Transcript
Lau: Is it time for traditional finance to merge with the crypto industry, or is Bitcoin’s leverage a red flag for investors? And will derivatives trading be the next step for digital assets?
Welcome to Word on the Block, the series that takes a deeper dive into blockchain and the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast.News. I’m Editor-in-Chief Angie Lau.
Well, a recent survey by J.P. Morgan across 1,500 institutions shows that 49% of investors say Bitcoin is — as Warren Buffett said — rat poison or a temporary fad. The other 51% believe it’s here to stay and will become an important asset in the future. But as inflation rates continue to rise, prominent voices in the traditional finance space, such as the “Big Short” investor Michael Burry, warns that governments will move in to squash Bitcoin in times of inflationary crisis. Burry also said that the crypto market is overleveraged.
Crypto derivative trading has become a target for governments across the world. But despite that, my next guest today says that derivatives is the next big thing for cryptocurrencies. So the question is, how will that all play out in the age of inflation?
He previously led Germany’s second-largest stock exchange Börse Stuttgart to become the first regulated crypto trading market in the nation. And now he is the CEO of 100x Group, which is the owner and operator of crypto exchange and derivatives trading platform BitMEX, Alexander Höptner.
Thank you so much. Welcome to the show. It’s great to have you on.
Höptner: Thank you very much for being here.
Lau: You really come from the world of traditional finance, from your time with capital markets from Deutsche Börse or the stock exchange Börse Stuttgart, as I said, and now you’re in crypto. How did you get here?
Höptner: It’s actually not that big of a move. Because firstly, by bringing the Börse Stuttgart fully into the crypto world as well, as you said, is one of the early adopters to that one, especially fully buying into that story. For me, this is the next big asset class to come, and cryptocurrencies, as we see today, is just the starting point of it. It’s not the end game already. It’s the starting point of a fully new development of asset classes and trading items that we’ll see in the future. And so what better place can you be in when you’re operating markets than go to the crypto world? And as I said, derivatives are the next big thing.
Lau: What exactly triggered that for you, I mean, you’re sitting in your very pristine office, no doubt, in Germany, you’re heading one of the most prominent exchanges in traditional finance. And across your desk or across your attention span comes Bitcoin, cryptocurrencies. What tweaked it for you? What was the trigger point?
Höptner: In traditional finance we don’t really have a global fungible market. We’re talking about a global financial market, but actually, we have a regional connected market through oligopolies or monopolies on the post-trade side. The markets are very restricted to pro traders that are exploiting — at least in some instances — larger retail markets. And the whole tokenization and cryptocurrency economy and environment is to overcome this — to bring finance to the next level. It needs to firstly truly build a global functional market that is accessible not only for pro traders but for the wider mass market. I think this is it. It brings the finance industry back to its fundamentals, to its core. It refocuses exchanges to operate in enabled markets. And come on, coming out of an exchange world, this is the core place where you can be. No better place.
Lau: BitMEX was really founded with that spirit as well. We had Arthur Hayes coming out of traditional finance from his offices in Hong Kong and saw the opportunity to create a derivatives market and really explore that. You came — in terms of the timeline — after the pioneers, after the founder. And in fact, you came to the role at 100x two months after the BitMEX founders Arthur Hayes, Ben Dilo, Sam Reed, CEO, CFO and CTO respectively, and another early employee were indicted by U.S. authorities for violating the Bank Secrecy Act, in essence, for flouting anti-money laundering laws. We’ve been following that news timeline very closely. Was that something that you had to really consider before joining BitMEX?
Höptner: No, not at all. When you think about the classical financial industry, tell me and show me the financial institutions who have never had any issues with regulatory authorities in the past. Let’s tackle the last big financial crisis topics and banks involved in all the endeavors there that got prosecuted at the end of it. So that’s the first thing.
The second thing is, the cryptocurrency industry is a very new industry. There’s not a lot of regulation out there already. It is inherent that when you come into an industry which is so young that you’re not fulfilling all the rules and regulations that are already out there. A lot of jurisdictions are right now developing, actually, the rules that are around this. We are pretty stable brokerage, we’re pretty stable on spot, we’re getting there on custody, derivatives is the next big thing. So naturally, the regulatory authorities take a closer look at that one. So that’s a natural given. And so for me, it was, ‘Yes. Okay. That’s a topic you have to tackle naturally.’ But on the other hand, it’s just something that you just have to work out on that one.
