Gimme shelter: Crypto companies head offshore as they hanker for regulation

Transcript

Angie Lau: What a conference … what a conference. What was it? How did we get from you back in the days of building this in Hong Kong to …

Sam Bankman-Fried: Yeah, it’s been a lot of fun. You know, I think part of it has just been ‘Just keep building.’ Just keep building out the product, keep delivering, keep adding on, keep refining it and keep moving forward. And to some extent, that’s all there is. It’s putting one step in front of the other. But outside of that, obviously, there have been a lot of shifts in the industry over the last few years, and seeing the institutional sort of adoption start to trickle, and seeing the interest really building, and seeing regulators start to get much more engaged in this space — those have all reshaped what the industry looks like. Obviously, one of the reasons that we’re here today is that the Bahamas is one of the first countries to pass a crypto regulatory framework, and (FTX) got licensed under it and started rolling out an office here.

Lau: The office is here and injecting a lot of dollars into the Bahamas. But also at this conference, very notably — a lot of the old guard, old money, Wall Street is here. What are they hearing that excites you? What are you trying to build a bridge to?

Bankman-Fried: So, if you look at where most of the capital is … in the crypto ecosystem, it’s with individuals, with crypto exchanges and with verticals. When you look at where most of the capital is that wants to be in the crypto ecosystem today, most of it is in things like pension funds, mutual funds, ETFs (exchange-traded funds) … living with prime brokerages, with other forms of brokerages, and living in banks. And so you look at where a lot of people’s access points are to the financial ecosystem, and they route through large institutions. A lot of them would like to be getting involved in the ecosystem, but in order to do that in a way which is convenient, comfortable for them, we need to build the bridges between those institutional services and the crypto ecosystem. And I think that that’s what our biggest goal has been this year in terms of getting regulated, getting licensed, in terms of building out relationships with institutions and trying to put together all the pieces that are necessary to build our robust connectivity.

Lau: Let’s talk about these pieces, because they aren’t here yet. Let’s say, for example, you have a big sovereign wealth fund and they’re like, ok, let’s go for a 100, 200 BTC play. Who’s the counterparty? Is that available? And despite it being blockchain, trust is a huge thing, still. 

Bankman-Fried: Oh, absolutely, and we have a lot of conversations that are a little bit confusing, with large pools of money, where we’ll start with like, ‘Look, we’d love to help support you guys. Like, what is it that you would want? Like, what would (you want to) make?’ And they’re like, ‘Oh, we really want to be investing in these.’ (To which we answer,) ‘That’s great, like, are you?’ (and they reply,) ‘Like, no.’ And we ask, ‘And so why not?’ And the answer is not always specific. 

The answer is sort of like, ‘Look, we’ve been talking with our compliance department and they need to get comfortable with the setup.’ And what does comfortable mean? It’s a diffuse thing. They’ll say we’ll have custody. And I’m, like, ‘Yeah, let’s talk about that. Like, what would you like in terms of custody?’ And they ask, ‘Like, well, is there a custodian? Like a qualified custodian, like a trust company?’ Or they’re like, ‘I don’t know.’ Like, it’s not clear exactly what that means. And they’re, like, well, ‘How about the platforms? Like, are they regulated entities as well in the United States?’ To which our reply is, ‘Sort of.’ Like, there’s the money transmitter regime with a money service, business license, money transmitters. Those sort of mostly look at the transfers, though, rather than the order piece of it. There isn’t really a federal markets regulator right now for most crypto markets in the United States. And so that’s another thing … (it would) definitely give us a lot more comfort if there was a clear … if we knew who it was, who’s overseeing these marketplaces, like, what agency is it? And so that’s sort of another piece of this that they think about. They think about, ‘Well, how about the assets? How about stablecoins? Can we trust them?’ And I’m like, ‘I think the set of stablecoins are really upstanding companies and so heavily and trust them, going great.’

(They ask,) ‘Is there like a … you know … are they registered?’ No. There’s nothing for them to register as right now, as money transmitters or something. But, like, that’s not really what they’re asking. And so I think there’s a lot of pieces here where, like, they don’t know exactly what it is they’re looking for. It’s a holistic thing.

