Edward Woodford: Building A Regulated Crypto Exchange

Edward Woodford is the co-founder of Seed CX, an institutional trading platform that recieved approval from the CFCT as a Swap Execution Facility (SEF) in August 2016. In this conversation, Woodford and Anthony Pompliano discuss crypto financial products, emerging markets, how institutional investors think, and why crypto is such an interesting problem for anyone building regulated exchanges.

• 0:02Speaker 00

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off the Chain, simply the best podcast in crypto. Let's kick this thing off.

• 0:15Speaker 00

  Edward Woodford is the co-founder of Seed CX, an institutional trading platform that received approval from the CFTC as a swap execution facility in August 2016. In this conversation, we discuss crypto financial products, emerging markets, how institutional investors think, and why crypto is such an interesting problem for anyone building regulated exchanges. I really enjoyed this conversation, and I hope you do too.

• 0:41Speaker 00

  This podcast is presented by Blockworks Group, the only blockchain event and media production company I trust. If you're an investor, lawyer, accountant, or entrepreneur, and want to attend exclusive events and dinners, visit them at blockworksgroup.io. I promise you won't be disappointed.

• 0:58Speaker 01

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 1:25Speaker 00

  Before we get into this episode, I want to give a quick shout out to one of our sponsors. Soluna is a blockchain computing company powered by its own renewable energy. The team is planning to build a 900-megawatt facility on top of a 37,000-acre location, one of the best wind sites in the world in southern Morocco. You'll hear more from them later in this episode, but I'd love if you could go check out their website. You can find them at soluna.io.

• 1:49Speaker 00

  Alright guys, I'm here with Edward. Thank you so much for coming.

• 1:52Speaker 02

  Thanks for having me.

• 1:53Speaker 00

  Awesome. Alright, so let's start with your background, because it's a little different, and then we can start getting into how you found crypto and go from there.

• 2:03Speaker 02

  Yeah, no. So, as you can probably tell by the accent, originally from the UK, came to the US.

• 2:10Speaker 00

  I thought you were from New York.

• 2:11Speaker 02

  Yeah, I know, easily confused. But I was in a...

• 2:16Speaker 02

  So I came to the US for grad school and then kind of became really interested in kind of emerging markets. And I saw this opportunity, along with my co-founder Brian, that people were very reluctant to enter new markets where there were, for whatever reason, some sense of controversy, there was some sense of a perception of risk. Despite the fact that there was this mass, there were these massive potential markets that could grow really, really quickly. And there was this visceral reaction that people had towards these markets. And we said, hey, we've actually got an opportunity here. We can research these things, get a real competitive edge and grow. And so we started off very much in the agricultural space.

• 3:00Speaker 00

  And just to be clear, you're talking about retail investors who want, they're looking for investment opportunities, you know, looking for yield. And you guys saw an opportunity for higher yielding products in emerging markets and products, but maybe these people were a little gun shy because of exchanges or whatever that might not exist or weren't at the par.

• 3:23Speaker 02

  Yeah, we really, the exchanges were the really, the groups that we saw as the risk verse groups. We wanted to start off in the institutional space and then potentially move forward into the retail space. But it was not only the potential for different yields, but it was also the correlations that these products exhibited were potentially quite interesting. But also you were providing a fundamental hedging product so that people in these emerging industries could actually hedge risk and potentially increase the growth of these industries.

• 3:49Speaker 00

  So where did, when you guys saw that there was opportunity to go into kind of newer markets, newer products and create exchange infrastructure, where did you guys kind of look first of all was interesting?

• 4:00Speaker 02

  Yeah, I mean, so we looked off at the industrial hemp space, organics, avocados, limes. We were fortunate that MIT gave us more credibility than potentially we were due. And we went forward, got regulated by the CFTC as a swap execution facility. And then about two years ago, we started to see that many of the same features that we were interested in. The markets were really strongly exhibited in digital assets. And so we moved full force into the digital asset space, becoming increasingly regulated to offer both spot and derivatives in this market, principally for institutional investors.

• 4:41Speaker 00

  So, okay, so let's back up with, walk us through the process of, you know, you want to create an exchange for avocados, limes and hemp, right?

• 4:51Speaker 02

  Yeah.

• 4:51Speaker 00

  And you show up to the CFTC to get the regulatory approvals. What is that process like and, you know, what are kind of the obstacles that you face and you've got to kind of get through? And then we can compare it to the digital asset space. Well, let's start with kind of the non-digital assets first.

• 5:09Speaker 02

  Yeah, so there's kind of two parts to that question. One is the regulatory entity on which derivative products can be traded on. And those entities are typically asset agnostic. So the first piece is to get that regulatory entity. The second piece is then, once you have that regulatory entity, getting the products approved or certified, there's a process called self-certification with the CFTC. And what they're really looking at when they're doing that kind of process on the product side is making sure that those markets cannot be manipulated, that the product construct reflects the actual spot market.

• 5:51Speaker 02

  And they're trying to make, basically make sure that there's efficient markets and there's not been manipulation. The actual entity, the Swap Execution Facility License that we have, it's an extended process. It takes quite a long time. Fundamentally, there's 15 core principles. The CFTC versus the SEC is more of a principle-based organization. So they lay out these principles and you have to show how you meet those principles in a number of ways that you do them. So for example, your rulebook, your compliance manual, your surveillance manual. All of these kind of processes to show them that you fundamentally acknowledge these principles and you will enact them because in a sense you are a self-regulatory body. And so they're given that, they're entrusted that in you.

