The future of digital currency exchanges
Board Chairman, Jon Matonis, and Managig Director, Liza Aizupiete, both cofounders of Globitex spoke at the Cryptoeconomy Conference in London on January 26, 2018.
Jon: I want to start off by saying something about the three functions of money.
If anyone takes an Economics 101 class, the first thing you learn in monetary economics are the three functions of money. You have a store of value, a medium of exchange and unit of account. Those three functions are required for what economists refer to as a functionary monetary unit.
Now the confusion around it though is that they don’t all start at the same time. They don’t start with unit of account and go backwards, there is a specific sequence to these functions of money for it to evolve into a successful currency.
An example with Bitcoin was the first transaction, the famous pizza transaction which would be about a $79 to $80 million pizza right now. Actually it was two pepperoni pizzas. But that’s the current value of the Bitcoin that was exchanged for that transaction. It was a transaction from Florida to London.
The reason people take something in exchange as a medium of exchange is because they believe that it has value for them after they accept it. They may not want to hold it but they may want to exchange it obviously for something else. It starts with store of value which is the first state that you have to have for anything to evolve as money. Then it moves to a medium of exchange. It can’t happen the other way around because it doesn’t make any sense for people to accept it if they don’t think that it will have at least enough value for them to hold it and get rid of it.
Then the last function is a unit of account this is the final stage of money. This is when you see goods and services priced in the dominant fiat. So you go shopping in the store in the UK or Europe and on the shelves it will say pounds or euros, this is the unit of account. Bitcoin is not there, no cryptocurrency is there yet. This stage takes a long time to get to unit of account because the government with legal tender has such an advantage in this area through the requirement of paying taxes and so forth that it’s very difficult for a newcomer to break into the unit of account phase. When it happens though it will be a massive disruption.
People are already starting to price their services in Bitcoin, but because it is so volatile they usually price it in another currency and then through that currency they receive Bitcoin. So that’s not really a unit of account. But one of the things that will be required to achieve a unit of account is to have raw basic commodities priced and traded in the digital currency which is Bitcoin. This is one of the things that Globitex strives to achieve in this phase of its rollout, the trading pairs of Bitcoin and raw commodities. So gold, silver, industrial metals, crude oil, agricultural commodities, for example. This will start to set, at least at a wholesale level, set the framework and the basis for using cryptocurrencies as a unit of account which will complete the three functions of money.
I’m not just making this stuff up, you can go to a Bank of England report and they have the same diagram where you have the nested functions of money.
People always ask me what do I fear most about the Bitcoin economy? What keeps me up at night? If I’m such a believer I must have something that I fear. What do I think will kill Bitcoin? Something like regulation, do I fear regulations? OK none of those are things that I fear about Bitcoin. What I fear the most is what is actually happening in the gold market right now. And I fear that we will get to a point where the exchanges themselves are successful but we will have government-sponsored, state-sponsored trading where they will be able to suppress the price artificially because they have an unlimited supply of fiat.
There are a lot of people that believe the gold market today is suppressed — prices don’t reflect what would really be happening if it were a true check on central banking. This is possible because unlimited fiat can be used to do naked short selling on exchanges. The paper market for Bitcoin in the futures exchange can be manipulated through price suppression by making naked short selling. Naked short selling is where you sell the commodity without actually owning it. Exchanges allow this and it’s legal, you just have to have a certain amount of margin, the exchanges have to manage contract limits and they have to warehouse a certain amount for physical delivery.
Now what is the remedy for this though? This is what keeps me up at night. Eventually, I think the Bitcoin market will be manipulated in the same way that gold and silver markets are. The remedy to this is to have enough global exchanges, enough exchanges worldwide in different jurisdictions, and even some that may be jurisdictionless. It doesn’t matter if they are centralized or decentralized, what we need as a defense is to have enough of these so that a single country or a few leading governments can’t control a certain exchange. It’s very easy with gold because most of the gold, paper gold, is traded in New York so it’s very easy to suppress the price through one exchange that has the majority of the supply. With Bitcoin we don’t have the mature exchange market yet, but to the extent that we can get this globally we will be able to apply the remedy before the attack that I fear.
This happens to be one the feature of Globitex as well, I mean obviously we’re going to be one of those exchanges in that ecosystem, but we’re not going to be the only ones. We’re going to need several thousand exchanges in different jurisdictions. Leading to the other point that I wanted to make is, what is the next stage in all of this? So we have a functioning currency which is a store of value and a medium of exchange. We have exchanges that are spread out globally in various jurisdictions, what is the next part of the evolution? Well, this is what I hear from a lot of my client companies, is that they have no way to hedge the balance sheet risk that they’re currently holding.
