Michael Moro: The Institutionalization of Crypto

Anthony Pompliano
Sep 14, 2018 · 36 min read
Michael Moro, CEO Genesis Trading & Genesis Capital

The following is a transcript of a conversation between Anthony Pompliano and Michael Moro where they cover crypto market infrastructure, how Genesis grew so quickly, what OTC trading is, and when institutional money will enter the market.

You can find the recording here: Off The Chain: Anthony Pompliano and Michael Moro

Anthony Pompliano: 00:00 All right, guys, here with Michael from Genesis Trading. How are you doing today?

Michael Moro: 00:05 Not too bad. How are you?

Pomp: 00:06 Awesome. We got a lot to cover today, but before we dive in, I think, probably, lots of people know about Genesis and some of the stuff you guys do but might not know as much about you personally, so maybe we could just start with your background, and then we can get into how you first discovered crypto.

Michael: 00:23 Sure. I am a reformed investment banker.

Pomp: 00:27 Awesome.

Michael: 00:27 Right out of college, I did seven and a half years at Citi in the financial institutions group covering finance companies, banks, and credit card companies. Then I left Citi in 2008, and that’s when I met Barry, Barry Silbert, the founder and CEO of Digital Currency Group, who was running a company called Second Market at the time. This is right at the onset of the financial crisis, and a lot of financial assets were becoming more and more illiquid. I joined up with him in the fall of ’08 and started getting involved in the illiquid asset-backed securities and the toxic assets that came about as a result of the financial crisis.

Michael: 01:15 Then one thing led to anther. Second Market got involved in crypto in … late 2012 is when we really started to study this base, and we opened up our trading desk in 2013. How did that all get started? That was all Barry. Barry, I think, personally discovered Bitcoin in 2011, spent about six months being a non-believer to a skeptic to a believer to evangelist. He completed that whole cycle in 2012, and then he wouldn’t stop talking about it in the office, and so we said, “All right Barry. What’s Bitcoin? Let’s chat about it.” At the time, we were making a market in all kinds of funky, illiquid, esoteric, off- the-rhyme financial assets. He said, “You know what? Bitcoin’s another one.” It trades like a lot of the other things we were trading at the time, and so we said, “Okay, let’s do this.” This was March 2013.

Pomp: 02:12 March 2013, you guys get the confidence, “Okay, let’s jump in and start making a market with Bitcoin,” right? What was, at that time, the concerns that people were voicing even though you guys were going to do it?

Michael: 02:25 It’s a few things. One, we were starting from scratch. The one thing we did have was Barry’s Rolodex. He had made a lot of contacts early on so he knew, really, a lot of the early adopters. What we really didn’t have were the investors or the buy-side demand. You had the guys that owned Bitcoin for like a dollar, right? What you didn’t have was the traditional institutional capital ready to step up and be the other side of the market so, one, establishing a Rolodex ourselves of the buy-side guys.

Michael: 02:59 Secondly, I think there was a lot of questions around money laundering, AML, KYC. Second Market is a broker-dealer, so we’ve always had the SEC and FINRA overseeing all of our AML, KYC compliance, but Bitcoin is just another animal, right? Fixed income compliance is entirely different than banking compliance, and so there was a lot we had to get comfortable ourselves, as well as our regulators, to prove to them that we knew what we were doing. Thirdly, I think a lot of the infrastructure that exists today simply, obviously, weren’t there, right? Even simple things like trying to do the Bloomberg equivalent and having a trading terminal getting up and going, simple things like how do we set up wallets? The Xapos and the BitGos of the world that are dominant today really were just getting started back then, and so trying to figure out how to properly store your Bitcoins, those types of things. Things you never had to worry about in the securities world were big issues, and so I think those were some of the biggest things.

Pomp: 04:10 Yeah. It’s interesting because, as much as things have changed, they’ve kind of stayed the same, right? There’s still conversation around compliance, anti-money-laundering, KYC. There’s conversation around infrastructure for institutional-type investors and is it high quality enough? How do they use this stuff? It feels like we just have moved that conversation down the road and up to the institutional level now but, really, what you’re describing is it wasn’t even there for retail, right, in 2013?

Michael: 04:41 We used to have individuals show up at our office with a suitcase full of cash wanting to buy Bitcoin-

Pomp: 04:50 Wow.

Michael: 04:51 … that would provide no driver’s license, no identification but, “Here’s my proof of funds,” and they’ll open up their briefcase. That world, obviously, that was 2013. We don’t have that issue anymore, and so a lot of the issues that we’re trying to tackle right now are actually much higher quality problems than we were trying to solve back in 2013. I would argue that we’ve come so far from where we are, but the market really expects how the equities world works and how the commodities world works and … but that took decades of evolution for it to get to today. Crypto, this has really been mainstream for a couple of years, and I’d argue that having futures products on the CME and the CBOE, that was unthinkable back then, and so I think about all the progress we’ve made rather than everything that’s still missing.

Pomp: 05:45 Absolutely. Walk me through … because that’s a interesting anecdote, right? People are showing up to the office with suitcases of cash and just, “Let me buy Bitcoin.” What’s their psychology or what’s driving them to do that? There was no exchange infrastructure for them to use? They didn’t trust the exchanges? They’re doing nefarious activity? Why are they walking in with cash trying to buy Bitcoin?

Michael: 06:08 I would argue that it’s probably a combination of both. When we first started, there were really two exchanges. You had Bitstamp that was still in Slovenia, and you had Mt. Gox out of Tokyo. If you really wanted to buy a bunch of Bitcoin, you were wiring money to a foreign country and just keeping your fingers crossed that the funds get there, right? Here we were where we were … we had an office. You could actually walk into our office and talk to us, which I think was a separate experience for a lot of people.

