Loading summary
Transcript58 lines
- [00:02]
A
Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I'm your host, Laura Shin. Thanks for joining this live stream. Today's topic is whether and how hyper liquid and similar offshore crypto venues and US regulations can find a way to accommodate each other. Here to discuss is Walt luken, president and CEO of the Futures Industry association and Chris Perkins, CEO of 250 Digital Asset Management, who you probably already know. Welcome, Walt and Chris.
- [00:32]
B
Thank you.
- [00:34]
C
Great to be here. Laura, Excited about this one.
- [00:36]
A
Yeah, me too. So, before we dive into the meat of the discussion, Walt, we would love to hear from you a little bit about fia. Tell us what you do and how your world has started to collide with the world of crypto and crypto derivatives.
- [00:52]
B
Well, the Futures Industry association is a global trade association that represents the, the, the, the listed and clear derivatives industry worldwide. So we have offices here in Washington D.C. but also in London and Brussels and Singapore. But we make sure that markets are open, accessible and, you know, approachable for all the users who want to get involved in risk management and in the derivatives markets. And so we make sure that regulations are appropriate, that there are best practices being done around the world. And we've been doing that for almost 70 years. So it's a long time trade association. And I'm just honored to run the trade association on behalf of our membership.
- [01:39]
A
Great. So, Chris, I'm sure everyone is familiar with you from bits and biffs, but it was your tweet that actually kicked off the idea for this episode. You were referencing some news last week that the CME Group and Intercontinental Exchange have asked the CFTC and other officials on Capitol Hill to oversee hyperliquid. And in response to that, you wrote, quote, so ICE and CME Group are worried about hyperliquid. They should be hyperliquid delivered 24. 7 price discovery. And both exchanges know that they will need to do the same to stay relevant. So tell us more about the problem you see brewing and the various options you see on the table either for hyperliquid or the CFTC to kind of find a way forward.
- [02:28]
C
Right. So prior to my current role in the crypto space, where I've been in the asset management space now for five years, I was in the derivative space in a major way back, really. I was sitting at the trading desk at Lehman Brothers and I started a derivatives business. I went to Citigroup the next day and I was actually running three global businesses on the derivative space. I was actually on the board of FIA an executive committee a long time ago. So it's really my background. And the one thing about derivatives is that the stakes are very high in markets because derivatives make the world go round. When you're looking at financial markets, it's probably the most important market. I think Walt's going to agree with me because it facilitates risk transfer and it allows markets to really thrive. And I'd argue that one of the greatest deficits and issues we have in our country right now with the crypto markets is that we lack comprehensive derivatives because we didn't have a taxonomy. But why this is such an interesting time and Walt's going to walk us through. To me, it's very, very similar to after the crisis where we had to reform the global derivatives markets. And what happened was we were at Lehman and at that time markets got in front of regulation. Now as we fast forward, markets have out. So, so markets got. Excuse me. So. So markets got in front of regulation, regulation had to catch up. But now we're in this position where markets are now out in front and regulation hasn't caught up. And I just feel like we need to get back to a principles based approach. And in the US after the crisis, we didn't have a choice. Like we didn't have decentralized technologies, we couldn't disseminate and distribute risk. And the only thing we could do was really centralize it like crazy, hyper centralize it, put a lot of capital and then pray for the best. And generally it's kind of worked out. But it also has forced a lot of consolidation. And so it's a very exciting time now where somebody like a hyper liquid pops up and they've been able to generate liquidity. And right now, like it or not, guys, 247 markets are table stakes. You have to have 247 markets to survive. Now the incumbents are doing it. They're in some sense trying to adapt the old regulated model to it. These worlds are coming together. I can't wait to hear how Walt's going to describe how he thinks it's going to play out. And I'm sure we're going to have a pretty lively debate today.
- [04:52]
A
So in a moment we will talk about what some of those options might be. But first we're going to take a quick word from the sponsors who make this show possible.
- [05:00]
D
A 3% top off on my entire portfolio.
- [05:04]
A
Yes.
- [05:05]
D
Who is saying no to that?
- [05:06]
A
That's free money.
- [05:07]
D
I don't care what's in your portfolio.
- [05:09]
A
That's a yes.
