Crypto Market Structure - TOKEN2049 Singapore 2022

morning everyone good to see all of you here and hope you guys hope you guys had a good journey in I know it's been a bit you know rough with all the road closures but glad to the attendance feel free to come forward uh listen in uh at the end we'll probably have some questions as well so in terms of this agenda I'm gonna do a quick introduction with our panelists uh my name is David I'm a co-founder of drift building the largest uh to see decentralized perpetuals exchange on Solana right now about 10 billion in volume and essentially looking to push the D5 Frontier but without further Ado I will quickly let our panelists introduce a little bit about their backgrounds before we kick off today's agenda so Paul if you wouldn't mind going first yeah David thank you very much and thank you to 2049 for inviting me here to speak today um so my name is Paul kremsky I run business developments for Cumberland drw um I've been with drw uh mostly as a Trader for most of my career uh for 16 years and I've been on the cryptocurrency side for about five years now hi guys good to be here uh my name is Philip Gillespie I'm the CEO of b2c2 b2c2 is one of the leading uh OTC liquidity provided into crypto space so this is institutional side liquidity on spot derivatives funding and everything else uh before b2c2 I used to work in traffic investment Banks and it's great to be back in Singapore again thanks um hello everybody my name is Thomas um I'm at Jane Street uh Jane Street is a global multi-asset liquidity provider and Market maker we did our first trailer year 2000. I joined the firm in 2003. I've traded equities ETFs Commodities FX volatility over the years but over the last five years I've been focusing on crypto with when we started trading in 2017. it's great to be back in Asia thanks for asking introduction so today's discussion is going to be about the crypto Market structure and recently we've seen so much take place both in the macro World which has then had impacts on crypto so I think we'll start at the very top and then slowly zoom in in terms of macro we've seen over the last two years tech companies benefiting a lot from the quantitative QE a significant amount of money injecting into the space and now this trend is taking a pause so I'm curious to get you guys thoughts on how that's going to be affecting crypto businesses Tech business and their crypto businesses so if any one of you guys want to take it away and we go from there so happy to start so I think it's pretty uh anybody in finance knows easy financial conditions leads to a lot of uh I don't say laziness but you get away with things right so in the last two years would rates suppressed um I think valuation and multiple is very high it was easy to raise funds it was easy to to hit these valuation metrics and really everybody talked a big game but now once rate starts rising and the financing cost goes up you have to really be selective on what you're delivering it's true Innovation it's true business it's true products and services and it's not just crypto I think we're going to see it you know across all these uh growth stocks in NASDAQ and everywhere else but especially in our super Innovative super growth industry that we're in you know Now's the Time that you kind of see the real players who are building the real businesses versus the others who were completely mispriced in terms of their valuation and the fundraising so I think it's it's a healthy thing it's painful sometimes and I think we're going to talk about credit markets and different stuff but um to me now is the time to build Now's the Time to really innovate the right products and services so one of the points that you mentioned um during a bull market everything is really easy and you know even if you're not excellent at something you can be successful with it and something that we see in the crypto markets which we actually don't see in tradpy really at all is you have a single company trying to handle multiple stacks of the trading business so in traffic you're not going to have the same company act as the exchange the custodian the prime broker certainly not as a trading desk um at worst that leads to really really serious uh conflicts of interest we like open um you know competitive markets and vertical Integrations just usually doesn't lead there um even if there's no conflict of interest in crypto what you see is if you have this vertical integration you're not getting the best user experience the metaphor the bad metaphor that I like to use is if you go to a restaurant and it has both Sushi and pizza like you can be very confident that it's going to be bad Sushi and it's gonna be bad Pizza not in Japan yeah and you should order the pizza the Sushi's too risky right um and in crypto like a lot of times when institutions are coming to the space they're trying to figure out everything they need to trade crypto for the first time which is there are a lot of hurdles and there's a temptation to do one single onboarding that offers all of these Solutions and the case that I try to make is instead you should focus on figure out okay I need a custodian who is the best custodian for what I'm trying to do okay I need a technology provider who's going to be the best OMS PMS for how I want to execute and then I need liquidity where is the best place for me to get liquidity it's very unlikely that the answer to all three of those questions are going to be the same spot yeah and I really like the lens of this question because most of the time when people talk about kind of what the macro situation is they're talking about how it affects crypto as an investment thesis and so a lot of the things that people have speculated about the use case of crypto in an Investment Portfolio such as it's an anti-correlated asset it's an inflation hedge uh things like that have kind of been disproven but the idea of how the macro affects the market structure is one that's not really talked about that much and I think that you know Phil is exactly right like one of the major themes now over the last six months is the impact of deleveraging and credit and the reduction of credit kind of across the space and you know you'll see a lot less of the the way that this impacts Market structure is that there's