But in general, a lot of this comes down to, like, what is the regulatory oversight here? Who are the bodies who are doing at least (some) amount of diligence on it? Who’s overseeing the custody? Who’s auditing that or vetting that, or something like that? And also, just how do we know we’re not missing something here that’s going to screw with us … going to hurt us in a way we didn’t realize we could be hurt. And I think the biggest piece of this is getting federal oversight over the exchanges, over the assets, over the stablecoins.

Lau: So there’s a little aspect of CYA (cover your ass), at the end of the day. It’s that I can inject a huge pool of one, great return, possibility of return, but what is the counter? 

Bankman-Fried: Possibly, and I will get fired if I screw that up like that. 

Lau: Exactly. 

Bankman-Fried: Obviously prices might go down. But if I do that and I lose money for something that’s nothing to do with prices going down, I’ll personally be held liable for that. And so I need to feel comfortable with this. And I think that’s really not so much like (that) is my specific problem as, like, how do I just, like, feel like this is going to work the way it says it (will).

Lau: ‘Work.’ And the traditional space has the luxury of that — (by being) the source of 50 to 100 years in capitalism — that all of these safety nets exist. Does that safety net exist here in crypto? Let’s be frank.

Bankman-Fried: I think the answer is, you don’t always know whether or not it exists. And in some places it does, and in some places it doesn’t. And it’s not easy from the outside to prove which ones actually do have it and which don’t — which is another way of saying multiple. Not in a generic sense, not in a generalized sense. Like, there is, and again, there might be places where people build off the trust that there are a lot of levels of safety. But you sort of have to do that on an individualized, bespoke basis, which is not practical. And so that’s like a big piece of what’s missing here — yes, the trust and the safety net, that sense of, like, even if things go haywire, like, it’s going to do what its setting would do. This is what it claims to be.

Lau: What is the play for FTX? It started out going to the retail space in exchange, etc. etc., but it’s much more than that now.

Bankman-Fried: So, yeah, and one thing that’s worth noting (is that) every exchange’s customer base is different, and we do have customers from all walks of life on the platform, and from a number of different jurisdictions. But if you look at who our core customer base has been historically, they’ve been powering services, whether they’re individuals or corporations. Most of the volume has come from people trading large amounts, which is not the same as every platform. Like some, like Coinbase, it’s much more specialized, in the sort of long-tail consumer demographic. And so that had been our sort of bread and butter. 

Looking forward, what I basically see with the core product (is) sort of three large areas and then a lot of sort of potential expansion opportunities. So I’ll say potential expansion things like NFT gaming is an example, one that we’re excited about. There are a number of others, but when you look at the core things, one of them is just continuing to build out that product of, like, international power users — like, non-U.S. users will be creating a compelling (product), like, in every asset class in the world. Most of it doesn’t trade just through vanilla, as bond markets mostly trade through some amount of futures or derivatives or financing or margin or leverage or structured products or something like that. Those are, by and large, not available in the United States today. So that’s one piece of just continuing to grow that out, as a second piece: being able to grow that out in the United States and being able to offer the same level of liquidity and depth in the market to U.S. users that’s currently being offered offshore.

And so, like, today, you know, 95% of volume in this space happens offshore. And you can guess where the most liquid markets are — they’re offshore. And what’s the reason for that is … that you need to start to price. You need futures in order to bring that depth of efficiency and liquidity to a marketplace. And so that, and when you look at institutional demand, you’re going to be looking for what is the most liquid, deep market in the world if they want to have real money in this space, right? And so I think — and consumer side, right, you know — I think it’s super-important. 

These are all going to require the same thing at its core, which is a federal regulator to oversee the marketplaces in the United States. That is the single biggest thing that’s missing. And we — I think, frankly — we would be super-happy for any reasonable regulator to be our regulator to oversee our activities, to be the license and registration entity and, you know, to enforce what they think is appropriate on our platform (and in) the industry more generally. I think, obviously the SEC (Securities and Exchange Commission and the CFTC (Commodity Futures Trading Commission) are sort of the two market agencies in the United States. And when you look — at, especially at … the futures side and the sort of commodity asset side, so putting aside security tokens and things like that, you know — the CFTC has been a regulator for crypto futures, and we have an amendment before them to activate our U.S. futures platform.

