Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan, I'm a senior editor at Bloomberg,
Speaker 1: and I'm Danna huk Across Acid reporter with Bloomberg. At
Speaker 1: this week on the show, Well, it seems like every
Speaker 1: day there are more alarming revelations about the mess that
Speaker 1: was left behind when Sam bankman Fried's f TX crypto
Speaker 1: empire collapsed, and as the bankruptcy case gets underway, there
Speaker 1: are plenty of questions swirling around about whether all of
Speaker 1: the contagion has yet to play out and how much
Speaker 1: permanent damage has been done to the industry. We'll get
Speaker 1: into it with the CEO of a Canadian company that's
Speaker 1: at the intersection of crypto and traditional capital market investors.
Speaker 1: But first, Phil Donna, I have to ask, are you
Speaker 1: watching the World Cup. I'm not. I'm being a very
Speaker 1: very diligent, hard working person when I'm at my desk.
Speaker 1: I'm definitely not watching soccer. I don't believe that, unlike you.
Speaker 1: Unlike you, I actually took a half day on Monday
Speaker 1: to actually watch the US game at the pub and no,
Speaker 1: you didn't, bitter sweet well at that and to do
Speaker 1: my Thanksgiving shopping, so I two for one, a very
Speaker 1: bitter sweet tie. But I bring it up because two
Speaker 1: of my craziest things are World Cup related. So little
Speaker 1: tease for the end of the show there. Yeah, no,
Speaker 1: that's a good tease. I wonder what it could be.
Speaker 1: I'm trying to think of all the headlines. I'll give
Speaker 1: you a hint that they go all the way back
Speaker 1: to the nineteen eighties, which, oh no, incidentally is the
Speaker 1: last time I've actually played soccer, so a little bit
Speaker 1: about my skills in that game. It's possible that we
Speaker 1: can bring in our guests from this week into this
Speaker 1: conversation as well. I want to bring in Stefano Lett.
Speaker 1: He's the chief executive officer of f R and T Financial. Stefan,
Speaker 1: thank you so much for coming on the show. Thank
Speaker 1: you for having me. I'm not a soccer star, but
Speaker 1: I will be watching with going on right now. It's
Speaker 1: a welcome, welcome, positive that we can have on in
Speaker 1: the background. You're calling in from a very special place,
Speaker 1: or it's special at least up today in the crypto world,
Speaker 1: which is the Bahamas, and I want to start with that.
Speaker 1: I want to ask you to tell us a bit
Speaker 1: about why you're there, what you're thinking about, and what
Speaker 1: that trip has been like. Yeah, no, I'm in the Bahamas.
Speaker 1: I've been here basically since I arrived, not this Sunday,
Speaker 1: this Sunday before. You know, our organization as a presence
Speaker 1: down here. We have a lot of partners and clients
Speaker 1: and just people that are are friends that are down here.
Speaker 1: So I came. I came here to be close to them,
Speaker 1: try to be on the boots on the ground and
Speaker 1: really get a feel of of of how everyone was
Speaker 1: thinking about the situation and how it was unfolding. It
Speaker 1: is really ugly down here, you know. This is uh,
Speaker 1: this was a real point of excitement for the Bahamas,
Speaker 1: the fact that they had become such a such a
Speaker 1: crypto hub. You know, this is this is a country
Speaker 1: that very much kind of missed out on that. Something
Speaker 1: it's not very well known about the Caribbean is that
Speaker 1: in the early nineties, when the tech boom was exploding,
Speaker 1: a lot of the dot com enterprises, including firms like Amazon,
Speaker 1: We're also having issues with kind of the US financial system,
Speaker 1: and they're were slow and the willingness to bring them
Speaker 1: on board, and so they came down to the Caribbean,
Speaker 1: and the Caribbean basically said, you know, if that, you know,
Speaker 1: if the US banks don't want to work with you,
Speaker 1: we don't want to work with you either. And obviously
Speaker 1: if they made a different decision at that time, they
Speaker 1: could have had a very different experience over the last
Speaker 1: you know, five years. So this was seen as something
Speaker 1: they didn't really want to miss out on, and they
Speaker 1: really you know, moved quickly and they brought in a
Speaker 1: lot of the top firms, uh, and to see that
Speaker 1: all unravel as quickly as it did is extremely disappointing
Speaker 1: to everyone involved, not not to mention the fact that, uh,
Speaker 1: you know, they're the ft X was a position to
Speaker 1: themselves as a banking alternative, particularly in regions where they
Speaker 1: operated like the Bahamas. So there's even more horror stories
Speaker 1: of people treating ft X like bank like infrastructure, and
Speaker 1: there are leaving you know, a significant amount of their
Speaker 1: assets just kind of lating on f t X, which
Speaker 1: are now and you know, you know, now they can't
Speaker 1: get access to just like everybody else. So there's a
Speaker 1: lot of different kind of angles to this story that
Speaker 1: just get really ugly. Um and you know, unfortunately, you know,
Speaker 1: uh you know, the Bahamas is bearing some of the
Speaker 1: runs of it right now. And I should have been
Speaker 1: super super clear. Um I should have mentioned this earlier.
Speaker 1: You're there because f t X is headquartered there, right, Yeah,
Speaker 1: just just to give a little color on that. I
Speaker 1: mean f t X basically when China kind of changed
Speaker 1: their strategy about foreign relations in general, ft X was
Speaker 1: launched in Hong Kong, and they've very quickly kind of
Speaker 1: turned around and used Bohmas as a new jurisdiction and
Speaker 1: came down here and they brought their whole organization to
Speaker 1: live here. Not only to kind of be regulated out
Speaker 1: of here, but there was you know, tons of FTX
Speaker 1: employees that moved down here. They all started to you know,
Speaker 1: to to rent, to invest in property, They bought a
Speaker 1: lot of office space and all that. So they really quickly,
Speaker 1: within about a year, you know, fifteen months, got very
Speaker 1: ingrained in the fabric of the country. And you know,
Speaker 1: it was one of the biggest, one of the biggest
Speaker 1: companies operating out of here, and brought a lot of
Speaker 1: other companies that wanted to kind of be in the
Speaker 1: f t X sphere and ecosystem with them. Well, Stefan
Speaker 1: as far As. Uh, I understand, Uh, your firm f
Speaker 1: R and C didn't have any direct exposure to to
Speaker 1: f t X. That's correct, That's correct. We didn't have
Speaker 1: any direct exposure f t X. In addition to that,
Speaker 1: you know, the we did see some red flags in
Speaker 1: f t X. I mean, you know, red flags and
Speaker 1: counterparty risk aren't as much of an issue in in
Speaker 1: a in a period one. I mean, you know, I
Speaker 1: would imagine that Sam, even if he did have a
Speaker 1: hole that he was covering up, would have been able
Speaker 1: to raise capital just you know, uh at the snap
Speaker 1: of his fingers. As two the credit cycle turned over,
Speaker 1: you know, those opportunities went away for even someone like Sam.
