The Institutional Appetite for Crypto and Digital Assets - TOKEN2049 London 2022

oh good afternoon everyone uh thanks for making it back from lunch um I'm David Brickell director of institution of sales at Paradigm and for those that don't know uh Paradigm we're an Institutional liquidity Network for trading block size and multi-leg crypto derivatives um I'm joined by an esteemed panel to discuss the institutional appetite for crypto and digital assets um it's been a double couple of days in in the world of institutional crypto um so there's a it should be an interesting conversation and lots to unpack um so before we dig into things do you guys uh perhaps want to introduce yourself Andre a little bit about what you do yeah sure I'm um I represented the traditional Investment Bank uh Goldman Sachs but over the last two years we are developing a digital asset strategy um within the bank and the team is growing so so we are now over 50 people I represent the trading side of the Endeavor we are the first years Bank to offer principal trading principal Market making to our clients and cash sets and crypto derivatives but at the same time we're exploring uses of blockchain In traditional financial industry be it re-portraits be it be it Bond issuance and and other ways that the blockchain technology can be used in the traditional financial sector yeah Max Boone and I founded b2c2 some a long time ago now and I was actually in the same Anonymous class as Andrei it was enough exceptions and I was on the interest rates trading side and I made the decision a little bit earlier to quit government to start b2c2 which strictly has been one of the mid market makers in crypto and today specifically the the main dealer on the OTC side and it's now part of SBI a Japanese Bank I'm the CEO of GSR we're a crypto Market maker and systematic Trader trade spot options derivatives and we also have a investment management itself and I guess um just to set the scene a little bit a good sort of starting point would be to look at where are we currently at in terms of the level of appetite institutional appetite for crypto how has that evolved over the last couple of years perhaps and how is it manifesting itself well I have to say that the situation of the last couple years has evolved especially in contrast to the last two days so you have to recognize that I find those he's extremely comfortable actually I imagine institutions today in crypto are a little bit less comfortable in comparison compared to what happened but it's been a multi-year process that's going to continue you know we went through many crisis mongarks bitfinex hacks a bunch of stuff that that we've always recovered but it it's just a fact of life that it's going to take them a really really long time and they're starting with cachet or products and one day Goldman is going to do physically delivered Bitcoin forwards and things like that probably we have obviously been sent back now a good six months probably more with the with the recent events with FTX and Alameda but it's not something that Andre myself Jacob uh you know are going to let us that that's not going to stop us uh we we strongly believe in this market and we're going to keep trucking and the institutions are going to come and come in fact one thing that uh people don't realize is that institutions have been active in crypto for a very long time but it's institutions that needed to be in crypto so it started with the retail Brokers IG Markets etoro Etc all those names were first in crypto of course if you expected BlackRock to come in in 2014 that was never going to happen so you also have to let the market evolve in terms of products and the verticals that you have for all those traditional players to come in at the right time um our journey has been a little bit different in a way because we highly regulate an institution we are not active in sport and so so it was our decision to do to be active and cash settled derivatives and and the way that it came about is client demand so we have our existing clients wanted exposure to to the crypto space initially a lot of hedge funds and and we cater to a lot of hedge funds on the traditional trading side they were attracted by the high levels of volatility but also high levels of yield compared to traditional asset classes a few years back what is what is changing now is that the counterparty risk is starting to be top of the mind for these traditional hedge funds as well and so they want to see the the names that they're already comfortable trading with to be the counter quality in in crypto space as well additionally look we've got clients who are starting to have revenues in crypto and they're looking to hedge their exposure and so so we are there to cater for their demand rather than um trying to speculate in the market in any way and what on that what what types of clients are and institutions are actually coming to you and and one of the kind of things that they're actually asking you for um yeah so so it's all sorts of clients so initially the conversation over the last two years it started with the hedge funds who were early in on the game and they want to have exposure to to an asset that was Rising very fast and Exhibits a high level of volatility um and then obviously uh given the news that it attracted um at the time uh more traditional asset managers starting to inquiring about the space and now conversations were firstly started with Bitcoin then with ethereum it's still a slow-moving slow moving space for a lot of our clients and there is a growing understanding that this is a space where they need to be active they need to participate on behalf of the clients and they're willing to see institutions such as ours to to cater their demands um and then of course corporates they're looking at more corporates uh having public revenue streams within um within crypto from either nft sales or or direct investments in crypto attached