There are a lot of companies that have Bitcoin and other cryptocurrencies on their balance sheets, the only way to hedge that is to sell it, sell it in the physical market, and remove the risk. They can sell it in the futures market now for the last month, but that’s the cash settlement market, not a physical settlement market. So it’s a little bit like the tail wagging the dog when you have cash settled market without the actual underlying thing being delivered. This allows them to at least reduce some of that balance sheet risk without having to sell the commodity. So it’s very helpful but still not 100% effective.
What I think is going to happen in this space is futures will lead to an options market where you have call option and put option, you’ll be able to pay a premium for a call option and a put option. And you’ll be able to protect the assets on your balance sheet for a known price. This happens all the time in other multicurrency corporations, they’re using derivatives to hedge that risk. At Globitex, the futures and options market is one of the planned phased rollouts, but physically settled. So they’re physically settled on the futures side.
The other thing is that when we get to that stage, and we’re already starting to see it, we start to see an interest rate market develop for Bitcoin, and Ethereum. The Bitcoin interest rate, does anyone want to take a guess at what the annual interest rate is for Bitcoin? It’s about 28–35% annually right now. It’s been as high as 350%.
The reason we know what the interest rate is because the short sellers have to borrow a Bitcoin in order to sell it. There’s an active two-way interest rate market for Bitcoin. You only borrow it for a day or a week, and the rates fluctuate between 28–35%. It’s very volatile so sometimes it goes over 35%. Now I have named that index Bibor, so it’s like Libor but it’s Libor for Bitcoin. So it’s a Bitcoin interbroker offered rate. That is going to be a product one day, and that product and that forwards curve, that interest-rate and the maturities schedules that come out of that are going to be used in capital finance for the crypto-economy. That’s why I love the name of this conference here because we’re building the early capital markets for a new currency. It can’t function any other way, it needs to have an interest rate.
So Globitex will also be market maker in that interest rate curve. So just like we have interest-rate futures now for the dollar, for the Euro, you’re looking at overnight, one week, 30 days those will be the maturities also for cryptocurrencies that are traded on crypto exchanges. And to give you more color around that and more details around that I want to introduce my co-founder at Globitex. She will do a close-up look at what Globitex is planning. We’ve just completed a successful private pre sale, so we are currently closed for any sales. So this won’t be a sales pitch, I want to welcome my co-founder Liza.
Liza: Thank you, my name is Liza Aizupiete. First I’m going to tell you a little more about what Globitex is, second, I’m going to present a case for and against a very popular notion of centralized versus decentralized exchanges. Then I’m going to talk about why we are here, and what actually got us started. And finally I’ll conclude with our actual token sale, which is basically looking into the future of what Globitex is planning to do.
So first of all Globitex is actually an institutional grade crypto-fiat exchange. Globitex was recently awarded an EU EMI license which is an unprecedented license in this space for cryptocurrency businesses, because it gives us the ability to actually act as our own bank for Euro payments across the SEPA payment system. Which means for Euro payments we actually don’t need to integrate with an intermediary bank, we will be able to issue our own IBAN accounts.
Next, we have the features of what actually makes Globitex special. Obviously we’re not the first-comers, we are quite the latecomers to the industry. But what actually makes us special is that we have a completely functional API which actually, to date it would be fair to say that none of exchanges have up to the level that we have developed. The FIX API gives you a direct market access. Obviously, we also support Rest API and web sockets. We are running a superior matching engine with over 1 million transactions per second capacity. If you are a market maker or a high-frequency trader, you will absolutely enjoy working on our exchange.
Now added to that, we are proudly touting our reporting tool. Something so basic that every broker and every exchange should have. And we have taken our time to actually develop it to a detail where you can pull something called the net asset value. Something not everybody understands or everybody needs, but if you’re an institutional broker, or accountant, you would definitely appreciate the ability to have a net asset value report on all trading activities. Our professional trading platform features a well designed GUI interface for day and night traders, and you can switch between night and day modes. You can also choose to move around the modules of the trading platform, so it’s very customizable.
Finally, obviously there’s a lot of security that has been worked into Globitex as a central custodian for cryptocurrencies. We have Bitcoin, Bitcoin cash, soon Ethereum and Litecoin wallets. And as I already mentioned we are EMI licensed, so it’s an amazing development, completely unprecedented in this space and we’ll be very proud to deliver on that and soon upon full integration with SEPA-MMS system.
