WATCH: No Permission Needed — How Arthur Hayes, BitMEX CEO, is Self-Made with a Multi-Billion Dollar Trading Platform

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In a candid conversation, Co-Founder and CEO of BitMEX Arthur Hayes defends why BitMEX is set up in Seychelles, the promise of blockchain for everyone, why ICOs are not a problem, and why his industry is not a “scam.”

This self-proclaimed “economics-history nerd” and former Deutsche Bank banker, who joined then lost his job at Citi as head trader of Asian ETFs, says that BitMEX as a crypto exchange actually protects investors by limiting the loss to only the amount put into the market. This is different, he says, than the traditional regulated system where investors can lose their entire net worth.

But why crypto?

Hayes says it’s history in the making. Cryptocurrency is permissionless — and that means everyone can use it. It may not be better, but “at least you have a choice.”

It’s a glimpse into why people are “opting out” who created an industry with a market cap of $350 billion. For a man who lost his job at Citibank in 2013, what he and his co-founders built at BitMEX since then has turned this out-of-work banker into a self-made crypto-preneur heading up the biggest crypto margin-trading platform in the world.

Listen to the podcast version

Full Transcript

Welcome to Forkast.News “In Conversation With”, I’m Editor-in-Chief Angie Lau and I am here with Co-Founder, CEO of BitMEX, Arthur Hayes who just got off the stage with Nouriel Roubini, the “Tangle in Taipei.” We’re on location here at the Asia Blockchain Summit here in Taipei, and it was watching two heavyweights, go at it in the ring. Nouriel Roubini was very, very vocal about the industry with some very colorful language. And you’re defending the industry, but you are defending your book, you are defending an industry, in which you have placed bets, you have made your money, you’re running BitMEX right now. What is the promise that you see that Nouriel Roubini says is a scam? 0:00

I see the promise in that humans for the first time have a choice in how they transact money and a choice between a government central bank-led monitor system and one that’s led by open source software and math.

Now, this is the first time in history that people can actually choose a system of monetary transfer. Usually, it’s forced upon them, and they sort of just live with it and they get by. Now, people actually have a choice and all I’m saying is that give people a choice and let’s see what happens.

We don’t know what the ecosystem will look like in 5 to 10 years, but the default action should not be to shut it down and not give human society a choice of how it transacts: moves money from value, from person to person.

But you saw monetary value, you saw business value in creating BitMEX, and one of the criticisms, a huge one, is that you’re based in Seychelles. Why you based in Seychelles? 2:29

Because the Seychelles are the friendly environment for companies doing our type of business, we actually have great contacts in the government. They want to establish a financial services sandbox for crypto, and they’re trying to upgrade their economy by being friendly to businesses that want to bring jobs and economic prosperity to their island. So this is no different than Bermuda, and reinsurance in the Caymans or BBI and hedge funds. 

So it’s these nations where they don’t have entrenched financial power that be, that they have to answer to, they can actually move with the times, innovate financially and bring business to their economies.

And what one would argue is that we’re getting into it now, but one would argue that with the higher regulatory environment, it protects the retail investors whereas in Seychelles or Caymans or any of these jurisdictions, the regulatory environment may be friendlier to you, but in actual fact, then that would be less advantageous for the very people who use your exchange. How do you respond to that? 3:17

So the first thing is, I think people don’t really understand what we do. So obviously, we offer leveraged trading in the form of derivative contracts. Now, unlike a traditional exchange, most people are familiar with and sort of combine us into… when you go and open up an account, let’s say, Scottrade, or TD Ameritrade, you sign an agreement and basically it puts your entire financial net worth on the line, go in short Tesla stock, Elon commits possibly securities fraud on Twitter, says we’re going to pump this stock up to 4-20 because of this take-out and you get taken out and you owe more money to the broker than you have in your account. Your broker can actually legally sue you and take your financial assets.

Now, on BitMEX, yes, we offer very highly leveraged trading, but we protect people because you could only lose what you put in. So if you put in one Bitcoin and the trade goes massively against you, the most that you can lose is one Bitcoin so it’s limited liability for all the participants, they’re not risking their financial future only if they choose to.

Now, maybe you only chose to put a 10,000 position on a stock in the United States, but all the sudden you owe your broker $100,000, that’s a system that is regulated. Our system we try to protect our customers because we want them to stick around longer. 

And they’re sticking around?

Absolutely.