a lot less designs that are predicated on you know High leverage or derivatives of derivatives of derivatives which I think you know is going to create a lot more of a stable environment long term the other thing that you see a lot when you have this macro environment where everything is going down is that there's a more of there's a heightened focused on consumer protection and certainly you're seeing that from a lot of The Regulators a lot of The Regulators are taking the stance that we want to support you know the development the innovation of blockchain Technology but we want to make sure that consumers are protected especially as like the you know the assets uh all asset classes are going down and one of the ways the primary ways that this happens is um an expectation of increased government intervention in markets and I think we're starting to see that already I think it's an excellent segue to two categories I will touch on today uh first being Credit Credit contagion has most recently hit us it's very fresh in everyone's mind and it does feel like we've gone through a similar cycle to what we've seen in financial markets in the 80s in the 2000s with long-term Capital Management and similarly again you're seeing uh this play out again where uh credit risk just blows out with certain parties being under collateralized and then you see this massive ripple effect that has hit all the way down to the retail that I've been ultimate participants to products like the Celsius participants in stable kind projects such as Terra so given that virtually no lender has come out of this unscathed you know there's been no bailouts in crypto as they have been in traditional markets you know what does this mean in the short term short medium term for participants of this phase yeah so I'll make a very obvious understatement uh I think Market participants in crypto um really didn't spend enough time on risk management um that's probably underselling it um there are a lot of parts of crypto and any new asset class where you know the motto is move fast and break things and that can even be true for parts of crypto but when it comes to someone who you have credit risk with whether it's an exchange whether it's an OTC liquidity provider whether it's someone who you have a derivative to deal with you don't want them to move fast and break things you want them to move very very slow and be as careful as possible one of the benefits that we have Cumberland is part of a company called drw which has been in financial markets for 35 years so we are not building our risk systems from scratch in fact we use the same risk team we I speak to the same people that are speaking to drw and a good risk team they're not just asking questions when prices start moving they're asking the questions that maybe the Traders are not asking themselves they're saying well what happens if this depends what happens if this moves like this what happens if Bitcoin goes down 80 in a day I think that when people are assessing credit risk in this space a common mistake that they made is they said okay this is someone I want to face because their AUM is X when really the question that you should be asking is what is their AUM going to be in this scenario that I should be afraid of what is their AUM going to be if crypto collapses how much leverage do they have how much of that AUM are they going to lose for one reason or another and at the end of the day while the events of the past six months have been really rough for the entire industry I think that the companies that are left are going to be a lot more mature about risk management um and the companies that are left are also going to be self-selected for the ones who have been mature about risk management and at the end of the day the sector is actually going to be a lot sturdier a lot more resilience um and more mature I actually uh have an interesting point on this because I agree with Paul on most of the points but I actually think it's easy for you know Jane Street you know drw Beach C2 um we we do stress testing and everything about this credit Market condition is very very difficult as well because going back to the first point valuation was hit a lot of these companies were raising money there's extensive due diligence there so when you look at the financial statements when you look at just the surface you see okay well you know this counterparty is credit worthy what happened in June was very interesting um you know you had this credit contagion happen and it kind of went into the governance the risk management of that particular company stuff that you don't really look at so I think you know uh Cumberland you know beats C2 we do we do stress testing we do all these things we look at uh the concentration Matrix and everything about it is extremely hard to build a proper credit risk model in a market like this to go back to the original question what I think is that happened in uh near term and longer term there's a massive need now for credit intermediaries because you know credit cannot be a reason why we say okay my NLP you know you're going to have to overcollaterize by 130 140 because I trusted your balance sheet but now I'm not really sure that really stops the business so I think in the medium term we're gonna have to have these credit intermediaries and like drw and Cumberland you know we're owned by SBI they can do parents or guarantees here and there to select companies but we can't just they can't just do it for everybody right so we really need to centralize credit intermediary to make sure that the credit Market flows right and to the original point there is no Central Bank like we're going to have to figure this out I mean that's what I love about crypto you know that's that's the Innovation part that's where we need to focus next but it is a very very tricky uh problem to solve but we're gonna do it and that's going to be the medium-term solution I think oh yeah I agree and that's really exciting that's that's a really exciting part of this because if you you know I'm gonna make a very gross over uh generalization here um oversimplification here but essentially there are two levers whenever you're talking about extended Credit One is collateralization and the other is identification and obviously from an identification standpoint