• 6:37Speaker 00

  So they're not even saying you have to have a rulebook. What they're saying is there's a principle and then the way that you show you have met that principle or kind of the spirit of the principle is you have a rulebook.

• 6:49Speaker 02

  Um, to some degree, um, they, they do set out required exhibits and one of those exhibits is a rulebook.

• 6:55Speaker 00

  Okay.

• 6:55Speaker 02

  But it's how do you convey those principles into that rulebook?

• 6:59Speaker 00

  Got it.

• 6:59Speaker 02

  Um, increasingly, there's, um, there's standards that the regulators would like you to, to, to use, um, but it's a much more principles-based organization than the, um, SEC, which is obviously the securities regulator.

• 7:12Speaker 00

  Got it. No, super interesting. Okay. And then, um, as you guys were kind of going down the path of the avocados, limes, hemp, et cetera, why not actually launch a product, uh, and kind of go after those markets? What changed?

• 7:25Speaker 02

  Yeah. So we, we worked on getting those products, um, basically self-certified, which means as, as a process, and this is a term that's been much more commonly used recently with the, with the derivative products that were just launched in digital assets. There was this talk of self-certification, what it means and whether it should be changed. Um, but what self-certification means is essentially that you file a draft product with the CFTC. Um, they look at it, they analyze it, um, the economists, um, review the work that you've done, um, looking at things like deliverable supply. Um, and at that point, um, once they've, you've answered their questions, they essentially give you the green light to self-certify. There's no formal, um, approval. Um, our fundamental

• 8:09Speaker 02

  thesis on a lot of those products was that those markets would grow by the time that we had the products, um, ready. Um, and those products just were not, the markets just had not grown to the size that we had anticipated. Um, and so we took a step back and we said, okay, where do we focus our time? We have interest in regulatory assets. We are very well-banked, um, and we have good technology. And let's look at the markets again. Let's look at the fundamental thesis that we had, which was around what we called seed markets, i.e. ones that were just about to flourish. And digital assets really looked like it had all the signals. Um, and bear in mind, this was, you know, almost two years ago now. Um, it wasn't what it was today.

• 8:50Speaker 00

  Yeah.

• 8:50Speaker 02

  Um, where it's like, yes, well, well, correct. But i- i- it's kind of with digital assets, the, the pillars fell or the dominoes of kind of Row fell and those other markets didn't. And we always knew that was going to be the case. But if you look at exchanges, if you look at sophisticated exchanges and other asset classes, exchange volume is concentrated in a small number of products.

• 9:12Speaker 00

  Yep.

• 9:12Speaker 02

  So you really got to believe that that product, you're going to have one product that will actually, what we term a Uber product, in the same way that a VC wants, it needs an Uber in its portfolio to give you the returns. It's the same in exchanges. You need products that will give you those Uber returns. And so we went full fledged into the digital asset space.

• 9:29Speaker 00

  Got it. Okay. And so as you've done that, let's pause for a second. And I want to go over some terminology that gets thrown around a lot, both digital assets and in the exchange world.

• 9:42Speaker 02

  Yep.

• 9:44Speaker 00

  Don't worry about the dictionary definition, but just give me kind of in practice, you know, what do these terms mean? Because I think a lot of people hear them, you know, they nod their head and say, yep, exactly. I know exactly what that means. And they have zero clue, right? And frankly, they're too lazy to go Google it. So you're going to be Google for us for a second.

• 10:00Speaker 02

  Okay, I'll try my best.

• 10:02Speaker 00

  Yeah, of course. So spot trading.

• 10:05Speaker 02

  So I would say spot trading is here and now. So as in I buy, you sell, and we actually get.

• 10:12Speaker 00

  At the market rate, whatever the market is right now.

• 10:14Speaker 02

  Whatever the market price is right now. And then we do the exchange. Legally, the technical definition, and it's kind of, not to get too much into the nuance, but it essentially means settlement in under 28 days. And this actually means something that digital asset space, this is why if you look at all the manuals and the rulebooks of these other exchanges, they talk about settlement within 28 days, because that is seen as the cutoff. But principally, spot market is here and now. I buy a Bitcoin off of you at an agreed price, and I get the Bitcoin later today.

• 10:46Speaker 00

  Okay, so the trade, a spot trade means we look at a price on an exchange right at this second, and I say, I'll buy at that price. You say, I'll sell at that price, and that's a spot trade. Now, settlement, right? What does that mean? Where does that play in?

• 11:02Speaker 02

  Yeah, so settlement, so there's two parts of a trade. There's execution, matching and execution. And then the other part is settlement. So me and you, we say, okay, we're going to agree at price X. That's the match and execution. The settlement piece is, okay, the fiat and the digital assets actually move. So that's the settlement piece. So it's these two distinct parts. And in other markets, these two things are conducted by different groups. The exchange is different from the actual settlement entity.

• 11:31Speaker 00

  Yeah.

• 11:32Speaker 02

  But we've seen digital assets as though those two things are combined principally because of the fact that other institutions that typically perform these functions don't exist in this space. But settlement is the movement of the digital assets and fiat to essentially settle or make whole the trade.

• 11:51Speaker 00

  Got it. So one is agreement right around price, assets, you know, currencies, et cetera. And then the settlement is the actual consummation of the true physical trade of the currency moving and the digital asset.