And they’re growing? How are you growing the business, how are you growing the business in the midst of crypto winter, in the midst of contraction in the market and what we’re seeing is a recovery right now. 5:03

Luckily for our business people actually are willing to pay for our services, so we’re not dependent on the largesse of venture capital to continue to hire and pipe people into the company. Even in a downturn, people still want to trade, so they care about the volatility. As long as things are going up and going down, people who had to put trades through our platform and we’re going to earn revenue. And luckily for us, the exchange business is probably, as anyone knows, is very possible if you’re one of the leading companies, that’s true in equities and that’s true in Bitcoin as well. So luckily we were able to actually grow our headcount during the crypto winter, continue to improve our technology because we really believe in crypto and we’re not going to divest or run away from a slight blip in the market.

Now, you and I started in traditional markets, actually. You started at Deutsche Bank, you then went over to Citi, you last in the traditional markets was head trader of Citi’s Asia ETF market making. You took a lot of this talent into crypto, into Bitcoin, into blockchain. What was the promise that you saw when you started BitMEX? 5:59

I’m an economics-history nerd and what I saw was a transition point in how people deal with money, and this usually happens in our society every two or three hundred years. 

We’re moving from an analog society in terms of money transfer to a digital one, that’s going to be hugely disruptive. And I saw a chance with Bitcoin and crypto to actually create a company that could benefit from this hugely chaotic transformation. And the great thing about Bitcoin is it’s permissionless.There’s a piece of software; me and my co-founders saw we had a business model; we didn’t have to ask permission to build this, and what other industry could three guys go and try to build an exchange that does billions of dollars a day turnover. It’s just almost impossible to do in the traditional space given all the things and all the people that need to allow you to do it. No one allows you to do anything in crypto. If you have an idea and it fits within the technical framework, you can go and do it and if you can find customers you can build a real business. That’s what’s powerful about crypto. 

It’s powerful, it’s disciplined, it’s what takes a lot of actually traditional knowledge of infrastructure to apply it to a new economy. The problem was in 2017, the ICO market, everybody got in, wild wild west, nobody knew what was credible or incredible. And they got wrecked, which is lose all their money, which very much has been in criticism of this entire market. As you saw that happen around you, how did you deal with it, address it, try to fight against it. Or did you participate in it? 7:25

Well, at the end of the day, if you look at statistics for new business ventures, 90-95% of all new business ventures fail within the first five years.

So if we’re talking about a completely new way of raising money for companies and new people, or entrepreneurs building technolog … why should we assume that greater than 95% of them would be worth zero in a very short period of time? We shouldn’t. So the statistics of all of these ICOS and tech projects that are now almost worthless in the 90 to 95 percentile actually fits with traditional data. So it’s just that it’s the media is talking about it because it happened so quickly. But if you go and start a restaurant most likely going to be worth zero in a few years, too. Why should an ICO be any different? So I don’t see this as being a problem. The good thing about crypto in these financial markets is they’re open and then you’ve a bad business model you get to zero very quickly, rather than being protected by some sort of vested interest. And the zombie companies kept along, longer than it should be.

And so… what truly is cryptocurrency? You characterize it as financial privacy, financial freedom, the ability of returning the economy back to the individual, there’s power in that. How is that, in your view, better than the current system that we have right now? 9:02

I don’t know that it’s better, but at least you have a choice. And if the current system for your circumstances isn’t to your liking at least you can opt out and choose something different. Now, a small percentage of people, through the knowledge of what’s happening in this industry opted out and created an industry that has a market cap and $200-300 billion-dollar range.

And so that’s all I’m saying, it’s a choice.

And there’s very few times in human history where you have choices like this of a government-controlled system versus one controlled by self-interested parties who don’t even need to know each other. That’s all that crypto is, it’s a choice.

That choice exists now for billions of people accessing the internet with simply a smartphone and that’s happening in emerging and frontier markets not only in Asia but in Africa, and really around the world. How does that change the economy for those people for the unbanked, for those who were n’t able to participate for a very long time, or is that a false paradigm? 10:00

I mean, the internet in general, maybe just stepping away from crypto, has given people choice in how they consume information, it’s taken away the one-man dictating what the people below them understand. So this has been a complete democratization of information, media, and now we’re moving on to finance: choice in how you manage your finances.

You could use Alipay or you could use Bitcoin or you could use Libra.

Each one of these systems will compete for customers, and offer actual goods and services rather than having to petition the government and pay off some official to be allowed access to market. The internet has democratized all that and allowed companies to bring real value to people. And so that’s giving this choice, maybe that or maybe not, but at least you as an individual can assess your situation and make an informed decision.

