Michael Moro: The Institutionalization of Crypto

Micheal Moro is the CEO of Genesis Trading, a FINRA registered broker dealer providing liquidity for institutions in the crypto space. Michael previously worked at SecondMarket and Citi. In this conversation, Anthony and Michael cover crypto market infrastrucutre, how Genesis grew so quickly, what OTC trading is, and when institutional money will enter the market.

• 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.

• 0:16Speaker 00

  Michael Moro is the CEO of Genesis Trading, a FINRA registered broker-dealer providing liquidity for institutions in the crypto space. Previously, Michael worked at Second Market and Citibank. In this conversation, Michael and I covered crypto market infrastructure, how quickly Genesis has grown, what OTC trading is, and how institutional capital is entering the market. This conversation is full of interesting data points and information. I hope you enjoy it as much as I did.

• 0:42Speaker 00

  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.

• 1:10Speaker 00

  Before we get started, I wanted to tell you about our sponsor BlockEstate, a security token project in the $200 trillion industry of real estate. They've partnered with Polymath and Coinlist's Comply API to create one of the first tokenized real estate funds, and they have a unique buyback and burn model. To learn more, visit blockestate.com.

• 1:30Speaker 00

  Alright guys, here with Michael from Genesis Trading. How are you doing today?

• 1:35Speaker 01

  Not too bad, how are you?

• 1:36Speaker 00

  Awesome. So, we got a lot of coverage today, but before we kind of dive in, I think probably lots of people know about Genesis and some of the stuff you guys do, but might not know as much about you personally. So maybe we could just start with kind of your background and then we can get into how you first discovered crypto.

• 1:53Speaker 01

  Sure. So I am a reformed investment banker. Right out of college, I did seven and a half years at Citi in the financial institutions group, sort of covering finance companies, banks, and credit card companies. And then I left Citi in 2008, and that's when I met Barry. Barry Silbert, the founder and CEO of Digital Currency Group. Was running a company called Second Market at the time. And this is right at kind of the onset of the financial crisis and a lot of financial assets were becoming more and more illiquid. And so I joined up with him in the fall of oh eight and started getting involved in the

• 2:37Speaker 01

  sort of the illiquid asset-backed securities and sort of the the toxic assets that came about as a result of the financial crisis. And then one thing sort of led to another. Second Market got involved in crypto in twenty late 2012 as sort of when we really started to study the space and we opened up our trading desk in 2013. How did that all get started? That was all Barry. Barry, I think, personally discovered Bitcoin in 2011. Spent about six months sort of being a non-believer to skeptic to believer to evangelist. He kind of completed that whole cycle in 2012 and then he wouldn't stop talking about it in the office. And so he said, all right, Barry, let's let's Bitcoin.

• 3:22Speaker 01

  Let's kind of chat about it. And at the time, we were making a market in all kinds of funky, illiquid, esoteric, off-the-run financial assets. And he said, you know what? Bitcoin's another one. It trades like a lot of the other things we were trading at the time. And so I said, OK, let's let's do this. And this was March 2013.

• 3:42Speaker 00

  So March 2013, you guys kind of get the confidence, OK, let's jump in, start making a market with Bitcoin, right? What was kind of at that time, the concerns that people were voicing, even though you guys were going to do it?

• 3:55Speaker 01

  It's a it's a few things. One, we were starting from scratch. The one thing we did have was Barry's Rolodex. He had made a lot of contacts early on, so he knew really a lot of the early adopters. What we really didn't have were the investors, was sort of the buy-side demand. So you had the guys that owned Bitcoin for like a dollar, right? But you didn't have was kind of the traditional institutional capital ready to kind of step up and be the the other side of the market. So one, kind of establishing a Rolodex ourselves of the buy-side guys. Secondly, I think there was a lot of questions around money laundering, AML, KYC. Second Market is a broker-dealer.

• 4:38Speaker 01

  So we've always had sort of had the SEC and FINRA. Um overseeing all of our um AML KYC compliance. But Bitcoin is just another animal, right? Um fixed income compliance is entirely different than sort of banking compliance. And so there was a lot we had to kind of get comfortable ourselves as well as our regulators to prove to them that we knew what we were doing. Um and thirdly, I think a lot of the infrastructure that exists today um simply obviously weren't there, right? Um even simple things like trying to like um do uh you know like the Bloomberg equivalent and having a trading terminal kind of getting up and going. Um simple things like uh you know, how do we set up wallets?

• 5:22Speaker 01

  Um you know, the the Zappos and the Bitgos of the world that are sort of dominant today. Um really, we're just kind of getting started back then. And so trying to figure out how to properly store your Bitcoins, those types of things, things you'd never had to worry about in the securities world, um were were big issues. And so I think those were some of the biggest things.

• 5:41Speaker 00

  It it's interesting because uh as much as things have changed, they've kind of stayed the same, right? There's still conversation around, you know, compliance, anti-money laundering, you know, KYC. There's conversation around infrastructure for, you know, institutional type investors and is it high quality enough? How do they use this stuff? Um and and so it it feels like we just have moved kind of uh you know, that conversation down the road and kind of up to the institutional level now. Um but but really what you're describing is it wasn't even there for retail, right? In 2013.

• 6:11Speaker 01

  We used to have um individuals show up um at our office um with a suitcase full of cash wanting to buy Bitcoin.

• 6:20Speaker 00

  Wow.

• 6:20Speaker 01

  Um that would provide no driver's license, no identification, but here's my proof of funds and they'll open up their briefcase. Um that world, obviously, um that was 2013. Um we don't have that issue anymore. Um and so a lot of the issues. That we're trying to tackle right now are actually much higher quality problems than we were trying to solve back in 2013. But, you know, and, and I would argue that we've come so far from, from where we are. But the market really expects how kind of the equities world works and how the commodities world works. But that took like decades of evolution for it to kind of get to today. Crypto, this is really can been mainstream for like a couple of years.