companies and so they look to Hash their revenues in a way that they hedge their revenues and effects for instance yeah interesting and and how about yourself Jacob what is what are your thoughts yeah I think it's been alluded to here um we have quite a few of institutional players whether they are market makers um you know sort of retail Brokers or Banks being active into space we have seen certainly hedge funds coming in and either trading directly or trading through you know their PB um the next step is the asset allocators so you're looking at people like family officers um you know more traditional asset managers and Pension funds and so on and so forth there you have you know you have you have a hurdle in operational due diligence they don't recognize how money is transferred within crypto or Assets in transferred within crypto um it's you know the concept of wallets isn't included in their odd so that's a bit of a hurdle so I think what we're seeing from that particular part of the allocators is probably people with a low friction investment committee like um you know some family officers are being more active to deploy capital and I think what's interesting in some of them have a very intrinsic view of crypto I think they believe in you know certain areas of disruption and they want to have the exposure other people are looking at purely from a portfolio allocation perspective and they will say so I have a new asset class which has a promising technology and a staggering Talent density of stem student moving into this industry with a huge amount of capital backing them so that's interesting and then if I look at the properties of how these assets are trading I get a lot of bang for my buck because there's a lot of volatility so I don't have to take a big precision and it tends to be at least if you look over the last few years it tends to improve your risk return so we've seen those coming in at a small small allocation but what's interesting I think is that some of them are allocating without actually having an intrinsic view on crypto it's just purely promising technology and talent density uh plus the properties of crypto so it's fair to say that you feel in terms of the appetite um is now no work today than it was two days ago yeah yeah for sure and I mean it definitely you know I think the events over the last couple of days you know feel like a major setback um but you know we've been we've been through events certainly over the summer a bit bit lunar three arrows Celsius I mean what what was the response after those events and what perhaps can we expect um over the coming weeks um in terms of how that's impacting appetite and The View well for our client base which again is slightly different than from yours it's actually I would say um the response for that has been the opposite so we are seeing more inbounds to to trade with us more because of the counterparty risk um but these are mainly again existing institutions that we have client lines in other asset classes that are coming back from from D5 protocols from from trading on unregulated exchanging exchanges to try to face a different kinds of party in terms of products what we've seen in terms of our client base what they have been doing is effectively there are a few groups one is hedge funds Who start focusing either on the price movements but also more so on the volatility or relative value volatility plays within the crypto crypto market and the volatility space is still developing the volumes are still growing there so there's still a lot of opportunities that can be harvested in the space um and so definitely the hedge funds that are active in bowler replays in other classes are coming to the crypto space where where a high level of volatility is actually a a benefit um but also the same time we have lots of cross-asset uh funds that are diversifying their exposure to crypto because we had very high correlations between crypto and particularly the U.S Equity Market early in the year and so it was part of the allocation asset allocation to have a again as Jacob points out a higher High return potentially within the same view of the market well I think there there's indeed a dynamic at play where if you're a more serious player like a Goldman Sachs for reasons of of counterparty risk you get more inbound now and that's also something it's obviously a benefit to be owned by a bank at the bcc2 because we also get get some of that but in reality it's not just that you find that in in crypto when there's a trauma like like we just went through people tend to even though it's supposed to be trustless tend to go towards institutions that they trust more that's going to be a coinbase that's going to be a kraken rather than maybe smaller or uh offshore exchanges but that only gets you so far to be Goldman Sachs because in reality one of the big risks of crypto from a user perspective is not that Goldman's regulator not regulated versus binance it's the crypto security and when you look at let's take maybe one of the exchanges that that's used as the safest Kraken in terms of they've never been hacked well it's one of the least institutional exchanges and so there's that extra Dynamic of the the the security that just isn't really covered by whether you're a big financial institution or not I'm pretty sure JP Morgan could also get hacked um and so that's one thing now what we have in crypto here and that's a lesson that we didn't have enough time from Luna and three arrows to it doesn't seep through is that there is by necessity we have lots of credit links in the industry and that's just how it's going to be for the rest of times because financial markets always rely on credit that's not going to change now we have a lot of bilateral private credit links and I think those links need to be made more visible so you have protocols interesting protocols like Maple where you have pools that are completely public you see