But isn’t there power in regulation? 11:15

Yes, but I think most regulation is basically driven by… We want to create a moat, we want to collect a toll for a particular activity, whether it’s financial… Why do hairdressers need a license? You know, in a lot of the US states, you need to go pay the government for a license to do somebody’s hair. So this is the sort of regime that regulation creates, it’s usually not about protecting consumers because the free market in many cases, is better than one that’s controlled by a few individuals. Central planning works for a time, but over time, it usually doesn’t.

Well, actually, the hairdresser license exists so that I can trust you with this service, that you have a license. You’ve been accredited by somebody, that you’ve passed some sort of regulatory hurdle, because you really wanted to be there. Now, with cryptocurrency, you really wanna be there through mining and through math, and decoding, right? So that, I guess in essence is the technological regulation, that is built into Bitcoins. 11:53

And that’s open. But it’s not dictated by fiat.

Yeah, but for everybody else who’s a mass adopter, that’s a little bit too complex to understand. How would you explain it? 12:21

I would explain like this: you shouldn’t have to understand it. The people building these solutions should make it so easy, the value proposition so clear, that you just use it. We all have iPhones. Did anyone go on Google and look up, “How do I swipe my iPhone?” Steve Jobs and (Jony) Ive made the iPhone so intuitive, the value proposition so clear, that you just picked up this device and you knew how to use it intuitively as a human being. That’s what we need to do for crypto and payments.

Now that doesn’t mean that’s going to be successful, but when you abstract to that level of simplicity, you really do understand the true answers of what you’re trying to solve for someone.

Facebook. Libra. Your thoughts? 13:05

I think it will, if allowed to roll-out, will completely destroy the revenue potential of commercial banks. Because at the end of the day Facebook controls 2 billion customers, they control our attention, we give them all of our personal information, they know more about us than the bank. Usually in the past it was the bank that knew the most about somebody because they had the most contact with them in that circumstance. Facebook, or any other company using Libra, can originate a loan at a lower cost than a commercial bank. They don’t have branches and highly paid people to offer these services. And most importantly Facebook and a lot of big tech companies have so much in terms of retained earnings, they can lend off balance sheets without having to fund themselves.

So if I’m Facebook, and I can implement this on Instagram; you see a nice pair of shoes that you want to buy, you can’t afford it. They’ve seen through your social media history that you’ve opted in to sharing that, “Okay I think this person has good credit. Here’s $1000 US dollars, at a 5% annualized yield. You can go buy a pair of shoes in Libra. They can now lend at the point of sale and number one, increase the amount of revenue that’s going through their platform, the merchants are happier, Facebook’s earning revenue. So, they’re getting off of the ad revenue (model) which, I think it’s becoming clear that ads in a crowded social media context are not really that effective. 

Is it a cryptocurrency? 14:22

No, it’s not a cryptocurrency. It’s a basket of the currency is represented on a digital permissioned ledger.

And so do you think that there is room for both? Both a permissioned ledger, a digital currency, and crypto-currency? Why are both confused with each other? And do you think there is room for both to exist as its own distinct product? 14:31

I think there definitely is room for both because Bitcoin and cryptocurrencies represent a different value proposition than a centralized way of sending money around. 

What is that value proposition? 15:03

Right now, because of the technology, it’s faster and easier to have a centralized system.

WeChat Pay is very fast because it’s owned by Tencent. They don’t have to get consensus among self-interested parties. That’s extremely energy-intensive, relative to a centralized organization controlling what goes into the record of transactions.

Now that’s great for consumer payments. Paying for a cup of coffee. It’s not great if you worry about your financial privacy. So if that’s something that’s a worry to you, and to most people, it’s not. Then you’re gonna use a different system for certain types of payments. And so that is again, it’s a choice. They don’t offer the same value proposition — will Bitcoin beat Libra in paying for a coffee? Probably not, but if you are, say, a politically-exposed person and you get shut out of the Libra system because some government said, “Please don’t allow this person to transact,” and now you can’t buy your groceries in a world where there’s no cash. With something like that, you could use another form of payment that is globally-accepted because the world recognizes that this algorithm that is encoded in Bitcoin actually has value.

One would say that fiat itself is a very closed system. We often forget that central banks… We talk about controlling the markets through printing money or quantitative easing, and controlling interest rates, Federal Reserve and central banks around the world do that. In a decentralized way, doesn’t this expose the global economy to more vulnerabilities, to instability, when central banks are trying to maintain stability? In a decentralized way …it’s free market. 16:16

Well, I don’t think Bitcoin is gonna be the harbinger of collapse for central banks. They do enough damage to themselves already. The fact that we have a credit-led business cycle means that at some point people recognize that it’s gone too far, and things contract, that had nothing to do with cryptocurrency. This is not a new thing for governments to print money essentially to give goodies out to their populations. It’s happened since the time of Rome, and it always ends in the same way, hyperinflation and government collapse. So when will that happen? I have no idea, but that will not be precipitated by anything that happens in the cryptocurrency ecosystem.