• 7:03Speaker 01

  And I'd argue that having future products on the CME and the CBOE, that was unthinkable back then. And so I think about all the progress we've made rather than everything that's still missing.

• 7:15Speaker 00

  Absolutely. And, and walk me through, because that's an interesting anecdote, right? So people are showing up to the office with, you know, suitcases of cash and, and just let me buy Bitcoin. What's their psychology or what's driving them to do that? They couldn't, there was no exchange infrastructure that's for them to use. They didn't trust the exchanges. They're doing nefarious activity. Kind of, why are they walking in with, you know, cash trying to buy Bitcoin?

• 7:38Speaker 01

  I would argue that it's probably a combination of both. So when we first started, there were really like two exchanges. You had Bitstamp that was still in Slovenia and you had Mt. Gox out of Tokyo. And if you really wanted to buy a bunch of Bitcoin, you were wiring money to a foreign country and just keeping your fingers crossed that the funds kind of get there, right? And so here we were where we were, we had an office. You could actually walk into our office and talk to us, which I think was a separate experience for a lot of people. And I still think that there was certainly a level of, you know, I don't want to say sort of like Silk Road level nefarious activity, but there were certainly lots of questions.

• 8:21Speaker 01

  If not red flags, certainly strong, strong yellow flags that sort of been, that were raised. And frankly, we were sort of caught off guard sort of back then because we didn't really know what kind of reception this, the market making stuff would actually take. Obviously, you know, we didn't end up onboarding any of these people that sort of walked in in person, but it certainly raised the, the compliance profile and the program as a result.

• 8:44Speaker 00

  Absolutely. Well, and it forces you to address it, right? So there's probably a bunch of questions you hadn't been asking, then all of a sudden you started asking. And then two is it probably accelerates the build out of your own infrastructure, right? Because you're like, hey, we need to get, stop people from walking in the office with cash.

• 8:58Speaker 01

  Yeah, there's no question. I think crypto security is one thing. Physical security was quite another. So I think that certainly introduced a new dimension to the way we need to kind of think about our operations, certainly when we started doing the crypto things.

• 9:12Speaker 00

  Very cool. Okay, and so let's go from, this is like, you know, 13 or so, up through 14, 15, into maybe even 16. How does Genesis kind of evolve over time? Right? So you guys started with just Bitcoin and pretty much just helping people buy Bitcoin, right? To even today, you have a multitude of products, different assets, etc. Like, what does that evolution look like?

• 9:35Speaker 01

  So in the late summer, early fall of 2013, Grayscale, our sister asset management company, launched the Bitcoin Investment Trust. So early on in 2013, we were just helping to put investors into the trust by buying the underlying tokens. And as you might imagine, the earliest investors were sort of the West Coast VC guys.

• 9:57Speaker 00

  Yep.

• 9:58Speaker 01

  Guys who understood the risk-return profile of 1,000x or zero. Because frankly, that's what all of their VC investment return profiles kind of look like. And so they were kind of the first guys to ultimately kind of get in. Obviously, sort of you recall in 2013, kind of what happened to the price of Bitcoin, kind of starting the early fall into the end of the year. And, you know, I think there was a lot more media attention and sort of press kind of started to sniff around in the asset class when the price of Bitcoin went from like $90 to whatever 1,200, $1,300 that we kind of saw in December.

• 10:37Speaker 01

  Early 2014 was the Mt. Cox event. And I remember being in the office. We had like an emergency meeting one Saturday. And we're trying to think through, okay, Mt. Cox just sort of announced that they're hacked and all of that. And what are we going to do? What's going to happen to the price of Bitcoin? And I think all of us were like, I think this might go back to the $50, $60 price of Bitcoin, kind of before the crazy run. And we were trying to think through a strategy, what can we do to kind of get out in front of this, etc. And then, you know, it didn't happen. We didn't see the price kind of dip back down to

• 11:20Speaker 01

  the to the $50 level. But, you know, 2014, 2015, there were lean times. The institutional interests, I think, that had kind of started to look into it, just entirely kind of got on the sidelines. And I really couldn't blame them, right? Like, you had the biggest exchange, you know, was it hacked? Was it an outside job? Was it inside job? How much of it was manipulated? All that kinds of things. And I think it threw a lot of those into kind of question. And so, you know, even into early 2015, you sort of saw the price of Bitcoin kind of hovering around the $200 kind of level. And the lack of volatility, Bitcoin became a lot less exciting, right? It came kind of boring for for a lot of folks. And,

• 12:05Speaker 01

  you know, I think for a time, a lot of the momentum that you kind of saw in the in the fall and in winter of 2013, I think certainly dissipated by the time early 2015 kind of came around.

• 12:17Speaker 00

  And it's interesting, because, you know, obviously, earlier this year, 2018, we saw this big drawdown in the market, right? And, you know, I think that there's two camps. Some people say, hey, we're gonna, you know, could fall further, or we're gonna stay kind of sideways for a while. Some people think that it's gonna race back by the end of the year. It sounds like during that last bear market, while the drawdown wasn't as long as you expected, it was quite, you know, from a timeline perspective, it did persist for a while, right? And do you think that there's an element of it persisted for that long because people had to forget about kind of the parabolic run and the, you know, following drawdown? Or do you think it was more kind of technically driven around, you know, infrastructure getting built and hash rate and things like that?

• 13:02Speaker 01

  I think it's probably a combination of both. I think when you look back to the 2014, 2015 years, obviously, lots of questions around how you could even do a fundamental analysis of Bitcoin, right? There's no book value, there's no earnings, how do you kind of get your arms around it? I think one of the things that people kind of look to is Where is the infrastructure? And certainly, you know, while it's kind of hard to, it's probably really difficult to justify a thousand dollar Bitcoin price in 2013. Given the lack of wallets and lack of any like trading platform. Banking support was kind of here and there, lots of questions about money laundering, all those types of things, I think.