- [05:10]
D
If you've Been looking for an excuse to consolidate your assets. This is it until May 31st. Coinbase is giving a straight 3% bitcoin boost on any crypto or cash deposits all month. Coinbase One is the ultimate membership to make the most of your money, which as you know is how I optimize my finances. Zero trading fees on thousands of crypto assets, 3.5% APY on USDC boosted staking and lending rewards and up to 4% Bitcoin back with the Coinbase One card. Plus you can still claim 20% off the first year of Coinbase One annual plans. A $50 Bitcoin bonus when you spend $100 on a new Coinbase One card in the first 30 days through May 31st. Plus your share of 5 Bitcoin if you out predict pro basketball coach Lethal shooter and a chance at a private shooting session with him. It's the perfect decentralize your assets and maximize your earnings. Get your 3% boost at coinbase.com Unchained Visit coinbase.com Unchained that's coinbase.com Unchained to claim your bitcoin bonus. No purchase necessary. See rules and other ways to enter terms apply to other offers. Futures swaps via Coinbase Financial markets. Risk of 100% loss payouts Event based not investment advice not available in Nevada. Coinbase OneCard is offered through Coinbase Inc. And Cardless Inc. Cards issued by First Electronic Bank. Bitcoin back rates are based on cardholders assets on Coinbase.
- [06:45]
A
Back to my conversation with Walt and Chris. So before the break we just talked about how Chris had this tweet and he laid out some options for what could happen in terms of, you know, this I guess conundrum or dilemma here where we have these markets that are attracting a ton of volume in real world assets, but they're not, you know, in the US And Chris said, you know, pos possibly one option would be that hyperliquid and similar venues stay offshore. They keep out US people. They could pivot and go fully onshore and they would need to, you know, get all the licenses to comply. Another option he put out there was that they could just further decentralize and continue to build and improve on the markets they have and use decentralized methods for the kind of oversight really, I guess, or to keep the markets fair. So Walt, I'm very curious to hear your opinion on these different options.
- [07:49]
B
Well, this is a pretty typical way that markets form and eventually as they grow and develop they actually seek out regulation because I think regulation Brings the credibility and the confidence in the markets. And we've seen these over times. Chris mentioned Lehman Brothers. The over the counter markets were largely unregulated in the 2000s until there was a crisis. And then we realized we needed to put them in a proportionate regulatory system and those markets continue to thrive till this day. And so I think these new markets, whether it's decentralized markets or prediction markets, are just going through natural growing pains of how they mature as a marketplace. So you're right, they do not have access to US persons right now. I think there's concerns that they maybe have back doorways to US persons and that's not legal. But if, if they want to come in the front door, I think most of the industry would welcome the competition of doing that. And the regulations that would come with that, that would require them to file with the CFTC to be a designated contract market, which is a fancy word for a regulated exchange in, in our, the derivatives world. But that's something that is, they could approach that and I think it would be unique in that it's a decentralized exchange and that may come with some additional requirements. But competition is a positive things for our markets and it makes others sharper and so we welcome that in our industry.
- [09:28]
A
Yeah, and so what would that look like? It would be that they would keep the offshore and then have a regulated entity in the US that had like that acted like a centralized intermediary or like how can you, you know, square the decentralized aspect with needing to register?
- [09:47]
B
Well, that's a very good question. I mean, I think if functionally they're acting and functioning and cracking like an exchange, they would have to have some type of entity that would register with this, you know, legal entity that would be onshore to register with the cftc. Again, I'm not an expert on decentralized exchanges, but there is a concept in regulation around accountability. I mean somebody has to help them to get onshore and be held accountable in case things go wrong with the exchange. And so that's something that we would have to figure out and develop as a regulatory community. Just figure out how that we would do that with decentralized exchanges.
- [10:30]
A
And Chris, since you laid out the options, I was curious which option you preferred or thought was best.