Michael: 06:39 I still think that there was certainly a level of … I don’t want to say Silk Road level of nefarious activity, but there were certainly lots of questions, if not red flags, certainly strong, strong yellow flags that were raised. Frankly, we were caught off guard back then because we didn’t really know what kind of reception the market-making stuff would actually take. Obviously, we didn’t end up onboarding any of these people that walked in in person, but it certainly raised the compliance profile in the program as a result.

Pomp: 07:14 Absolutely. Well, and it forces you to address it, right? There was probably a bunch of questions you hadn’t been asking that, all of a sudden, you started asking, and then two is it probably accelerates the build out of your own infrastructure, right, because you go, “Hey, we need to stop people from walking in the office with cash”?

Michael: 07:28 Yeah, there’s no question. I think crypto security is one thing. Physical security was quite another, so I think that it certainly introduced a new dimension to the way we need to think about our operations, certainly when we started doing the crypto things.

Pomp: 07:42 Very cool. Okay, and so let’s go from … this is ’13 or so up through ’14, ’15 into maybe even ’16. How does Genesis evolve over time, right? You guys started with just Bitcoin and pretty much just helping people buy Bitcoin, right, to even today, you have a multitude of products, different assets, et cetera. What does that evolution look like?

Michael: 08:06 In the late summer, early fall of 2013, Grayscale, our sister asset management company, launched the Bitcoin Investment Trust, so early on in 2013, we were just helping to put investors into the trust by buying the underlying tokens. As you might imagine, the earliest investors were sort of the West Coast, the VC guys, guys who understood the risk-return profile of 1,000X or zero because, frankly, that’s what all of their VC investment return profiles look it, and so they were the first guys to ultimately get in.

Michael: 08:42 Obviously, you recall, in 2013, what happened to the price of Bitcoin starting in the early fall into the end of the year. I think there was a lot more media attention, and press started to sniff around in the asset class when the price of Bitcoin went from $90 to whatever, 1,200, $1,300 that we saw in December.

Michael: 09:08 Early 2014 was the Mt. Gox event, and I remember being in the office. We had an emergency meeting one Saturday, and we were trying to think through, okay, Mt. Gox just announced their hack and all of that, and what are we going to do? What’s going to happen to the price of Bitcoin? I think all of us were like, “I think this might go back to the $50, $60 price of Bitcoin before the crazy run,” and we were trying to think through a strategy. What can we do to get out in front of this, et cetera?

Michael: 09:46 Then it didn’t happen. We didn’t see the price dip back down to the $50 level, but 2014, 2015, they were lean times. The institutional interest, I think, that had started to look into it just entirely got on the sidelines, and I really couldn’t blame them, right? You had the biggest exchange. Was it hacked? Was it an outside job? Was it an inside job? How much of it was manipulated? All that kind of things, and I think I threw a lot of those into question, and so even into early 2015 you saw the price of Bitcoin hovering around the $200 level, and the lack of volatility … Bitcoin became a lot less exciting, right? It became boring for a lot of folks. I think, for a time, a lot of the momentum that you saw in the fall and in winter of 2013, I think, certainly dissipated by the time early 2015 came around.

Pomp: 10:48 It’s interesting because, obviously, earlier this year, 2018, we saw this big draw down in the market, right? I think that there’s two camps. Some people say, “Hey, we’re going to … It could fall further, or we’re going to stay sideways for a while.” Some people think that it’s going to race back by the end of the year. It sounds like, during that last bear market while the draw down wasn’t as long as you expected, it was quite … From a timeline perspective, it did persist for a while, right? Do you think that there’s an element of it persisted for that long because people had to forget about the parabolic run and the following draw down, or do you think it was more technically driven around infrastructure getting built and hash rate and things like that?

Michael: 11:33 I think it’s probably a combination of both. I think when you look back to 2014, 2015 years, obviously, lots of questions around how you could even do a fundamental analysis of Bitcoin, right? There’s no book value. There’s no earnings. How do you get your arms around it? I think one of thing that people look to is where is the infrastructure? Certainly, while it was hard to … It was probably really difficult to justify a $1,000 Bitcoin price in 2013 given the lack of wallets and lack of any trading platform. Banking support was kind of here nor there, lots of questions about money laundering, all those types of things, I think, and the price of Bitcoin clearly ran ahead of itself.

Michael: 12:20 What I think what it forced the crypto space to do was retrench a little bit and actually really just build and really forget about the overnight, get-rick-quick type of mentality that I think a lot of the investors may have had in even 2013, which obviously repeated itself in 2017, but I’m sure we’ll get to that later. I think it really focused the industry to say, “Okay, there’s potential here, so let’s build the product, let’s build the services, and let’s elevate this thing from Bitcoin 1.0 to a next level and see where this takes us.” I think those couple of years were absolutely necessaries because the price stopped being a distraction, and it just really focused … got your mind to just focus on building the business.

Pomp: 13:05 Absolutely. This really takes us into ’15 and into ’16, right, and it goes from a Bitcoin-only world to Ethereum and all of these alt coins, ICOs, et cetera. From where you guys were sitting, at that point, having been so early in building infrastructure for Bitcoin, what does that look like? What are you guys talking about at the time? What are the concerns, or are you excited about these alternative assets popping up in the space?