• 13:47Speaker 01

  And the price of Bitcoin clearly kind of ran ahead of itself. But I think what it kind of forced the crypto space to do was kind of retrench a little bit and actually really just build. And really forget about sort of the overnight get rich quick type of mentality. But I think a lot of the investors may have had in even 2013, which obviously kind of repeated itself in 2017, but I'm sure we'll kind of get to that later. But I think it really kind of focused the industry to say, okay, there's potential here. So let's build a product, let's build the services and let's kind of elevate this thing from Bitcoin 1.0 to kind of the next level. And see where this takes us. So I think those couple of years were absolutely necessaries because the price stopped being a distraction.

• 14:30Speaker 00

  Yep.

• 14:31Speaker 01

  And it just really focused, got your mind to sort of focus on building the business.

• 14:35Speaker 00

  Absolutely. And so this really takes us into like 15 and into 16, right? And it goes from a Bitcoin only world to, you know, Ethereum and kind of all of these altcoins, ICOs, etc. From where you guys are sitting at that point, having been so early in kind of, you know, building infrastructure for Bitcoin. What does that look like? What are you guys talking about at the time? What are the concerns? Or are you excited about kind of these alternative assets popping up in the space?

• 15:04Speaker 01

  I think we've always imagined a world in which multiple tokens would certainly exist. I don't really think that anyone kind of thought that Bitcoin was kind of the one and only. And I think when when if ether sort of came around, I think initially we had a difficult time to just kind of get our head around what it was kind of meant to do because I think from a design specs perspective was just so different than Bitcoin. Bitcoin is very narrow in kind of what it's kind of meant to do, whereas Ethereum was exactly the opposite. It was so wide in terms of possible applications and kind of uses via the the smart contracts. And I think and obviously the way that ether kind of came about and its kind of funding

• 15:45Speaker 01

  mechanism was certainly interesting and sort of the the first ever ICO, right, being kind of purchased just for Bitcoin. And I think that certainly opened up a our minds certainly as kind of the possibility is what's what's possible in a truly kind of crypto world. And I think all of the ICOs that have sort of come upon afterwards and kind of in the aftermath of the ether stuff are certainly exciting. I think there's fantastic projects. I think there's a ton of potential for for some of this stuff. On the other hand, I do think that, you know, that market clearly got overheated.

• 16:25Speaker 01

  I think the ICO market, there was a truly kind of a disconnect between traditional VC guys who said to me personally that like that these projects have a hard would have a hard time raising a million dollars of traditional VC funding and they're raising thirty, forty, fifty million dollars in two days, right? There's certainly a disconnect there or whether or not VCs are really that bad and they're just way too strict in kind of what they're valuing or there's a lot of quote unquote dumb money kind of being thrown at these projects. And so we stood on the sidelines or trying to figure out what really is happening because there was a ton of noise, certainly last year.

• 17:08Speaker 00

  Absolutely. And so that brings me, you know, let's go sixteen into seventeen and even till today in eighteen. What does the business look like today? And kind of, you know, what do you offer to clients across, you know, your different lines of business?

• 17:24Speaker 01

  So, well, let's touch on Genesis Trading to kind of start with. From an infrastructure perspective, we're now market making eight or nine different tokens. And our decisions to sort of add tokens are entirely based on investor demand. So we're institutions only. Our average trade size is somewhere between half a million to a million dollars right now. And so unlike kind of the exchanges that do thousands and thousands of transactions, we're much more kind of smaller in terms of trades per day. But we're, you know, doing anywhere from, call it, half a billion to like $2 billion a month in terms of total OTC volume. It's still mostly Bitcoin.

• 18:06Speaker 01

  I would probably say 75% of our volume is kind of Bitcoin right now. Number two kind of varies kind of month to month. XRP, huge January, as you might possibly imagine. So they kind of occupy the number two spot, but it kind of switches. But most months is probably still, still Ether is probably, probably yes. But we offer just a two-sided market. And we just recently hired an overnight trader to kind of cover Asia hours. So we have a guy that's sort of doing that at 2, 3, 4 in the morning, which sort of introduced sort of a new market for us. So I think that's been a really sort of interesting kind of addition to our service.

• 18:51Speaker 01

  And then in February, we launched Genesis Capital, which is our lending business. We've had sort of small pockets of demand for crypto borrow over the years. And we've always kind of run it out of our broker dealer, taking some of the Bitcoins and Ether that we owned on our balance sheet and kind of lending them out. We realized that this was a true kind of opportunity. Because one, I think it's really important for the market growth to have a two-sided price discovery possible. In a long-only market, I just didn't see this, sort of the institutional money being able to kind of come in if the only thing you can do is just buy. And then we also said, hey, you know, it's a fantastic sort of hedging tool for investors.

• 19:36Speaker 01

  They may own crypto elsewhere that want to take a short position and kind of hedge your exposure at one point without selling their initial purchases. Two, I think the, um, the growth in the futures market, um, has sort of seen futures market makers come to Genesis Capital to get a borrow on the spot market. Cause as they're taking action on the future side, they're able to hedge instantly on the spot market via a borrow. And then we've had guys who just wanted to outright short it that had no long position, um, that were happy to sort of take a, a calculated naked short bet, um, that either this thing is zero or close to zero and that over time this thing will actually play itself out.

• 20:18Speaker 01

  Um, we launched the business with about 20 million in loans in February, and I think right now we're about a hundred and 25 million dollars or so, um, in sort of our overall loan portfolio. And I think we've originated about a quarter billion of loans so far. Um, so demand is there.