- [10:38]
C
I don't know if it's either. I think they can pursue numerous options. To be honest. I think Walt is right that after the global financial crisis we forced this massive centralization. It's generally worked. The markets are as robust as ever. But they're also more concentrated than ever. And I don't know if that's a good thing. Walt, how many intermediaries, FCMs have gone away since the crisis? I think it's a pretty big number. I remember we saw volumes go up and intermediaries go way down. So generally what happens when you have regulation like this, it's a high fixed cost and then the big get bigger and the only people that survive can scale. This is already happening in spot markets because that's just how it works. It forces consolidation. And so if you're hyper liquid, there's a few things that I think have to be addressed. And this is for many of the perps, Dexs, they're very focused on adl. I think they're going to be able to, which is auto deleveraging. There are some risk management things I think that they're going to be able to improve over time to make them more institutionally capable. And again, let's just talk about first principles first before we get into regulation, because that's important. But what do you want to do when you trade a derivative? You want to make sure that you're able to lay off that risk. You want to make sure that when you have a hedge that it stays and it's, and it's immune as much as possible from counterparty risk. And I think that can be done in a centralized context. I also think it can be done in a decentralized context and we can talk through it. But option one, they or a version of them. And look, they're even in D.C. right now. They have the Hyper Liquid Policy Institute led by Jake Trinsky, a good friend of ours. They can come on shore, they can get those licenses. And in the United States you need three of them. You need a dcm, which is an exchange. You need need a dco, which is a clearinghouse or a ccp, a centralized clearing counterparty, which is kind of the antithesis of, of the decentralized thing here. And then you need an intermediary, which is called an fcm. I used to run one of the largest in the world. And what we're seeing now is that some of these guys are saying, well, I'll do all three just to streamline it. But those are the three licenses that you need. Can they do it? I think so. They've got capital, they can buy the licenses, they can build the licenses. You know, can they reconstitute that liquidity? Can they tap back into the liquidity of, of the, of the offshore exchange? All Things to be worked out. The thing I love about the CFTC and I love about Chairman Cig is that he's focusing on principles here, which is great. So, so one option, come on short, compete just like everybody else. Maybe you leverage your 247 capabilities. That's your edge. As the other guys are trying to keep up, like ICE is doing the same. They, they're partnering with OkX, CME is partnering with Google. They think they have a solution as well. So it would be an arms race. Anyway, I think it gets interesting. We know what the current status quo is and that's working for them. And if people are saying, hey, people are backdooring in, I'm sure people will have to figure out if that's true or not. But what they're doing right now is generally working. Their liquidity is growing. More and more eyeballs are on them because of their liquidity and the 247 markets. The last idea of decentralization is probably the most complex, the most challenging, but perhaps the most interesting, because this is where you step back and you say, well, wait a second, these guys are not, they're not an entity. They're just code and tech. And gosh, shouldn't anyone in the world who has access to the Internet be able to access that tech and allow it to function as it functions? That is the new paradigm, that is the breakthrough. And a lot of regulators are like, wait a second, uh, no, someone's making money here. There's some kind of something, I need a throat to choke. And, and, and many institutions will be frightened or not comfortable tapping into this concept of decentralized technology defi. Because they want somebody to hold accountable. I think ultimately, you know, is it something that is good or bad or regulated or unregulated? My sense is, is that technology is technology. You can't regulate tech. You can regulate an entity that builds tech, but if it's just tech that's decentralized, it's very hard to regulate. But what you do need to regulate are the people that use it. And if they're abusing markets, they should be held accountable, et cetera. So three different paradigms. I'd say the last one, the decentralized one, is the most innovative, the most interesting, and definitely the most challenged. Or they can just go on shore and go toe to toe.
- [14:53]
A
Yeah, honestly, that last option is probably going to be most appealing to my audience. It's certainly appealing to me. And I, you know, when I was kind of preparing the script for, for this episode, I was thinking about how the Internet got formed in a way where there's the Internet that the world is on and then there's the Internet that China's on. And I just was like, this is such a weird situation where we could end up with the US having its own financial Internet and is cut off from the world financial Internet. Which that doesn't seem like a good thing for the country that, you know, at least now is at least one of the, you know, leader, one of the leaders of finance, if not the leader. So I just worry a little bit that the fact that we are dominant currently is going to basically hurt us in this next evolution of where finance and tech are going to. But, and so actually I'd love for Walt to respond to that.
- [16:03]
B
Yeah, I'm not concerned about that, Laura. I mean I think if you can get proportional regulation, I think firms are seeking that out. I mean you see the crypto industry want the Clarity act to be, to be passed for the legal certainty and the predictability that it provides. I mean, Chris is right. You know, first principles, let's think about first principles. And the nice thing about the CFTC and why people are seeking to come into the CFTC's jurisdiction is it has principles based regulations, it has outcomes based regulations. And so you can take a unique, innovative new structure and put it into that regulatory those principles based regulations. And as long as it's meeting those principles, thou shall not manipulate markets, thou shall not steal from customers, thou shalt uphold the financial integrity of the marketplace, whether it's defi or traditional exchanges. As long as it's meeting those principles, the CFTC can regulate those things. And so that is very attractive to the marketplace. It also takes away some of the uncertainty around other regulatory authorities regulating those markets. And we're seeing this in the kerfuffle around prediction markets. If the CFTC regulates something, it has exclusive jurisdiction over that activity. And so the crypto markets are looking to do that. And when they do that then state law doesn't apply. Other types of laws in the United States may not apply. The CFTC becomes the sole regulator of that marketplace and the principles based regulator. And so to me it's not going to be things stay offshore. I think it's quite the opposite. I think people are trying to get into the United States for the predictability and the innovative nature of the CFTC regulatory structure.