We’re bringing the crypto world now to the next level of maturity, and that means that we bring it to a regulated world, and that means that we have to clean up some of the stuff that has been possible in the past in an unregulated world. But as I said, the regulators are waking up. We have to adapt to that one.
Now, for me, that’s easy because I’m coming from the regulated world. I fully understand what it’s required. I’ve done it already. So bringing crypto to the regulated world, it’s not a theory that I’m doing here. And so for me, that was, ‘Okay, that happened. Now let’s just tackle it.’
Lau: There are a lot of colorful personalities here, and certainly it takes that kind of assertiveness to really drive forward innovation and a product that nobody ever heard of and to gain exceptional adoption in the industry, to become one of the leaders in crypto exchanges. But I’m also thinking about these colorful personalities and these voices that have also colored it in a negative way. Regulators and you in the U.S. have very clearly said that the former leadership and the founders of BitMEX were in that category. That’s obviously going to be figured out in court.
But on a broader sense, there’s a lot of Wild West activity and behavior in crypto. There’s a lot of reputational risk that the entire industry faces on a daily basis, and certainly now that we have seen the rise of DeFi, we have seen a complete pump and dumps drops to zero recently, we’ve seen hacks and the like.
How do you navigate this space as a traditional guy trying to work with regulators to know that this is still the space that you’re working in and that also potentially colors a lot of what you’re trying to do on a daily basis?
Höptner: We’re a little bit over exaggerating some of the things that are happening there, because we’re neglecting similar developments from the past and the classical financial industry. We’re talking about huge volatility. Now, think back about some bonds of some fringe countries and problems the traditional financial industry had with these ones. Think about the Lehman crisis. Think about — in Germany — Neuer Markt. Everybody’s complaining about ICOs (initial coin offerings), out of the Neuer Markt developed the prime standard, the DAX. So the highest quality standard. Everybody’s complaining about ICOs, ICOs, was good instrument, but it was treated badly. But coming out of that one comes tokenization now with the first steps of NFTs (non-fungible tokens). So just because we are very new to using a technology and new asset class, maybe in some instances not directly, perfectly right. Doesn’t make it an ultimately bad instrument.
Look at the classical financial industry. We see similar developments over the last 20 years and now we’re complaining that for the last four years we see something in the crypto world. Come on, guys. You serious? Look at the last 20 years of the classical financial industry.
So what are we fussing around? The same with all this ‘oh, my God, crypto is paying terrorism.’ What was paying terrorism before crypto? And nobody was complaining about this. Nobody said let’s take another global currency because that one is used for financing terrorism. But now as it is crypto, everybody’s complaining about it. So I think we need to treat it like for like, and like for like. It’s a very new technology. It’s a very new asset class. It has tremendous possibilities. And for me, it really sounds like that’s the ultimate fight of the old establishment to prevent it from happening, like ‘the internet is not coming.’ Come on. Who cares?
And so for me, it’s really if you look beyond that and if you take it for what it is, it’s just another technology. And the regulator doesn’t care about the technology. He only cares about function. And if you fulfill a function, you have to abide to the regulation, then it all of a sudden becomes very easy. And it’s very, very obvious what you have to do. And so for me, there’s a lot of hot fuzz around it, but it’s not a lot of substance when you compare it to the classical financial industry.
Lau: Well, to your point, let’s all remember the time that Bitcoin was birthed right in 2008 at the height of the global financial crisis that nearly brought down not only one nation’s capital structures, but the entire world. So good point there.
What are you tasked to do at 100x and for BitMEX?
Höptner: Year, we’ve got to get back to a leadership position. We’ve come through the innovation of Arthur, Ben and Sam and the perpetual swap, which was, and still is the leading, most traded instrument globally. We can build back again on this innovation capabilities and capacities and our brand of BitMEX, the position that we had in the past.