Michael: 13:34 I think we’ve always imagined a world in which multiple tokens would certainly exist. I don’t really think that anyone thought that Bitcoin was the one and only. I think when Ether came around, I think, initially, we had a difficult time to just get our head around what it was meant to do because I think, from a design on specs perspective, it was just so different than Bitcoin. Bitcoin’s very narrow in what it’s meant to do, whereas Ethereum was exactly the opposite. It was so wide in terms of possible applications and uses via the smart contracts. Obviously, the way that Ether came about, then it’s funding mechanism was certainly interesting and sort of the first-ever ICO, right, being purchased just for Bitcoin. I think that certainly opened up our mind, certainly, as the possibility is what’s possible in a truly crypto world. I think all of the ICOs that have come upon afterwards and in the aftermath of the Ether stuff are certainly exciting. I think there’s fantastic projects. I think there’s a ton of potential for some of this stuff.

Michael: 14:48 On the other hand, I do think that that market clearly got overheated. I think the ICO market, there was a truly kind of a disconnect between traditional VC guys who said to me personally that these projects would have a hard time raising $1 million of traditional VC funding, and they’re raising 30, 40, $50 million in two days, right? There’s certainly a disconnect there, or whether or not VCs are really that bad, and they’re just way too strict in what they’re valuing, or there’s a lot of, quote, unquote, dumb money being thrown at these projects. We stood on the sidelines just trying to figure out what really is happening because there was a ton of noise, certainly, last year.

Pomp: 15:38 Absolutely. That brings me … Let’s go ’16 into ’17 and even til today in ’18. What does the business look like today, and what do you offer to clients across your different lines of business?

Michael: 15:55 Let’s touch on Genesis Trading to start with. From an infrastructure perspective, we’re now market making eight or nine different tokens. Our decision to add tokens are entirely based on investor demand, so we’re institutions only. Our average trade size is somewhere between half a million to $1 million right now, and so, unlike the exchanges that do thousands and thousands of transactions, we’re much more smaller in terms of trades per day but we’re doing anywhere from, call it, half a billion to $2 billion dollars a month in terms of total OTC volume.

Pomp: 16:34 Wow.

Michael: 16:35 It’s still mostly Bitcoin. I would probably say 75% of our volume is Bitcoin right now. Number two varies month to month. XRP, huge January, as you might possibly imagine, so they occupy the number two spot, but it switches, but most months it’s probably still Ether is probably buying me gas. We offer just the two-sided market, and we just recently hired an overnight trader to cover Asia hours, so we have a guy that’s doing that at 2:00, 3:00, 4:00 in the morning, which introduced a new market for us, so I think that’s been a really interesting addition to our service.

Michael: 17:21 Then, in February, we launched Genesis Capital, which is our lending business. We’ve had small pockets of demand for crypto borrow over the years, and we’ve always run it out of our broker-dealer, taking some of the Bitcoins and Ether that we owned on our balance sheet and lending them out. We realized that this was a true opportunity because, one, I think it’s really important for the market growth to have a two-sided price discovery possible. In a long-only market, I just didn’t see this, the institutional money being able to come in if the only thing you can do is just buy. Then we also said, “Hey, it’s a fantastic-”

Michael: 18:00 And we also thought, “Hey, it’s a fantastic sort of hedging tool for investors.” They may own crypto elsewhere that want to take a short position and kind of hedge your exposure at one point without selling their initial purchases.

Michael: 18:15 Two, I think the growth in the future’s market has sort of seen futures market makers come to Genesis Capital to get a borrow on the spot market, because as you’re taking action on the futures side they’re able to hedge instantly on the spot market via a borrow.

Michael: 18:31 Then, we’ve had guys who just wanted to outright short it, that had no long position, that were happy to sort of take a calculated, naked short bet that either this thing is zero or close to zero, and that over time this thing will actually play itself out.

Michael: 18:48 We launched the business with about 20 million in loans in February. I think right now we’re about $125 million [inaudible 00:18:55]. It’s sort of our overall loan portfolio. I think we’ve originated about a quarter billion of loans so far, so demand is there.

Michael: 19:05 The fantastic part about it is that we’re really only lending to the best of the best. Again, we’re not facing individuals. These are all hedge funds, sort of institutional accounts. We’re doing the credit work. Plus, they’re posting U.S. dollar collateral against kind of loan positions we’re making.

Michael: 19:21 It’s been a fantastic sort of new service addition for us. It allows both sides, [inaudible 00:19:26], to actually put on a position in the spot market.

Pomp: 19:30 Absolutely. No, it’s fascinating too to go from 20 million to about 125 today, got that $250 million or so in kind of total loans. Is this all in Bitcoin? Bitcoin and [Ether 00:19:43]? What’s the kind of disparity look like given what you see on the [OTC 00:19:47] side? Is it similar?

Michael: 19:49 It’s interesting. We get fantastic kind of market color. We’ve seen in 2018 so far sort of price resistance in Bitcoin in the high fives, some around the 5,800 level. We’ve had guys who initiated short positions kind of in the 7,000 area. Then, for … Because they feel some level of resistance on the price, close out their shorts somewhere around the 6,000, 5,900 number.

Michael: 20:18 We’ve had guys kind of do a rinse and repeat, have the price kind of come up to the 7,000s, innate the short right back down, about that’s where they close.

Michael: 20:26 When [inaudible 00:20:27] kind of talk about, hey, I think we’ve seen the lows of the year kind of come in, it’s actually playing out that way in the loan market because no one keeps their loans outstanding for very long once we kind of hit the high fives.

