EBC22 | The Evolution of Institutional Crypto

[Music] hello everybody thank you very much and welcome everybody to the evolution of institutional crypto panel discussion is everybody comfortable seated and excited almost all right let's start with an introduction round we have michael lau senior vp global head of sales as bullish we have michael bayer senior account executive at figment and tim grant had me a galaxy digital can i ask you to quickly introduce your company your role and how that relates to the panel topic yeah sure so um hi everyone uh my name is michael i work for bullish we're a centralized exchange we'll go into that a little bit later but basically you know from our perspective we've launched this exchange as an institutionalized leaning exchange and so that's the reason why we're so excited to talk about this topic today uh mike baer figment nice to be here uh so we are a staking provider we provide infrastructure that helps blockchains operate if you don't know what a staking provider is if you don't have staking you don't have proof of stake protocols um then i help companies implement staking hello oh that works i'm judging by the low energy here did you guys all go out last night is that what happened the first night out i just got in this morning it feels like i missed the main party um don't worry we'll sort it out tonight uh tim grant galaxy digital galaxy is a uh regulated global institutional uh diversified financial services company say that 10 times um we are in trading uh we're in asset management we're in custody through our uh our bitgo uh acquisition that we're making as we speak we're in uh mining and we're in investment banking and we have a venture portfolio thank you very much quickly well my name is michael gaukler unlike announced in the program so take a photo if you want to follow up i'm a head product development and innovation at bitcoin swiss a pioneer in the crypto valley in switzerland since 2013 offering brokerage custody staking and related services to the crypto industry but for now it's my turn to ask the questions and not answer them so our first question is uh it's crypto winter i would say cryptowinter for the first time for many of the institutions not for the for the ogs but the institutions that came in a bit later than the ogs it's the first time so what's going on from their perspective how they're weathering the storm right so i i'm i'm i don't know if i'm in og i've been doing this seven years that i don't know if that probably counts as some sort of og right so i've seen so-called crypto winters before hit my my thoughts on the market right now so crypto was trading very much as a risk asset for the first few months of this year which is actually a big moment of maturation for our space that really bitcoin if you look at it was trading like a nasdaq stock for all the way until you got to early may uh and then terra luna kind of started a a a series of idiosyncratic crypto dynamics but until it's really important to know until that point until may uh crypto was just trading as a risk asset which which tells you that this is an institutionally driven market now and that's slowly changed over time i think you look at the coin based statistics from when they started to when they went public it was really in a retail-led volume that became institutional that well that's now increased even further so that's a really key point like this market is not the same market that we went through in 2017 which wasn't an institutional market back then and so there were no institutional dynamics to kind of grab onto well that's that's now changed we've got truly uh the the institutional money is really here which is not to say that we don't have an increase in adoption cycle that needs to come um but then terra luna uh for lots of reasons that we don't need to go into detail here i suspect everybody here is pretty familiar with that threw us a little bit into idiosyncratic risk territory and now you've got the inevitable the credit problems that have come up and to your point in the way you asked the question a lot of people in this market uh and let's just talk about lending standards as an example being way too lacks on lending standards to win market share and now the tide's gone out and the emperor has no clothes and like that that's just a really important point uh in in the cycle of an asset class to wash out those who who really maybe shouldn't have been running the businesses the way they're running but that's totally uh to be expected is desirable and look at tara luna that was actually quite an orderly kind of unwind if you like nobody wants to see people lose money but it unwounds uh in a way that i think demonstrated a level of maturity so i'm not sure if i if i buy this crypto winter narrative crypto definitely is a high beta asset in institutional terms people call it volatile but it's really a high beta risk asset now which means it will go down further on the way down and it will go up quicker and bounce faster on the way up so is it really idiosyncratic crypto i think the leverage in the system in crypto is materially less than we've seen in other downturns in traditional markets and it feels like that leverage has already found its way out so so i think we've got a we've got a mac a challenging macro picture but i i think we are still quite constructive and bullish crypto assets especially at the point at which we we hit a bottom which i'm not calling that i don't know when that will be great thanks for that elaborate answer you're almost saying that the institutions know better how this is played and took away the market from the ogs fair point what uh the other views um you know we're coming at it figment comes at this from a very um infrastructure forward builder perspective so a lot of the people that we focus on um are the developers that are in the space that are building on these protocols and you know i agree with tim's point we don't really consider this a winter you have price action we are agnostic as to prices these blockchains work really well even when prices go lower and you know the idea that there are more developers right now in web 3 than ever before building on these protocols these are going to be durable criteria to cause these asset prices to increase sustainably over the future we're seeing a ton of developer activity and it's giving us a lot of hope we're