Speaker 1: So at that point, you know, you start to say
Speaker 1: to yourself, Okay, well, how do I feel about these
Speaker 1: counterparties and you know, the risk that they're taking, the
Speaker 1: even like the ethos of the way that they operate,
Speaker 1: and so from my perspective, and this is come and
Speaker 1: started to come out kind of as as the veil
Speaker 1: has been lifted on f t X. I thought they'd
Speaker 1: been extremely aggressive on the regulatory side. They're you know,
Speaker 1: very associated with the the US A lot of the
Speaker 1: principles or US persons, they use US banking system. You know,
Speaker 1: when I'd seen what happened to bit max, where essentially
Speaker 1: the d o J claimed jurisdiction over them and it was,
Speaker 1: you know, really aggressive, I thought that that was also
Speaker 1: a similar risk to f t X, that the U
Speaker 1: S regulators were going to try to claim jurisdiction and
Speaker 1: essentially say that they hadn't been ambided by US regulations.
Speaker 1: Now that's not that bad from a customer standpoint, because
Speaker 1: in the bi Mex case, the platform wasn't impacted at all.
Speaker 1: They really just came after the founders, so that wasn't
Speaker 1: f t X has was a fiat on ramp, which
Speaker 1: bit Mex was not, and so you know, I did
Speaker 1: think that there was a potential that assets would be
Speaker 1: you know, held up for a while, but ultimately I
Speaker 1: felt as though the creditors were going to would just
Speaker 1: have to deal with that for a little while when
Speaker 1: we get resolved. The second thing that I was really
Speaker 1: concerned with with f t X, which is definitely a
Speaker 1: part of what actually has trans are it was they
Speaker 1: grew so quickly. But I mean the reality is is
Speaker 1: that in crypto there are really unique security risks that
Speaker 1: you have. The accounting is also very unique. There aren't
Speaker 1: as many services that are willing to support you with
Speaker 1: things like accounting, So these are kind of limitations to
Speaker 1: growth that when you just look at the FTX timeline
Speaker 1: and how fast they moved, you had to think that
Speaker 1: they were playing a little fast and loose with things
Speaker 1: like security and accounting, right, And you know, we happen
Speaker 1: to just with our you know, our our presence down here.
Speaker 1: I've come to the bombs a lot. You know, we
Speaker 1: also were quite well aware of just kind of how
Speaker 1: they were operating their security, and it was in ways
Speaker 1: that you know, we wouldn't feel comfortable with. So I
Speaker 1: was I was definitely thinking that there was a potential
Speaker 1: that they'd wake up one day and then you know,
Speaker 1: there wouldn't be there would be money missing from whether
Speaker 1: it was a hack or just accounting mistakes, etcetera. Did
Speaker 1: you know the last piece of the puzzle was that
Speaker 1: al Mida was very well known to be seeking leverage
Speaker 1: through different crypto participants over the last nine months, and
Speaker 1: I mean that you know, made its way to our door, etcetera, etcetera.
Speaker 1: And you know, the last nine months has not been
Speaker 1: a good trading environment for cryptocurrency, it's been you know,
Speaker 1: there was a counterparty with Scares following the Luna and Celsius,
Speaker 1: and then kind of moving to the summer, opportunity really
Speaker 1: went away. The market was very quiet, so you know,
Speaker 1: when there was a few firms that we're looking for
Speaker 1: leverage and almost all of them ultimately announced that they
Speaker 1: had taken a big los so would say, okay, you
Speaker 1: know this is something that Celsius was doing, so you go, okay,
Speaker 1: this has been a bit of a telltale sign of
Speaker 1: financial issues with an organization, and you know, given all
Speaker 1: the interconnectivity between Alameda and FT, actually started to say, okay, well,
Speaker 1: I mean I really hope that this isn't is that
Speaker 1: there isn't customer assets that have gone into the mix here.
Speaker 1: But from what transpired, I would never have anticipated that
Speaker 1: it was this bad. I mean there there was, I
Speaker 1: mean just every kind of financial mouthfeasance that you could imagine,
Speaker 1: it seems to have occurred here. And that was beyond
Speaker 1: even what I thought was possible for sure, right right,
Speaker 1: And you know we should point out still no criminal
Speaker 1: charges against anyone, who knows if they're coming, but as
Speaker 1: of now, you know, I'm not sure if anyone is
Speaker 1: sure if it's actual you know, criminal intent or just
Speaker 1: incompetence or what. But well, well, well I'm not gonna
Speaker 1: be a person who's gonna say that either. Unfortunately, just
Speaker 1: with the way that the media is, and it's no
Speaker 1: one's fault, is that everyone is afraid to make those determinations,
Speaker 1: which definitely makes it seem that that Sam's getting a
Speaker 1: little bit of softball behavior in the media, right because
Speaker 1: I'm also not gonna stand here and say like it
Speaker 1: was this or it was that. But it's certainly it's
Speaker 1: very hard to imagine what else he could have been.