Michael: 20:40 [Ether 00:20:40], there really isn’t a bottom. I don’t have that sentiment for [Ether 00:20:45]. That’s just kind of the way data is kind of playing itself out. We don’t have guys that try to play the … I think there’s resistance around the 275 level, so they’ll short their way down from 300 down to 275. I think there’s plenty of people that will kind of keep their loans outstanding on [inaudible 00:21:04] for a lot longer than that.

Michael: 21:06 That’s actually playing out on the [OTC 00:21:09] side, too. The last two weeks priority to this run right now into the mid-7,000s, we couldn’t find a Bitcoin seller in the low 6,000s. We’ve had some buyers, but very, very few sellers. There was no [inaudible 00:21:21] sellers.

Pomp: 21:23 Wow.

Michael: 21:24 [crosstalk 00:21:24]. We could’ve sourced a ton of [Ethereum 00:21:26] if there was [inaudible 00:21:27], right? People talk about price decoupling and Bitcoin and [Ether 00:21:34], which kind of traded on path with each other for quite some time. I think we’ve already kind of started to see that.

Pomp: 21:40 Yeah. That’s super fascinating. If you started the business in February, this is kind of initial draw down had already been initiated, right? How much of the shorting that happened maybe December, January timeframe was volume that you saw and that drove the decision to get into the lending side, or you were already kind of planning on doing that and then it … The timing just worked given the market conditions?

Michael: 22:07 I wish I was smart enough to kind of predict it in December and January that this is the way it would play out, but we really just made the decision bout over a year ago now. This was in early 2016 where we said, [inaudible 00:22:22] 2017 rather, where we decided to launch Genesis Capital.

Michael: 22:25 It’s an idea that we’d been kicking around kind of internally and said, “Hey, one day is going to be kind of the right time to do it.” Myself and the board kind of decided that early 2017 was kind of the year in which we were going to try this.

Michael: 22:38 It obviously took six or nine months to kind of hire some folks and kind of build the infrastructure and kind of plan the launch of the business, but, yeah, February just happened to be when we were ready to go.

Pomp: 22:49 That’s awesome. Okay. Obviously you guys are very well-versed in kind of liquid cryptos, cryptocurrencies, and really kind of participate in maybe the top ten or so kind of liquid cryptos. One of the things that a lot of people have been talking about is tokenized securities, right? Kind of these tokens that are backed by stocks, bonds, currency [inaudible 00:23:17] commodities, etc.

Pomp: 23:19 One of the show’s sponsors is [Block Estate 00:23:22], [inaudible 00:23:22].com. They basically created this equity token for real estate, right? Before the show we were talking that you just bought a home, right?

Michael: 23:30 Yes.

Pomp: 23:32 The thought process would be rather than you signing all of the paperwork, etc., you could actually own a token that represented ownership of your home, right? How do you guys look at these equity tokens or these asset-backed tokens in light or your business and then the overall ecosystem?

Michael: 23:50 I think one of the things that we are still kind of trying to figure out is if these are technically securities, and if they are then they would be obviously under sort of [SEC 00:24:00] [inaudible 00:24:00] oversight and kind of purview. I think there’s a lot of questions and guidance that kind of needs to be put out by both regulators about how we should think about trading these assets, how … Who’s going to be the custodian of these assets, right?

Michael: 24:18 The traditional crypto guys are not qualified to be [inaudible 00:24:24] custodians, so that’s when Northern Trust is building something, it’s possible that Goldman Sachs is going to build something. There’s kind of been rumors in the press about both of these guys.

Michael: 24:34 It’s kind of getting the traditional [inaudible 00:24:38] custodians in place, I think, is a key, key determination of how it happens. Now, personally on the tokenized real estate front, yes, I did just buy a house last week. It was a painful process in terms of the closing. It took about an hour and a half of just signing my life away. Could this entire process have been a lot more seamless by having real estate on the block chain? 100%. The deed just kind of is on the block chain. It’s sort of provable, and then when it’s time to sell the house I just transfer the deed assets over to another address. I think there’s a lot of efficiencies that can come about, but I think it really kind of depends on what the regulators kind of sit on this.

Pomp: 25:15 Absolutely. It’s interesting too because if all of a sudden you get these asset-backed tokens, right? Whether it’s [OTC 00:25:22] trading, lending, etc., it opens up a world of possibility, right? Because today you’re basically doing this, with Bitcoin for example, a digital currency, but imagine if you could do it with every asset class, right? It’s fascinating to think about in the … For those that want to learn more about block estating, blockestate.com.

Pomp: 25:41 Okay, so let’s talk about the broader ecosystem for a second, right? What is the part of crypto that you find most fascinating or interesting that most people don’t talk about?

Michael: 25:53 I think one of the things that I try to find really [inaudible 00:25:57] kind of interesting is how everyone, and I don’t blame them for doing this, but I think everyone is trying to fit Bitcoin and block chain crypto into an existing bucket in terms of the way they kind of analyze prices, infrastructure, fundamentals. That type of stuff.

Michael: 26:14 I think we’re really still trying to get our arms around how do you value this stuff? While there’s plenty of kind of theories and kind of valuation thought pieces kind of around the asset class, I still think the equity research equivalent of crypto is still sort of a work in progress.

Michael: 26:33 I am sure over time there will be sort of investment banks that dedicate entire equity research coverage teams to this space and try to come up with an industry consensus for how we kind of think about this stuff, but that’s still up in the air. Lots of competing thoughts about how to kind of do this.