exactly how much Alameda is borrowing that's quite interesting but I think we're going to need to have an actual credit market for crypto because the fact that there's been a pretty large loans made to Alameda where none of that's really known and I think we need both visibility in terms of well who's actually borrowing in the market but also tradability of that credit and I think that's something that's going to emerge maybe in the next call it one to two years of this debacle is that we're gonna end up and I think that's a very good thing with a crypto credit Market where you're gonna have the the big names instead of relying on you know boring from Celsius and block five and others there's going to be another writing process there's going to be something that's going to look and feel like a bond but probably not going to be a bond from a legal perspective and that is going to be traded either on Exchange or TC on uni Swap and I think it's going to be fascinating and that's going to really help us give us price signals that we don't have today when it comes to the financial viability of all those big companies that we end up trusting Why well because Sam and cesia have big Twitter followings and that's a little bit silly when you think about it so it sounds very much like you're on the the path of that you know we need to go more D5 um because it's interesting to me that a lot of the institutions coming in they're just more comfortable with like centralized exchanges um I say that might have changed over the last day or two but but but obviously one of the issues that we're seeing yet again this week is one of transparency and um you know as someone who's at Lehman's in OA you know one once that the lack of transparency no one knew who owned what um and of defies obviously the the potential answer to that now the regulator doesn't like it because I guess the on-ramps and off-ramps how we control for that but but is that how you see the space evolving in terms of we need to go sort of more defile and perhaps less centralized I like that but the problem you're always going to have is that you will not have all the every crypto firms balance sheet in D5 so we're always going to have things like you have a long on D5 that's going to be visible but offset against a synthetic shorter TC that's always going to be the case and so to me unless you've got the entire balance sheet fully transparent it's as if you had nothing so I think we're going to have to rely more on on on on the market putting a price on the credit of those firms rather than just to have full visibility uh where everyone can make the research I think we're going to need to rely on on credit asset managers doing the due diligence where that somebody is going to be private with private financials and then those signals seep through the market by by through prices I think CeCe promised us a miracle tree of all the assets of Finance that's great you know that's good transparency for everyone to look into but I think if you go back um you know when when money was cheap uh it wasn't accessible to crypto native players so crypto crypto natives started to lend to each other well-funded firms that had raised external Capital built a big lending books and this created a huge amount of uh sort of contagion within the space and that was used for leverage not only for defy but also on chain Leverage um and we saw that on time untangle with Luna and and three arrows I think people were surprised about the the level of contagion that was in the market um and it's the same thing here right it's it's exactly the same thing and transparency um it's super opaque um and it all comes in but what I would say is that for traditional investors if you're talking about traditional institutions to understand what's happened here um you don't need to know crypto this has nothing to do with crypto this is um this is just Market contagion and and leverage and a bit of grief um so transparency I think is going to be forced upon Institution if they want to come in or if they want to trade with you know counterparts coming in yeah sure um another area again I I come to crypto from uh from the sort of macro and I think about crypto in a macro framework macro was boring for a long time and we've now got you know zero rate world and we now that sort of policy positive interest rates and and we've seen volatility in the macro space how packed in the appetite for for the move into digital Assets Now that macros become a bit more interesting again what are your thoughts around that um well we it has definitely changed um the the appetite to be more crypto because clients can execute larger volumes uh also potentially larger leverage positions So within the traditional um uh asset classes it effects be it equities be it uh be a rate if you zoom out of like the recently events what's interesting to see to your point is that the volatility in all asset classes over over the course of the year has increased in everywhere equities affects rates credit in crypto a bit of well I'm talking more Bitcoin ethereum it has actually dropped the longer term volatility has actually been reduced over the course of the year and we had a very interesting dynamic in in September and October where the realized volatility of crypto was below traditional asset classes which which is not very common but at the same time we started seeing um inbound clients asking whether we could have relative value plays based with crypto now where where we've seen more in bars saying like is this a good time to go a long crypto wall at the about by shorting other asset classes as well for instance um but what's more is taking despite the markets being traditional markets being very busy at the moment every single big institution we speak to has still a dedicated crypto person on board there are different stages of development but there is a but there's a digital strategy for all all of the all of our clients