• 20:35Speaker 01

  Um, and the fantastic part about it is that we're really only lending to the best of the best. Again, we're not facing individuals. These are all hedge funds and certain institutional accounts. We're doing the credit work, um, plus they're posting US dollar collateral, um, against kind of loan positions we're making. So, um, it's been a fantastic sort of new service addition for us and it allows both sides, bulls and bears to actually put on a position, um, in the, uh, in the spot market.

• 21:00Speaker 00

  Absolutely. No, it's fascinating too, to go from, you know, 20 million to about 125 today, got the $250 million or so in kind of total loans. Is this all in Bitcoin, Bitcoin and Ether? What's the kind of disparity look like, uh, given what you see on the, uh, on the OTC side? Or is it similar?

• 21:19Speaker 01

  Um, it's, it's interesting. We get fantastic kind of market color. So we've seen in 2018 so far, sort of price resistance in Bitcoin in the high fives, somewhere on the 50, 800 level. So we've had guys who initiated short positions kind of in the 7,000 area. And then for, you know, because they feel some level of resistance on the price, closed out their shorts somewhere around the 6,000, 5,900 number. We've had guys kind of do a rinse and repeat, have the price kind of come up to the 7,000s, initiate the short, write back down, but that's why they close. And so when folks kind of talk about, hey, I think we've seen the lows of the year kind of come in,

• 22:02Speaker 01

  it's actually playing out that way in the loan market because no one keeps their loans outstanding for very long, once we kind of hit the high fives. Ether, there really isn't a bottom. I don't have that sentiment for Ether. And that's just kind of the way data is kind of playing itself out. And we don't have guys that try to play the, you know, I think there's resistance around the, you know, the 275 level. And so they'll short their way down from 300 down to 275. I think there's plenty of people that will kind of keep their loans outstanding on Ethereum for a lot longer than that. And that's actually playing out on the OTC side too. Last two weeks, prior to this run right now into the mid 7,000s, we couldn't find a Bitcoin seller in the low 6,000s.

• 22:47Speaker 01

  We've had some buyers, but very, very few sellers. There was no shortage of Ethereum sellers. None. We could have sourced a ton of Ethereum if there was buy side demand enough to kind of get that done. Right? So people talk about price decoupling and Bitcoin and Ether, which kind of traded on path with each other for quite some time. I think we've already kind of started to see that.

• 23:09Speaker 00

  Yeah, that's super fascinating. And so if you started the business in February, this is kind of initial drawdown had already been initiated. Right? How much of the shorting that happened, maybe December, January timeframe, was volume that you saw and that drove the decision to get into the lending side? Or you were already kind of planning on doing that and then, you know, the timing just worked, given, you know, the market conditions?

• 23:37Speaker 01

  I wish I was smart enough to kind of predict it.

• 23:42Speaker 01

  In December and January, this is the way it would play out, but we really just made the decision about over a year ago now. So this is an early 2016 where we said, 2017, rather, where we decided to launch Genesis Capital. It's an idea that we had been kicking around kind of internally and said, hey, one day is going to be kind of the right time to do it. And myself and the board kind of decided that early 2017 was kind of the year in which we're going to try this. And it obviously took, you know, six to nine months to kind of hire some folks and kind of build the infrastructure and kind of plan the launch of the business. But, but yeah, that February just happened to be when we were ready to go.

• 24:19Speaker 00

  That's awesome. Okay, so obviously you guys are, you know, very well versed in kind of liquid cryptos, cryptocurrencies, and really kind of participate in maybe the top 10 or so kind of liquid cryptos. One of the things that a lot of people have been talking about is tokenized securities, right? And so kind of these, these tokens that are backed by stocks, bonds, you know, currency or commodities, et cetera. And so one of the show's sponsors is BlockEstate, right? It's BlockEstate.com. And they've basically created this equity token for real estate, right? And so before the show, we were talking that you just bought a home.

• 25:00Speaker 01

  Yes.

• 25:00Speaker 00

  Right? And so the thought process would be rather than you signing all of the paperwork, et cetera, you could actually own a token that represented ownership in your home, right? How do you guys look at, you know, these equity tokens or these asset-backed tokens in light of your business and then the overall ecosystem?

• 25:20Speaker 01

  I think one of the things that we are still trying to kind of figure out is if these are technically securities, and if they are, then they would be obviously under sort of SEC, FINRA oversight and kind of purview. And I think there's a lot of questions and guidance that kind of needs to be put out by both regulators about how we should think about trading these assets. How, who's going to be the custodian of these assets, right? The traditional crypto guys are not qualified to be securities custodians. So that's when, you know, Northern Trust is building something, it's possible that Goldman Sachs is going to build something. There's kind of been rumors in the press about both of these guys and

• 26:06Speaker 01

  It's kind of the getting the traditional securities custodians in place, I think, is a key, key determinant of how it happened. Now, personally, on the tokenized real estate front, yes, I did buy a house last week. It was a painful process in terms of the closing. It took about an hour and a half of just signing my life away. Could this entire process have been a lot more seamless by having real estate on the blockchain? A hundred percent. And the deed just kind of is on the blockchain. It's sort of provable. And when it's time to sell the house, I just transfer the deed assets over to another address. I think there's a lot of efficiencies that can come about. But I think it really kind of depends on where the regulators kind of sit on this.

• 26:45Speaker 00

  Absolutely. And it's interesting, too, because if all of a sudden you get these asset-backed tokens, right, whether it's OTC trading, lending, etc., it opens up a world of possibility, right? Because today, you're basically doing this with Bitcoin, for example, a digital currency, right? But imagine if you could do it with every asset class, right? And so it's fascinating to think about. And for those that want to learn more about Block Estate, they can go to blockestate.com. But, okay, so let's talk about the broader ecosystem for a second, right?

• 27:16Speaker 00

  What is the part of crypto that you find most fascinating or interesting that most people don't talk about?