- [17:58]
C
I think if I could just respond, I think the big question there is who's thou? Right? And in today's world, thou the people that they're being regulated are the intermediaries. It's really the, it's, it's the FCM that's clearing, it's the DCO that's clearing, it's the DCM that's, that's, that's executing. Whereas if you pivot to a decentralized approach, it's really the individuals that are transacting on the software and it kind of blows people's minds like, who am I going to regulate here? And it's really the behaviors and the activities. Now that doesn't mean that the principles can apply. Like if you're manipulating markets, you should be held accountable. I do think one of the things we spent, I know, well, years on was structuring what we call risk waterfalls and so making sure that that counterparty risk. Because remember, if I do a trade and it's a hedge and the market works in my direction, or the last thing that I want is that hedge to get liquidated when I need it most. And so we spent because my counterparty went away or went bankrupt. So we literally spent years designing a lot of these waterfalls, we call them risk waterfalls that make sure that when you do a trade, it's good, it's going to be with you. And we really insulate that counterparty risk. Sadly, those best practices were largely ignored in the crypto space and they went right away to this thing called ADL that we've talked about on bips and bips and other shows where they put the bottom of the waterfall first. I think we're in a really unique position where decentralized technologies can actually reconstitute that risk waterfall in a way that delivers counterparty risk in a decentralized manner that would really deliver on those principles. And as you keep, you know, building out the principles that you need to be quote, compliant, it's going to be very hard for the CFTC to say, wait a second, Americans, you can't use this because it's too dangerous. Like, gosh, like I, it really makes you feel uncomfortable if you're a sophisticated individual and you're like, hey, I want to go on hyper liquid. It doesn't feel American for someone to say, I'm sorry, Laura, it's too dangerous and risky for you. We don't want you to do it. And so like, I think hopefully the market over time and liquidity is going to migrate to those, in those, those defi protocols that deliver best in class risk management and other things. But it's, it's going to be fascinating.
- [20:24]
A
Yeah, I mean if I kind of like, you know, weigh everything, pros and cons. I can say, okay, so the technology has all these different benefits around, you know, transparency and like even things around basic execution. But you know, obviously when CME and ICE went to the CFTC about these issues, it's not like there was, you know, no concern. You know, there are some legitimate things that they're calling out. Some of them are so, so, you know, one of the ones that they call that, which I personally think is just like an interim thing, but at least at the moment I do agree that, that there is an issue which is that these venues potentially pose a risk to global commodity benchmarks. Another one was about sanctions evasion that you know, for instance, maybe like Iranian or Russian flows are moving through hyper liquid. You know, like people in the crypto community would counter by saying that on chain analytics firms can, you know, flag those, those kinds of activity faster even than ofat can. And Chris, and I know, yes, if you talk to people who have persecuted or yeah, prosecuted really crypto crimes versus traffic crimes, they, they definitely prefer doing it with blockchains which are just so much faster and easier for them to, to track that kind of activity. So I was wondering, you know, when you look at some of the real risks that are being called out here, you know, how do you think that those can be, you know, mitigated or how do you think that regulators can both bring that activity here while also accounting for those risks or preventing those risks?
- [22:09]
B
Well, the CFTC has broad manipulation and enforcement authority, so even beyond its market. So you know, we talk about bringing these, these exchanges onshore and then the rules and the structure that would come with that. But even without that, if they see manipulative activity that is impacting, let's say, the price of oil that is being utilized in some capacity, the CFTC has broad authority to go after that activity. So they only have, you know, one arm right now in the two arm, two arms, you know, trying to enforce these markets. They have their enforcement but they don't have the pre event regulatory structure in place. And so I think what we're suggesting is it would be beneficial, you could then to have them come on shore to register and then you get the, know, your customer protections, you get the AML protections that help with money laundering. You get some of these other things that allow the structure to come on, come into place that and benefited our markets over a period of time. And so that to me is the way that we address this. I think ICE and CME have some legitimate concerns that Price discovery is happening in unregulated areas. We'd rather have that happening in a regulated environment, especially in the commercial activities where hedgers and those people who are relying on those prices in interstate commerce are utilizing the price of oil or agriculture or whatever it may be. We want to make sure that those markets are legitimate and the financial integrity around those markets are held up. And so to me, that is concerning. And another reason that these, these markets should consider coming onshore in the United States.