Michael: 26:53 My hope is that some point the industry kind of come together and come up with a [DCF 00:26:58] or a market comparables or any of those types of things to kind of think about the right way to think about it.

Michael: 27:05 Then, it’s easier to kind of get your head around price targets, whether they actually mean anything or not. I do think that traditional investors will look to equity research equivalent sort of in the crypto space as they kind of make their investment decisions.

Pomp: 27:21 Yeah. A lot of it is I think is, one, there’s got to be some level of standardization, righT? When it comes to, hey, these are the things that we’re actually going to look at from a data perspective.

Pomp: 27:32 Then, two is the way that everyone interprets that data, right? You and I may look at, for example, a revenue multiple in the public markets and we may think that the company’s actually worth different things, but at least we agree that that is one of the data points that are important to valuing a company, right?

Michael: 27:49 I think that’s right. I think … There’s certainly plenty of controversy around just data generally and the integrity of the data. While I have no doubt that 2017, 2018 block chain data and Bitcoin, people can kind of come to a consensus around what the right data is. Go back to 2012. Good luck trying to get actual real data on Bitcoin back then, or even trying to figure out the hash rates of [light coin 00:28:16] from just a couple years ago.

Michael: 28:17 Those data is really kind of hard to come by. While I do think there’s kind of promising data projects, I think there’s still a lot of work to be done on data curation side before we even get to trying to figure out the right methods of evaluation that the industry can kind of rally around.

Pomp: 28:34 Absolutely. I mean, look, one of the things that happened that was … I think it was either end of last year, beginning of this year that just really didn’t get that much attention was when coin market gap switched up some of the data sources it was pulling in. All of a sudden, it wiped, like, $100 billion of market cap, right?

Pomp: 28:48 That was one of the kind of higher-quality reference data sources, so that immediately pulls in the question what is the quality of the data that they’re using and the data that they’re presenting to people? I think that that’s just one website, right? Across exchanges, data providers, etc., this is a huge issue.

Pomp: 29:10 Again, I don’t know if we’re really going to get to a solution, right? In the short-term, but I do think that getting to a point where there’s audits or valuation of data, and kind of consistency and accuracy, is essential to get these institution investors in.

Michael: 29:25 I think that’s right. This is, like, the unsexy stuff, right? This is the back office, accounting, finance operations work, but that’s really kind of what’s necessary to kind of move the spot forward.

Michael: 29:37 Frankly, there really shouldn’t be like as of, let’s say, midnight, 12:31, what was the price of Bitcoin? Right? I guarantee you the people in this room will come up with different prices because you’ll reference different exchanges or different [inaudible 00:29:51]. We really haven’t really agreed upon kind of the standard.

Michael: 29:55 Now, there are folks that’s trying to kind of raise their hand and kind of become that. Certainly the efforts that the [CME 00:30:00] has done, for instance, around the Bitcoin reference rate as they price their futures. The [CBOE 00:30:05] obviously has something kind of similar as a way to kind of get there, but I do think that industry consensus I think has yet to be seen.

Pomp: 30:12 Absolutely. Actually, let’s dive in a little bit how you guys use data on the [OTC 00:30:17] side. First of all, there’s probably plenty of people who are listening who actually don’t even understand what [OTC 00:30:21] trading is, so maybe kind of give quick two minute overview of what is [OTC 00:30:25] trading. Then we talk about how you guys use data.

Michael: 30:27 Sure. [OTC 00:30:28] trading is all post-trade settlement. As opposed to exchanges where you pre-fund the exchanges with either [fiat 00:30:36] dollars or Bitcoin or [Ether 00:30:38] or [light coin 00:30:38], whatever it is, we actually agree to a transaction first. This is the way all Wall Street sort of works in that you agree to a transaction first.

Michael: 30:46 All Wall Street also trades on the settlements [T + 2 00:30:50], so trade date plus two days. On the third day is when you actually settle the transaction.

Michael: 30:56 In crypto, things move a lot faster, so we’re much more sort of same- day settles. We’re much more, like, [T 00:31:02] an hour or two hours, kind of opposed to settlement. We agree on the trade.

Michael: 31:06 On the time we agree on the trade, that trade is actually agreed. Regardless of what happens to the price, up or down, we honor the trade and we expect all of our counterparties to do the same.

Michael: 31:16 If we’re selling you Bitcoin, we give your bank wiring instructions, you send the bank wire … The bank money to us, and then we just send you the Bitcoins to your address, and sort of vice versa. It’s a very simple, kind of straightforward process, but it’s much easier than trying to wait for the wire to hit any of the exchanges before you put on the trade.

Pomp: 31:38 Part of this is … The way that it works in practice, right? Is I can call you, I can message you. Whatever way I choose to communicate, and I talk to somebody who works at Genesis. We come to an agreement. I literally say, “Hey, I want to buy five Bitcoin,” and somebody on the other side says, “Okay, we’ll sell you five Bitcoin at x price.” Right?

Pomp: 31:57 Once we actually agree, that is where the trade is final in terms of price, amount, etc. Then, the settlement is actually what you just described in terms of the transaction of [fiat 00:32:10] or crypto trading hands. Right?

Michael: 32:12 Correct. The exchange is the settlement portion, but that comes after we agree upon the transaction.

Pomp: 32:18 Yep. The reason why somebody does this, right? One is either they want to get lower fees, right? They’re going on an exchange with kind of a large transaction. Two is they want to guarantee that there is some liquidity there, right? Kind of consummate the trade much faster. Are there other reasons why somebody’s doing that or are those the two main ones?