So in a sense, transforming the company in this direction, bringing our strengths back like we had it in the past, plus coming with my experience moving the 100x Group and BitMEX into a fully licensed and regulated world. You need to learn to walk before you can run. DeFi is the ultimate goal that we all striving for. But in step between this is cryptocurrencies, and the technologies that we have right now moving into the classical financial world. And that means adopting to the rule-sets that we currently have. We might complain about it, but this is a step that we have to take. Moving BitMEX into this regulated license world will open up mass markets for the crypto industry — this is what I’m tasked for, to bring this to the next level. As I said, most of the regulators are currently working on regulatory regimes, on spot trading, brokerage and custody. And the next thing that’s coming now is defining and designing a regulatory regime for derivatives.
Lau: When you take a look at the landscape of your competitors, how do you rank BitMEX?
Höptner: In what respect?
Lau: In the most honest respect, in the way that obviously you could say that you’re the best that you have the highest trust value, et cetera, et cetera. But how about in the most honest sense in that it’s a very competitive landscape. We have Binance, we have Coinbase in the U.S., we have some in Korea and each are trying to navigate this regulatory space. To a degree, you’re competing against a lot of these crypto exchanges, and yet they’re also your brothers and sisters in arms. What they do also influences the direction of the entire industry. How would you rate the competitors and what everybody needs to do and what you’re doing uniquely, potentially?
Höptner: Our biggest competitor is ourselves, because we have to do the necessary transformation to bring the company to the next level, is not Binance bringing us there, it’s not FTX bringing us there, or it’s not CME bringing us there, it’s ourselves bring us there.
We did the right steps in bringing in KYC/AML, and in this one we are leading because we are the only one — at least as far as I know — that has a fully KYC and AML client base and this is a necessary basic step. Is that seen all positive by everybody globally? Probably not, and you see this and the market share. But it is — from my point of view — a necessary basic step that we have to do to become fully licensed, to open up the mass market and to bring new clients to that market — institutional clients of that market — a wider retail flow to that market. So in that respect, we are ideally positioned. But when you look at naturally the product range that we currently have, yes, we have a lot to catch up with our competitors.
However, I have to say that with the increased demand in the crypto space coming from the spot now moving into derivatives, it is still a long way and a lot of possibilities until we really are competitors in the sense of fighting for the same clients because we might celebrate the size of the crypto world in comparison to the classical financial world, it’s still very, very small. So we have a long way to grow until it’s really a red ocean market like we have it in the classical financial world. And in that sense, yeah we are more brothers. But we should behave more like brothers in a sense of we can transform the regulation only together. It cannot be just one player doing that. We need to together prove that we are doing the right things to bring it to the next level, and then that I think the industry could do more.
Lau: I absolutely agree and there have been cries for the industry to police itself — to self-regulate, we’re seeing some of those moves in India right now as that nascent industry attempts to work with policymakers and regulators in India. And that is still a very volatile relationship. But also even just in the market, people who have been scammed or hacked trying to get back to an exchange and try to to restore what they’ve lost. And the exchanges themselves sit at at the crux of a lot of the ability to actually return and participate in this — if they wanted to. Some do, some do when forced. In your view, do you think that there should be a concerted effort within the industry and who’s going to lead it?
Höptner: I think there should be a concerted effort of the industry to help the regulators understand the possibilities of the new asset class and the technical possibilities that comes along with that. You’ve got to understand that regulators are not proactive. Their job is not to be proactive. They’re acting on something that the industry is driving and they are put in a very difficult spot if they are to lose on the reins and something happens they are to be blamed. If they’re too tight and they restrict the new developments, they will be blamed. So it’s a lose-lose position for them. The only chance to build a viable regulatory regime is together with the market participants. Now we need to show them the possibilities and the benefits before the classical financial industry. And naturally there it makes more sense to have all the voices collected together and speaking the same language to the regulators than somebody popping up here telling this, somebody popping up there telling this and also telling something different to the different regulators. That doesn’t help because then ultimately will have the same like in the classic financial industry where you have regional markets who are different and they need to be connected over monopolies. And that’s exactly what we want to overcome.