what's more I would also say for our competitors is probably the digital access team within investment Banks are one of the few groups that are actually growing and and across numeracy whether it be European or U.S banks and this is the value of not just the trading or the volatility of the asset class but it's more of the value for the blockchain technology to the financial industry um such and and can you give us an idea in terms of say the appetite at Goldman Sachs and and I guess that the banks what's the appetite in terms of resources being committed to it um and also what kind of time frames when you're trying to strategize around that business um in a very volatile um business what kind of time frames what kind of resources are being put towards this um every bank has has a digital asset strategy so so two years ago we were around five people in the digital assets team we've been grown to more than 50 and then another 20 engineers um and every other bank is on the similar scale of expansion despite what is happening in the in the broader crypto community um it's so the bank is allocating a lot of resources into not not just trading or facilitating markets to acquires but more importantly to the to the value of the blockchain technology that can change the way that the existing financial institute existing operations are performed within the banks and we see in collaboration within I'm saying within investment Banks to drive the blockchain technology forward to again to prove that the technology works and has increases beneficial um improvements to the to the way that things are done today well markets businesses rely on volumes that's the main source of Revenue it's completely created to volumes whatever you do and in crypto volumes depend on price sadly um I think we have to see what remains of our industry um if we can't move beyond that Dynamic where it's on your Rising prices that bring increase and increase the increase value by Plateau from crisis to crisis now the problem is when it comes to prices but one of my favorite tweets a year and a half ago didn't get to know of likes because I think maybe I'm a party pooper sometimes it was Rising interest rates are going to make Bitcoin very interesting but not in the way that everyone wants and I think that's what happened High interest rates are going to make it so that's going to be a that's going to put a lid on prices for for a while I don't know why not everyone thinks that but I look at the Art Market quite a bit and it's quite obvious that when you've got assets that you can't really do much with and they don't have a natural yield their their prices depend on on the level of interest rates I don't see why crypto would be any different bar you know some utility that you can actually yes indeed derive but the complex as a whole right and so we need to we need to move beyond that which is not necessarily going to be going to easy but we have to we have to come to terms with that the macro environment is not going to be positive for quite some time now but I do think though and I'm not one of those blockchain not Bitcoin guys but the high level of interest rates now in the real world makes it so that there's a clearly a fixed income play Within crypto and we're starting to see some Dynamics in the world you'll remember when when you could just sell rabbit Futures by physical make 20 a year we had a lot of institutional money coming to try to capture that and now it's actually the opposite because a lot of the crypto yield While most of crypto years are just the demand for leverage the demand to go long and that's completely disappeared that's why on Ave now you get you're lucky to get one percent whereas you could get 10 just a few months ago well you're seeing now flows in the other direction there's a lot of captive money in crypto you know a lot of people sitting on on Tether and usdc they don't know what to do with it because the yield is solo and they don't want to take the credit risk and we're seeing now opposite flows where people are trying to bring in what they call real world assets which a bit of a misnomer in my view rwas into crypto that are going to be financed with the captive wealth of crypto user that's quite interesting that we're seeing both directions now um yeah I I agree on that the the um I mean when we're talking about yield um crypto had the most attractive yields if you take away credit risk I mean for as long as I've seen it sometimes those were in the hundreds of percentage obviously there was a huge amount of uh you know operational and credit risk uh attached to those in protocol risk and so on and so forth uh and I think that was one of the reasons why we didn't see uh the options Market really take off in crypto because inherently um I think as Andre was saying inherently if you hold digital assets you hold a lot of a huge amount of vol and Vol is very valuable um but because there was so high yield in defy people were sort of moving that way again now that yields have come down uh um in in defy and in crypto in general I do think that we will see a a growth finally in in the options markets for crypto both from within as well as from you know the clients and so on that Andre is talking about so so that's a very needed and exciting development because you can tail your tailor your exposure um quite handily with options yeah it's certainly an area a paradigm that we're obviously hoping uh given out our sort of footprint in the space and and I mean I and and see I think one of the areas as well has been that access to liquidity and um which is another thing that hopefully we're trying to address in terms of you know providing that that liquidity Network that that you can you can access that um in that space um just um because we do want to go to some questions um because we thought given what's going on that there might be some questions out there but just before we get to that um what are and