• 27:23Speaker 01

  I think one of the things that I try to find really, really kind of interesting is how everyone, and I don't blame them for doing this, but I think everyone is trying to fit Bitcoin, blockchain, crypto into an existing bucket in terms of the way they kind of analyze prices, infrastructure, fundamentals, that type of stuff. And I think we're really still trying to get our arms around, how do you value this stuff? And while there's plenty of kind of theories and kind of valuation thought pieces kind of around the asset class, I still think the equity research equivalent of crypto is still sort of a work in progress. I am sure over time,

• 28:04Speaker 01

  there will be sort of investment banks that dedicate entire equity research coverage teams to this space and try to come up with an industry consensus for how we kind of think about this stuff. But- You know, that's that's still up in the air and lots of competing thoughts about how to kind of do this. And but my hope is at some point, the industry can come together and come up with a DCF or a market comparables or any of those types of things to kind of think about the right way to think about it. Then it's easier to kind of get your head around like price targets, whether they actually mean anything or not. But I do think that traditional investors will look to equity research, equivalent sort of in the crypto space

• 28:47Speaker 01

  as they kind of make their investment decisions.

• 28:50Speaker 00

  Yeah, and a lot of it is, I think, one, there's got to be some level of standardization, right? When it comes to, hey, these are the things that we're actually going to look at from a data perspective. And then two is the way that everyone interprets that interprets that data, right? So you and I may look at, you know, for example, a revenue multiple in the public markets, and we may think that the company is actually worth different things. But at least we agree that that is one of the data points that are important to valuing a company.

• 29:18Speaker 01

  I think I think that's right. I think and there's certainly plenty of controversy around just data generally and the integrity of the data. You know, while I have no doubt that like 2017, 2018 blockchain data and Bitcoin, people can kind of come to a consensus around what the right data is. Go back to 2012, good luck trying to get actual real data on Bitcoin back then. Or even trying to figure out the hash rates of Litecoin from just a couple of years ago. Those data is really kind of hard to come by. And while I do think there's kind of promising data projects, I think there's still a lot of work to be done on data curation side before we even get to trying to figure out the right methods of valuation that the industry can kind of rally around.

• 30:03Speaker 00

  Absolutely. I mean, look, one of the things that happened, I think it was either end of last year or beginning of this year, that just really didn't get that much attention was when CoinMarketCap switched up some of the data sources it was pulling in. And all of a sudden, it wiped like $100 billion of market cap, right? And that was one of the kind of higher quality reference data sources. And so You know, that immediately pulls into question, what is the quality of the data that they're using and the data that they're presenting to people. And so I think that that's just one website, right? You, across exchanges, data providers, etc., this is a huge issue. And again, I don't know if we're really going to get to a solution, right?

• 30:43Speaker 00

  In the short term, but I do think that getting to a point where there's audits or validation of data and kind of consistency and accuracy is essential to get these institutional investors in.

• 30:55Speaker 01

  I think that's right. And this is like the unsexy stuff, right? This is the back office, accounting, finance, operations work. But that's really kind of what's necessary to kind of move the, you know, spot forward. And frankly, there really shouldn't be like as of, let's say midnight, 12:31, what was the price of Bitcoin? Right? And I guarantee you, the people in this room will come up with different prices because you'll reference different exchanges or different indices. And we really haven't agreed upon kind of the standard. Now, there are folks that's trying to kind of raise their hand and kind of become that. Certainly, the efforts that the CME has done, for instance, around the Bitcoin reference rate as they price their futures, the CBOE obviously has something kind of similar, is a way to kind of get there. But I do think that industry

• 31:40Speaker 01

  consensus, I think, is yet to be seen.

• 31:42Speaker 00

  Absolutely. So actually, let's dive in a little bit how you guys use data on the OTC side. So first of all, there's probably plenty of people who are listening who actually don't even understand what OTC trading is. So maybe kind of give, you know, a quick two-minute overview of what is OTC trading, then we talk about how you guys use data.

• 31:57Speaker 01

  Sure. So OTC trading is all post-trade settlement. So as opposed to exchanges where you pre-fund the exchanges with either fiat dollars, or Bitcoin, or Ether, or Litecoin, whatever it is, we actually agree to a transaction first. This is the way old Wall Street sort of works, in that you agree to the transaction first. Old Wall Street also trades on those settlements, T plus two. So trade date plus two days. So on the third day is when you actually settle the transaction. In crypto, things move a lot faster. And so we're much more sort of same-day settles. We're much more like T plus an hour, or two hours, kind of a post-settlement. But we agree in the trade. At the time we agree on the trade, that trade is actually

• 32:39Speaker 01

  agreed. Regardless of what happens to the price, up or down, we honor the trade and we expect all of our counterparties to do the same. If you're, we're selling you Bitcoin, we give you our bank wiring instructions, you send the bank wire, um, a bank money to us, and then we just send you the Bitcoins to your address and sort of vice versa. It's a very simple, kind of straightforward process, but it's much easier than trying to wait for the wire to, to, um, to hit, um, any of the exchanges before you put on the trade.

• 33:07Speaker 00

  And, and, and part of this is, uh, so the way that it works in practice, right, is I can call you, I can message you, you know, whatever way I, I choose to communicate, and I talk to somebody who works at Genesis, and we come to an agreement. I literally say, hey, I want to buy, you know, five Bitcoin, and somebody on the other side says, okay, we'll sell you five Bitcoin at X price, right? Once we actually agree, that is where the trade is final in terms of, uh, you know, price, amount, et cetera. And then the settlement is actually what you just described in terms of the, the transaction of fiat or crypto trading hands.

• 33:42Speaker 01

  Correct. The exchange is the settlement portion, um, but that comes after we agree upon the transaction.

• 33:48Speaker 00

  Yep. And, and the reason why somebody does this, right, one is either they want to, uh, get lower fees, right? They're going on an exchange with kind of a large transaction. Two is they want to guarantee that there is some liquidity there, right? And kind of consummate the trade, uh, much faster. Uh, are there other reasons why somebody's doing that? Or are those the two main ones?