• 12:03Speaker 02

  Correct.

• 12:04Speaker 00

  All right. So let's talk about derivative trading. So spot trading is here and now we're actually taking the individual asset and agreeing and then we'll settle it in some period of time. Derivative trading is?

• 12:14Speaker 02

  Yeah, so derivative trading is somewhat forward dated. So me and you, we decide on a price at a forward dated point. So we could say, hey, let's enter into a forward contract in a month's time at X price. And so what will happen in a month's time is that the settlement will occur at that point.

• 12:35Speaker 00

  So we say, let's use a real example. So today Bitcoin is trading at $6,500.

• 12:39Speaker 02

  Yeah.

• 12:39Speaker 00

  We would say in 30 days, we are going to transact at $7,500, right? And you're saying that you'll buy at $7,500, sell at $7,500. If it goes up to $7,500, then that's good for one of us. And if it doesn't, then that's bad for one of us.

• 12:56Speaker 02

  Exactly. You're taking a position somewhat on the future.

• 13:03Speaker 02

  And this can also serve as a hedge product, but hedging meaning that you are a natural user of the assets and you want to protect the potential price risk that exists. So, for example, hedges in the digital asset space actually includes, for example, miners. They are essentially mining in the same way that a copper miner has copper risk. But also, we actually see hedges actually being actual other exchanges. Other exchanges take fees in digital assets, yet their costs typically are in fiat. And they can project

• 13:42Speaker 02

  how much digital asset they will likely collect in the future. They can lock in that price and so they can make better strategic decisions. And that's the fundamental purpose of hedging is partly it is speculation for certain groups, but the core purpose and the genesis of this was fundamental hedging.

• 14:03Speaker 00

  Got it. Okay, that makes sense. And then let's talk about market surveillance. Right? So this is something that gets thrown in a lot by regulators and people who are, you know, looking at all sorts of regulatory approvals. But again, I think it's a term that people don't really understand.

• 14:18Speaker 02

  Yeah, so market surveillance essentially is you're looking for potential mistakes or you're looking for bad actors. And the way that market surveillance actually really works is you have these automated alerts. So for example, at CCX, we have over 30 alerts. And then what happens is, is that that triggers, just because it's a machine, triggers a lot of false positives. And then you have surveillance specialists who understand the markets, understand the actual players, and they're looking at things like wash trading. Are you trying to manipulate the price by essentially putting these trades through? Are mistakes being made? Do you need to assess if a mistake has been made? So for example,

• 15:02Speaker 02

  a fat finger, a fat finger essentially is, well, what it really means is basically you put in the wrong number by material amount because you have a fat finger. So you hit the number. Next to it. So you have all of these automated alerts and exchanges don't go into those exchanges that do surveillance like ourselves. We don't go into detail about the kind of alerts that we have because essentially you're trying to surveil the market and not give away.

• 15:27Speaker 00

  You don't want to tell them the secrets.

• 15:28Speaker 02

  Exactly. Give away exactly what you're monitoring. But the purpose fundamentally is to prevent manipulation of the price and to make sure that it is a fair and balanced platform for everybody on the exchange.

• 15:42Speaker 00

  Got it. So really market surveillance is like automated vigilance.

• 15:45Speaker 02

  Exactly. That's the best way to put it.

• 15:46Speaker 00

  Got it. Okay. Now that makes sense. Custody.

• 15:50Speaker 02

  Yeah. So custody is obviously something that people talk about a lot in this space, to say the least. Probably you probably get the word dropped every couple of hours.

• 16:01Speaker 00

  It's a word where we should just start dropping in the middle of sentences, right? Where it doesn't even make sense and people just nod their head, yep, uh huh, custody. Yeah, that's important.

• 16:07Speaker 02

  Yeah, it's always it's always the go to question with kind of new digital assets. Well, when you meet someone for the first time, it's kind of like go to. It's not what's your job. It's also what do you think custody right now? That's the question. So custody is really the holding of assets or fiat.

• 16:27Speaker 02

  And that's kind of custody as we define with a small c. So that's just the holding of it. Who who who holds it? There's this concept of qualified custodianship and that makes that's required for registered investment advisors who hold above, I believe, the numbers 125 million dollars or there's some threshold. And basically what the rules say is that if you are a registered investment advisor that meet these qualifications, you have to hold the assets at a qualified custodian. And a qualified custodian is a definition and it can cover a whole host of things, including broker dealers, banks, certain trusts, FCMs.

• 17:13Speaker 02

  And so that's what a qualified custodian is. And often these terms are somewhat conflated, but.

• 17:20Speaker 02

  Custody is essentially, how do you, what's the entity or how's the actual assets being held? And then the qualified custodian piece is the actual legal entity. Those two pieces are important, but really, and it's kind of, when people talk about why custodianship is important is because if you are holding your assets at a place, you want to make sure that they really have balance sheet. And I think that's kind of one of the points that is often not discussed, which is, okay, we talk a lot about custodianship, about security of assets, which is super, super important. We talk a little bit about the regulatory implications, but the reason that when we talk about big institutions coming into the space, it is they're also looking at balance

• 18:01Speaker 02

  sheet of these custodians, which is kind of ironic, given the fact that this is a distributed system that we're saying, hey, I need to hold my assets in a, in a place where there is actually centralization with a, with a huge balance sheet. And then that's a function of mindset that still exists and potentially will change, potentially won't. But people feel more comfortable holding, or certain people still feel more comfortable holding them at a bank with big balance sheet, rather than on a distributed ledger with, you know, or holding it themselves in cold storage. That is just a perception and mindset that exists amongst certain people. It may change, it may not, but that's essentially what custodianship is.