So from my point of view, it is a collective effort of the industry. Now, who’s the right one to lead that one? Normally, I would say the biggest one is the right one to lead that one or at least need to be in conglomerate one. Big one can be actual size, can be name, can be reputation, can be industry knowledge or connection. There’s various angles from which you can tackle that one. But let’s say the most dominant players and the most outspoken players should come together and do this as a concerted effort.
Lau: Latest headlines in London, FSC clampdowns on Binance — Binance UK is leaving that market. South Korea, they’re intensifying crypto regulations for exchanges — for crypto exchanges specifically — in September. Hundreds once in business, now just a handful possibly applying to remain in business as a crypto exchange in South Korea. Where do we sit right now with regulators, with Binance as a market leader globally now having to leave a major market, where do you see BitMEX as you start to reposition yourself?
Höptner: We need to get fully licensed in an appropriate and respected jurisdiction. And this for all the relevant aspects of our strategy. Through the strategy revamp, we announced to go to brokerage, derivatives, spot, information products and in custody. And if we want to be present there to address the mass market, that means we need to have a license for all of these aspects and we need to have a license, not allow me to say, “Something here, something there, hey, oh, my God. Here, we found something on the stone. Let’s put it there too.” No. If you really are honest up to that, you have to go to a respected jurisdiction.
Lau: Where is that for you?
Höptner: Let’s say most advanced. You have to double-check where the jurisdictions are most advanced on regulatory regimes for cryptocurrencies. There’s namely a few of them. Singapore is opening up, Switzerland, Germany is doing a lot, Canada is doing a lot. There’s a lot of jurisdictions who are tackling that already. Japan is now waking up again. Even the U.S. is waking up now with a change in government, we see much more discussion around this. It now depends on where your starting point is. For us wanting to offer the full value chain and countries like Canada, Switzerland, Germany, but also Japan, Singapore naturally would be very interesting. And we have to see and find out which regulators most open, especially for the derivatives part, because there’s very few regulators already having defined that. Bermuda is the only one that has structured a crypto derivatives regulation so far. So we have to see who’s the first one to wake up for that one. But these are mostly the dominant countries. But Korea is a very interesting market. It’s very difficult from a regulatory standpoint right now.
Lau: And that is what we’re hearing and reporting as well. You’re answering directly very much the criticism that we even heard from Nouriel Roubini. I was there. The tangle with Arthur Hayes in Taiwan at a blockchain conference just a couple of years ago before Covid. But addressing the criticism of being based in Seychelles and jurisdiction shopping, which was very much what the criticism was laid on early exchanges, Malta, Gibraltar, Seychelles, and not to disparage any of those jurisdictions, but certainly in the tier of the regulatory gold standard, they’re not up with, as you’ve said, the Singapores, the Germanies, the Switzerlands and the United States.
I did not hear the United States as potentially a priority for a base for BitMEX, even though obviously, Arthur is an American citizen. However, obviously as well, there’s certainly some tension there as the U.S. is proceeding with legal action against BitMEX founders.
But why not the U.S? It is the gold standard. If you can make it there, as they say about New York, you can make it anywhere.
Höptner: Firstly, it’s unfair in hindsight to say that, for example, Seychelles is not a good location. Now, when you look at every country, more or less has this — let’s say — if you want to have a company set up fast, you go there. Even Germany has that. In the U.S., it’s a Delaware company, in I don’t know. In Europe, you go to Gibraltar or Malta and that’s broadly about the regulation in both countries.
Lau: And not to disparage any of those countries.
Höptner: Absolutely not. In hindsight that the regulation is developing in a certain direction and now complaining that the companies took the first step in doing that, it’s not really fair. Now, well it’s not fair, so who cares? I think that is something I should say to that aspect.
Now, the U.S. Definitely is an important market, but same is Korea, same as China, same as Japan. All these markets are very difficult from a regulatory angle. And you as a company, you have to make up your mind how you want to approach these markets. All these markets are super important and super relevant. Do you have to physically be there alone? That’s a question you have to tackle. You cannot be in every country in the world fully regulated. It’s impossible. So you have to pick and choose where’s your primary location, where do you want to operate with which aspect of your offering, and where it might be partnered up at the end, or even consider joint venturing or doing something else.