Speaker 1: So it's I'm not exactly sure why charges haven't been
Speaker 1: levied yet. I think a lot of people are confused
Speaker 1: about that. But obviously this is a bit of a
Speaker 1: pro Sam news cycle until something like that does happen,
Speaker 1: which a lot of people are getting very upset about
Speaker 1: because they think it's relatively black and white. Right, and
Speaker 1: just before before we delve deeper into this, can you
Speaker 1: actually just tell us a bit more about your company,
Speaker 1: like what you guys do and layout for listeners, what
Speaker 1: you do um your headquartered in Canada, right, so just
Speaker 1: tell us a bit more of that background so that
Speaker 1: we have a sense of f R and T as
Speaker 1: we're discussing su UM. Basically, we are an institutional service
Speaker 1: provider hit within cryptocurrency. Refer to ourselves as an institutional
Speaker 1: capital markets and advisory platform focused on digital assets and
Speaker 1: web based finance. And ultimately what that means is that
Speaker 1: we try to offer a similar service suite that that
Speaker 1: uh you know, that firms would experience from something like
Speaker 1: an investment bank uh to emerging from crypto. And so
Speaker 1: we have several trading which is what I produced cap
Speaker 1: of markets and advisory business lines. In trading, we we
Speaker 1: are what I think, we have some very interesting structured
Speaker 1: products that are institutionally focused that focused on some of
Speaker 1: the you know, very interesting alpha trades in this space
Speaker 1: which have persisted over time, such as you know, access
Speaker 1: to basis. But creating a synthetic layer on top of
Speaker 1: the crypto ecosystem that is regulated and allows people to
Speaker 1: interact without touching crypto directly a lot of different commodities
Speaker 1: and asset classes. It's inconvenient to deal in the underlying
Speaker 1: like the oil market. You know, people don't when they
Speaker 1: do an oil trade. Generalists don't hold physical barrels of
Speaker 1: proud and store it UH. You know, they trade synthetic
Speaker 1: exposure in most cases. So we've built what we think
Speaker 1: is the world's kind of most sophisticated synthetic structure products
Speaker 1: platform UH targeted to institutions. We have deliverable service lines
Speaker 1: where we have you know ODC trading technology, and we
Speaker 1: have treasury management technology that we allow different organizations implement
Speaker 1: if they want to trade large blocks of crypto or
Speaker 1: earned yields on crypto, and we have a bit of
Speaker 1: a different way of doing them than than has been
Speaker 1: was done in the last in the last year or so.
Speaker 1: Then in addition to that, we have the advisory business,
Speaker 1: which is UH we do general advisory for traditional firms
Speaker 1: that are looking to create some kind of crypto product
Speaker 1: on their side, or enter crypto or just looking for
Speaker 1: some advice. We do merchant banking like services where we
Speaker 1: take we know where we get crypto companies and and
Speaker 1: help them you know, sell themselves or you know, get financing,
Speaker 1: and we think we bring to the table, you know,
Speaker 1: real expertise and cryptocurrency. Whereas the traditional investment banks that
Speaker 1: are doing that kind of activity in a lot of cases,
Speaker 1: they don't know crypto well enough to give the strategic
Speaker 1: advice that maybe these companies are looking for. They really
Speaker 1: just kind of fulfill the agency function. We we think
Speaker 1: we fit very nicely into their We also have an
Speaker 1: asset management license which allows us to you know, work
Speaker 1: with large asset managers if they want to build out
Speaker 1: their own crypto portfolios. And really just we find ourselves
Speaker 1: to be extremely well positioned for what we think will
Speaker 1: ultimately be a lot of institutions entering the space. You know,
Speaker 1: these these down market cycles impact that, but we we
Speaker 1: ultimately continue believe in our thesis. Well, yeah, I was
Speaker 1: gonna ask you that stuff in I mean, how much
Speaker 1: damage has been done to sort of the enthusiasm among
Speaker 1: institutional investors to crypto for this FTX fiasco. I mean,
Speaker 1: I would assume that there's been some real sort of
Speaker 1: second guessing and perhaps you know, clients pulling back on
Speaker 1: what we're more aggressive plans previous. What's kind of the
Speaker 1: mood among among clients seft for all this, Yeah, I mean,
Speaker 1: you're entirely right. You know, this has definitely impacted the
Speaker 1: mood of clients. There's definitely a lot of constitutional clients
Speaker 1: that are going to kill all of their crypto plans. Absolutely,
Speaker 1: but I will say, you know, our our businesses were
Speaker 1: launched in the market cycle. There's absolutely more interest from
Speaker 1: institutions in crypto now than there was. I mean when
Speaker 1: the market rolled over, institutions basically said, okay, well that
Speaker 1: thing went away, see you later, not don't need to
Speaker 1: worry about that. You saw really aggressive moves to pull out,
Speaker 1: such as something like the cbo E killing their bitcoin future.
Speaker 1: I don't know that, but I would imagine that it's
Speaker 1: costs about as much to kill a bitcoin future as
Speaker 1: it does to just leave it. So you know, there
Speaker 1: was a real kind of dissociation with the space, which
Speaker 1: you're also seeing right now. But then you are also
Speaker 1: seeing other other organizations that are viewing this as an opportunity.
Speaker 1: You have you know, well known independent investment banks like
Speaker 1: Mollis that announced that they were going to be doing
Speaker 1: merchant banking style activities in space. And this is post
Speaker 1: Luna and Celsius. Man Group came out last week and
Speaker 1: said that they were launching edge fund. There are a
Speaker 1: certain amount of institutional investors that are saying, okay, uh,
Speaker 1: this space was run by a bunch of people who
Speaker 1: didn't really know what they're doing. None of this is
Speaker 1: Bitcoin's fault, right, you know, maybe you could argue that
Speaker 1: the financial services around bitcoin have been extremely, extremely impacted,
Speaker 1: and I've got it. I think I have a bunch
Speaker 1: of thesis as to why that has happened so so aggressively.
Speaker 1: But if you view bitcoin as a potentially, you know,
Speaker 1: growing an alternative financial system, or or crypto as a whole,
Speaker 1: developing an alternate financial system, I mean, just because someone
Speaker 1: someone operating in exchange did so in a way that
Speaker 1: was either as you said, incompetent or as also, as
Speaker 1: you know, as many people think, fraudulent, I mean, it
Speaker 1: doesn't change your thesis on the space. You just think, Okay,
Speaker 1: these people didn't do it right, we can do it better.
Speaker 1: So it's a it's a mix. It's definitely the sentiment
Speaker 1: is horrible, but there are some at least this time
Speaker 1: that are that are sticking with it. Is there more
Speaker 1: contagion to come? Do you think, I mean, have all
Speaker 1: the sort of shoes drop that that are about to
Speaker 1: drop from FTX, or do do you think there's more
Speaker 1: sort of bad news ahead in the space? Well, I
Speaker 1: think that the Genesis news is really really bad news,
Speaker 1: and that itself could create knock on effects that you
Speaker 1: know in firms that you know haven't quite played out yet.