• 34:08Speaker 01

  I think the, um, certainly, um, the two that you mentioned, exchange slippage is certainly one thing. Um, and we're much tighter probably on a spread on a five million dollar transaction, say, than, than some of the exchanges. Um, the other thing that feet pokes, um, folks like to face Genesis is kind of our highly regulated status. For the institutional guys, and they're, um, they have, um, limited partner investors who rely on the general partner, they don't want any questions as to where do these Bitcoins come from? How do I know that a Silk Road guy didn't own these Bitcoins three hops ago? So they trust the RML KYC compliance process to kind of know that these Bitcoins, um, were that we're vouching for them.

• 34:51Speaker 01

  And that the questions around, hey, where did you get these Bitcoins from? From your auditor or your compliance department? Oh, we got these from a broker dealer. It kind of ends the conversation kind of at that point. So providence of Bitcoins and kind of the crypto is certainly one of the value add of sort of facing an OTC desk.

• 35:09Speaker 00

  Makes sense. Okay, and so obviously if I'm somebody who wants to purchase via OTC and I call you guys up, how do you determine the price? Right, so we're talking, you know, we talked a little bit about kind of the quality of data that's out there. Are you guys going to one exchange, kind of taking a, you know, average of a couple of exchanges? How do you actually use that data to kind of get confidence around this is the price that we're comfortable trading at?

• 35:33Speaker 01

  So our early technology partner is a company called TradeBlock. And TradeBlock kind of helps power our trading platform at Genesis. And they have an index called the XBX, which takes into account the volume weighted average price across some of the biggest US dollar exchanges. And so our quotes are based off the XBX. We don't try to rely on sort of any single exchange. Because as you might imagine, you know, this is kind of less the case now, but a year ago, two years ago, certainly, prices varied greatly kind of across exchanges. If you only looked at kind of one exchange for market color, you would have been off kind of what market was. And so the, I think the advent of a lot more sort of market makers and some of the high frequency guys kind of getting involved

• 36:18Speaker 01

  have sort of removed exchange arb opportunities. And so prices are trading way more uniform across exchanges than they were in the past. But we do rely on an index from TradeBlock as far as how we think about kind of our quoting.

• 36:32Speaker 00

  Got it, yeah, and the exchange arb was huge, you know, even as early as, or as late as last year. Right, I mean, there's people who are literally setting that up as their trading strategy.

• 36:40Speaker 01

  That's 100% correct, but like I said, I think all of that is gone by now.

• 36:46Speaker 00

  Got it. Okay, and so. As we look forward, right, what do you think are the areas that people are not building in that are going to be either important or are going to become kind of the focal point as we, you know, kind of go into early 19 and maybe even to 2020?

• 37:05Speaker 01

  Ultimately, I think there are questions around the exchange infrastructure and how that kind of ultimately develops over time. Today, you have, in the traditional markets, you have sort of NASDAQ, New York Stock Exchange, which is the pure matching engine, but they actually don't hold any equities or any money. They're just matching buyers and sellers, right? And then you have the DTC that kind of does the settlement aspect of it. And then there's a separate custodian, right? The State Streets and the BNY Melons that are actually holding the securities. So you actually have three different parties in the traditional

• 37:45Speaker 01

  world, whereas all three happens by the same company in crypto today. You fund Coinbase, they hold your coins, they hold your fiat, and they're also the matching engine and they're also the settlement agent. So you basically have pockets of funds kind of globally kind of scattered. Is that really the way that this space ultimately kind of evolves? It's possible. Or will the New York Stock Exchange kind of model, will a DTC get created at some point to kind of help settle transactions? Because I think one of the things in the OTC space is somebody still has to act first. There isn't this concept of simultaneous settlement and DVP, delivery versus payment, that you see in this world. And traditional

• 38:26Speaker 01

  investors really aren't interested, obviously, in kind of taking that counterparty risk, right? What if I send the money and you don't send me the Bitcoins, then what happens to me? And while that's why you work with reputable counterparties on the OTC side, I think a lot of that concern can be alleviated if you actually create a sort of a DTC for crypto. But that has to be so trustworthy, so well-funded, and it's possible, but I think it'll take a lot of effort to kind of get there.

• 38:54Speaker 00

  Can that only get built by a traditional financial, like, incumbent?

• 39:00Speaker 01

  If you recall, I think the DTC was initially funded by the big banks, right? And so certainly getting industry participants to kind of help fund a group effort certainly goes a long way because you have immediate buy-in from the incumbent participants to serve a DTC. Is it possible that the existing crypto guys can put funds together? Certainly, but if we're really targeting the biggest hedge funds and family offices in the world, I'm a little bit skeptical that they trust an effort put together by a bunch of startups. I think they want to see some traditional money kind of backing it to really give them the comfort level that everything's on the up and up.

• 39:44Speaker 00

  Yeah, look, it's something that we talk all the time, right? It's to an extent, Wall Street is the best thing that could happen to crypto and on the flip side, it's the worst thing that could happen to crypto, right? In terms of Caitlin Long came on and she was talking about, you know, kind of the rehypothecation of Bitcoin and, you know, really attacking the core value prop of this scarce asset. Wall Street doesn't really like scarce assets, right? And so I think that it's, you know, a double-edged sword there.

• 40:11Speaker 01

  I think that's probably right, but I think, you know, I would argue most, if not everyone, wants to see the price of Bitcoin going up to 100K, half a million, a million dollars, and I'm strongly of the belief that this doesn't happen without Wall Street involvement.

• 40:25Speaker 00

  No, it makes sense. Okay, and something you said earlier was at Genesis, you guys just brought on kind of the first overnight trader, right? And so obviously you're doing that to address or serve this global community, right? In the customers that you guys have coming to you, either on the OTC side or on the lending side, talk about kind of the demographics, right? These are obviously kind of higher quality, either borrowers or participants, but mostly domestic focused, internationally even, what does that really look like?