also seeing really nimble blockchain projects being launched on a regular basis figment right now runs validator nodes on 60 plus protocols and we see really sharp teams every day in the space launching new chains that promise to bring a lot of value and i think as we see the application layer evolve and people start using blockchain tech to solve problems things will sort of stabilize but right now we're in a really interesting part of the space where people are taking you know directional bets on the future functionality of these underlying chains and it's there's gonna be some price wings and just ride it out have fun buy low no i would say that um one of the things that i remember when i first joined the industry about uh early 2020 um a lot of my friends from outside space would be like so what's going on in krypto what's happening and what i'd always say is that if all you follow was the mainstream media all you would get really is the news flow around price volatility and regulatory changes but what oftentimes you miss is a significant amount of effort that's being put in by people you know on this stage and others in in the audience of building the infrastructure in the space and i think what we're seeing is the natural kind of call it you know swings and gyrations that you'd notice out of a nascent market we're still fairly early on but you know even if you think about some of the longer term thinkers um before joining uh this space he used to work in capital markets and number of the people that i spoke to were pension funds and sovereign wealth funds and it's surprising the number of people in that space who have a long-term view who are spending even more time and focus and interest in this space even as we're going through this because i feel like there's a certain i guess kind of alignment towards this idea that this is just part of the natural growing process of an industry that hopefully will become even you know more mainstream more more adopted over time thanks for the additional view uh you caught me totally off script my notes say we agree on the crypto winter and you're saying it's not a crypto winter but let's phrase it nevertheless so let's say challenging times not winter but challenging times and there's decisions to be made and according to my notes some point in time we'll have summer again and we'll see who made the right decisions who took an advantage of this turbulent market if you want to call it and depending on the segment of the player it might turn out to be a different success factor different decisions so would go through the different players starting over with tim like exchanges custodians and industry industry players what would they need to decide now and how that does affect whether they come out successful well you know it's interesting that the the theme that came out with from all three of us actually is and i always cite the the anderson horowitz race that they did recently you know anderson horowitz just raised four and a half billion dollars for a venture fund venture pe fund for this space why is that significant because the guys who figured out web 2 definitively and and made it you know made a name for themselves in finding the companies that drove commerce in uh in the web 2 environment have now decided uh and convinced their their uh their investors that this is the next thing and and they're investing in it and they're investing in it more than anyone else so michael's point is what on like the builders are still building and if you can in other michael's point is also spot on as about like you've got to remove this notion of this price sensitivity is a massive red herring like what really matters is we're building now to your question the the companies that are going to come out a year two three four years from now as the dominant players regardless of whether exchanges or the custodians whether they're building the staking infrastructure whether they're trading houses or investment banks all those flavors are the ones that are going to make the smart decisions in the coming days weeks and months and my colleague actually said this really well uh katarina yeager who who's running on middle east franchise she was at the qatar economic forum and she she said you've got to focus on your customers which i think is exactly right i think that i think the answer to your question is sort of the naval gazing has to stop this is now a maturing industry with in to your point institutional players sovereign wealth funds pension funds you know these are these are companies that have gone through multiple cycles of engaging in new asset classes when they've come along and they're going to do it in a really buttoned up way and they will demand institutional quality services they will demand that everything's buttoned up that it's papered that it's regulated where it's appropriate and like that's going to create an experience for those companies that brings them in and the the difference between all of us assuming that the the rising tide lifts or ships we all want to succeed so i love this space because we're all going to make it is is the next level of adoption has to be significant right like the institutional money is what's going to go from you know the the order of magnitude of volumes that we need the derivatives markets growing institutional staking being done in size the the exchanges growing their volumes like that so we all have to work together and bring in these big institutions the retail play isn't going to drive volume it can't that's already been done so that's i think the mindset everybody needs to have this is a we have to really be grown up um which is arguably not that straightforward for this space which didn't kind of come from an institutional back which is fascinating so everyone needs to really kind of think institutionally and not not fall into the trap of thinking that that is somehow selling out right you know it's interesting that that little tone still sits in our space you know tim for the view of the providers to the institutions what about the institutional investors maybe michael now do you see what the right decision is for the investors themselves yeah by the dip or yeah no so so just just a little back story so when i joined 2020 and we were starting to build this exchange i remember i put this presentation in front of our senior manager and i said if you looked