Speaker 1: I do think that there's going to be more bad
Speaker 1: news amongst kind of smaller almost definitely amongst kind of
Speaker 1: midsize smaller firms will be more bad news because there,
Speaker 1: you know, everyone's kind of jumping all over firms right
Speaker 1: now that haven't kind of given there, you know, there
Speaker 1: I'm safe. I'm not safe thing. But the reality is
Speaker 1: that those are a little bit those are complicated terminations
Speaker 1: to make. In some cases, maybe you're a firm that
Speaker 1: has a lot of investments with different you know, funds,
Speaker 1: and you have to wait till they communicate with you, you
Speaker 1: you know fully, and if someone's trying to figure their
Speaker 1: situation out and is a little slow, then you don't
Speaker 1: feel comfortable with having your full communication yet in terms
Speaker 1: of what you're doing, because you only want to do
Speaker 1: it once, right. So there, there's definitely going to be
Speaker 1: more bankruptcies. I feel as though, you know, just given
Speaker 1: the market pricing, the market price what you see with
Speaker 1: Genesis essentially saying that there's a very strong chance that
Speaker 1: they will declare bankruptcy and seeing relatively little market impact.
Speaker 1: I think that a lot of the kind of mid
Speaker 1: size to large bankruptcies have been somewhat priced in. I
Speaker 1: think if another major exchange platform was also found to
Speaker 1: be insolvent, that would create a whole bunch of other issues.
Speaker 1: But so far, so good on that front. But definitely
Speaker 1: everyone's pulling back their their capital to what they believe
Speaker 1: to be the safest corners of whatever they have access
Speaker 1: to and are just waiting to see what happens. So uh,
Speaker 1: you know, I think that even if we don't get
Speaker 1: any major bankruptcies for the next month or so, people
Speaker 1: are still gonna wait and see, you know, until the
Speaker 1: new year, at least until they start kind of redeploying
Speaker 1: in a significant way. Okay, I have a difficult question
Speaker 1: for you, which is that there's just so much interconnectedness
Speaker 1: within the space. Can you actually just lay out, like
Speaker 1: maybe the big picture of you layout for us, how
Speaker 1: it is that there are knock on effects where you have,
Speaker 1: you know, the collapse of f t X and what
Speaker 1: it means for these other lenders or other exchanges, Like
Speaker 1: how is it that that happened? Like what is it
Speaker 1: about the crypto space that allowed that to to sort
Speaker 1: of happen. Well, I would I would also say that
Speaker 1: this is not unique to crypto, right, like there's there's
Speaker 1: you know, the interconnectiveness of financial markets is there everywhere,
Speaker 1: and in fact, a lot of what a lot of
Speaker 1: what I think cause the honest failures, let's say, like
Speaker 1: the honest failures is really just people bringing things like
Speaker 1: unsecured lending into the crypto space, Like, well, before this
Speaker 1: market's ready for something like that, And you know, the
Speaker 1: biggest move from Wall Street employees we've seen into the
Speaker 1: crypto space, I think a lot of people just pulled
Speaker 1: out their old Wall Street playbook and started applying it
Speaker 1: to crypto and some of the stuff the markets ready
Speaker 1: for and some of the stuff the market isn't. So
Speaker 1: I think a large part of kind of the like said,
Speaker 1: the honest failures, we're just implying allowing business practices like
Speaker 1: un secure lending that just don't work right now. I mean,
Speaker 1: this is an asset class where if you own five
Speaker 1: assets in your portfolio, they could go to zero within
Speaker 1: a couple of days. Right, It's just and that's just
Speaker 1: not something that you typically see at scale and traditional
Speaker 1: finance like you do in crypto. But what's happening, you know,
Speaker 1: the the actual kind of knock on operational effects are
Speaker 1: I mean, it's relatively simple. It's it's say, I you know,
Speaker 1: if you were a fund that was involved in the
Speaker 1: ft X bankruptcy and you were using them as a
Speaker 1: massive counterparty. Okay, well, first of all, you may just
Speaker 1: have so much of your assets tied up on that
Speaker 1: platform and written it down to zero that you just
Speaker 1: wind down your operation altogether, right because you said, okay,
Speaker 1: I lost of my assets, we're writing them all down
Speaker 1: to zero. And ft X, you know what seems apparent
Speaker 1: now is we're going to go through a long bankruptcy
Speaker 1: that's probably gonna end up being a zero. I'll give
Speaker 1: my my investors back the little money that's left and
Speaker 1: call it a day. So that's kind of like the
Speaker 1: most vanilla unwind. Then you get into situations where say
Speaker 1: you had debt, you were you were using leverage in
Speaker 1: your in your fund. Well, now you may not even
Speaker 1: have the opportunity to give back money to equity holders
Speaker 1: because debt holders that stand in advance of your equity holders,
Speaker 1: and so you know, your dead holders say, we're taking
Speaker 1: whatever you have left and your equity holders are wiped out.
Speaker 1: So that's another version of a bankruptcy. The Genesis situation,
Speaker 1: to me, is still quite complicated in terms of what
Speaker 1: really happened there. I think that you know, clearly they
Speaker 1: were extremely impacted by the Three Arrows bankruptcy. They released
Speaker 1: that they had six d some odd million of exposure
Speaker 1: to them, and I mean Three Arrows has been accused
Speaker 1: of kind of you know, taking taking an asset and
Speaker 1: and depausing his collateral of multiple platforms, which would if
Speaker 1: that was true, that would be fraud. So you know,
Speaker 1: Genesis may the Genesis collapse may also have been have
Speaker 1: been the subject of other frauds as well. It could
Speaker 1: have been fraud could have played a role into that.
Speaker 1: So I think, you know, the two kind of things
Speaker 1: that are there's two components that are that are leading
Speaker 1: to these collapses. One is over leverage and poor risk management,
Speaker 1: which I think is very very evident in the miners right.