just to kind of wrap up with this conversation one of the key the key sort of a couple of things that you guys are actually working on in terms of um where the your relative businesses are going forward to real world markets because I I'm I personally lend to b2c to myself as an individual and uh they're paying me you know sub three percent rates I'm not happy about that I think it's it's just silly that we can't just pay a 20 bips commission to just get access to to whatever short-term interest rate product is existing in normal markets and so that that's something that we're working on actually making sure that we ourselves up the lines not just into the banks for FX swaps and things like that which we have at for some time but actually for money market products which hasn't been necessary for the longest of time is because rates were zero what are you going to do anyway if anything uh a lot of our Euro Banks were charging us negative interest rates that that's the world has changed now yeah yeah I mean we're um we're very busy with sort of continuous Improvement across the microstructure trading um you know we're a liquidity provider um don't go into it here but slightly different than in traditional Finance we we we work with a lot of the um crypto issuers and you know their network doesn't work unless there's liquidity so that's a something that we provide and the market microstructure is ever evolving and uh um so we're spending a lot of time there uh we're spending a lot of time on options Market making um we're we've always been fairly big in in that market and we continue to be and so we're excited about it um bespoke execution algorithms within crypto I think it's you know we have a unique position of developed these given you know the years of uh fill tick data um that we've assumed and you know for this panel I think what's most interesting is that we are utilizing our you know the data that we have collected and sort of you know we're 280 people firm with you know somewhere around 100 engineers and direct mostly Quant developing real systematic strategies whether those are Market neutral or uh or directional um in our asset management business the projects that we're working on are a bit different in a way one is obviously in terms of crypto Market making in our cashless alternative products I come from a background of FX options and within FX options the product scope that the clients are able to trade is just I think it's bigger than anywhere else you've got you've got vanilla products you've got barrier products you've got digital payouts you've got correlation products you've got you can also bold products as well and in crypto we just at the very early stages of of effectively of the market liquidity what were you expecting what we're waiting for is more participants so there's more underlying hedging opportunities for the market makers to offer more complex products for for variety of uh of of clients but on top of that at within our digital assets team we're really looking into how we can use it so our main projects how we can use it within to improve efficiencies within the firm so whether it be repo trading whether it be digital conditions just to say the few um but at the same time aligning us our strategy digital asset strategy with strategic Investments that we're making of the balance sheet which is which is not common within the kind of a global markets division where we investing into companies that align uh where with what we see we're going to be doing in the future as well cool um so we just got time to open up to a couple of questions um are there any questions at all for the panel that anyone would like to ask it's hard to see that there's one at the back there I can see your hand up in the white shirt here but there's a there's a microphone on its way yeah thanks guys there's a variety of an audience here from the traditional Finance background as well as some people who are more familiar with the D5 background and web3 and I think there's a common ground that we can find when it comes to regulations of the space now there's a lot of people who are not you know against the regulations and there's a lot of people who think it is what is going to bring on the next wave of massive Capital how do you guys think that we find that balance to push the crypto industry forward without being too restrictive okay so on on defy particularly or generally in crypto I'll answer you then yeah across the board um so I think in it's it's interesting in in in defy I mean we made a point earlier which I think I think stands so what I mean when we try to get with regulation is very not only markets and consumer protection I don't think anyone argued that those things are very valuable and those should be applied to any business maybe even including transparency but within within defy I mean I think as Max mentioned regulation won't uh protect the industry against hacking risk and security they will still those actors will still uh Prevail so it's a big job being done in in building that regulation shouldn't think that that's what they can fix the other the other part is we're talking a lot about you know kycing and you know showing you know making sure that we know who's trading where and um so on and so forth there is a bit of development in sort of zero knowledge proof where you know in essence if you can prove that you are the person trading the assets and you've been basically verifying yourself on the way on the way in um we might not have to have this world where we have to show a Passport to every single person that we meet on the street so I think that for regulations if we're talking about fair and orderly markets and consumer protection I think certainly that would be great and a global regulation the more Global it is the more harmonized it is the better and the clearer it is the better I'm going to say the the quiet part our Cloud here I think that many institutions