• 40:59Speaker 01

  I would say that today, we're still about 75% domestic here in the US. But it's our international counterparties that are growing the fastest. So over time, I do expect the ratio to get closer to 50/50, if not flip upside down entirely. But like I said, I think a lot of the Asia flow and kind of the conversations that sort of happen, we're just kind of scratching the first surface. And so I think that's an exciting kind of growth opportunity for us. The one thing we haven't done is open up foreign offices. We've decided to go 24/7 out of New York for now. What we're really kind of realizing is that a lot of the liquidity is sort of isolated in separate countries,

• 41:44Speaker 01

  especially in Asia. Like, there's a Tokyo market, a separate Hong Kong market, there's a separate market in South Korea, a separate market in a bunch of different countries, and there's really kind of isn't fantastic kind of overlap across the countries. And so you have really siloed pockets of liquidity. And trying to figure out which country to set up an office, and figure out what the laws and regulations, as well as just hiring, kind of the upsart cost, we really couldn't justify that, right? So what we're doing for now is trying to figure out where the liquidity is, where the interest is, and gather the data ourselves out of New York. And then we're in a much better position to kind of decide what to do once we figure out what the right, you know, right market for that is.

• 42:29Speaker 01

  But, you know, at the end of the day, everyone's trading on an email or via screen. They don't really care where the traders are sitting, right? And so we really haven't had pushback as far as from folks to say, "Hey, you don't actually physically have a trader in Tokyo." That doesn't really seem to matter.

• 42:44Speaker 00

  Absolutely. It's funny that you talk about trading over email or screens. Obviously, on Wall Street, that's not how it's done, right? And somebody said to me the other day that Skype, right, is like the OTC backbone of the entire crypto industry, because there's so much done via messaging and video, etc. And so it's just fascinating, you know, the infrastructure's not... To the level yet of Wall Street, but given that we're, you know, 10 years less into this, it's actually quite a bit of infrastructure that's been built and kind of sits here today to allow you to, you know, operate on a global scale, all from New York City, right? With a number of different assets and both on the OTC and the lending side.

• 43:26Speaker 01

  What I think is also interesting, I think, is that like, you have to remember, like, as a broker dealer, we've been doing traditional securities for years before we got involved in crypto. We know how everyone, all the traders on Wall Street use the Bloomberg chat function, right? And so a plenty of trades get agreed upon in Bloomberg chat. Then you just cut tickets on Bloomberg to sort of make it formal. A lot of the negotiation, kind of the back and forth, still happen over chat. It's just that in crypto, we don't have sort of the active community on Bloomberg yet. I bet that's coming. And really, like, whoever controls the chat really controls the audience, right? And so we kid around from time to time that somebody like Skype should just open up a crypto

• 44:09Speaker 01

  trading platform and you already own the conversation. And I do think that's a large part of actually who gets the transactions.

• 44:16Speaker 00

  Yeah, it's fascinating. All right, so let's talk about a couple of the controversial things that are going on in crypto right now and kind of from your seat, what you guys think. So Tether, huge, kind of, you know, back and forth as to whether they actually are backed to one to one to the US dollar or not. Kind of what is your guys' take or even you personally in terms of how you see that playing out and any concerns there?

• 44:38Speaker 01

  Obviously, I think that the industry as a whole has a lot of vested interests in making sure Tether has, is fully kind of collateralized on the US dollar. And I don't really, I don't have a view one way or the other if it is or not. But it has certainly spawned a whole host of other kind of stable coins and kind of currencies out there that I think Tether was first to market and I don't know whether other guys would have really jumped in if Tether could have been way more kind of transparent about their books and records. I think that would have been, that might have been like a closed door to a lot of these companies, but questions and skepticism kind of around Tether gave the opportunity for a lot of these guys to kind of launch their own thing.

• 45:21Speaker 01

  I certainly think it's interesting, but I've always said to my traders, I don't want you guys trading 35 stable coins, right? There needs to be more of an industry consensus around one, two tokens maximum. And as these projects kind of come on board and come online and actually start trading, I'm sure it'll be like a market test. Whoever's strong enough and has the most liquidity will end up winning and kind of play itself out. I think there's a lot of interesting things about the traditional asset-backed model versus some of the algorithmic models that's kind of out there and kind of made the best one win. But ultimately, it's all about confidence and whether or not the market really believes in the product that you're selling. But that's

• 46:05Speaker 01

  no different than like crypto and people kind of buying into the vision, white paper, what it's ultimately trying to do. I don't think it's any different on the stablecoin side.

• 46:14Speaker 00

  Absolutely. No, I completely agree. Obviously, some of the people who are transacting in, Tether specifically, are the retail, right? Investors who are trying to go in and out of crypto or kind of transact with some level of safety in terms of that value. One of the things that I think people are really pushing for is the participation of retail investors into just investing in general, right? So we saw this with the ICO boom where all these non-accredited investors could start to participate. Remains to be seen kind of how regulators will come down in terms of was that stuff compliant or not. But recently, the SEC chairman said, you know, they're looking at ways to get the non-accredited

• 46:56Speaker 00

  investors into more private-type opportunities in a compliant way, but still provide investor protections, right? You guys are obviously dealing with much more institutional-type investors. Is it a thing where if there was the regulatory compliance and protections available, you think that you'd be able to kind of go down funnel and start to, you know, interface with more of those retail-type investors? Or is it something where just from a ticket size, et cetera, it's kind of, you know, preventing you from going down?