Speaker 1: The miners, a lot of them don't seem to have
Speaker 1: modeled bitcoin price below thirty thousand for a persistently long
Speaker 1: time at all where their business would effectively evaporate, which
Speaker 1: has happened. You know, you have definitely things that smell
Speaker 1: a lot like fraud going on in the space, which
Speaker 1: is which is another component and so and then you
Speaker 1: just have this cascading effect of you know, if I
Speaker 1: lend to this minor and they go out of business,
Speaker 1: do I go out to business, I can't pay my
Speaker 1: dad's etcetera. And it just then it becomes quite a
Speaker 1: traditional financial you know, like a contagion like environment. Yeah.
Speaker 1: I wonder how the space will have changed once all
Speaker 1: the dust settles from this. You know. Obviously, I think
Speaker 1: the issue of an exchange being so closely tied to
Speaker 1: a trading firm is a big deal. Uh. There's a
Speaker 1: lot of talk about how exchanges should have to uh
Speaker 1: sort of show proof of what reserves they have, that
Speaker 1: sort of thing. Where Like, where do you see the
Speaker 1: industry going from the centralized exchange perspective, especially after all this.
Speaker 1: I mean, I'm guessing it's gonna look a lot different
Speaker 1: than what it did prior. Yeah, there's been a lot
Speaker 1: of kind of I would say, jumping the gun on
Speaker 1: talking about oh well this means that defy is the
Speaker 1: way to go toes centralize change of the way to
Speaker 1: go Okay, a little bit early for the de centralized
Speaker 1: exchange crowd to be doing a victory lap after about
Speaker 1: fift of assets were hacked out of that ecosystem last year,
Speaker 1: and you know, they had their own collapses and all
Speaker 1: of that. So de centralized exchanges in a lot of
Speaker 1: ways are very new technology, and I would and I
Speaker 1: would argue, you know, aren't ready to be the core
Speaker 1: of any kind of financial ecosystem. Maybe in the future,
Speaker 1: but right now that's a little early. So, you know,
Speaker 1: unless everyone's going to start passing around ledgers like hardware
Speaker 1: wallets and stuff like that, there is some kind of
Speaker 1: centralized exchange infrastructure that needs to persist so that that
Speaker 1: so that people can continue to transact in biitcoin and
Speaker 1: whatever their cryptocurrancies they're interested in. There's a very strong
Speaker 1: argument to say that regulation will be important, and I
Speaker 1: am one of the people that you know that that
Speaker 1: also thinks that regulation would help because the reality is
Speaker 1: is that there's a lot of discipants in the bitcoin
Speaker 1: ecosystem that really can't do their own due diligence or
Speaker 1: don't feel comortable doing their own diligence. Doesn't matter how
Speaker 1: many financial proof of reserves or balance sheets the show
Speaker 1: in front of them. They're never gonna understand whether or
Speaker 1: not that the exchange should be worked with or not.
Speaker 1: And for those people to have kind of a regulated
Speaker 1: avenue in crypto, like within crypto, to participate in the
Speaker 1: space where they can feel comfortable that the same controls
Speaker 1: are there versus what they're familiar with in the other
Speaker 1: financial ecosystem I think will help the adoption of bitcoin,
Speaker 1: uh and other cryptocurrencies. But that can't be just it.
Speaker 1: Regulation is not a panacea in in this context. The regulators,
Speaker 1: you know, can't play whack a mole with every single
Speaker 1: platform that just pops up. I mean, this is a
Speaker 1: relatively new paradigm. You've got an environment where anybody can
Speaker 1: start their own exchange overnight. This is a new phenomenon.
Speaker 1: This isn't something that was around in the eighties. You
Speaker 1: couldn't just launch an exchange for very little cost overnight
Speaker 1: and get into business. Right, So this is how a
Speaker 1: free market educates itself. If you look at the if
Speaker 1: you look at the if you look at this evolution
Speaker 1: of a kind of new financial system as a hundred
Speaker 1: year cycle, right, doesn't make sense that there would be
Speaker 1: a two year period where no one really understood the
Speaker 1: elements of counterparty risk because they're used to dealing with
Speaker 1: completely fully regulated ecosystem and they kind of have to learn, right,
Speaker 1: you know, hopefully the next time, you know, uh, an
Speaker 1: SPF comes around, everyone doesn't just like just take him
Speaker 1: at his word no matter what, and there's a little
Speaker 1: bit more critical, critical, critical discussion around whether or not
Speaker 1: this person should be as trusted as they are. And
Speaker 1: you know, I think proof of reserves is a good step,
Speaker 1: it doesn't fully create the the what you need because
Speaker 1: you need some visibility to in to exchange liabilities as well.
Speaker 1: You know, just because in Exchange has fifty billion, if
Speaker 1: their liabilities are a hundred, it doesn't you know, you
Speaker 1: still have an issue there. So those transparency structures I
Speaker 1: think are going to evolve. But then that then people
Speaker 1: need to go to those platforms that are being more transparent.
Speaker 1: People have to choose that they want that. If we
Speaker 1: get into another market cycle where you know, coin Base
Speaker 1: and you know, all these other firms that have committed
Speaker 1: to transparency aren't getting the asset, it's because they don't
Speaker 1: have the The newest defy yield farming thing. Then it's
Speaker 1: hard to really sympathize, right, It's it's the typical investor
Speaker 1: has to learn. And then what happens with with why
Speaker 1: institutions kind of get hit or market makers is really
Speaker 1: what institutions are in this context is that they kind
Speaker 1: of have to just go where retail is. I mean,
Speaker 1: you can say I'm not gonna use ft X at all,
Speaker 1: but when it has all the volume there, I mean,
Speaker 1: you're highly incentivized to to have to you know, that's
Speaker 1: your business that you get involved in that, right, So
Speaker 1: you know, retail needs to needs to understand that there
Speaker 1: is no you know, there's no there's no one that's
Speaker 1: going to save you in this market. There's no one.
Speaker 1: You know, it's your your very limited recourse if something
Speaker 1: goes wrong and you really need to do your due diligence.
Speaker 1: And if one platform is transparent and another platform is not,
Speaker 1: then you gotta go with a transparent one or else
Speaker 1: you run this huge risk. Can I ask you what
Speaker 1: in reality regulation would look like because obviously we're talking
Speaker 1: big picture, but like what specifically would be regulated? And
Speaker 1: I want to ask this question of you specifically because
Speaker 1: you have you know what things are like in Canada,
Speaker 1: you know what things are like in the US and
Speaker 1: obviously in the Bahamas and other places as well. Yeah, so,
Speaker 1: I mean our platforms relatively straightforward to regulate, to be honest,
Speaker 1: Like we're basically taking kind of drivative structures that have
Speaker 1: like driving structures that do fit in the existing regulatory framework.