And I think that that’s by far the key thing that’s necessary to protect American consumers, to protect systemic risk, and to bring industry onshore — to give institutional access, to have federal regulatory agencies start to license precious or fee platforms in the United States. That hasn’t happened yet. We’re optimistic that that will start happening, and we’re really excited to work with them to get there. I think that by far the single most important thing to make the industry safe and effective is for the CFTC to start granting, and to be given, the green light.

Lau: So is that the play in Dubai for you?

Bankman-Fried: So, I mean, that’s going to play in Dubai and a number of other places, if you look internationally. We have a licensed exchange in Dubai. We also opened in Japan, with Australia, in Switzerland, in Cyprus, Gibraltar, the Bahamas, obviously, and we’re applying in a number of other places as well. And so (it’s) much, much different from two years ago, when almost no jurisdictions had registered or licenses and anything. At this point, we’re starting to see some jurisdictions come out and issue those licenses and oversee this space. That’s helped the international market start to move in the direction of growing and maturing. I would love to see that happen in the United States, as well. I think it’s extremely important.

Lau: So, from the regulatory front — last question to the social culture … all that combined. Elon Musk buys Twitter … going to take it private. What are your thoughts? 

Bankman-Fried: I mean, excited to see what happens there. I think there’s a lot of things that can be done with the product — that can be done with it both from the perspective of great user experience, but also from the perspective of the being an important ‘town square,’ and, of course, I don’t know what’s going to happen there.

Lau: It’s a very big, very important part of crypto conversation.

Bankman-Fried: It is, and frankly, it’s a more general conversation. It’s one of the most important platforms in the world when it comes to discourse on a number of different topics, so really excited to see how that develops.

Lau: Another important platform right here on Forkast. And it’s great to see you. Thanks, Sam. 

Amy Wu, it’s so great to have you here, because I feel like you’re one of the construction workers in this ecosystem, and you’ve been granted US$2 billion from FTX ventures to actually pick and choose what an ecosystem looks like, and I think that’s an incredible platform to be talking right now.

Amy Wu: Yeah, I feel super-lucky to be here leading the fund, and I love this analogy, the construction worker, because that’s literally how we feel — that we’re builders ourselves with FTX, and we’re investing in builders and we’re playing an active role in helping drive mainstream adoption of crypto and blockchain today, and just working hand in hand with these builders.

Lau: Talk about your experience. I mean, you come with incredible experience … grew up in the media space … being part of the team that spearheaded some of the biggest deals that we saw there … came from the discovery space and then founded ApeCoin DAO. How did that actually happen?

Wu: Yeah, so before I came to FTX, I was a partner at Lightspeed, and I covered crypto and gaming, and then my fascination (grew) with the NFT space and also just consumer internet. First, I’ve been investing in consumer internet for a number of years and have also operated there as an executive at Discovery, and NFTs are so fascinating because they’ve clearly captured mainstream interest of the population, and that’s how consumer trends start. It’s not necessarily that the technology is the best, but you’re sort of capturing the zeitgeist and culture, and that’s absolutely what’s happened with the Bored Ape Yacht Club NFT collection, for example — like, the most popular collection in the world right now. And I got to know the team some months ago, and the community was thinking about, like, launching the ApeCoin DAO, and, so, I was asked to join the board of that, and was totally thrilled to, because it is — it was at the time, and it is now — one of the most visible experimentations in decentralized autonomous organization governance of one of the most valuable IPs (intellectual properties) right now in the Web 3.0 space.

And so, I joined a couple of months ago along with Yat Sui, the founder of Animoca … also Alexis Ohanian, founder of Reddit … a couple of others. And we’ve been working pretty much on a daily basis in helping set up with, along with the community, the DAO, the governance structure, helping shepherd the first proposals to sort of, like, set up an ecosystem where we could give grants, the community can approve grants, etc., to build on top of the ApeCoin community and specifically the ApeCoin token. And so, it’s been challenging, it’s been rewarding, it’s early, still, in the process. The challenging part of working with the DAO is that everyone, the community, has a voice, and they can take it publicly on Twitter, whether you’re involved with the project or not involved with the project, for example, like ‘Cobie’ CryptoCobain has done. And so, putting yourself out there is uncomfortable, but also just thrilling, given how innovative the space is right now.