- [24:03]
C
But Walt, isn't the answer to that. Hey, guys, you don't like the pricing, Maybe it's more susceptible to manipulation, but gosh, you're also not 24. 7. And people need 24. 7 markets. Fiduciaries need 24. 7 markets and risk management. And when Trump invades Venezuela on Friday night, gosh, I need to go and mitigate my risk. When Operation Epic Ferry starts on a Saturday night, gosh, I need to move quickly. I'm a fiduciary. I want to act in the interest of my clients. So isn't the answer, hey, guys, with all of your robustness, why don't you just fix your tech, go to 24. 7 and compete?
- [24:43]
B
No, it's a great point, and I think the world is moving to 24 7. FIA just did a paper on this. But there are some structural things that have to happen in order for the integrity of the market to keep pace with the execution side of the market. So you're right. 247 trading is possible and currently happening in several markets, but the payment rails aren't open, the banking system's not open, and so the de risking of the system can't happen. And so what FIA has suggested is we need to make innovative new steps there. We need to look at tokenization. We need to make sure that the clearing Systems are running 24. 7 Before we go into these markets. Because again, on the first principle ideas, the people we're trying to protect are ultimately the commercial participants that are hedging in our markets. If there is an illiquid market on a Sunday night where a hedger gets blown out because we have rushed too fast to get to 24. Seven, that's not great for the commercial participant, and we'll lose confidence in our markets. So we are totally in support of getting to 24. 7, but let's do it in a responsible way that gets us there, and all the the benefits of our markets come with it.
- [26:02]
C
I just want to ask what would need to happen because we have stable coins that pay 24. 7 we have money market funds that you can move 247 from a margin perspective. You know, we also, you know one of my big thesis right now is that technology has really held us back from, from, from, from the very beginning in keeping up with the natural state of markets. Natural state of markets are 247 markets don't get tired. The only reason why liquidity ebbs and wains or, or, or, or changes over periods is that people go to sleep and they get tired. But now we have agents that are starting to trade. We have bots that are starting to trade. So I guess the question that I would have is, you know I, I mean and I, I know I'm biased because I'm in the venture space and I see all the innovation and the capabilities and I'm just like guys like this is easy to, you know, if it's a payments issue, just use a stablecoin. So what's the holdup do you think to getting to where we need to be on the 247 side of things?
- [26:59]
B
Well, I think largely exchanges are closed systems and so it's really up to exchange by exchange of how they innovate in this space. FIA has been trying to work with exchanges to say in the post trade collateral space. How do we update the systems? And you mentioned a lot of the partnerships that you know, ICE is doing with OkX. You know we have had Circle for example, Jeremy, a speak at our conferences about the importance of getting to stable coins and how that could be utilized in a post trade environment to help speed up the velocity of money. You even have the public sector that it's looking, looking at this project Agora which is happening with the bank of International Settlements IIF the trade association is looking at that of how they can speed up tokenization of assets and move the public payment rails faster. You have Fed now with the Federal Reserve trying to figure out how do we keep our fed system moving 24 7. So there's a lot of simultaneous things happening. What I love about this debate is it is caused, this competition has caused really interesting ideas to happen. So I don't, I can't tell you what's going to be the ultimate outcome but it's exciting. Like I think it's causing everybody to sharpen their pencils a bit and to get better and competition. That's what it does over the years, what it does. And so to me this is an exciting era for us.
- [28:31]
A
Yeah. So let's actually talk about how the Hyperliquid Policy center shot back at this news About CME and ICE attempting to get regulators to rein in hyperliquid. They wrote on X. Hyperliquid offers enhanced market transparency, publishing a complete on chain record of every transaction in real time, making it a uniquely hostile environment for insider trading or price manipulation. Hyperliquid's transparency serves as a strong deterrent for misconduct and facilitates surveillance, detection and investigation by regulators and law enforcement. Hyperliquid also offers 24. 7 trading and innovation that substantially increases market efficiency. Continuous trading eliminates gaps and discontinuous discontinuities between legacy market hours, improving price discovery for all participants. So, like, what do you think of the argument that you're making there and, or that they're making there and do you feel like, you know, their argument that the tech alone just is superior in, in all these ways and kind of addresses the concerns that CME and ICE have? Do you feel like that is basically persuasive? Are you talking to me or either one of you?