you know that's a little bit tricky in in a field like crypto where there's so much emphasis on privacy but you know the the main issue from a from a credit perspective is a credit perspective is if they both fall down and we saw this in the housing crisis in in the great financial crisis in 2008 like when everybody realized that all of these mortgage-backed Securities were actually under collateralized you know there you didn't have any recourse to the lender because they never did any kind of income checks on the lender and so from the identification standpoint and you you include kind of risk checks credit risk checks and things like that in the identification part but you know I do think that at some point you know having somebody who actually understands how to do credit checks how to understand how to do risk checks because I do think that a lot of the you know it's fine to lend uncollateralized if you are actually strong at doing the identification doing the credit checks and you know a lot of people didn't have that in their Arsenal but if you have like a significant credit intermediary whether they do it on a credit basis whether they do it on a pooled collateral basis like uh which a lot of the clearinghouses are set up as then I think that you know it will go a long way to solving this and you know the crypto space is working on this problem of digital identification right now it's a very very big growth industry um and so I do think that this will be solved over time but that doesn't you know it's only a risk mitigate it's not going to go away and do away with the entire kind of concept of credit crisis I guess in terms of what we observed with the you know the likes of Voyager and Celsius was that the I mean in your thoughts sort of Thomas what was what was lacking the identification piece for them where people weren't able to properly assess frankly how things were being done behind the scenes yeah and you know I don't want to assign blame because you know there are things that you can do you know there are things that I think that they did do which is like to try to check you know navs and things like that but you know on some level there is an element of trust which is really hard to build in a trustless system and if you know if the if the borrower is not providing the right documents and you have to make the choice from a business perspective like do I extend them credit or do I do I not then you know if you were focused on growth and you know it's very easy to lose sight of the tail risks no absolutely I think there's this sort of segue is well into sort of the next piece of discussion which I think we sort of touched on the edges of which was regulation I think following this large credit contagion the retail getting significantly affected we're seeing arguably some of these Regulators changing their stance I was talking to Philip you know backstage around a recent article that Mas put out and the headline reads as follows yes to digital asset Innovation but no to cryptocurrency speculation which I think for a lot of people is confusing given that people saw Singapore so mad as like a very you know forward Financial Hub you know this kind of statement might be considered a step back so I'm very curious to get your thoughts on how such a statement is to be interpreted you know is this the regulator saying I'm going to take a significant step back or is it saying hey maybe we should move a little bit slower we shouldn't let growth sort of dictate The Narrative of how our regulation looks yeah so if at the end of the day all the crypto Market does is build a new product for people to trade and speculate in I would say that as an industry it's really failed um there are so many people so much talent has moved into this space over the past five ten years that if crypto achieves anything less than changing the world anything less ambitious I think is is just a complete failure Cumberland drw we've been liquidity providers that's that's really our bread and butter that's really our ethos for the past 35 years we think that there is a real strong public good served by liquidity providers providing consistent um reliable liquidity even in the worst market conditions that's the thing that we do um if anyone is a liquidity provider Maxi uh it would be Cumberland drw and even from that Maxi position we still see that it's necessary to do more than just trading in this space it's necessary from the position that we're sitting in to actually be Builders as well that's why we have a venture team which is investing in projects in the space that's why we have Cumberland Labs which is a recently launched incubator which is going to be building products in this space because we really think that if you have that understanding that technological know-how that markets structure know-how um then you have to be doing more than just creating the space you also have to be building the products you know build the products that you would find useful and then give it to other people and that should Advance the market and um maybe I'll go into a little bit in terms of view this is my personal view um you know all three of us up here liquidity providers and I think we're very proud of providing the gateway to crypto without liquidity can't access crypto and if you look at you know the spreads compression the liquidity in the market it's great and I think you know we can credit ourselves for building that building that out but for the next probably six months or so you know maybe a little bit more I think speculative volume especially from retail is going to go down so where am I focused on I'm actually quite interested in the build out of like stos I think it's a great opportunity right now why because if interest rates are going up debt financing is going up a lot of these projects a lot of these companies are looking at Alternatives now we've talked about stls for quite some time and I think the Innovation piece in crypto in this digital asset is is quite large now I've been speaking to a lot of I'm based in Tokyo and I've been speaking to a lot of these large Japanese asset managers real estate managers and other kind of Mega project guys and we're talking about potentially looking at stls what I can tell you is one of the first questions they ask is well