Lau: So when it comes to a DAO —  that social zeitgeist — how would you explain it … is this a democracy? Is it, you know, a new channel to integrate with your core audience in a meaningful way so that they spend dollars with you? Like, what is it in terms of the value proposition that maybe the old world needs to understand?

Wu: A DAO (was) popularized as a pre-popular concept in Web 3.0 for a couple of reasons. The first one is a legal one. There’s very little hardline sort of guidance, from a regulatory perspective, on tokens and the securitization of that. And so, therefore, a DAO is a safer way of bringing a token to life, for example. And that’s the first reason why they’re really popular. But also in Web 3.0 is this ideology of decentralized governance — ownership to the community, power to the community and empowering them. I would say that the community is literally voting by participating in buying tokens. Your vote is correlated with how many of the tokens that you own, and then you’re essentially applying your vote to that. And sometimes the decisions are actually carried out on-chain directly. In terms of the difference in DAOs, they don’t mean anything other than a group of people coming together in pursuit of essential passion.

Lau: So what’s that thinking now? You’re on the inside, you’re leading the FTX venture fund. You’ve got money to spend. What’s the architecture that you’re trying to build, the infrastructure that also incorporates this new thinking into what you’re trying to build out?

Wu: We at FTX Ventures — we’re excited across crypto and Web 3.0 innovation right now. We’re really excited to back generational founders with vision. We also very deeply look at the underlying blockchain technology and really understand today there’s, let’s say, tens of millions of people that own a token, trade tokens, maybe, and far fewer than that are actually actively engaging in blockchain applications. But in the future, when there’s hundreds of millions and billions of people interacting with that, with applications that need to run a million transactions per second on-chain, does that blockchain actually scale? We look very deeply at the technology. And so we spend a lot of time actually in infrastructure and developer platforms, and we both are actively participating in these blockchain ecosystems by ourselves building applications on top of them and primitives on top of them, and also looking for innovative applications to build on top. 

Lau: Where are we in the life-cycle of this house that we’re building?

Wu: I love that question. I’m going to paint an end-state picture. So, today, like, let’s say you live in New York City. You wake up in the morning and you’re essentially, like, picking up your Uber app and you’re taking an Uber to work, and then you’re maybe, like, ordering on DoorDash, like your meal of the day. So, notice that in none of those circumstances, none of those times, am I, the user, thinking, ‘Oh, and let me … let me boot up my JavaScript application running on Post Press, right, etc.,’ and all. Similarly, it’s about these killer apps with great utility or entertainment that … have completely abstracted the infrastructure layer for a user. So that’s the end state, and we’re not there today. Like, today, we’re actually building the infrastructure layer of the blockchain.

Lau: You’ve got to invite the capital in, as well. I mean, this is why we’re also seeing this space grow explosively, because now the institutions and the traditionals are coming into the space because they say, ‘I can’t not.’ This is a very bullish environment right now, despite what’s happening.

Wu: It’s very true.

Lau: The macro economy and all of the pressures that we’re even seeing in the venture capital space when it comes to more of that speed … Why are people bullish about this space? 

Wu: At a high level, many investors believe that blockchain technology is essentially as large of a paradigm shift in technology as mobile has been in technology. And so, therefore, in my lifetime, this is the biggest potential technology shift. That’s why you see all of the capital flooding into the space. It started with crypto-native funds, and then it was crypto hedge funds coming into venture, and then it’s institutional investors coming into venture, etc., etc. There’s so much capital in the space, and that’s led to very high valuations — like, very high valuations, I would say — given to strong and less strong teams alike. That’s driving some challenging dynamics in the space and also alignment of interest on both sides: the investor that’s going to potentially build with you, a strategic investor, and the team itself. 

