 30 seconds, you see a lot less of that over time because capital will be more efficient.
What’s your long term outlook on centralised vs decentralised derivatives trading?
… the lack of transparency is scary, decentralisation is fine as a virtue but when you see people just throwing stable coins or bitcoin into one of these decentralised protocols without really understanding whats on the other side of that. You can throw anything into a derivative and start generating yield… users don’t know the difference in risks between one that’s offering 2% and one that’s offering 15%… more transparency might come in to play with regulation and that’s at odds with the whole decentralised mentality… so we have to find that fundamental balance / equilibrium on that spectrum to protect the average user and at the same time blow up the stranglehold of the oligopolistic traditional finance model.
Here I was living in Spain and we’re about to loose the banking system… realising that the whole thing was a mess. The collateral at the heart of the system was rehypothecated when it claimed it wasn’t… it’s a mess, it’s a mess in who owns what, it’s a mess in leverage, it’s a mess in every level and at that point I realised that we need something different so I was trying to set up a bank at the time… that was trying to be the worlds safest bank that had no leverage… and it was just complicated… really hard. Never have I seen a black hole like this where all the smart guys in technology are getting sucked in, the smart guys in finance are getting sucked in, the philosophical thinkers… the non-mainstream economics people… everybody’s being sucked into the space which is like a super black hole of talent. I’ve not seen anything of this magnitude before in terms of the sheer number of people and the size of the outcomes. When you started in the internet you didn’t know the outcome but we know how big money is, money is one of the oldest things on earth and we know the size of it… it’s not just about money everything is going to be tokenised, literally everything. The whole digitisation of assets none of us can get our heads around… everything is about to change, its a platform change of money and value… that’s extraordinary.
How soon can we expect a CBDC?
I think it’s coming fast… maybe the next 2 years…they’ll create digital on-ramps and off-ramps making everything easier… it’s a nightmare for someone in the Cayman islands to open a Kraken account it took me 7 weeks… PayPal manged to solve the KYC problem so it must be solvable in the blockchain space, it would literally change and accelerate everything overnight.