at the composition of players that are in let's say the new york stock exchange 200 years old london stock exchange to 200 years old 80 percent roughly were institutional players contributing to that flow and then you looked at let's say for example chinese stock markets 60 years old 60 institutional and i remember back in the day it was often talked about look at how retail you know these particular exchanges operated and you looked at ours and it was very much this kind of like maybe best guess five percent institutional it was heavily retail driven and i think there's a little bit of this history kind of playing out right kind of from first principles thinking i think that people will begin to realize that this is a significant asset class that they need to participate in but not everyone has the time or or ability or attention to be able to manage their money or manage their assets in a certain way and so i think there is going to be this kind of professionalism that's called for from this industry and i think that given the current space where we're in right now it's you know i think before it was simply a matter of an access product how do i get exposure to that performance now it's how do i understand risk and also achieve that in a way that actually helps me to accret you know basically uh you know you know achieve long-term growth or even even if it's short-term but be able to manage it to navigate the space so i do think that from an institutional investor perspective those that are able to provide that bigger picture understand risk understand how to be able to achieve performance with that mindset i think those are the people that are going to win out well and middle michael i i i i will add this the the institutional you're alluding to the level of rigor with which institutional investors will look at the space what's really exciting to me is seeing some of the really big investors big hedge funds talking about the idea of a token analyst we've got fixed income analysts we've got securities analysts we've got fx analysts why wouldn't we have token analysts and i think that's now seeping into the the the the smarter guys in the room are realizing well there's a that in order for us to have a view on a project or the economic viability of of of a of a company in the defy space i need to develop a new set of tools to establish the valuation mechanism which is really not obvious to a traditional uh frame of reference and i think that's a really cool moment in time though it's going to take a while but i bet you'll see job adverts for token analysts at some point in the next couple of years because it's it is as my colleague robert said in the wall street journal the fifth asset class right it's a new asset cost that that needs and it demands you look at it with a level of rigor that that big institutions will you know won't invest without it so in summary the institutions bring in the professionalism for this next wave of development so in terms of functionality and projects mike do we see anywhere where there are special interesting things where stuff is being built there's enough funding and talent and resources to go through the cycle and we come up on the other end with something that's interesting to the institutions but not around yet yeah i'm not going to sugarcoat it i mean some of the founding teams that we're working with have decided to pause the launching of their chain until prices recover a little bit this makes sense i think it's good management i think at the end of the day this is going to dovetail on what tim was saying like the idea of a well-run company is not foreign to an equity analyst that wants to make sure that the board of directors ceo etc are making the right decisions for the company protocols that stand the test of time need to be well run as well it's critical really really important i think if you look at protocols like ethereum that have responded really really well to changes over time um they have not always been um you know the sterling name that that they are right now they've had some trouble uh they work through it so i think you know we're we're generally bullish at figment because you know we see these founding teams make high quality decisions all the time they have really well uh well-funded projects and the governance structures behind these these token projects are really sophisticated too they they want to ship products and stay head down shipping products and that's what we're doing too at figment we're really focused right now focusing on our end customers who most of the time are custodians exchanges some wallet providers etc we need to make it easy for access staking access in particular like michael number two mentioned the ability to bring stake to proof-of-stake protocols and give comfort to these founding teams that really high-quality validators are in the space and keeping their blockchains running and their governance structures running are really really important um so we're head heads down shipping cool thanks for these explanations um one important topic for the institutions is regulations and i know that there are other streams that are much stronger and longer talking about regulation but just the connection between the regulation and the and the institutions would be an interesting point i want to raise uh answering it from the perspective of bitcoin swiss we're committed to switzerland being regulated in switzerland not doing the regulatory arbitrage and jumping around and we also seeing it from the clients that we have to have to do this because lots of the ogs that are where our early customers now have the big bags and the big bags are wrapped in funds and and structures that require regulated services regulated structures and of course we're going to provide this how do you how do you see the this trend this is a necessity and the institutions driving the regulation are they sitting on the fence until it's cleared out well my two cents on this it's it's back to that point of for this to really succeed we need the regulation because the big buttoned up asset management or the asset allocators the people who own who have the assets what will demand nothing less so that's this is sort of non-negotiable and always has been i think we might look back on this moment in a couple of years as a turning point because europe has in the space of a few months gone from switzerland