Lau: Well, in the way that you’re connecting buy side to sell side, we connect buy side to sell side on the knowledge level. But there’s a huge knowledge gap.

Wu: There is a huge knowledge gap. Yes, there’s a gap actually in, for example, what’s a Flatiron School for Web 3.0? We need educational protocols and projects to help onboard. So right now, let’s say, there’s maybe 200,000 blockchain developers building. We need to bring, like, 5 million developers or 10 million developers around the world into blockchain eventually. And so how do we train them? How do we get them comfortable? And we start on the developer side, but then there’s also marketers and product people, and then go-to market talent, and we all need to bring the No. 1. One of the biggest challenges for blockchain companies, actually, is recruiting talent. And so there’s education in terms of bringing these people in to build. There’s also, of course, education around a user — whether you’re buying a Bitcoin for the first time … where do I do that securely?

Lau: You know, it doesn’t matter how influential you are. We talk to our readers, some of whom are running funds, US$2 billion of assets under management, and they want to get into the space. They’re on that same knowledge level as the high school kid who’s got like US$1,000 and is ready to get into the space. They both want to know their influence and impact — very different, but they’re on the same grade level. 

Wu: I was told by a CEO of a Fortune 500 company that in no industry has he seen more information asymmetry than in blockchain and crypto. It truly is, like, depending on who you talk to. First of all, a lot of people have self-interest. They’re holding some token, and so they’re going to be selling that. And so we spent a lot of time with education — both Sam and other people at FTX and myself — and it starts off with just trying to explain in layman terms like, ‘OK, here’s your end business school, all right, here’s the different steps you can take to get there, here’s the limitations of the technology today, here are the different players in the ecosystem, pros and cons of them.’ And we really try to lay it out in as neutral of a point as possible, and that was the purpose of the Crypto Bahamas (conference), as well. 

You know, we didn’t call it (an) FTX conference for a reason. This was meant to be an interdisciplinary coming together of thought leaders in exploring, and exploring their curiosity (about) crypto and Web 3.0. And so … I think we’ve gotten pretty close to that with our first conference. We’ll do better next year, as well. But that really is the purpose here — that we kind of take a bit of a back seat and we let the thought leaders talk to each other and learn from each other.

Lau: We’re veterans in media — you on the deal side, us in front of the camera and building our own thing. But we’ve been in the space for a while. It’s changing fast. The old guard, even, is changing, and now everything’s happening on Twitter. Your thoughts on how that’s changing the crypto conversation and even, you know, how social media platforms like Twitter and Elon Musk’s, you know, obvious influence there in the crypto space as well? How is that all kind of coming together for you?

Wu: Well, I mean, yeah … all eyes on Elon and whether he’s going to acquire (or if) actually the deal will close and what he’s going to do with Twitter if so. And, of course, the loudest voices and the community of crypto has taken to Twitter as the social network of choice. 

Crypto Twitter is the metaverse, also, as in, people have made friends, built businesses, made business relationships with completely anonymous accounts. Like, I’ve done deals with people — I have no idea who they are and I’ve met them on crypto Twitter. I’m, like, this is literally the metaverse, which is incredible. And so, that’s why we in the space have a tremendous amount of interest in what Elon’s going to do with Twitter. If he takes the helm there and he gets on a soapbox and he wants to understand and make sure that this most influential news platform in the world, essentially, is not censored, right? Like, and that’s, like, the thing that he really wants to … like, freedom of speech and removal of censorship. And it turns out that, actually, blockchain can really help with that, because, hypothetically, if you can imagine that every message and tweet on Twitter actually is stored in some fashion on the blockchain, maybe the front-end interface of Twitter, you don’t actually — the user doesn’t — see all of that. However, if anybody actually wanted to know if Twitter or anyone deleted a tweet from an important, influential political figure and there, and thereby, you know, engage in censorship, you can actually see that on-chain, because every single interaction could potentially be stored on-chain for somebody to query and essentially bring up, like, that essentially solves, like, Elon’s censorship question. And we think, like, that’s an incredibly exciting solution for this problem.

Lau: Amazing to talk to you, Amy. Thanks so much.

Wu: Thanks so much for having me on.