Speaker 1: The problem with a lot of this regulatory discussion is
Speaker 1: that they're trying to take like an equity framework and
Speaker 1: apply it to you cryptocurrency, or take commodity framework and
Speaker 1: applied to cryptocurrency, and it's just it's it's it's it's
Speaker 1: a struggle to kind of to to fit these these
Speaker 1: round holes into square pegs right for it typically for
Speaker 1: the for retail exchanges. And in addition to that, you know,
Speaker 1: if the if the retail traders, if you limit the
Speaker 1: activities that are available on one exchange, right, then you know,
Speaker 1: it incentivizes people to go sure, and then you know,
Speaker 1: that's been a criticism of the regulatory environment and the
Speaker 1: US that they didn't move fast enough and was forced
Speaker 1: people off shore. Now I don't buy that entirely. You know,
Speaker 1: everyone could have traded on coin based which looks to
Speaker 1: be fine. They just wanted to get more access to leverage, etcetera, etcetera.
Speaker 1: You know you, I think that you have to look
Speaker 1: at this this space with with fresh eyes. Unfortunately, you
Speaker 1: probably have to re write a regulatory framework from the
Speaker 1: ground up if it takes an account cryptocurrency. It's a
Speaker 1: very difficult task. You know, there's not a lot of
Speaker 1: regulators that even themselves would count themselves experts and cryptocurrency.
Speaker 1: But if we want a regulatory framework that really applies
Speaker 1: to what we're doing here, I mean, that kind of
Speaker 1: thing needs to happen. You know. The really where the
Speaker 1: regulators have focused on is like, oh, we don't want
Speaker 1: this product, we don't want that product, we don't want
Speaker 1: you know, I think that that is that's just it's silly,
Speaker 1: like we look at the issue we had here. Who
Speaker 1: cares what products they are? You need to make sure
Speaker 1: that the exchanges had the assets that they claim to,
Speaker 1: like those are the key controls, right, so that all
Speaker 1: this discussion around like oh there's too much leverage, retails
Speaker 1: is gonna blow themselves up. It's like, well, if they
Speaker 1: if they traded on this platform, they blew themselves up.
Speaker 1: The trick too much leverage, I can get my head
Speaker 1: around that if they traded on a platform, because and
Speaker 1: it was a huge fought and the people didn't have
Speaker 1: the assets, you know, that's a whole different story, and
Speaker 1: that's where regulators should come in, right. Yeah, I wanted
Speaker 1: to rewind a little bit, Steffan and talk about that
Speaker 1: notion of yield farming that you brought up. You know,
Speaker 1: whether uh, you know, we're talking about locking up your
Speaker 1: tokens at a centralized finance platform or even you know,
Speaker 1: depositing them with um a high yield account that's say
Speaker 1: Gemini or one of these centralized counterparties. Where do you
Speaker 1: see that whole space going. You know, so many people
Speaker 1: criticize these high yields is too good to be true?
Speaker 1: I mean, are they truly too good to be true?
Speaker 1: Or is there a way to do this that's um yeah,
Speaker 1: I mean it's definitely a nuanced question. And you're entirely right.
Speaker 1: There are ways to actually get yields in crypto, and
Speaker 1: then there are ways that are completely fictitious. And top
Speaker 1: of the list and fictitious yields is yield farming. I mean,
Speaker 1: I don't think there's a lot of yield farming supporters
Speaker 1: left to be honest with with what's happened. You know,
Speaker 1: this was a dynamic that we saw kind of emerge
Speaker 1: very like, very from the ground. You know, the whole
Speaker 1: decentralized exchange model was considered a bit of an afterthought
Speaker 1: and cryptocurrency and interesting experiment for the future, and it
Speaker 1: all really changed in the summer of I believe that
Speaker 1: the first platform that did this was Compound Finance, where
Speaker 1: they launched a comp token where you would deposit bitcoin, eth,
Speaker 1: you know, stable cooin, other mature assets and receive comp token.
Speaker 1: And because we are in the middle of a bowl market,
Speaker 1: I don't want to beat up on comp token. They
Speaker 1: seem like religive, you know. I mean, I haven't had
Speaker 1: any occase and they're not honest operators. But all these
Speaker 1: ut plumbing platforms, you deposit bitcoin and they'd start paying
Speaker 1: you in their token, which they invented like weeks ago
Speaker 1: and is now trading for whatever reason. Because we're in
Speaker 1: the middle of an insane crypto market at a multibillion
Speaker 1: dollar valuation, so yes, your yields are high in this
Speaker 1: token that has evaluation that's unsustainable, right, So and when
Speaker 1: the market sells off, okay, then all of a sudden
Speaker 1: If Okay, you got token worth of a project where
Speaker 1: two billion. If if if the token collapses and the
Speaker 1: market cap of it is now fifty million, what's your
Speaker 1: yield now, it's probably pretty bad, right. And in addition
Speaker 1: to the fact that there's all these other issues that
Speaker 1: have come up with DeFi because it's an experimental situation,
Speaker 1: such as regulatory risk, hack risk, etcetera. If you take
Speaker 1: all of that and you add it all together, the
Speaker 1: yields are probably negative, right, And so so the whole
Speaker 1: yield farming dynamic needs I I don't think it has
Speaker 1: much of a as much of a future it was
Speaker 1: really and it really kind of pushed the defy exchanges
Speaker 1: and platforms. You know that the argument for defy exchange
Speaker 1: decentralized exchanges is self custody in a lot of cases,
Speaker 1: which is which is a which is you know, as
Speaker 1: we've seen, definitely a value add use case. There's other
Speaker 1: elements that you know that I would say that the
Speaker 1: DeFi crosism needs to kind of figure out. But anyways,
Speaker 1: and then and then moving into the centralized lending, which
Speaker 1: was the other element that you that you discussed, I
Speaker 1: mean that should be that should be fine. I mean,
Speaker 1: centralized lending itself is a risk management exercise, right. It's saying, hey,
Speaker 1: I'm lending you. You know, a safe form of lending, right,
Speaker 1: would be if someone lent me overcollateralized you with U
Speaker 1: S dollars because they wanted to borrow bitcoin or some
Speaker 1: other asset and you're overcollateralized, and because I or I
Speaker 1: lend you bitcoin overcollateralized to get US dollars because I
Speaker 1: don't want to lose my upside on bitcoin, but I
Speaker 1: need U S dollars for right now, Okay, that kind
Speaker 1: of stuff can be risk managed, right And and and
Speaker 1: if you have kind of segregated accounts there you have
Speaker 1: access to you can you can manage that stuff. There
Speaker 1: are other real ways to get yields, such as people
Speaker 1: like you know, peer to peer lending markets on exchanges
Speaker 1: like bitfin x. Those things have held up amazing if
Speaker 1: if if you believe bitin x is a solid counter party,
Speaker 1: which which I do, then the peer to peer lending
Speaker 1: markets have worked perfectly. And that's really just people either
Speaker 1: borrowing stable coin because they want to go margin long
Speaker 1: or boring crypto because they want to go short. And
Speaker 1: that's really what's created yields, Like historically it's it's all
Speaker 1: based off this kind of borrow lend lend margin long
Speaker 1: short dynamic. That's why you can get yields in option markets.