• 47:25Speaker 01

  It's certainly much more the latter. We're just not set up from a systems, operational infrastructure to be onboarding like thousands and thousands of counterparties. We're much more sort of high-touch, white-glove service, and it'll be really difficult for Genesis, I think, to offer the same high-quality customer service if we had like 100,000 users kind of calling in kind of at the same time to be able to speak to a Genesis representative. So it's much less about, you know, the accredited investor kind of definition around like suitability, for instance, than it is much more about, hey, that's a market that the exchanges service very, very well.

• 48:04Speaker 01

  But it's kind of the bigger ticket guys are the ones where it's worth it from a customer acquisition cost perspective to spend the time effort to get on the phone, onboard, educate, because they'll venture kind of trade through us.

• 48:18Speaker 00

  Got it. Yeah, it's fascinating. Okay, and then what about the kind of legacy tech players, right? So you've got the Facebooks, Googles, Twitters of the world. How do you see them playing into this, right? So Facebook's got their blockchain team that they're kind of going after. I don't think Google's really said too much other than they're going to ban some crypto ads. Twitter, same thing. Like, how do you see an audience in the crypto space who comes out of that tech industry for the most part interfacing back with those tech incumbents?

• 48:49Speaker 01

  My hope is that the solution for any of these incumbents is not to create their own token. And, you know, they just hop on the backs of the Bitcoin or Ether or Litecoin. Pick one of the existing ones and not kind of create like Facebook dollars, right, on the Facebook coin. But you've sort of seen the way that Square has sort of integrated kind of Bitcoin into their payments platform. I do think that rather than kind of creating Square Coin, they kind of went with Bitcoin as kind of the future internet money in the way that Jack Dorsey is currently kind of thinking about it. And so I do hope that

• 49:29Speaker 01

  they figure out ways to reward content creators by letting them, hey, accept payments and whatever cryptocurrency of your choosing without kind of creating the additional friction of a Twitter coin and having to make people sort of buy whatever that token is. Because chances are that author is not holding on to the Twitter coin. They're going to turn the right around and sell it for fiat.

• 49:55Speaker 00

  Absolutely. It is, Facebook specifically, I have continued to say, one of the greatest things that could happen to crypto is if Facebook gave everyone a digital wallet and somehow drove adoption of Bitcoin. I think that just the inflection point of

• 50:09Speaker 00

  Two billion plus people getting to interface with this digital currency would be like nothing we've ever seen.

• 50:18Speaker 01

  I 100% agree, and I think that if you rewarded users who click on banners by giving you a little bit of Bitcoin in your Facebook wallet, even without having to buy anything, I think just owning some gives you that incentive and the interest to follow it more. And I do think there's a lot of creative ways to, I think, get more adoption, certainly at the consumer mass level, simply by rewarding folks back in crypto.

• 50:46Speaker 00

  Yeah, that's awesome. All right, so I've got one more question for you, and then I let every guest ask me a question, so think of a good one there. What is the one thing in crypto that you believe that you think a majority of the people you know would disagree with you on?

• 51:01Speaker 01

  That is a good question. I'll have to think about this one for a few seconds while I also simultaneously come up with a question for you.

• 51:12Speaker 00

  The big intelligence test on this podcast.

• 51:16Speaker 01

  I think that the US will get their head around ICOs, and that they, I will say, that within 10 years, the US will not be the ostracized ICO market that it exists today. I do believe that regulators, while they certainly are scared, first and foremost, will get their head around the fact that if they don't adopt, all of that capital formation and capital funding moves offshore. And I don't think that's in the best interest of the United States to let that happen.

• 51:58Speaker 01

  I do think that the US needs to continue to be a hotbed for startups and funding, and I do think that they'll get their head around ICOs and that US will be a hotbed for ICOs within 10 years.

• 52:11Speaker 00

  Yeah, I mean, look, I completely agree with you, right? I actually think that ICOs are just a different name for an IPO. Right? It's a funding mechanism or capital formation event. And the only reason why it is different is because the current laws force it to be. Right? But if we change the laws, then they would look very similar. Right? You could see a world where they say, hey, look, you've got to report X information. You've got to have these disclosures. You can only raise capital from, you know, one group of people versus another. I mean, it really is kind of the taking the Wild West and just putting a box around it and saying, you know, here's the right way to do this stuff. Right? Now, very, very cool. All right. What question do you have for me?

• 52:51Speaker 01

  All right. In the last 30 seconds, I've come up with one. Is, so Ether is $275 today.

• 53:02Speaker 01

  Is Ether more likely to be $1,000 or $10?

• 53:11Speaker 00

  So everyone who's ever come on here always asks me like random questions about Twitter, etc., and you asking me about price is amazing.

• 53:19Speaker 00

  So I'm one of these folks who, when it comes to Ether, I do not think that it's very analogous to Bitcoin. Right? In terms of the deflationary schedule versus inflationary and kind of the way that it's used as utility.

• 53:34Speaker 00

  I probably don't have the confidence to say that it's going to $10, right? But I do think that the mechanism in which it is used, especially that decoupling that you talked about of prices, it is much more likely to stay depressed according to where Bitcoin goes. Right? And the thought process there is you are incentivized to use what you are holding if you want to use the network. Right? And so, you know, kind of the macroeconomics of that forces a lot more downward pressure than, say, Bitcoin, where because of the deflation and ultimately the detraction of the monetary supply, people are incentivized to hold, right? And so it is, you know, the decoupling piece is really interesting to me because at the core,

• 54:19Speaker 00

  there are two separate systems in terms of how the assets are both created, held, and ultimately incentivized to use or not use. And so I think that, you know, it's much more likely to go lower than it is to go higher, right, over a long period of time. Great. Awesome, man. I really appreciate the time. This is fascinating. I think that a lot of people are going to get a lot out of the OTC trading and kind of what you guys do. So I appreciate you coming on. Thanks for having me.

• 54:50Speaker 00

  Thanks again to our sponsor BlockEstate. To check out their tokenized real estate fund, you can check out www.blogestate.com. Hey, everyone. Pomp 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.