And you see the same — once again — in the classical financial industries. Most financial institutions like the bigger exchanges, they don’t have multiple exchange licenses. They usually pick one exchange license and then they have broker licenses, or custodian licenses, or post trade licenses, CSDR, ICSD licenses. In the classical banking world, you have a broker-dealer licenses in various jurisdictions. So you have to build for yourself a license strategy, which at some point in time will have to address the most important market, how we will tackle these markets, we have to find out. First thing’s first, start with the first fully licensed jurisdictions and then we tackle the next one. And probably the first one is not the U.S.
Lau: What about Hong Kong, you mentioned Singapore. Why not Hong Kong?
Höptner: There’s currently a lot of discussions about what the jurisdiction in Hong Kong will be. We don’t know so far, but naturally, Hong Kong is a very important market, it is a very talented market, too. So it has various aspects that are very interesting. But we have to see how the regulation develops and then we have to make up our mind how we position ourselves in that one. So it’s a little bit too early. It’s an interesting market, absolutely. I would love to be here, but let’s see how it all plays out, and then we have to decide that. Currently we’re not serving clients in Hong Kong.
Lau: Got it. You’re not serving clients in Hong Kong because of the latest policy. Same with the U.S. And potentially in Asia or Europe is what I’m hearing.
Let’s talk about the markets now. It’s been a very volatile market over the past couple of months. The highs, the highs, and now we’re probably half that at the moment. As of whenever our audience is watching this, it could be ranging from US$35,000 where it is right now to higher or lower.
When you take a look at just the volumes of activity and also who is participating in the markets, how are you viewing the market reception to the volatility that we’ve seen in crypto over past couple of months?
Höptner: Firstly, let’s say the negative development of the past weeks and we see a floor somehow — at least a line around the floor right now — ever so often, that’s a natural development that you see there. Honestly, I wouldn’t overrate right now, because for me, this is a long run anyway. Again, take a look at the classic financial industry and look what happened over the course of 20 years. You have seen stocks at 2,500 and now you see it at, what, 13,000, 14,000? Look at the Nikkei, look at the Dow Jones.
And so for me, this was just a correction. Yes, volatility is low. Volumes are still good. And so that’s a correction phase for me — nothing more, nothing less. And the interesting piece will be what happens around the developments of the classical financial market and how much is the crypto world still tied to that one? In the past, you can see some correlations there over the past couple of months. You could see some deviation from these correlations. It’s very interesting to see how that develops going forward. But the general development, I don’t see too negative, actually.
Lau: Inflation, I am thinking about inflation, we’re seeing the rise of inflation in the U.S., in China, around the globe, things are getting more expensive. The power of the dollar or the currency is weakening. How do you think that’s going to play out in the crypto markets if inflation fears intensify?
Höptner: Yeah, this is what I was hinting at. The question is, how much are the Bitcoin and other currencies used as a failsafe against inflation in classical currencies? And how much correlation is still there? At least to a certain extent, it is a means to positioning assets outside of the classical financial industry, which is just too natural. When you look at what happened — we talked about the Lehman crisis and other crises that we just scratched, and there’s a lot of, let’s say, discussion around when the next crash will happen. So it’s a natural given and that can actually support another upturn of especially Bitcoin.
The question for me also, then, is the Bitcoin already developing to be a different “animal” to say? So is Bitcoin becoming — also a discussion that’s happening — the next gold? So is that more the value storage tokens?
Maybe ETH is developing in what Bitcoin was before. Even if we talk about some interesting altcoins, ultimately, it all tailors around the two of them, at least for now. And so there might be even a change in how we use this or how it is seen, how is it treated and very, very difficult to foresee, especially with the inflation, the correlation for the classical financial market right now.
Lau: The counter concern as well, is that is Bitcoin overleveraged?
Höptner: Is Bitcoin overleveraged?
Lau: You’re calling yourselves 100x. You built yourself up on leverage, perpetual swaps, what we’re seeing in DeFi. But there’s also growing concern that there is overleverage. Or, does that that even exist in a smart contract world? But I’d love to hear your view.