- [29:46]
B
No, I think, I mean clearly some of those innovations are beneficial and the transparency that the blockchain brings is really helpful in seeing illicit activity. So that's going to be helpful. But there are certain things about who is accessing your markets. There are certain concepts that are part of the law right now of making sure that we want the right people who understand the risks of risk profiles of these products to be participating on these exchanges. And so those are things that right now they don't have to abide by. And so in order to create this, you know, outcomes based level playing field that would require them to come onshore. And it's not purely the tech is going to solve all those issues.
- [30:36]
C
I think if they came on shore they would have to change a number of things. I think Walt and I have disagreed in Congress before about some of the things we'd like to see changed in the US as well. Like I, I think that these markets shouldn't require an intermediary anymore as they come on shore. And I think we're seeing now the CFTC is starting to look at, okay, what principles are we trying to solve for? Do we really need an intermediary in certain cases? You know, I've testified, say, no, we don't. And that's coming from someone who used to run one of the largest intermediaries in the world. And so I think it works both ways. I think there would have to be some things that if, if they came on short, went the US route that they'd have to conform with. But I, I would like to See the CFTC and, and it seems like they're willing to do it, change some of their more rigid requirements into more principles based. I think it's going to work in both directions.
- [31:25]
B
And Chris, just vigorously agree with you. We agree that there doesn't need to be an intermediary in all circumstances. I think for us when you start to get into leveraged margined risk management products so you're getting to more, you're really dealing with hedgers that are margined. We think the fcm, the intermediary plays an important role of, of the risk management and all the things, the balance sheet that sits behind it. When they're fully pre funded collateralized products. I think vast, vast majority are on hyper liquid. That's really just settlement risk. That is not as much system integrity risk that you face with leveraged products. So I agree that there are instances that allows for fully collateralized direct access to exchanges. But we believe when it's highly leveraged that it should go through an intermediary.
- [32:22]
C
So while they're getting closer, getting a little closer, I disagree still. I agree that intermediaries are going to still be around and I think they're going to provide incredible value add services and they're going to mitigate all different types of risks and be very helpful. I guess my difference is leverage or not, I don't think they should be forced on people or institutions. They're sophisticated investors. All right, we're getting closer Walt, but maybe a couple of years will come around. You're getting there.
- [32:52]
A
Chris, I have a specific question for you, which is that as this controversy was brewing, we were hearing that the Hyperliquid Policy center led by Jake Chervinsky, who's a friend and a friend of the show, and even Hyperliquid founder Jeff Yan were in D.C. and it was crazy. If you were them, how would you, you know, propose that regulators move forward or like what would you advocate for?
- [33:21]
C
It starts with education and you know, this idea of decentralized perp Dexs. Well by the way, like first the product, right. Like we're not there really on perps. So Bitnomial has one. But like you want to make sure that there are no regulatory impediments to perps, which are an incredible innovation that crypto has brought to the world. And so you want to make sure that the conditions in the product are sorted and then I think there's two different directions you can go. Number one is hey, we're going to go decentralized. We're going to be A perps. Dex, we want to work with you on what that would mean and how we could do so for US Persons. So forget the intermediaries. We're the tech layer. We want to make sure US Persons can connect to our tech layer and express their risk views. That would be one stream. The other stream I'd say is perhaps if they made a business decision, and I don't know if they have or not, I want to come on shore. This is my plan. I'm going to get my licenses. Maybe I don't want this license. I want that license. You know, let's talk through how I can. I can work together. But. But at the end of the day, it's like, how can I service the US market, which I think would really benefit from 24. 7 risk transfer in accordance with all those principles. We talk about markets that aren't manipulated, counterparty risk that is mitigated. And so I'm not entirely sure what their business model is, but I think that they can take it in a number of directions. But the ultimate appeal would be how do I get US Persons legally part of my liquidity.