Michael: 32:38 I think the … Certainly the two that you mentioned, exchange slippage is certainly one thing, and we’re much tighter probably on a spread on a $5 million transaction, say, than some of the exchanges.

Michael: 32:52 The other thing that puts [inaudible 00:32:54] Genesis is kind of our highly-regulated status. For the institutional guys and their … They have limited partner investors who rely on the general partner, they don’t want any questions as to where did these Bitcoins come from? How do I know that a Silk Road guy didn’t own these Bitcoins three hops ago?

Michael: 33:14 They trust they are [AMLKYC 00:33:15] compliance process to kind of know that these Bitcoins were … That we’re vouching for them and that the questions around, hey, where did you get these Bitcoins from, from your auditor or from your compliance department. Oh, we got these from our broker dealer. It kind of ends the conversation kind of at that point.

Michael: 33:32 Providence of Bitcoins and kind of the crypto is certainly one of the value add of sort of facing an [OTC 00:33:39] desk.

Pomp: 33:39 Makes sense. Okay. Obviously if I’m somebody who wants to purchase via [OTC 00:33:45] and I call you guys up, how do you determine the price? Right? We talked a little bit about kind of the quality of data that’s out there. Are you guys going to one exchange, kind of taking a average of a couple of exchanges? How do you actually use that data to kind of get confidence around this is the price that we’re comfortable trading at?

Michael: 34:04 Our early technology partner is a company called [Trade Block 00:34:07]. [Trade Block 00:34:09] kind of helps power our trading platform at Genesis. They have an index called the [XBX 00:34:15], which takes into account the volume weighted average process across some of the biggest U.S. dollar exchanges.

Michael: 34:21 Our quotes are based off the [XBX 00:34:23]. We don’t try to rely on any sort of single exchange.

Pomp: 34:26 Yep.

Michael: 34:27 Because, as you might imagine, this is kind of less the case now, but a year ago, two years ago certainly, prices varied greatly kind of across exchanges. If we only looked at one exchange for market color you would’ve been off kind of what market was.

Michael: 34:43 I think the advent of a lot more sort of market makers and some of the high frequency guys kind of [inaudible 00:34:48] involved have sort of removed exchange [inaudible 00:34:51] opportunities, so prices are trading way more uniform across exchanges than they were in the past.

Michael: 34:56 We do rely on an index from [Trade Block 00:35:00] as far as how we think about kind of our quoting.

Pomp: 35:02 Got it. Yeah. The exchange [inaudible 00:35:04] was huge in even as early as … Or as late as last year, right? There’s people who are literally setting that up as their trading strategy.

Michael: 35:10 That’s 100% correct, but, like I sad, I think all of that is gone by now.

Pomp: 35:16 Got it. Okay. As we look forward, right? What do you think are the areas that people are not building in that are going to be either important or are going to become kind of the focal point as we kind of go into early ’19 and maybe even into 2020?

Michael: 35:36 Ultimately I think there are questions around the exchange infrastructure and how that kind of ultimately develops over time. Today, you have in the traditional markets, you have sort of the NASDAQ, New York Stock Exchange, which is the pure matching engine, but they actually don’t hold any equities or any money. They’re just matching buyers and sellers, right?

Michael: 35:59 Then, you have the [DTC 00:36:01] that kind of does the settlement aspect of …

Michael: 36:00 Have the DTC that does the settlement aspect of it. And then there’s a separate custodian, the State Streets and the BNY Mellons that are actually holding the security. So you actually have three different parties in the traditional world, whereas all three happens by the same company in crypto today. You fund Coinbase, they hold your coins, they hold your fiat, and they’re also the matching engine, and they’re also the settlement agent. So you basically have pockets of funds globally scattered. Is that really the way that this space ultimately evolves? It’s possible. Or will the New York Stock Exchange model, will a DTC get created at some point to help settle transactions. ’Cause I think one of the things in the OTC space is somebody still has to act first. There isn’t this concept of simultaneous settlement and DVP, delivery versus payment, that you see in this world. And traditional investors really aren’t interested, obviously, in taking that counter party risk. What if I send the money and you don’t send me the Bitcoins? Then what happens to me? And while that’s why you work with reputable counter parties on the OTC side, I think a lot of that concern can be alleviated if you actually created a DTC for crypto. But that has to be so trustworthy, so well-funded and it’s possible, but I think it’ll take a lot of effort to get there.

Pomp: 37:24 Can that only get built by a traditional financial incumbent?

Michael: 37:31 If you recall, I think the DTC was initially funded by the big banks. Certainly getting industry participants that help fund a group effort certainly goes a long way. ’Cause you have immediate buy-in from the incumbent participants to a DTC. Is it possible that the existing crypto guys can put funds together? Certainly. But if we’re really targeting the biggest hedge funds and family offices in the world, I’m a little bit skeptical that they trust an effort put together by a bunch of startups.

Pomp: 38:05 Just [crosstalk 00:38:06] crypto.

Michael: 38:06 I think they want to see some traditional money backing it to really give them a comfort level that everything’s on the up and up.

Pomp: 38:15 Yeah. Look, it’s something that we talk all the time. It’s, to an extent, Wall Street is the best thing that could happen to crypto. And on the flip side, it’s the worst thing that could happen to crypto, right? In terms of, Caitlin Long came on and she was talking about the rehypothecation of Bitcoin, and really attacking the core value prop of this scarce asset. Wall Street doesn’t really like scarce assets, right? So I think it’s a double-edged sword there.