• 18:41Speaker 00

  You're, you're gonna love this. I come up with these phrases randomly sometimes to, to remember concepts and this reminds me a lot of like, the banks are too big to fail, right? But the code is too secure to fail.

• 18:53Speaker 02

  Yeah.

• 18:54Speaker 00

  And so right now, what we're doing on the custody side is we're looking for banks that are too big to fail, but we should actually start trusting the code more and understanding that if the code is written correctly, that's where the security actually is.

• 19:06Speaker 02

  Yeah, I mean, there's a lot of work that, I mean, these, these banks are probably, you know, some of them are very good at security. I mean, these are instrumental organizations. If they get hacked, it has actually an impact on the entire economy.

• 19:20Speaker 00

  Yep.

• 19:21Speaker 02

  Whereas if.

• 19:22Speaker 00

  Or if they just fail like in 2008.

• 19:23Speaker 02

  Yes, exactly. So it's kind of this ironic, or maybe it's not ironic, but this kind of melding of two worlds. When we're talking about custodianship, it's this kind of, maybe you want to term old school mentality, or just the mentality that exists, our innate sense of what it means to be secure, plus this kind of new digital asset that potentially doesn't need to fit into this rubric. But the reality is that that rubric has a lot of stickiness.

• 19:53Speaker 00

  Yeah, and look, it is, as much as I joke around about the banks and everything, there's an element of like, cover your ass, right? So if you're an institutional investor and it goes along the saying of, you know, you don't get fired for going with IBM, right? Same thing here, I think, is there are certain institutions that are really big, really well-known, they've been around for a long time. And so if you go ahead and you use them for custody and something happens, right? It's a, oh, well, we had used X institution, right? There's less blowback and kind of there's more understanding, I think, than if you say, oh, we used Y institution, and by the way, Y institution is a year old and has, you know, very little balance sheet. Nobody's ever heard of them.

• 20:32Speaker 02

  Yeah, it's also if something does go wrong, the perception is also that you can, you can get your money.

• 20:40Speaker 00

  Yeah, there's recourse.

• 20:40Speaker 02

  There's recourse, right? It's kind of just the, these organizations are so, so big that even if they held the entirety of the digital asset space, it would still be a fraction of their, of their actual underlying risk.

• 20:53Speaker 00

  Absolutely. So, all right, let's talk about C C X and tell me like, you know, one sentence, what are you guys doing today, right? So you were kind of prepared to go do avocados, limes, hemp, all this stuff. Saw digital assets as, hey, it has all the ingredients for a, you know, kind of nascent market that has the kind of breakout potential. Made a bet on it about two years ago. It broke out, right? And so where are you guys today?

• 21:16Speaker 02

  Yeah, so we're ramping up to launch. We're launching in about a month's time. And what we offer is an institutional platform for trading digital assets. We're initially launching with SPOT and then, subject to regulatory approval that we kind of discussed, we will be launching physically settled derivative products as well.

• 21:36Speaker 00

  Very cool. And so who would you say is doing or is likely to do the same thing that already exists, right? So when people think of what you just said, they try to make a comparison, right? Is it the coinbases of the world? Is it like a back from the New York Stock Exchange, ICE? Is it NASDAQ? Who do you kind of look at and say, you know, we're going to be doing very similar things in the future?

• 21:59Speaker 02

  Yeah. So obviously partly, we think we can do it better. We think, you know, we have really strong institutional technology, such as really strong fixed connectivity, physical data centers, strong cybersecurity. Then from a compliance perspective, we have a, we do things above and beyond regulatory requirements, such as preventing our employees from trading digital assets. We also don't trade at all as a company against our clients. So we don't have a principal trading desk. So these are kind of some of the differences. Really strong operational support. Our goal is to have a couple of hundred customers, not a couple of million. So real high-touch experience for for our customers.

• 22:40Speaker 02

  In terms of where we fit in this landscape, we kind of dovetail to two areas. And there's a benefit of combining them because of kind of capital efficiencies. But in a sense, the closest on the spot market is kind of a group like Gemini or G-Dax or Coinbase Primers, they've rebranded it. And then on the other side is a LedgerX, a backed CME kind of group. So we do both things. So yeah.

• 23:05Speaker 00

  Got it. No, it makes sense. And so you've said previously that your goal is to make crypto trading boring, right? What does that mean?

• 23:13Speaker 02

  Yeah, by boring, we mean basically not that the fundamental asset class is boring, but that the operational risk is as close to zero as it can be. It's analogous to trading stocks or FX. And by boring, we mean that the stories that permeate kind of our mindsets are not things around hacks. They're not about insider trading on the exchanges. They're not about WASPs trades on exchanges. They're not about manipulation. They're not about these kinds of, they're not about going, exchanges going down for two days. They're not about exchanges basically telling multiple regulators, we don't care what you think. What we're trying, what we're trying to do is reduce operational risk as close to zero. And I think that has

• 23:58Speaker 02

  had particular resonance, especially recently.