- [34:51]
A
Yeah, yeah, I agree. So, you know, the CFTC kind of is in an interesting position here. So first of all, the chair, Michael Selig is a crypto lawyer who now has this position and he acknowledged, quote, hyperliquid could end up influencing the spot market price or the futures market price on our registered platforms. But then he added, our goal is always going to be to onshore those markets and to have the market subject to our regulations here in the U.S. you know, so that's interesting because obviously all the regulations so far are based on having an intermediary. But Chair Selig is definitely somebody who understands the merits of decentralization and how it works and how it could be used to fulfill a lot of the goals that the regulators have. So I was curious if you had thoughts on how the CFTC might approach this issue. What might it change about its own regulations or what might it seek to have changed and laws like Clarity or anything else. Do you have thoughts on not just how can hyperliquid change to address this problem, but also how the CFTC or US Regulations could change?
- [36:09]
B
Well, I know the Clarity act has language in it on Defi that talks about doing a rulemaking with, I think the CFTC and the SEC about how do you deal with these types of entities? So that's an invitation by Congress to start that dialogue to understand better in a decentralized platform without necessarily a Logical accountability structure. How do you regulate? For years we have regulated by making sure somebody was responsible for the activity and holding them. So even in the Commodity Exchange act right now, you can outsource things to third party vendors, but you retain the responsibility of having whatever you're trying to do with that third party done and you're held accountable. So if that construct is, is no longer available under a defi scenario, the regulators are going to have to figure this out. So I think the Clarity act is, and our hope is with last week's passage in the Banking Committee, that we can get to final passage on that soon and the regulators will have a platform in which to start that dialogue. So to me, that is a great starting point to start to have these important conversations. I know that, I know that Hyperliquid commented on the 247 per request for comment that the CFTC put out in April. And so we're already starting to have those productive conversations about how we get them onshore in a way that preserves some of their innovative nature.
- [37:49]
C
And for me, it goes back to 2009 actually. So I was at Lehman and then everyone knew that derivatives were a huge part of the crisis and people forget how big a deal it was globally. And then In Pittsburgh of 2009, the G20 put out this communique and they said, guys, enough. All these derivatives you're doing, you got to report them, you got to centrally clear them and you have to electronically execute them. And what they really meant was they wanted to have visibility into the activities. And remember, back then we didn't have blockchains, so we had no choice but to centralize everything. And so if you take what they were trying to do was obviously make sure they saw it, they mitigated counterparty risk and that there was fair execution. I believe you can take decentralized technologies and deliver on those same principles. And if there was a regulator in the world that wasn't so terribly rigid and doctrinal, that's the cftc. And I think that they're going to be very excited to explore how to deliver on those principles from 2009 with the technology solutions of today.
- [39:00]
B
And Chris, I was acting chairman of the CFTC during the Lehman Brothers crisis and was up in New York helping to resolve Lehman Brothers and make sure that the futures markets were taken care of. And the good news and the reason that all the over the counter derivatives came to the futures regulation model was because it worked. It worked and central clearing worked. And so to me, there are lessons learned from Lehman that structure, unregulated structure, failed. We were able to bring massive transparency in a structured way to central clearing, which is working. But I agree that we have to have an open mind about maybe decentralization along with AI can help us to figure out when there is illicit activity happening. And so I think the cftc, through the Clarity act, is going to have an ability to do that. And I just can't wait. Like I said, this is the most interesting time in the last 30 years to be a part of this industry. This is going to be exciting going forward.
- [40:04]
C
I agree, like, clearing is supposed to be like the most dull, boring function in all of markets, but it keeps becoming sexy, like every few years. OTC clearing was like the hottest thing on Wall street after the crisis, but it's like clearing.
- [40:18]
B
Yes.
- [40:19]
C
And now we have this new iteration of it, which, which is really cool.
- [40:24]
A
Yeah. Chris, I would call clearing, sorry, sexy, a strong word, but I try, but I understand, I understand the concept. Um, so I know we had. Walt, only for a short period. Um, I do want to ask one last question. Walt, do you have the time?
- [40:42]
B
Of course.
- [40:42]
A
Oh, great. Okay. Because you referenced prediction markets earlier in the show and as we know, polymarket is in a very similar position to Hyperliquid. And I wondered, you know, to hear from both of you what you thought would be a good solution for what is essentially a similar problem. It's obviously a different type of market and I don't know if there's anything particular to prediction markets or just, you know, anything in the differences between prediction markets and like a perp dex that would make the solution different. But I'd love to hear your thoughts on how polymarket could overcome the same issues.