Speaker 1: That's the same thing that you can get yield trading basis.
Speaker 1: I mean, those are all very real opportunities that unfortunately
Speaker 1: are getting a little bit noised out right now because
Speaker 1: of these blending dynamics that have exploded, and it's made
Speaker 1: our pitch a little bit tougher for our clients because
Speaker 1: we think those are great trades they should be involved in,
Speaker 1: right So, you know, I think that over time will
Speaker 1: be able to do the education process again. Have this
Speaker 1: discussion explained that, Like, yes, that wasn't a real dynamic.
Speaker 1: This is and we'll get back to it, but obviously
Speaker 1: it's going to take a little time. Speaking of that,
Speaker 1: I actually wanted to ask you what specifically your clients
Speaker 1: are coming to you with, Like what are they asking
Speaker 1: of you right now? And maybe you can talk a
Speaker 1: little bit about what is going on in the market
Speaker 1: in terms of how much things have scaled back exactly. Yeah,
Speaker 1: So our clients are coming to us right now and
Speaker 1: a couple of different different contexts they're coming to uh,
Speaker 1: you know, they're they're speaking us a lot about physical
Speaker 1: crypto trading because there's been a lot of their counterparties
Speaker 1: that you know, aren't haven't made it, they can no
Speaker 1: longer service them, so they're looking for new counterparties. There's
Speaker 1: also a lot of people that were using FTX to
Speaker 1: hedge themselves. You know, they're you know, cryptodesks that need
Speaker 1: to hold balances so they can facilitate kind of you know,
Speaker 1: their their whole all of their activity, and so they
Speaker 1: don't want to just be long, you know, one asset
Speaker 1: and have that move with their treasury, so they choose
Speaker 1: to hedge. You know, miners off are you know, potentially hedging.
Speaker 1: It's less of a market right now, But the advisory
Speaker 1: side is really where we're getting a lot of the
Speaker 1: interest right now. I mean, there's a lot of people
Speaker 1: that have projects that are struggling to raise money right now,
Speaker 1: and we have a really strong network of investors that
Speaker 1: are going anywhere in crypto and are still very well capitalized.
Speaker 1: So we're trying to make some introductions on that side.
Speaker 1: There's people that are looking for a general statue overview
Speaker 1: from us because they think we have, we're well positioned
Speaker 1: in the market to judge is this business going to
Speaker 1: work going forward is it not. You know, we're trying
Speaker 1: to lend a hand where we can and some of
Speaker 1: these various restructurings which we think we're very well suited
Speaker 1: to do, and we are, you know, making a lot
Speaker 1: of progress on that side. Um, we're in a nice
Speaker 1: position here where where where the impact to us has
Speaker 1: been relatively modest. So you know, we're not ourselves kind
Speaker 1: of in a bunker right now. We can have conversations
Speaker 1: with people and go out and try to help them out.
Speaker 1: And so I would say that it's it's really kind
Speaker 1: of advising the crypto native side. And we've seen a
Speaker 1: lot of clients coming to us on the trading side
Speaker 1: because their prior serius survivors have gone away. M hm.
Speaker 1: So for for like the FTX case, would you you
Speaker 1: could possibly work as an advisor to to one of
Speaker 1: the debtors or one of the creditors rather Yeah, I
Speaker 1: mean I don't want to get into the weeds too
Speaker 1: much on that because there's just a lot going on. Unfortunately,
Speaker 1: the situation was messy enough to begin with, and it
Speaker 1: became messier just with how the whole thing's played out,
Speaker 1: you know, from from not halting withdrawals when they probably
Speaker 1: should have, to not shutting down the exchange when they
Speaker 1: should have, and now there's money flowing in and out still.
Speaker 1: But you know, we think that uh, you know, we
Speaker 1: think we have some ideas for how this situation can
Speaker 1: be man edged, and we encourage other institutions to reach
Speaker 1: out and and kind of her ideas. But it is
Speaker 1: there's a lot of competing interests in this right now,
Speaker 1: and it's it's very difficult to even if you do
Speaker 1: have something really valuable to contribute to to stand out. Um.
Speaker 1: But you know, we think we we think will ultimately
Speaker 1: we'll be able to provide some insights on on how
Speaker 1: to manage some of the FTX situation in particular. Great, uh,
Speaker 1: really appreciate your time stuff in Hey, at least you
Speaker 1: know you get to get to a warmer uh climate
Speaker 1: there for a little while. Yeah for Cape Toronto, good
Speaker 1: time of year at least to be making making them
Speaker 1: the switch. Well, U vil data, I think it's our
Speaker 1: time now to get into the craziest things. You've got
Speaker 1: something crazy for us so adjacent, but it's not really
Speaker 1: about crypt job. But this is a boomerk headline. Actually,
Speaker 1: I'm going to pose a question to you, Mike. All right,
Speaker 1: if I told you the one person's wealth loss for
Speaker 1: this year exceeds a hundred billion dollars, who would you
Speaker 1: guess it is? A hundred billion? I think i'd guess Ellen, Yeah,
Speaker 1: you're right, I mean, okay, this was, this was this is.