Michael: 38:41 I think that’s probably right. But I think I would argue most, if not everyone, wants to see the price of Bitcoin going up to 100K, half a million, a million dollars. And I’m strongly of the belief that this doesn’t happen without Wall Street Involvement.

Pomp: 38:57 Makes sense. Okay, and something you said earlier was at Genesis, you guys just brought on the first overnight trader. Obviously you’re doing that to address or serve this global community. In the customers that you guys have coming to you, either on the OTC side or on the lending side, talk about the demographics. These are, obviously, higher-quality either borrowers or participants. But mostly domestic-focused, internationally, even … What does that really look like?

Michael: 39:30 I would say that today we’re still about 75% domestic here in the US. But it’s our international counter parties that are growing the fastest. Over time, I do expect the ratio to get closer to 50/50, if not flip upside-down entirely. But, like I said, I think a lot of the age of flow and the conversations that happen, we’re just scratching the first surface. I think that’s an exciting growth opportunity for us. The one thing we haven’t done is open up foreign offices. We’ve decided to go 24/7 out of New York for now. What we’re really realizing is that a lot of the liquidity is isolated in separate countries, especially in Asia. There’s a Tokyo market, a separate Hong Kong market. There’s a separate market in South Korea, a separate market in a bunch of different countries, and there really isn’t fantastic overlap across the countries. You have really siloed pockets of liquidity. And trying to figure out which country to set up an office and figure out what the laws and regulations … As well, just hiring. The upstart costs. We really couldn’t justify that. What we’re doing for now is trying to figure out where the liquidity is, where the interest is, and gather the data ourselves out of New York. And then we’re in a much better position to decide what to do once we figure out what the right market for that is.

Michael: 40:59 But at the end of the day, everyone’s trading on an email or via screen. They don’t really care where the traders are sitting. We really haven’t had push-back as far as from folks that say, “Hey, you don’t actually physically have a trader in Tokyo.” That doesn’t really seem to matter.

Pomp: 41:14 Absolutely. It’s funny that you talk about trading over email or screens. Obviously on Wall Street, that’s not how it’s done.

Michael: 41:21 Right. And somebody said to me the other day that Skype is the OTC backbone of the entire crypto industry. Because there’s so much done via messaging and video, et cetera. And it’s just fascinating. The infrastructure is not to the level yet of Wall Street. But, given that we’re ten years, less, into this, it’s actually quite a bit of infrastructure that’s been built and sits here today to allow you to operate on a global scale, all from New York City, with a number of different assets, both on the OTC and the lending side.

Michael: 41:56 What I think is also interesting, I think, is that you have to remember as a broker/dealer, we’ve been doing traditional securities for years before we got involved in crypto. We know how everyone, all the traders on Wall Street, use the Bloomberg chat function. Plenty of trades get agreed upon in Bloomberg chat. Then you just cut tickets on Bloomberg to make it formal. But a lot of negotiation, the back and forth, still happen over chat. It’s just that in crypto, we don’t have the active community on Bloomberg yet. I bet that’s coming. And really, whoever controls the chat really controls the audience. We kid around from time to time that somebody like Skype should just open up a crypto trading platform. And you already own the conversation. And I do think that’s a large part of actually who gets the transactions.

Pomp: 42:46 Yeah. It’s fascinating. All right. Let’s talk about a couple of the controversial things that are going on in crypto right now, and from your seat, what you guys think. Tether, huge back-and-forth as to whether they actually are back to one-to-one to the US dollar or not. What is your guys’ take, or even you personally in terms of how you see that playing out and any concerns there.

Michael: 43:08 Obviously, I think that the industry as a whole has a lot of vested interest in making sure Tether is fully collateralized on the US dollar. And I don’t really, I don’t have a view one way or the other if it is or not. But it has certainly spawned a whole host of other stable coins and currencies out there that I think Tether was first to market. And I don’t know whether other guys would have really jumped in if Tether could have been way more transparent about their books and records. I think that might have been a closed door to a lot of these companies. But questions and skepticism around Tether gave the opportunity for a lot of these guys to launch their own thing.

Michael: 43:51 I certainly think it’s interesting. But I’ve always said to my traders, I don’t want you guys trading 35 stable coins. There needs to be more of an industry consensus around one, two tokens maximum. And as these projects come on board and come online, and actually start trading, I’m sure it’ll be a market test. Whoever’s strong enough and has the most liquidity will end up winning and play itself out. I think there’s a lot of interesting things about the traditional asset-backed model versus some of the algorithmic models that’s out there, and may the best one win. But ultimately, it’s all about confidence. And whether or not the market really believes in the product that you’re selling. But that’s no different than crypto and people buying into the vision, white paper, what it’s ultimately trying to do. I don’t think it’s any different on the stable coin side.

Pomp: 44:44 Absolutely. No, I completely agree. Obviously, some of the people who are transacting in Tether, specifically, are the retail investors who are trying to go in and out of crypto or transact with some level of safety in terms of that value. One of the things that I think people are really pushing for is the participation of retail investors into just investing in general. We saw this with the ICO boom, where all these non-accredited investors could start to participate. Remains to be seen how regulators will come down in terms of was that stuff compliant or not. But recently, the FCC chairman said they’re looking at ways to get the non-accredited investors into more private-type opportunities in a compliant way, but still provide the investor protections. You guys are obviously dealing with much more institutional-type investors. Is it a thing where if there was the regulatory compliance and protections available, you think that you’d be able to go down-funnel and start to interface with more of those retail-type investors? Or is it something where, just from a ticket size, et cetera, it’s preventing you from going down?