do not think that regulation protects them in any way and for them it is a box taking exercise if they're going to trade with a regulated concert party and nothing more in and I learned that the hard way early on Mid to city was the first crypto company to get the the method investment firm license in Europe and we thought was going to be great then we onboarded one of the biggest brokers in the world very well known very large and we said Okay so we've got regulated entity not regulated entity who do you want to face the answer was don't know don't care what they want to see is you have a lot of equity capital do you have uh you know what are your security practice are you audited that's the kind of stuff they want to see and sure Regulators are forced you to have some processes around that but you can also just Implement those processes yourself if you actually want to get the clients so I think that regulation for crypto is completely unfit for purpose um and I mean in fact FTX was supposed to be the the regulated new poster child because they were going to Washington and and actually using regulation as a competitive mode to Elbow out binance and other offer exchanges well guess who won in the end and so I think that's a journey that many crypto companies have experienced and and in fact it's been a little bit disheartening to see that some of the biggest firms I've never paid anything more than lib service or regulation so I don't think that it's actually that much of a drawback in only maybe in as much as whoever signs the paperwork at whatever big asset manager needs to be able to cover their ass in terms of their career risk I don't think it's really much more than that well uh I'll have to disagree yes and we are part of a well we have heavy heavily regulated institution and and we respond to Regulators not only in the US but in every single jurisdiction that we are that we are present and we are and we're present globally um and from the conversations with uh with big asset allocators we're saying is regulatory Clarity is is important um in terms of how to structure the product offering to the clients and and at the moment um they're just trying to understand where how they can work around that and so and so regulation is exceptionally important into I would say that the bigger the large institutional adoption not so much maybe for for some hedge funds um or or more crypto native names but you use a very specific word use the word work around that and I think that's the point I was actually trying to make a lot of Institutions they see regulation they're looking for a way to work around that not necessarily because they think it brings an intrinsic benefit I I have a hard time thinking about a crypto firm who doesn't welcome regulation but they want Clarity and they want consumer protection and fair and orderly markets um I think my point is that there's a lot more about security uh about transparency that the market needs to deliver and regulation is not the only answer we were part of the first self-regulatory organization Adam that was starting the um in the U.S several years ago and we were quite hopeful that regulation would come in but on the other hand let's say regulation historically well most banks haven't protected people I mean there's been instances where the consumers haven't been protected by the Banks because the banks have been able to speculate within that regulation and I think we see that in crypto as well um so I think there's a lot of work to do but harmonized regulation across crypto where it's easy to understand the rules perfect perfect yeah I I think as well an interesting thing from my point of view on that is um there's there's huge there's lots of similarities between between the world of crypto and sort of Trad fire that there's also obviously clear differences and it's about we kind of want we welcome the regulation we need the regulation and certainly for the mass adoption that we were looking for um but but you know we can't shoehorn like the current sort of regulatory landscape into this completely new world and I think my hope is um is that you know we'll see The Regulators work work with guys out here and um and the industry just to get a better understanding of exactly what the nuances are to this business and and bring a regulatory landscape that I guess is sort of more fit for purpose um in that sense and because like you say you know we're certainly for the more traditional institutional money and and those big pools of capital that we want to bring into the space that's exactly um that's exactly I guess what we need and what we're looking for um ironically before before coming up here we did we did sort of say between us we didn't really want to sort of talk about regulation and then we've taken one one sort of question and and um taken up sort of most of the time speaking about it um so so we pretty much out of time um so just for me to say um thanks to thanks to you guys for for an interesting panel um I hope you all found it insightful and I think I'll I'll sort of leave on Just one thought and when I think about the appetite for institutional um and for digital assets it reminds me of um The Bill Gates sort of saying about you know most people overestimate where they'll be in in one year from now but underestimate where they'll be in 10 and I kind of I kind of feel that's where we are where we're at now in terms of yeah we all see the potential we all get excited about where where this space is going how it's going to potentially transform all areas of business but there's a lot of roadblocks and we've seen that this week and we've sort of taken a knock this week um and that's part of the that's a feature of this exponential sort of tech but um I think the institutions are coming the appetite's there and and who knows in 10 years we'll we'll be further than any of us think so I'll leave us on that optimistic note and and thank you