Höptner: So firstly, when you look at the leveraged products, yes, we have 100x, but the majority of the leverage clients are using single-digit. So when you look overall, how customers are using that, yes, that’s an interesting instrument. It’s an interesting aspect to have leverage that big, but it’s not what everybody is using on a daily basis. And so is it overleveraged by leveraged products? No, I don’t think so. When you look at the classical financial markets, yes, the leverage is lower, but the usage of that one is much higher. When you look at the classical derivatives market in regards to the spot market, the derivatives market is tremendously bigger and the leverage might be lower and in absolute what you can have. But the composition is much higher on the leveraged product.
Is the crypto world too leverage in the sense? It is still too dependent on very, very few, very outspoken personalities. I think that is the biggest issue right now.
Lau: The Elon Musks of the world.
Höptner: For example.
They are so outspoken and they are so much moving the markets still — that can have a negative image impact. I’m not talking about whether there’s a price drop, an autumn price drop. Come on. On a 20 year basis, who cares? But the problem is that the instrument is so young that the inexperienced mass is taking this as a negative symbol for the stability of the underlying asset. And that’s the risk for it.
Now, again, you start to argue, “Yeah, but you know, is the current leadership of the Fed not as influential as somebody like this? And isn’t everybody reading every word from some messages that are coming from there?” Yes, they are. So when you look at that and the comparisons with, again, the classical financial market, again, is it that important?
But, yes, it is, because the crypto market in comparison is so small and this is more of a risk than while it is still so small, people so influential need to be much more aware about what they are saying because of the potential negative impact to the full ecosystem.
Lau: There’s a responsibility here, there’s no doubt, but you also echo something that whether or not this entire industry is mature enough to actually handle the retail investors and then also the traditional institutional investors. You kind of sit right in the middle as you come in from traditional finance. You’re talking with regulators. If the market of the exchange business is to grow, what needs to happen?
Höptner: The exchange market, in a sense, it’s very easy. Regulation is not a hidden secret. It’s not something where you have to find out, “Oh, my God, what did we do?” Most of the regulators, they have it on a home page. You can just download it and then you just have to follow it. It’s like a manual. Like do this, do this, do this, this, and then we’re fine. You just have to do it. You have to offer that on a standardized, transparent and secure basis and more or less that’s it. I mean retail investors, yes special protection for retail investors, data protection. But again, the data protection rules out there, you can just download it, you can read it, you could just apply for it or you can just build it into your system and then you can offer it.
In that sense, we should stop fussing around and start to just do this. The longer we are trying to maneuver in a gray area, the longer and the more difficult it will get and the harder the reaction naturally will be from prosecutors and regulators, the sooner we adopt and include them in a discussion and build something together with them then which is available for retail and institutional investors, the sooner we get to mass market adoption and the sooner we get to wide acceptance of cryptocurrencies or tokens as future means of trading. In that sense, we just have to do it. And this is not such a big secret.
Lau: What’s next for you, what’s next for BitMEX, who’s your ideal investor?
Höptner: As I said, the next things for us is really expanding on the product universe, getting a fully licensed approach to assure our investors that we are abiding by the rules and that we apply for the rules that are out there for financial products or that for the license regime, for cryptocurrency and Bitcoin and what we are offering, building product universe, offering that on a broad basis.
Ideal investor? There’s not a single ideal investor. We’re here for the mass market. We want to have retail investors, we want to have the more sophisticated semi-pro, pro traders, we are offering services to family offices, smaller institutional clients and bigger institutional clients. I think you need to have a healthy mix. If you don’t have a healthy mix, then you will have issues at the end because you need to have it, because the individual customer classes, they’re fueling each other. Their offerings are different, the demands are different, but they all need to come together to an ecosystem to build a live exchange world. So there’s not a single one that I can point out and say, let’s head for that one. Unfortunately not. If that would be, it would be nice.
Lau: I would also say a healthy discourse and a healthy conversation, of which I would absolutely rank this as one.
Alexander, it was such a pleasure to sit down with you and really talk about so many wide-ranging topics, but most importantly, the industry that we both share.
Alexander Höptner, CEO of 100x, got to thank you so much for joining us on the show.
Höptner: Thank you very much, Angie. It was a pleasure being with you.
Lau: And thank you, everyone, for watching this latest episode of Word on the Block. I’m Editor-in-Chief of Forkast.News Angie Lau. Until the next time.