Michael: 45:55 It’s certainly much more the latter. We’re just not set up from a systems operational infrastructure to be onboarding thousands and thousands of counter parties. We’re much more high-touch, white-glove service, and it’d be really difficult for Genesis, I think, to offer the same high-quality customer service if we had 100,000 users calling in at the same time to be able to speak to a Genesis representative. It’s much less about the accredited investor definition around suitability, for instance, than it is much more about, hey, that’s a market that the exchanges service very, very well. But it’s the bigger ticket guys are the ones where it’s worth it from a customer acquisition cost perspective to spend the time and effort to get on the phone, on-board, educate, because they’ll eventually trade through us.

Pomp: 46:48 Got it. No. It’s fascinating. Okay. And what about the legacy tech players? You’ve got the Facebooks, Googles, Twitters of the world. How do you see them playing into this? Facebook’s got their block chain team. They’re going after it. I don’t think Google’s really said too much other than they’re going to ban some crypto ads. Twitter, same thing. How do you see an audience in a crypto space who comes out of that tech industry for the most part, interfacing back with those tech incumbents?

Michael: 47:19 My hope is that the solution for any of these incumbents is not to create their own token. And they just hop on the backs of the Bitcoin or Ether or Litecoin. Pick one of the existing ones and not create Facebook dollars, the Facebook coin. But you’ve seen the way that Square has integrated Bitcoin into their payments platform. I do think that rather than creating Square coin, they went with Bitcoin as the future internet money, in the way that Jack Dorsey is currently thinking about it. I do hope that they figure out ways to reward content creators by letting them accept payments in whatever crypto currency of your choosing, without creating the additional friction of a Twitter coin. And having to make people buy whatever that token is. ’Cause chances are, the author is not holding on to the Twitter coin. They’re going to turn right around and sell it for a fiat.

Pomp: 48:25 Absolutely. It is … Facebook, specifically, I have contenders say, one of the greatest things that could happen to crypto is if Facebook gave everyone a digital wallet and somehow drove adoption of Bitcoin. I mean, I think that just the inflection point of two billion plus people getting to interface with this digital currency would be like nothing we’ve ever seen.

Michael: 48:48 I 100% agree, and I think that if you rewarded users who click on banners by giving you a little bit of Bitcoin in your Facebook wallet, just even without having to buy anything, I think just owning some gives you that incentive and the interest to follow it more. And I do think there’s a lot of creative ways to get more adoption, certainly at the consumer mass level simply by rewarding folks back in crypto.

Pomp: 49:17 Yeah, it’s awesome. All right. I got one more question for you and then I let every guest ask me a question. So think of a good one, there. What is the one thing in crypto that you believe that you think a majority of the people you know would disagree with you on?

Michael: 49:32 That is a good question. I’ll have to think about this one for a few seconds while I also simultaneously come up with a question for you.

Pomp: 49:43 The big intelligence test on this podcast.

Michael: 49:47 I think that the US will get their head around ICOs and that they … I will say that within 10 years, the US will not be the ostracized ICO market that it exists today. I do believe that regulators, while they certainly are scared, first and foremost, will get their head around the fact that if they don’t adopt, all of that capital formation and capital funding moves offshore. And I don’t think that’s in the best interest of the United States to let that happen. I do think that the US needs to continue to be a hotbed for startups and funding. And I do think that they’ll get their head around ICOs and that US will be a hotbed for ICOs within 10 years.

Pomp: 50:41 Yeah. I mean, look, I completely agree with you. I actually think that ICOs are just a different name for an IPO. It’s a funding mechanism or a capital formation event. And the only reason why it is different is because the current laws force it to be. But if we changed the laws, then they would look very similar. You could see a world where they say, “Look, you’ve got to report X information. You’ve got to have these disclosures. You can only raise capital from one group of people versus another.” It really is taking the wild west and just putting a box around it and saying, “Here’s the right way to do this stuff.” Now, very, very cool.

Pomp: 51:19 All right. What question do you have for me?

Michael: 51:22 All right. In the last 30 seconds, I’ve come up with one. Is … Ether is $275 today. Is Ether more likely to be $1000 or $10?

Pomp: 51:41 Everyone who’s ever come on here always asks me random questions about Twitter, et cetera. And you asking me about price is amazing. I’m one of these folks, who, when it comes to Ether, I do not think that it’s very analogous to Bitcoin, in terms of the deflationary schedule versus inflationary and the way that it’s used as a utility. I probably don’t have the confidence to say that it’s going to $10. But I do think that the mechanism in which it is used, especially that de-coupling that you talked about, of prices, it is much more likely to stay depressed according to where Bitcoin goes. And the thought process there is, you are incentivized to use what you are holding if you want to use the network. The macroeconomics of that forces a lot more downward pressure than, say, Bitcoin, where because of the deflation and, ultimately, the detraction, of the monetary supply, people are incentivized to hold, right?

Michael: 52:43 Mm-hmm (affirmative).

Pomp: 52:43 It is … The decoupling piece is really interesting to me. Because, at the core, they’re two separate systems, in terms of how the assets are both created, held, and ultimately, incentivized to use or not use. I think that it’s much more likely to go lower than it is to go higher, over a long period of time.

Michael: 53:07 Great.

Pomp: 53:08 Awesome, man. I really appreciate the time. This is fascinating. I think that a lot of people are going to get a lot out of the OTC trading and what you guys do. I appreciate you coming on.

Michael: 53:17 Thanks for having me.


You can find the recording here: Off The Chain: Anthony Pompliano and Michael Moro

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