I think it was interesting that Roubini and you really tried to find value or not value, which is Nouriel’s point of view. But really, how did we get here anyway? A Bitcoin was born in the ashes of 2008 global financial crisis. What was it that people voted for with their own hard earned dollars? 17:30

They voted for something different. They thought that at the end of the day, if a private company or companies made bad decisions that they would suffer those bad decisions, and not society as a whole. And society as a whole, dictated by the representative governments, no one was asked to vote for these things, decided that they were going to bail out these financial institutions who had done bad or scandalous things over the past 10 to 20 years. So it was the fact that no one had a say whether or not this recapitalization happened. That’s what people were upset about– maybe they would have chosen the same thing, but they never were asked, they were just dictated to. 

And now there’s another system, a system that is just math. Anyone can look at the code, there’s no secrecy there’s no… “I know better than you just trust me.” It’s right here in the open, it’s open source, so there’s none of this hide-and-seek that governments and central banks play, because at the end of the day, they’re all con men. It’s a confidence game. You have to have confidence that the federal government can make good on these fiat currency promises.

You come from that tradition you worked for Deutsche Bank, you worked for Citi, you worked in that traditional market. Now let’s talk about BitMEX. You saw your value in the cryptocurrency market. Let’s talk about crypto-futures exchange. Where are you going with that? What is the promise that you see with BitMEX? 19:03

So at the end of the day, I’m a derivatives trader. And what you witnessed, in most asset markets, in all asset markets, is that derivatives are traded in a larger volume than the spot market. So back when I got into crypto in 2013, the major spot exchanges were already in existence. And if you take a look at the top 20 changes, most of them have been around since 2012 to 2014. The boat had already sailed. But where there was a niche was derivative markets– it was very underdeveloped, there were a few exchanges which I thought were not offering the right types of products and services and I really believe that I wanted to be part of this industry, so I use my experience in derivatives to build a derivatives-only trading platform.

How do you, future-proof yourself though in the tightening regulatory market across the US-EU? FATF (Financial Actional Task Force) just came out that requires the $1,000 KYC and AML. How are you future proofing yourself against tightening regulations around the world? 19:56

I mean, at the end of the day, you have to offer products that are a value to a consumer at a price that makes sense. We will never be able to predict what sort of regulations happen. All I know is that regulations will change and where some business model may make sense now, another business model opens up. At the end of the day, I know that people like to trade financial assets and they do it in other markets than Bitcoin and they’ll do it in Bitcoin too. We just have to find a way to offer them products and the good thing is we have the financial resources to tinker. We’re not really starting out from scratch trying to find our way in this worsening business climate, if you can say that. So we have time; we’re fine.

How are you thinking about regulatory exposure and liability? 20:57

Well, the first thing is: be an honest operator. So, don’t steal people’s money; have good security; try not to get hacked. Those are the number one things. Everything else is sort of a secondary concern. Just because you’re regulated if you’re a dishonest organization, you’re a dishonest organization. So that is what we strive for at BitMEX. It’s making sure that we put our customer first. You put the safety their funds first, and I think if you saw for that a lot of these regulatory issues sort of wash away. 

Now you are very vocal about the need for this kind of I guess freedom of the market, right? But increasingly what we’re seeing, is that the regulators are coming in, and a lot of crypto exchanges are speaking now with the regulators and working in concert with each other. Are you doing the same at BitMEX? 21:27

Well, I think, taking a step back in terms of the free markets, people reporting suspicious transactions, or KYC/AML which exchanges have been doing for years, nothing is really changing, is different than sort of saying, “we’re going to determine what we think the price of this asset is trading on our exchange.” The second any exchange tries to do that the crypto market is, given how perfectly competitive they are, we’ll disabuse them of that notion. And the best thing about crypto is that just because you’re number one today doesn’t mean you’re gonna be number one next year; it’s a permission-less technology. Anyone can start a new exchange. If you’re trying to curtail the free market from operating and bringing value to customers, you will not be in business very long, so regulation or no regulation, you still have to put the customer first.

We’re seeing a lot of geoblocking though. Are you doing that at BitMEX? Does it expose you to SEC, CFTC, and the US regulatory? 22:34

We actually did the US since 2015 and that’s not just a crypto phenomenon that’s just a banking phenomenon. I’m a US citizen unfortunately, I live in Asia and I’ve denied banking services routinely because of the passport that I hold. I might as well be from Iran or North Korea as far as they’re concerned. So, the vulcanization of finance due to overreaching US regulations is a fact in regular finance as well as crypto and we’ve chosen not to participate in that at all.