Now here’s the case for and against centralized and decentralized exchanges. I totally agree with a decentralized monetary system because this is a thing. As for an exchange there is actually a difference. So here are the differences. For a decentralized exchange you still need to do a KYC/AML, in fact in Europe following the banking directive you will actually be forced or compelled to register and actually disclose your personal details. By disclosing your KYC you are submitting these details to a centralized service provider. Therefore by definition, even if the transactions take place off chain, identification is already a central point. Obviously for a centralized exchange, identification is disclosed and centralized, it’s a standard adhering to AML laws.
For volume, for decentralized exchanges you’re absolutely limited by the on-chain transaction capacity, which is around seven transactions per a second for Bitcoin. For Ethereum, in theory, maybe 15 to 30 per second on a good day but that’s it. So on-chain transactions on a decentralized exchange are very limited. Whereas for centralized exchanges it is unlimited, and as mentioned, Globitex supports over one million transactions per a second. Now, of course you are still able to exchange on a decentralized exchange, in a limited way, whereas on a centralized you can list so many things.
Globitex will be listing futures, options, all the various types of securities which cannot actually function on a decentralized exchange, it just doesn’t work, due to transaction speed limitations, impairing price discovery and liquidity. You need one centralized point of reference, one point where all of this is clearly listed, quickly executed and settled. And of course, you need several exchanges to do that, but these must be centralized.
As for use cases, obviously decentralized exchanges are going to be exclusively peer-to-peer, whereas for centralized exchanges enable global trade, hedgings, speculating, various types of investment. All of that is enabled by centralized exchanges. It is very biased of course because I am with a centralized exchange, Globitex is a centralized exchange and it cannot really be a decentralized exchange unless we solve the transaction speed per second issue. Maybe once we have streaming prices I think we can revisit that. And if the regulator is also on board with it perhaps one day it’s going to be all decentralized.
So this is just a very quick reminder of why we are all here, having listened to the presentations of this wonderful conference. I just thought that we need to take a look back and see why we’re all here. Obviously it’s because of Bitcoin, Bitcoin came about and basically changed pretty much everything. So just a couple of points, Bitcoin is a distributed completely decentralized network of payments. It doesn’t sleep on Saturdays or Sundays, like SWIFT or SEPA. The most important however is that in 2015 on October 22nd here in Europe, Bitcoin was actually defined as a currency. So on that date the European Court of Justice pronounced that Bitcoin should be exempt of VAT. Which means that it is effectively a means of payment and currency.
Now speaking of exchanges, which diversified further our development into becoming not only a spot cryptocurrency exchange, but actually go after the next license, which will enable us not only peer-to-peer lending, enabling interest rate futures, enabling commodity futures and token indices futures. We are going after a regulatory approval and system revamp in order to be able to actually become an exchange for securities trading, that’s huge.
So for our Globitex GBX ICO, the fact that cryptocurrencies are here to stay, this is our basic premise. Bitcoin or bitcoin protocol based crypto-economy scaling can be achieved by providing better market access and more diversified product offering. The liquidity issue can also be solved by developing cryptocurrency money markets to find an equilibrium between supply and demand. Because money, if you think about it, is also a thing with an inherent demand and supply. And only when and if there is enough of a possibility for that demand and supply to meet, only then would we truly see the relative value of that thing which in our case is cryptocurrency.
We believe that Globitex can be instrumental in scaling the cryptocurrency economy by listing standardised derivatives instruments in money markets and commodities with both cash settlement and physical delivery, with bitcoin or Bitcoin protocol-based cryptocurrencies as the unit of account.
Now we have seen various types of tokens and ours is going to be a utility token. Here’s the thing, you will be able to settle trades with the Globitex GBX token. And if you’re an owner of our token you’ll also participate in loyalty programs, which we envisage as market making activities. We would incentivize you to actually help us make market or provide liquidity by making that trade extremely profitable for you. When we list futures, from gold to crude oil futures and we need market makers to participate, we will be incentivizing you to use your tokens to provide market on these new listings. So it’s a utility token not only for you, but also for us, as an exchange. The token supply is limited, or calculated at a €10 million market hard cap. The redeemed tokens will be burned, and taken out of the circulation, therefore the Globitex GBX token is deflationary, limited in supply and therefore should be appreciating in value.
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