- [41:20]
B
Well, first off, I would say prediction markets have been around for a while. You know, I was at the CFTC in 2004 when we first approved Head street as one of the first prediction markets in economic activity. I was there during the Iowa political markets where it was low dollar marks in prediction markets around politics where you could put a dollar or $10 on what's going to happen in an election. And the CFTC gave a no action letter allowing that activity to occur. So Polymarket and Kalshi have been able to do this at scale. And to me, the amazing thing is that these markets are incredibly predictive in the way that they work, the wisdom of crowds, that they're able to bring a lot of information to market in an incredibly accurate way. So let's start with that premise is this is very innovative and it works and people are excited about it. But there are enormous growing pains that are going with this. How do you deal with insider trading to make sure that people with inappropriate information cannot profit off of that? It ruins the integrity of the market when that happens. How do you deal with as a regulator when these products are being self certified so quickly that they are indeed not susceptible to manipulation and all the things the act requires. So there's a lot of wood to chop here with the agency. And I know the chairman of the Chairman Selig of the CFTC is looking to do a rulemaking on this and that's a great first step is to start that process. And so FIA has been active in that dialogue and provided a comment letter for that. Now, Polymarket, like you said, has a US registered entity, but the main market is still offshore. So I think Polymarket should come on shore for the same reason I said that hyper liquids should come on soar. I think it would bring incredible credibility to the product. It would subject it to a level playing field with the rest of the marketplace. And I just think it's good for that industry, the prediction market industry, to have one of the bigger players come onshore. And I know ICE has put $2 billion into polymarket and so there's, there's a parent there or a partner there that knows how to run regulator markets very well. So my hope is that polymarket does exactly what you know, others are doing, which is coming onshore.
- [43:58]
A
Chris
- [44:01]
C
Walt said it right. The issue, the thing that confounds me with prediction markets is that market manipulation for derivatives has always been illegal. And just because you have a new technology doesn't make market manipulation legal. It's like ridiculous. So I mean it's all about principles in the end. And I'm curious as to what your, your letter is saying, Wal, because like, other than, hey, we have like the law is the law, guys. Like you can't manipulate prediction markets. It's still legal, guys. And so yeah, I think we're all believers in markets that are not subject to fraud, manipulation or abuse. It's illegal to do so. It's always been like that since Dodd Frank. Nothing's changed, guys.
- [44:43]
A
But Chris, you think the best way to resolve that issue was for them to have a separate US entity and then the offshore prediction market, like two different entities.
- [44:52]
C
I believe in free markets. I think if obviously if they come onshore and they have regulated intermediaries, those intermediaries will be regulated to the extent that markets are manipulated in any venue, you wouldn't Expect liquidity to prevail. And I do think there's ways to hold folks accountable with Hyper Liquid's particular structure. But the market will figure it out. I've got no time for markets that are being manipulated and to the extent that they are, DOJ has a very long reach and I'm certain that will be addressed. I'm less concerned around the illicit finance piece of things, not because I'm not concerned about illicit finance, because I know lawmakers love blockchains because they can trace it very easily. So for me, the more we put on chain, the better. And I think the bad guys should put more and more stuff on chain because they're going to get found out.
- [45:45]
B
And Laura, I mentioned this earlier, but Chris is right. The CFTC has unlimited unf fettered access to to on enforcement authority. They can go after this illicit activity and you saw that with some of the enforcement actions around the Venezuelan president. So they're going to aggressively police this going forward. But I think even better would be for them to come onshore and to abide by the anti manipulation requirements of a lot of these products. So you don't have to just do it after the fact that we're trying to police some of it before.
- [46:26]
A
Yeah, yeah. I think for that particular case, Polymarket is the one who referred that case to regulators or something like that. I forgot the exact details, but I think they flagged it. So it does seem that they already have a program like that in place. All right, well both of you, this was such a pleasure to discuss because I find this sort of intersection of questions just endlessly fascinating. I am rooting more for a technological solution, so we'll see what happens there. But thank you both so much for coming on Unchained.
- [47:04]
B
Thank you, Laura.
- [47:06]
C
Thank you, Laura. Thanks Walt. Awesome to see you.
- [47:08]
B
Great to see you, Chris.
- [47:10]
A
And thanks to everyone for joining this live stream. We will catch you tomorrow. Bye. Nothing you hear on Unchained is investment advice. This show is for informational and entertainment purposes only and my guests and I may hold assets discussed on the show. For more disclosures visit unchained crypto.com.