• 24:03Speaker 02

  With groups that have been trading digital assets for some time, because when returns were really abnormal, even if these operational risks existed, it still made some sense. On a risk-adjusted basis, you could say it made sense. Absolutely. They weren't blind to those risks. However, as returns have normalized, that operational risk still exists at a high level. And so, you know, if you if you kind of did a proxy sharp ratio where you actually included this risk in your returns, your returns have been massively hit pretty hard, kind of because operational risks have stayed the same, but returns have decreased. Also, what we're trying to do is bring in groups that have so far sat on the sidelines. So these are big institutions, big groups that have looked at digital assets,

• 24:48Speaker 02

  are interested in digital assets, but have so far sat on the sidelines because of this kind of headline risk that you alluded to.

• 24:55Speaker 00

  All right, guys. For a quick break, I just wanted to ask John from Soluna, the CEO, a quick question. So you guys are building a vertically integrated blockchain computing company. What exactly is that?

• 25:05Speaker 03

  So vertical integration is a real innovation we're bringing to the blockchain community. What we're going to do is essentially, for the first time, combine renewable energy we develop with advanced computing technologies specifically focused on blockchain computing. Vertical integration is essentially creating a balanced system that generates green power and consumes it on-site through this approach. And the advantage of that is we can provide that computing power to whatever is beneficial to the blockchain community. We can power crypto mining, advanced distributed graphics, rendering networks, file storage networks, AI networks.

• 25:47Speaker 03

  All the blockchain breakthroughs that are taking place in the space can now be powered by this utility-scale site that we'll be creating.

• 25:54Speaker 00

  So I recently wrote a post about those with the cheapest energy will be king in the future. Agree or disagree?

• 26:02Speaker 03

  Agree, Anthony. I think that cheap energy is going to be the new innovation. In fact, I would go as far as to say it's the next frontier in the blockchain revolution. Satoshi Nakamoto created a network effect that really focused a lot of energy around innovation. We've seen innovation on chip technology. We've seen innovation around creating new blockchain networks. We've also seen innovation around creating technology specifically designed for blockchain computing. What we're starting to see is really a plateauing of those innovations. And now there's a new focus on how can we use energy to really power the next set of

• 26:46Speaker 03

  breakthroughs on the blockchain. And what we're going to do is essentially start right there with the energy innovation. We will start by developing renewable power and connecting that renewable power to blockchain computing. And our cost of power will be among the lowest in the world. In fact, we expect our levelized cost of power unsubsidized to be well below 3 cents per kilowatt, which is about average for blockchain computing companies around the world. And we think by having the cheapest power, it allows us to bring our computing capability to a host of different networks around the world at utility scale.

• 27:26Speaker 00

  Great. Thanks, John. All right, now let's get back to the podcast. One of the things you do, I think, is really interesting, right? So the headline risk is there's a high percentage of crypto media that is focused on this, right? Whether it's the Wall Street Journal report about money laundering, whether it's manipulation, wash trading, all this stuff. And so if we can get away from that, hopefully we can focus on the projects being built. But you guys ban trading of digital assets for your employees, right?

• 27:55Speaker 02

  Yes.

• 27:56Speaker 00

  And so why do you do that? How do you enforce that? And what's people's reactions when you tell them that's part of the job?

• 28:01Speaker 02

  Yeah, I mean, obviously, we're all bullish on the asset class as a whole, right? We're real enthusiasts, especially some of our developers who've been very, very early on this. So it's a mindset that we want to be completely impartial and to have no conflicts. So As part of this broader conflicts question that has been raised increasingly, for example, the New York Attorney General raised some of these points. So the reason we do it is, as a company, we do not trade against our own clients, which presents obvious challenges as well, right? Because you have all the data.

• 28:40Speaker 02

  But also, we ban employee trading because there's potentially insider information, right? If we're going to list token X, that token, if we're a reasonably successful exchange, will likely have an uptick. And there's been allegations that other exchanges employees have used that inside information for their own benefit. That damages trust in the institution. And so we really want to make sure that that does not occur. In terms of enforcement, we all, a lot of our employees, including myself, hold digital assets. And when you join the company, we say, look, we have this no trade policy. That is the default.

• 29:22Speaker 02

  If you need to, if you need to trade digital assets, you can present it to a committee within the company. And we will make a determination whether there is potential insider risk. And essentially, the determination we're making there is, if this trade were public, would we be, would there be any sense of reputational risk? Could there be any allegations that there was insider information? So we take that very, very seriously.

• 29:50Speaker 00

  And that's someone who they hold digital assets and maybe they want to sell some and buy a house?

• 29:54Speaker 02

  Yes, exactly. It's those kinds of things. And so, once we make the determination, we then say, okay, you then have 48 hours to actually execute that trade. And then you have to update your disclosure documents. So when an employee joins us, they have what we call a digital assets disclosure form. They give us the amount of digital assets that they hold and also where they hold them and the wallet's address. And then we periodically review those wallet addresses. It's obviously more difficult in omnibus wallets if they hold it on an exchange. It's much easier if they hold them themselves.

• 30:26Speaker 00

  And what you're looking for is to make sure that they haven't conducted trades or transactions that you're unaware of?

• 30:32Speaker 02

  Yes, so obviously, there's still a degree of trust in our employees. These are standards that have been taken, for example, broker dealers put these kind of restrictions on some of their employees for trading, banks do the same. So obviously, there's a degree of trust, but we're trying to create a culture of, look, we're an exchange, we're complete, our goal is to be completely independent. We're not meant to have a financial stake in the success of one digital asset as a whole.