Okay, so how do you evolve and how do you grow? How do you grow your liquidity pool of people who are based wherever they’re based… And exposed to those rules? How are you going to be able to tap those markets for liquidity? 23:14

Well, maybe we won’t be able to tap those markets, but other companies can. And there would be organizations in the trade shops that can sort of straddle those lines, they can trade in one jurisdiction that other people can’t trade in, and another. And there’s arbitrage. And the fact that money still moves around world even given all these regulations and traditional assets. In crypto, I have no worry that people will find a way to bridge these silos of liquidity, but the number one thing is we just need to give more information about bitcoin and crypto to people. If more people hold bitcoin, there’s more types of financial services that people can offer. 

You are hiring talented people from the regulatory world to now BitMEX. Your COO Angelina Kwan comes from SFC in Hong Kong. So how is that dynamic changing? How are these conversations internally helping shift the business and helping grow the business? 24:00

At the end of the day we want a professionalize BitMEX from a very small company to our goal as a company, which is to be the largest and most profitable exchange in the world, beating even the CME. So that obviously requires getting the best talent out there and people with the right context in government and regulatory agencies. A lot of these people want something new. They’ve been doing this job for 10-20 years. This is a new industry. There’s different things that maybe they didn’t like about the business culture where they are from that is happening here; it’s more free. People can be themselves. So the conversation we’re having with people is, “Take a chance. Here’s a new way of doing things and guess what, we can pay you if market, if not above,” because we are adding value to our customers. So we’re actually getting amazing talent.

Do you think it’s a combative relationship right now between regulators and exchanges like yourself or is it more collaborative? 25:08

It’s a spectrum.

And where would you put BitMEX on that spectrum? 25:18

It’s a spectrum in terms of countries. So on one end you have countries where they have such a long history of established financial players that they’re gonna unwilling to change the laws to fit the new technology of today. You have other countries that have no financial services and  infrastructure, and they see crypto as their chance to become relevant in the world because there’s no way that they can become a U.S. dollar swap center but maybe they can become the home for crypto companies. Maybe these crypto companies can bring jobs to their country.

So, depending on the legacy system that a country has, that will be how friendly they are to crypto and in my view the countries that really embrace financial change in technology will be the ones in the next 100 years that outpace those that just differ to how things were done over the past 100 years. If you look at the United States, for example, if you look at them in the 19th century, they were the backward hicks of the world and they sort of transitioned by being a little bit more open to new ideas, to the way they are today. Now what I see that they’re the paragon of financial inclusion and innovative technologies, absolutely. So that’s how the cycle changes.

BitMEX. Will it ever become a regulated exchange? 26:34

We are regulated in our home jurisdiction of the Seychelles and we’re looking at getting licenses all around the world and we invest in bitcoin exchanges that have bases all around the world.

Okay. All around the world, including the US? 26:46

We do not think that the United States presents a good business opportunity for the products that we think the customers would like to trade.

So, you’re removing 330 million people from your equation? 26:55

But, I’m adding 6 billion.

At the end of the day, a lot of emerging markets, frontier markets are embracing the thought of blockchain and cryptocurrency to leap-frog itself into a global economy. How will BitMEX engage with those countries? 27:02

So we’re investing in a lot of startups in emerging markets where we think that or would play an important part. A recent investment that we made was in an exchange called PDEx. They have a license from the Philippine Central Bank to do fiat-to-crypto trading. So we’re looking for these type of opportunities. People will have strong local connections, we can interface with the local regulators and offer the ability for these people to on-ramp into crypto and maybe at some point they will interface with the BitMEX product, but that’s not really the concern for us.

Is BitMEX ever going to help the Central Bank come up with its own digital or crypto-currency? 27:49

I don’t really think that is our business model. There’s plenty of consortium that will charge them a lot of money to do that. 

You ever going to participate with Facebook Libra? 27:59

We were thinking about it, we’re looking at it.

Why? 28:04

Well, if two billion people of access to digital money, they might want to trade something. We might be in place so they can trade it.

Five years from now, what are we going to see from BitMEX; for this industry? 28:13

The thing that we’re working on very closely is fixed-income products. We’re going to be helping to shape and launch the Bitcoin bond market for high-quality companies to issue native Bitcoin debt instruments.

Arthur Hayes, a pleasure. 28:30

Thank you

Alright, great to see you in Taipei.