Speaker 1: There's not not that many with that with that much
Speaker 1: to lose, you know, exactly exactly, but it's a striking
Speaker 1: bluemo head right, So okay, so he um, what's happened
Speaker 1: is Tesla shares are down obviously all the Twitter stuff
Speaker 1: that's going on, etcetera. He's worth roughly a hundred seventy
Speaker 1: billion dollars right now, but it's down from three hundred
Speaker 1: forty billion around this time last year. Wow. Yeah, that's
Speaker 1: a rough year. I think. I think all land on
Speaker 1: his feet stuff. All right, Well, that's pretty good filled
Speaker 1: out a hundred billion cheese. Puts it in perspective when
Speaker 1: the rest of us check our four in one case,
Speaker 1: I guess I'm gonna dip into the alternative assets space here.
Speaker 1: As I said, I've got two soccer balls World Cup
Speaker 1: where he ended. Soccer balls that are up for auction,
Speaker 1: one already sold, one's still up for auction. The first
Speaker 1: is I think we talked about this before. Diego Maradonna,
Speaker 1: the great Argentina star of the eighties, he had what's
Speaker 1: known as the hand of God, had right where they
Speaker 1: he clearly scored a goal in the World Cup quarter finals.
Speaker 1: I believe it is with his hand, and they asked
Speaker 1: him afterwards, did you use your hand? And he said, now,
Speaker 1: it was the head of Diego Maradonna and the hand
Speaker 1: of God that scored that goal. But replay clearly shows
Speaker 1: it was his hand. They're still very sore about this.
Speaker 1: In England, I will I will point out and then
Speaker 1: the referee who missed the calls has had the lion
Speaker 1: judge who missed the calls, uh, kind of ruined his life.
Speaker 1: But the actual referee of the game was able to
Speaker 1: take home the game ball. They all used one game
Speaker 1: ball back then, believe it, and I think the guy
Speaker 1: was in his seventies, uh, and he put it up
Speaker 1: for auction. So that's one soccer ball or i'm sorry,
Speaker 1: football that went up on American football that went up
Speaker 1: for auction. The other one LDNA was there auctioning off
Speaker 1: all sorts of gifts that we're giving to the various
Speaker 1: UH mayors of New York over the year, and one
Speaker 1: included a one of a kind Louis Vatton soccer ball
Speaker 1: given to Mayor Giuliani in commemor fans World Cup Prices Precise,
Speaker 1: I'm gonna ask you both, which one do you think's worth? Moore?
Speaker 1: And what's what do you think it's worth? Okay, I'll
Speaker 1: go first. It's definitely hand of God ball, and I'm
Speaker 1: going to go with two point five million dollars. Two
Speaker 1: point five million dollars, all right, Stefane, what do you
Speaker 1: think I'll go with the Hand of God ball as well.
Speaker 1: But I'm gonna take the under. In this market, I
Speaker 1: think it's probably I think it's yeah, under two point
Speaker 1: five million. I was going to say in the hundred thousands,
Speaker 1: but let's say a million. Oh my gosh, can I revise? No?
Speaker 1: You could? She always wants to revise. You're not allowed
Speaker 1: to revise. This might be the closest call we've ever
Speaker 1: had in a game of prices precise precise. It's all
Speaker 1: for two million pounds, so two point four million, So
Speaker 1: I think we got to give it to Stefane for
Speaker 1: taking the under on the come on that one, sure
Speaker 1: well done, believe it or not. The Louis Baton soccer
Speaker 1: ball Vildonna. It's only six hundred bucks, that's it. Not crazy?
Speaker 1: That seems less than the price of a Louis Baton purse.
Speaker 1: You could cut the top of it, make a purse
Speaker 1: out of it. And yes, but uh, that's all I
Speaker 1: got Stefan. I'm guessing, um, you being in the Hamas,
Speaker 1: I think we have a clue as to what your
Speaker 1: craziest thing of the week is. Yeah, yeah, no, this,
Speaker 1: this FTX situation is the craziest financial situation I could
Speaker 1: ever imagine. I mean it was. It's not just me
Speaker 1: that saying that. John Ray, who's who's the quarter point
Speaker 1: in CEO during the bankruptcy proceedings, Who did Enron nor tell?
Speaker 1: I mean, he's been at the epicenter of everything. He
Speaker 1: went out of his way in the bankruptcy filings to
Speaker 1: say that this was the craziest thing you've ever seen.
Speaker 1: And honestly, that's an extremely unusual approach, Like usually you
Speaker 1: stick to facts and it's under and all those things
Speaker 1: are under under the threat of perjury if you're wrong,
Speaker 1: and so, like you know, it's just for someone of
Speaker 1: his professionalism and stature to come out and say that,
Speaker 1: I mean, just underscore is just what we're dealing with here. Unfortunately,
Speaker 1: for a lot of people, it's it's really mind boggling.
Speaker 1: And when you read some of these statements in the
Speaker 1: bankruptcy filings, like you're saying, you know, they they just
Speaker 1: seem flabber guested that a company could have been run
Speaker 1: the way it was exactly that's a good way to
Speaker 1: put it. So well, Uh, Stefan, we really appreciate your time.
Speaker 1: We know it's a it's a very busy time for you,
Speaker 1: a very uh sort of risky and i'm sure stressful time.
Speaker 1: So we really appreciate you taking some time out to
Speaker 1: to explain how you're doing all this and what happens next, um,
Speaker 1: and uh what'sh your the best luck and hopefully we
Speaker 1: can bring you back some day and happier times. No,
Speaker 1: I love to, I'd love to. Yeah, it's uh, it's
Speaker 1: definitely a little bit of a fog right now. You know,
Speaker 1: we'll see how they does settles, but uh, I think
Speaker 1: that will be We'll be back in. You know, the
Speaker 1: industry will be back in business probably sooner a lot
Speaker 1: of people are are expecting. All right, thanks again, yeah,
Speaker 1: thank you so much for joining us. Thank thanks guys,
Speaker 1: Talcu latter What Goes Up. We'll be back next week
Speaker 1: and so then you can find us on the Bloomberg
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Speaker 1: you next time. Just not want