• 30:57Speaker 00

  Yep.

• 30:57Speaker 02

  Our goal is, we're bullish on the digital asset space as a whole, but our sense of, we don't, we're not here to pick the winners and losers, also not here to make money on particular winners and losers. We're here to basically take, position ourselves for a rising tide that is occurring and to be completely impartial in every decision that we take.

• 31:20Speaker 00

  Absolutely, that makes complete sense. What is the biggest mistake that you see other exchanges making, whether it's in the digital asset space or other kind of emerging markets? Is it around the manipulation and kind of the lack of, you know, control?

• 31:39Speaker 02

  Yeah, I mean, I think we kind of, maybe more, kind of more focused on kind of where we see real positive differentiation. One is around the compliance piece, right? I mean, we're now regulated by close to thirty different regulatory entities, being very responsive to these regulators, building strong, strong relationships, strong rapport. You know, we take that really seriously. Building institutional technology, so low latency, high throughput, resiliency, so actually having very strong failovers. These are kind of areas that have been flagged in other exchanges that don't quite exist or to the degree that people want, but also very focused on market structure, right, and institutional exchanges.

• 32:24Speaker 02

  And so what we're really keen on doing is our market structure reflecting this institutional market. So for example, Our minimum order is one Bitcoin, for example, in the Bitcoin market. We have relatively high tick sizes or $5 tick sizes for Bitcoin, for example. And so what that does is it's not only the technology being really robust, the compliance piece being really robust, operational support being exceptionally solid, but also a market that has been built and created for institutional platforms. And so what you're doing is, rather than there being, and diving into a little bit more about this market structure point, if you look at a lot of changes and you do any kind of market analysis, the spreads look pretty tight. But if you want to trade, say, five Bitcoin, which is not a huge amount for these kind

• 33:07Speaker 02

  of institutions, you actually clear a huge amount of the order book.

• 33:12Speaker 00

  And so let's make sure people understand this. So tick size?

• 33:17Speaker 02

  Yeah, basically, that tick size is the minimum increments of that.

• 33:26Speaker 00

  Got it. So if I want to buy at $6,500, the next size up that I can order at is $6,505.

• 33:34Speaker 02

  Precisely, yeah.

• 33:34Speaker 00

  Got it, okay. And when you say clear the order book?

• 33:37Speaker 02

  Yeah, clear the order book basically means, say, I have one order at X, one order at X plus five, and I want to trade two, I will have cleared those two prices.

• 33:48Speaker 00

  Got it. So there's an order in the order book that says, somebody's willing to buy Bitcoin at $5,000. Order two says somebody's willing to buy Bitcoin at $5,050. You want to sell two Bitcoin. When you go to sell those two Bitcoin, it basically fills those two orders and that's the clearing of the order book.

• 34:05Speaker 02

  Yeah, the priority of mansion is really price and time. So it will fill at the price, so it will fill at the best price. But you look at this order book and you say, hey, this looks like a super tight spread. But actually, if you want to do any size, you're going to probably end up with a ton of tiny fills at an aggregate price. And we know how difficult tax returns can be on digital assets. All of a sudden, one trade turns into, say, 100 different tiny little trades. You have to account for that. So those are kind of some of the benefits.

• 34:37Speaker 00

  Got it, okay.

• 34:39Speaker 00

  So that all makes sense. And then let's do a rapid fire. Right, so beforehand, I always ask a bunch of questions at the end. What is the most important company in crypto, other than Europe?

• 34:54Speaker 02

  Yes, I probably don't want to say a different project, well, a project because it kind of, we want to be as sincere as possible, everything that I've said. I think, you know, some of the, some of the other exchanges have done some really good things. They've pushed things forward. They've, so I think, for example, Gemini has done some interesting things. They've worked very closely with trying to kind of, they've seeded some of this derivatives conversation. I think they take compliance pretty seriously, and I think they've done some, some, some good things.

• 35:30Speaker 00

  Got it. And then, what do you believe in crypto that you think a high percentage of other people would disagree with you?

• 35:38Speaker 02

  Um, yeah, so I mean,

• 35:40Speaker 00

  Like, if you, if you stood up right now and, you know, you tweeted something that, that you believed and people would freak out?

• 35:47Speaker 02

  Yeah, fortunately, I have, I have Twitter. I think a lot of people should probably,

• 35:50Speaker 00

  Are you not, you're not on Twitter?

• 35:52Speaker 02

  Personally, I'm not on Twitter. The company, the company is.

• 35:55Speaker 00

  Why are you not on Twitter? That might be the most controversial thing anyone's ever said.

• 35:59Speaker 02

  Yeah, maybe, maybe that's it. Look, I don't know if I have enough interesting things to say. Plus, if you look at some of the, some of the, some of the recent tweets by some, some people, it's probably best to not, not, not actually have Twitter in certain cases, right? But in terms of,

• 36:15Speaker 00

  Unless you have $20 million, and then you're, then you're good. If Elon Musk,

• 36:18Speaker 02

  Yeah, and probably have great DNO insurance as well. The, in, in terms, I mean, the reality is, is that this is an emerging asset class, and I don't know if this is novel or new, but the reality is, is that the, that the most, most things will not exist in 10 years' time. But the overall asset class, I believe, will be much, much bigger. I don't know if that's the predominant view now, but that's probably something. I mean, there's a lot of, if you talk to individual projects, maybe they, they take a slightly different, more bullish view, but I'm bullish on the overall asset class.