what about liquidity in the secondary Market we can't split Innovation and speculation you know Innovation is coming and Innovation is there and a lot of the macro factors that we talked about in the first question I think will eventually lead to the build out of more you know debt token uh real estate you know token and tokenization of assets and stuff in the right way um but then we need to come in and we need to be able to provide the liquidity and that is being driven by speculation so there's no way you can split it and say two different things we're going to accept Innovation but now it's a speculation well and I think you know just to just to take a bit of a step back I think that you know I The Regulators jobs are a lot harder than I think a lot of people realize because you know for people who are in this room uh The Regulators feel very kind of stayed and backwards but I think the the right lens to look at this is that The Regulators are not trying to create rules to protect you guys they're trying to protect your parents or your grandparents or people that you have tried unsuccessfully over the years to to understand and describe like what is actually happening in crypto and you know it's it's very very difficult for people who are on the outside to actually understand the depth and how much uh of a paradigm shift this actually is in the way that you know you not only conduct Finance but and fundamentally in the way that a lot of things are going to work and so The Regulators are trying really hard to protect them while still keeping the door open for everybody in this room to work on the projects that are actually going to you know labor the groundwork for the future uh and it's a tricky balance they're very likely going to get you know it's a pendulum they're going to kind of Miss on both sides of the pendulum but you know hopefully over time because firms like ours because people in this room are engaging with regulators and helping them understand the challenges and helping them understand the value proposition that you know that hopefully will work together towards a brighter future so it seems like speculation is something that almost can't be unbundled from Innovation is what I'm hearing is that something is that a necessary evil that encourages and maybe that's a very controversial question is that something that's needed to sort of perpetrate liquidity I mean are you saying speculation is evil because I would not disagree with that stuff yeah yeah please challenge that yeah I mean I think this and this kind of ties into this idea of credit you know this idea you know one thing that is important to understand credit is this idea and you know ultimately the the role of credit that credit place and speculation is in the velocity of money and if you think about it like velocity money is very simply like how quickly like a dollar moves through the you know through the entire system and so you pay your employees your employer pays rent they play you know they pay the dry cleaners they pay for goods and services and then you know those vendors go and they pay you know for supplies etc etc and how quickly that money moves through the system a lot of that is what drives um is what drives Innovation and speculation and credit is an absolutely an integral part of that because if you have to wait until all of your vendors pay then you can't actually pay your employees and then what happens uh where in an innovation is an important part of that because in order to drive Innovation like somebody has to take a risk they have to borrow money in order to implement some of the things that you want and you know the danger when it comes to the Restriction of credit when it comes to some sort of friction that's introduced by some of the Regulators is that you know the velocity of money stops because something happens you know that's part of the reason why deflationary deflation is so destructive is because it stops consumer spending and so you know as credit restricts then you have less capacity to actually go out and borrow money uh to buy the equipment now that you can kind of find us down the road and so the idea of speculation and Innovation I think are I think I think you basically said this like they're two sides of the same coin you can't actually innovate we can't question the current status quo without some layer of fundamentally asking why are we doing things and is there a better way to do things and I think that's what speculation is like this idea of like can we build a better system can we build a better model can we build a better world and you know so the idea that speculation and Innovation kind of are at odds with each other I would disagree with and you know I think that everybody in this room has taken a very very significant speculative leap at some point um and I think that you know the idea that this is somewhat destructive I mean certainly it can be if you're doing things that you don't understand and you're over leveraging yourself um but system-wide I think it's important so I guess that's why we're all here right um I think in the time that we have left we'll quickly change lanes I think Paul sort of touched on this in terms of these liquidity providers also investing in bringing the best practices to support this this new area in the form of you know where there's Venture infrastructure I'm very curious to get a sense of you know in the near term crypto resembles a short term almost like macro speculative assets in the long term there's almost a decade long technology roadmaps so as you know large institutions how do you see yourselves as being part of that that Journey yeah I can take this so one of our key roles in the market one in particular what I spend a lot of my time doing uh is speaking to firms that are coming from traditional finance and figuring out what is the proper way um to enter the crypto markets it's you know one of the things that we see right now in crypto in the past is if a company is trading or if they're involved in crypto that is what they're doing as a company and that's the only thing there's not a lot of companies that are saying okay we're coming from this background then we're approaching it a different way and if we want growth as an industry and this is you know this is the way that we try to