which was always a very positive story relatively speaking globally where you were able to get the policy makers the central bank the the the social acceptance arguably as well um and the regulators all all aligned to to generate change which has now made switzerland sort of punching way above its weight in terms of its its impact in crypto uh singapore tried to do it and not not so much but then look at the rest of europe it was always a bit behind germany did a great job of sort of allowing the special funds to invest a certain amount of money into crypto but but france was a hold out and the uk was seen as as a as a negative it was seen as really not not wanting to get involved in crypto because it threw the baby out with the bath water with its original policy changes a couple of years ago where they were trying to protect uh the retail consumers from leveraged crypto product which i think we can all we should all get behind that's a good thing let's not put these weapons in the in the hands of of of retail but in doing so they shut off the potential for example to a crypto etp in the london stock exchange which meant that you know that's one of the key starting points that germany and switzerland are already way in advance of now what's happened in the last couple of months is rishi tsunak the chancellor of the exchequer in the uk uh said publicly they want the uk to be a global crypto hub this is this is not to be underestimated this is a bold statement from the very very top in the uk that they're they're doing a 180 they they were open for business now they've still got to do some policy changes to to follow through on that but then finance gets regulated in paris no one saw that one coming um paris was traditionally quite negative and suddenly finance gets regulated as the first really the first g7 uh uh country to kind of get behind binance's model and that basically said uh and if any of you were at paris blockchain week you will agree it was heaving that week right that paris is now open for business so we've now got this this totally different tone in europe from six months ago where the uk germany france uh and switzerland are all and and right there you've got the majority of wealth of the entire of the european bloc in in those countries like that's a pretty significant turning point where where now the big institutions will feel incrementally more inclined to get in because they're seeing the nod from the policymakers i think it's it's an exciting moment and obviously see what happens to the rest of the year i i'd say that like at a very high level greater regulatory clarity brings confidence i think that there's a lot of people who are trying to do the right thing but you know because of that lack of clarity oftentimes it becomes difficult to navigate and you know to a certain degree it it it then takes up a significant amount of resources from these companies from developing because they're trying to make sure that they're you know working out kind of this somewhat uneven non-uniform uh kind of set of jurisdictions i think that you know definitely regulations that promote consumers safety is good i think the need for us to make sure that that's balanced with the ability to continue to innovate is also very important but i do think that you know when i for example a couple years ago when d5 summer happened i spoke to a number of these institutional investors and they were saying hey we're really interested in d5 and you know i kind of kept talking about but they're like we can't do anything about it right now and what it began to realize was if you kind of deconstructed it into this kind of device programmatic finance and then decentralization there was a deterrent with that because of regulated related matters because they themselves are regulated even though the space is not regulated so they demand it out of that the need for kyc and aml so therefore they can touch it and so i think there's an element of like you know both this space getting that clarity getting more confidence but also fitting into the wider picture of kind of how capital is flowing and how this also plays in to match what for example these other institutions do as other businesses in their own right so that we can actually see greater adoption come through thank you out of personal interest i have another question which wasn't on this uh notes um when we we got uh blockchain and crypto after the financial crisis with uh some ideology of creating a more inclusive financial system something that doesn't depend on the central counterparty and the institutions are now jumping on these trends looking at the charts creating products and services around it and is there a disconnect or is there a giving back from the institutions or do their institutions understand what the original idea about crypto was or could we also instead of looking at bitcoin price charts to do products on weather derivatives if they would be as as trendy and popular as crypto is right now i might take a whack um i think to the extent that the institutions um especially the banking groups are building on public blockchains very very positive they're going to have to follow the same rules that everybody else does there won't be a gating mechanism they'll simply providing like products and services that use the core functionality of the chain so i view that it's very bullish you know it's actually it's a very good question um because you know i don't to some extent we don't talk about the why as much as we should in our space we all know the sort of relatively libertarian ideal that gave birth to bitcoin and and and we all get the power of decentralization up to a point like it really doesn't make sense to decentralize everything bitcoin in itself proved that you ended up having to have certain centralized institutions in place to make it all work and that's there's nothing wrong with that um as long as they're not fattened intermediaries and that's what we're trying to we're the the tran the transparency should allow us to sort of not fall into that trap again but it does beg the question if i'm a very big sovereign wealth fund or a very big asset manager pension fund do do i am i buying into the to the to the narrative here and the narrative is faster better cheaper democratized access to financial services for corporations governance and individuals which if it's done right should