• 36:53Speaker 00

  You just think a lot of the earlier projects are going to die?

• 36:55Speaker 02

  Um, I think that there'll be a lot of, I think there'll be a lot of change. That may be new projects, or it may be that the projects actually change, right? So we've obviously, we've seen, for example, hard forks, soft forks. And these kinds of things. It's just an involved asset class. The corn that we trade today is not the corn that we traded 50 years ago. It fundamentally is not. There's different specifications. And so that's why I compare it to kind of hard forks and soft forks. So but rather than it being 50 year timeline between any kind of material change, it's like a five year or even a five month timeline that we're seeing. So everything's way more condensed.

• 37:30Speaker 00

  Absolutely. Crypto time is is pretty crazy.

• 37:33Speaker 02

  Yeah, I like that one.

• 37:35Speaker 00

  All right. And so if you could take a magic wand, wave it and change any one regulation, what would it be?

• 37:46Speaker 02

  Regulation wise, I think.

• 37:47Speaker 00

  Or improve.

• 37:50Speaker 02

  So my my view is, my view is that we should not have digital asset specific regulation.

• 37:57Speaker 00

  Okay.

• 37:58Speaker 02

  I feel that pretty strongly. Digital assets are such a broad term, but they are either securities or they are commodities.

• 38:08Speaker 00

  What do you think they are?

• 38:09Speaker 02

  Well, I think they're both. I think it depends on the the the actual asset that you're looking at. But this isn't, these kind of novel products, yes, they're really, really cool. But there have been a ton of other really, really cool products that has been created that are defined as a commodity. So the regulation is if if everything by default is a commodity unless it is proved to be a security under the Howey test. And things like movie theater receipts have been deemed a commodity. So we didn't say, hey, we need to just create specific regulation for this one thing.

• 38:44Speaker 00

  Could you imagine if there was an exchange for movie tickets?

• 38:46Speaker 02

  They they they tried. Actually, there's there's there's three products that are enumerated as being illegal, one of which is actually movie theater receipts.

• 38:55Speaker 00

  Really?

• 38:55Speaker 02

  Yeah. The other is assassination contracts, and the third is onions. Those are products that are illegal to create derivative contracts on. So they actually tried.

• 39:03Speaker 00

  Back up. Hold on, hold on. So, okay, assassination assassination contracts are pretty obvious.

• 39:08Speaker 02

  Yeah.

• 39:09Speaker 00

  Although Augur, I think, is they had one or two on there and that got a bunch of bad press. But why movie ticket receipts?

• 39:17Speaker 02

  So it wasn't too long ago, I think it was about 2008, 2009. And it was actually incorporated, I think, into Dodd-Frank. It's the lobbying group, basically. By having forward dated contracts, you can have insights into what the market perceives will be the likely output. So you could say, hey, we're going to trade a forward dated contract on movie Y. And if it doesn't perform, we can probably predict that that movie isn't going to perform very well.

• 39:46Speaker 00

  Because of the receipts.

• 39:48Speaker 02

  Yeah, because you're basically taking a future position on the receipts that will be collected. And so you're getting this kind of forward dated market view of how the market believes that you will perform. And if you're a believer in efficient markets, it will be an accurate prediction.

• 40:03Speaker 00

  Isn't that true? And I don't understand this well enough to kind of debate the nuances. This is more a question. Couldn't I say the same thing about Walmart? Like Walmart stock and say, oh, I can't buy a future on Walmart because I can go and collect all the Walmart receipts?

• 40:19Speaker 02

  So, but basically, so the receipts have been like the future revenue of that movie. I mean, yeah, I mean, we get insights into all sorts of things with derivative markets. It is just that the movie lobbyists obviously did what they thought was best for their constituents. And then if you actually follow it, some of the senators that actually pushed that forward then went on to take nice jobs in the movie theater industry. So you can make of that what you will.

• 40:51Speaker 00

  The movie theater lobbyists sound like badasses.

• 40:53Speaker 02

  Yeah. I mean, they got one of three. And Onions is like 1958, it was like a squeeze. And then they were like, the Onion lobbyists then said, we're going to ban this. So you can kind of see these weird rules have occurred. So probably if I had to change those regulations, I would probably, because they're just quirks, I agree with the assassination one, but movie theaters receipts and Onions lift those bans.

• 41:20Speaker 00

  I was scared of the assassination markets. I might be more scared of the Onion lobbyists and the movie theater lobbyists.

• 41:26Speaker 02

  Yeah, I know, I know. Got lost way.

• 41:29Speaker 00

  Yeah, exactly. All right. So one non crypto question, we just have to admit that aliens exist. All right. Do you think that they have pets?

• 41:40Speaker 00

  And what we mean is, do you think there are alien animals and alien humans? Or do you think that there's just one type of alien creature and there's no delineation between the animals and the humans?

• 41:52Speaker 02

  I think if, if aliens exist.

• 41:55Speaker 00

  If? You don't believe?

• 41:57Speaker 02

  Well, I'm just saying, if, okay, aliens, if there are, if there are aliens, there will be, I, I, I think it's a natural kind of corollary of that, that there will be other alien-like creatures, and by alien meaning that we don't have them on our planet.