raise the tie that's going to lift all boats is bringing other institutions and basically making crypto a lot more mainstream by getting these institutions involved and understanding the questions that they are going to have on day one you know going from day one when they're saying okay what's the difference between Bitcoin and ethereum um two coming to the end when they're saying okay what's the difference between custodial and non-custodial um what's the difference between you know trading uh trading via exchanges or trading via an isda right answering those questions and so generally the way that we try to help these companies enter the space properly and back to a point that I made earlier you know we're not trying to do every piece of this ourselves and we've worked with a lot of the infrastructure providers outside of liquidity provision um and we say okay these are the companies that you're going to need to speak to these are the tools that you're going to need to have and kind of trying to guide them towards um who over time in trial and error we figured out okay these are these are the the healthy players in the space yeah and uh I guess uh from a very large perspective um I have a few this is very theoretical theoretical I guess but I think first you need to have liquidity you need the foundation and then you start building out the gateway to to the asset class um in that sense what we're doing is we've built out you know we have the spot liquidity we have the derivative stuff now what we're working on is a little bit the second level in my view which is private order books you want to limit your uh exposure and you want to limit your hand you want to limit your Market impact so we're delivering a private order book very soon uh then we're looking at delivering the first electronically different option chain so you can actually look at the option change in an OTC base right now you want to trade options you go to derabit it's an exchange-based trading I'm a big believer this could be just be me coming from FX but there's over 450 exchanges in the world right now crypto exchanges I'm a huge believer in OTC and I think the three of us are definitely big OTC guys right so right now we're building out this still in the process of building out all the products and services that's necessary in the OTC space so that it's easy for everybody else to come in because exchange is great for retail it does not work for institution you need consistent liquidity you need the product and services that institutions need and and so on and so on now one thing that I will touch though uh in terms of innovation I'm a big believer in securitization of assets and I think that has to come next uh that's why I personally even at bc2 we're starting to focus more on looking at debt token issuance and looking at securitization of assets because once the liquidity is there you know that's not the end of our story right The Innovation I think really comes from the securitization and that's that's my big bet that you know uh in the next few years we have to focus on yeah and I know everybody else has been talking about liquidity but I think that you know it's important to understand that one of the one of the absolute kind of fundamental underpinnings of capital markets is the idea of entering exit points like especially in an Institutional side uh they care about like entry like if I were to invest one percent of my portfolio in Bitcoin like how much input impact would I have and then once you place the investment like what is the exit like am I going in a stress scenario like am I going to be able to exit an investment if you're starting a company a lot of your employees are going to care about like what's the exit scenario are you going to sell yourself are you going to um you know list go public things like that and so you absolutely have to have a good story for both entry and exit and liquid liquidity is absolutely essential to making that story possible like if I'm sure everybody here has you know some tokens in their bags that they're dying to get rid of but they can't find a bid and that's the that's you know if in that context it's very easy to understand why liquidity liquidity is valuable but the other thing that you know that we're also trying to do and very much like the other panelists are is that you know we have over 20 years of experience in financial markets and one thing that we've realized in crypto particularly is that we have a lot of Market structure and product structure expertise we've seen a lot of experiments succeed and fail in other asset classes and we can leverage that when we talk to people who are doing this kind of intense experimentation in the crypto space and lend some of our expertise and you know we have a pretty strong Capital base now so we can lend some Capital we can provide a little bit of guidance to help mature the space and you know if anybody is in that bucket please you know feel free to come talk to us any any of us it's to that point there's there's a lot of crypto that is new and new things being built new ways of trading but there's also a lot of it that the wheel does not have to be reinvented um one of the one of the ways that we provide liquidity is the most tradify thing you could possibly do which is via an isda um and this is not nearly as exciting like I'm a D5 guy or that's that's how I like to think about crypto and but at the end of the day you know when you're talking about bringing institutions into the space they want to trade the same way that they're comfortable that they've been trading in traditional asset classes um so okay FX Traders have traded via nisda before and so they have the same structure here and all of a sudden it abstracts away a lot of the differences a lot of the things that they're gonna have to spend a lot of time getting comfortable with and they say okay it's an isda there's an underlying index and at the end of the day we're gonna cash that all to something that's based on that and all of a sudden the market doesn't seem so new and scary it seems like okay this is just another thing that our team can trade a great way to conclude guys I know we've done a little bit over and we could probably go for the next hour but everyone please join me in thanking our panelists for the time today