remove a whole bunch of friction should enable uh and support growth and should enable people who haven't had access to things to have access to things now like that core idea is really important and it's funny we i can't remember having a conversation about it recently you know what i mean like perhaps your question is spot on like should we be sort of taking our our eye off the price action and and actually start to talk about the why a bit more and i think i think a lot of organizations will will buy into that yeah no i'd say that like i think what i've what i've always found really fascinating is like for people who are in this space building there's always been this kind of philosophy of trying to get value back to the individual right more and more of that value back and i think to a certain degree like there's an element of mature 100 year old industries have had these intermediaries come in all rent seeking of course that have kind of you know added on layers of friction or added on layers of cost that as people being early in this particular industry building we want to try to make it so that we're building on first principles there's a need for the service therefore we will build we obviously need to be able to pay people for doing that type of job so we'll do that but at the same time it's you know this idea of trying to get back to this flow of value back to the user back to the creator and i think whether or not you're working on a decentralized project or a centralized project i think underlying this industry is this kind of understanding that we're trying to build it from that perspective and i do feel like from that and there will probably be greater benefit you know and greater inclusion around those who can participate those people who can actually create value in the space um yeah and so i do feel like we're all working towards that direction cool thank you all for those wonderful answers is there any one good last question from the audience yes over there please stand up and shout it out you think that institutions please rep is it around have institutions lost some trust in the system because of that no no no this whole lending thing is really straightforward right like see i i what i i find sometimes funny about our space is we use these terms called crypto economics there is there are no crypto economics there's just economics there's always been economics and it's just another set of tools to engage with uh with economics right and and so lending i mean you can't tell me that 20 return on anchor protocol which by the way if you're an institutional investor is a really really risky high-yield bond that has a very high chance of defaulting right that's the return rate of return you would expect that that that in the and anyone in their right mind would say that was sustainable like it just doesn't work that way you can't magic up the money out of thin air at some point you get caught out and that's exactly what happened that's just one example the lending community was being too large you can't lend uncollateralized and then expect not to take losses when there's an inevitable downturn uh it it it's just like 2007-8 all over again we put all these models together that assumed that real estate aaa real estate would never go below a certain price well look how wrong that was does that mean that there should be less confidence in in traditional finance no it should be less confidence people who have terrible business models and and who who basically try and refly in the face of basic economic principles so actually what i think is quite good at the moment is you've got celsius and voyager and others taking pain because with this credit we're having a little credit cycle within crypto and it's very welcome it's great let's flush out the guys who are just lending at profligate rates and that's that's just that that is the core bedrock of any economic community is lending and borrowing so what i'm what i'm hearing what i'm hearing from from institutions is more scrutiny on on basic lending standards and those companies that have solid defensible you know blending and borrowing mechanisms and rules are going to survive uh and and those that haven't are literally going bust as we speak um so i actually think it's just plain old credit uh analysis here that we're looking at and i think it's all this this wash out that we're seeing is all welcome because what's going to be left is really much stronger institutions do you think that uh there's signs of maturity in the space given that we're seeing opportunistic lines of credit being extended that we're seeing opportunistic buyouts of firms does it show you a more mature space than you would originally thought yeah isn't it you know it's interesting it's a really good point actually when you look at the the headlines at the moment uh if it's not sbf who just is sort of blazing a trail around the world bailing people out which is really smart if you've got the cash um but it's others too it's it's it's smart moves i think you're absolutely right like that it's it's not playground uh m a and and it's it's sort of feels like the sort of stuff you saw in 2008 um and i i you know an interesting one on that is the middle east like the middle east is flush with cash because the oil prices remain quite high they've been working over the last few years to understand crypto uh the other place that that finance is regulated is in is in the middle east as well uh dubai and abu dhabi between them have vast amounts of of of capital they're starting to look at this now right when you've got that quality of money that's looking at bailing out or at least getting cheaper assets uh i think that's a good sign i i however let's not over egg the pudding we've still got work to do but i think that's spot on thank you very much for the good question and the answers so trying to summarize what we talked about if i can is the institutions are here they're here to stay they make the game bigger they make the game better they're more professional on every level level from having the jobs of token analyst to professional risk management to having clear rules how things work and bringing all the knowledge how the markets other markets work and at the same time this creates opportunity for projects and people who are into the space to build stuff so i think exciting times ahead thank you very much for joining