• 42:15Speaker 00

  Yep, and, and so then there would be animals or some other?

• 42:19Speaker 02

  Or some other, other form that we have no concept or no word that we can actually describe these as, but they will be, I believe that there will be multiple different forms of aliens, if aliens exist.

• 42:31Speaker 00

  I, I just always think of, you know, they get here, they step off the spaceship and do they have dogs or not?

• 42:37Speaker 02

  Well, it keeps you up at night, right? Digital asset prices and that question.

• 42:42Speaker 00

  So, so people, people have actually tweeted at me and tried to tell me what the answers are, and they've got all kinds of weird things they're finding, but, but it's awesome. All right, so before I end each one, I let the guest ask me one question, so any question you've got for me?

• 42:58Speaker 02

  Yeah, what are you most excited about in the digital space?

• 43:01Speaker 00

  Ooh, what am I most excited about?

• 43:02Speaker 02

  You see a lot of things.

• 43:03Speaker 00

  Um, yeah, so, uh, this is probably not the answer people would expect from me.

• 43:09Speaker 02

  Even better.

• 43:10Speaker 00

  I'm actually really excited about what I call like the aha moment for large capital allocators. So we're spending too much time, frankly, banging on doors and, and, you know, hanging out with people who are managing, you know, tens of billions, hundred billion plus, you know, dollars, they are, you know, some of the most sophisticated kind of institutional investors in the world. And six months ago, it was, oh, that's cute, I've heard about Bitcoin, that's what all the criminals use, and I didn't even realize there was any other digital asset, you know, ecosystem. To now, I think there's awareness, there's more acceptance of Bitcoin itself, and there's

• 43:53Speaker 00

  a couple who have said, I actually think this is like a legitimate asset class and here's some money, and I think we're going to get over the next 12 months, like much more of that, right? Coming into the industry. The most exciting point throughout that entire, you know, kind of education, conversation, and decision making is the second you see, you know, usually a middle aged or older CIO with, you know, decades of experience, like flip over and they realize, oh, the code is actually more trustworthy than the humans, or, oh, a deflationary system versus inflationary, or a decentralized system versus a centralized system, or a global world versus a Western-centric

• 44:38Speaker 00

  world. Like, there's a couple of these, like, you know, like, flip points where when that mind turns over and they realize the potential or power of this stuff, there's down the rabbit hole, we'll never get them back, right? And so I think that that's, I've seen it a couple of times now, and they go from being the biggest detractors to like, the biggest supporters pretty quickly. And so I think that's the, that's the thing that just, you know, actually gets me excited every day right now.

• 45:06Speaker 02

  That's great. I mean, I agree with that. I think there's also going to be kind of an inflection point when there's enough of those aha moments. Groups that haven't necessarily had that aha moment are going to worry that if, because if this is a huge asset class, which I believe everyone in this room believes, if you are not allocating any capital in that space, because returns are not kind of a normal return, if this is a disproportionate amount of returns, digital assets as an asset class over the next 10 years, if you're not in digital assets, you will no longer essentially be relevant in 10 years' time because you won't have had those returns. And so what I'm starting to see in both the VC world and kind of the kind of more institutional world is, they maybe haven't had this aha moment, but they do get the point that enough people have had this aha moment, that there's

• 45:50Speaker 02

  enough capital now being deployed in this space, that if there are, you know, two, you know, pretty high returns in this space, then they will be left behind and their returns compared to everybody else will be massively reduced. So I agree with that.

• 46:04Speaker 00

  Absolutely. It's, you know, every asset's going to get tokenized or digitized, and we just tell the institutions, look, you have to get off zero. I can't tell you what your exact exposure is, right? But zero is the wrong number. And so you got to get off zero. Awesome, man. Thank you so much for coming. This is tons of fun. I think people will learn a lot from this one. So I appreciate you coming in.

• 46:22Speaker 02

  Thanks for having me. Cheers.

• 46:25Speaker 00

  Hey guys, thanks for listening. We're back with the CEO of Soluna, John Bellzir. John, what are you most excited about right now?

• 46:33Speaker 03

  What excites me the most is that we're really in the midst of a revolution. Satoshi Nakamoto's paper that came out eight years ago really launched a revolution globally. And the blockchain is definitely here to stay. Today's blockchains are predominantly seen as the core technology for cryptocurrencies, among other things. But in the future, blockchains will do more. They'll be the foundation for entire new ecosystems. They will revolutionize a host of different industries around the world. And taken as a whole, these new distributed applications will form a new kind of internet. One where protocols replace companies and algorithms choose the best computing backend and solutions that they can find. This new ecosystem, this new internet, if you will, will need dedicated infrastructure

• 47:16Speaker 03

  to power it. And what excites me is that Soluna aims to be the key part of this infrastructure. We have the opportunity to build the next great infrastructure company to power this revolution. Thank you for taking the time. If you'd like to learn more about Soluna, please visit soluna.io.

• 47:33Speaker 00

  Hey everyone, Pop here. If you liked this episode of Off the Chain and want to help us take crypto to the top of the Apple, Spotify, and other podcast charts, please do us a favor and rate, review, and subscribe. To review, simply go to the Off the Chain homepage, scroll down until you see the five blank stars. Taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts. I appreciate you listening and see you next time on Off the Chain.