With all of the recent activity in the cryptocurrency markets, I wanted to have a conversation with one of its most rational and informed participants.  I naturally a previous guest of the Asia Tech Podcast, Hayden Hughes, a co-Founder and the CEO of Alpha Impact.
 
Hayden has been posting, blogging, and not-sure-what-to-call-it over the past few weeks and I wanted to cover some of the topics he was addressing:
  • Algorithmic stablecoins
  • The logistics around the crypto lending markets
  • Terra and Luna’s watershed event
  • The implications of Celsius, Zipmex, and others halting withdrawals.
  • What regaining trust looks like for firms in the crypto space
  • The inevitability of the future of finance is digital
  • What regulation could look like going forward
Other titles we considered for this episode:
  1. The Market Has Run Out of Things to Be Scared Of
  2. Crypto Is Pretty Forgiving
  3. We Were in Several Months of Down Only
  4. It Has Been a Crazy Couple of Months!
  5. This Isn’t the First Time Crazy Finance Bros Have Taken Such Risks
This episode was produced by Isabelle Goh.

Read the best-effort transcript below (This technology is still not as good as they say it is…):

Michael Waitze 0:24
Hi. This is Michael Waitze. And welcome back to the Asian Tech Podcast. Today we have Hayden Hughes, a co founder and the CEO of Alpha Impact back back for an emergency podcast. Hayden. I cannot thank you enough for coming back on the show on such short notice. But there’s just so much going on. It’s an awesome thing to do. How are you doing, by the way?

Hayden Hughes 0:43
Yeah, thank you emergency podcast, it sounds like Like, like, we’ve put this light up in the sky and the Batman has come. I’m not sure if I’m that important. Yeah, no, no, I’m very good. Thank you. We’ve been. So at alpha impact. We’re trading firms social trading firm, we have customers who copy trade expert traders and won’t won’t blow my own, you know, or bang my own drum too much. But just to say, we have some people that have made been consistently making money throughout this bear market. So I tried to stay a little bit ahead of the pack in terms of what I can do. And I won’t go too far in detail on that. But it’s been a crazy couple months. So lots of stuff is happening. And it’s good to good to come back and have a chat. Yeah, I

Michael Waitze 1:29
really want to know, right? So I follow the market, but I’m not as deeply involved in it as you are. I’m curious, like, when you take a step back, what does it look like to you? Now? I think I can’t remember the first time we talked, but it’s over a year ago, for sure. Right? And yeah, a lot of stuff has changed. But like, how would you describe the current environment? And how were you looking at it, per se?

Hayden Hughes 1:50
Well, I think, great question. And look, I think it’s it’s very important to be thinking about these things. It’s also important to kind of question this narrative, you always have to question their, the narrative, right. And I think when we, when we initially spoke, it was kind of one of those like, things are going up, and they’re only ever going to go up, you know, vibes use the language of the young people in my office who don’t think I’m cool anymore. But the vibe was that it’s just gonna go up forever. And now the vibe, the sentiment has substantially changed. And so we were in several months of kind of down only where it was just every single week was printing a red candle. We’ve seen some recovery since then, obviously, you know, I kind of feel like the market has run out of things to be scared of. And so that’s filled a little relief rally, which we’ve seen on Wall Street, as well as in crypto markets. There’s been some crazy stuff happening on the lending side of things. You’ve, your listeners will, no doubt be aware that Celsius and coin flex, and they will finance in three arrows capital all affected in one way or another by the market, whether that was the USD and Tara collapse, or whether it was just yeah, quite frankly, bad risk management for

Michael Waitze 3:06
Altera actually, go ahead. Yeah, I mean, live, as you would say, the

Hayden Hughes 3:10
that was the kind of first nail in the coffin. Yeah, but I guess, you know, the themes that have really emerged have been number one, algorithmic stable coins, still a lot of work to be done, we might still be at the White whiteboard phase, not at the, you know, 100 billion market cap phase. Number two is that the risk management man, this has really been all these lending platforms blowing up, has been a failure of risk management across the industry. And, you know, in any bank or financial institution, if you’re giving a loan, they, they tend to ask two questions, right? One, what happens if this person can’t repay the debt and doesn’t make their payments? And two, what happens if this collateral that we’ve been given substantially declines in value? And those things just didn’t happen? And everyone was like, oh, yeah, the good times are here, everything’s gonna be great forever, have a loan of $50 million. I know you’re good for it. You don’t need to give me any collateral. I know everything, or anything. Yeah, exactly. Like, well, you did? Well, this one time. So clearly, you’re gonna do well, forever, and I have nothing to worry about.

Michael Waitze 4:12
Can you dig a little bit deeper into some of the way this lending looks? And um, I’ll tell you why. You know, you look at some of the advertisements for Celsius, right? And they say something like, you know, give us your Bitcoin, we’ll lend it out. We guarantee you X percentage, I don’t remember what the percentage is. Right. Can you run through exactly how that lending works? So the people that are involved in the crypto space can actually know how that works. And then what the implications were of this collapse? Yeah,

Hayden Hughes 4:37
yeah. So so the way that this works, customers basically are set or asks, hey, you’ve got some assets, they’re sitting around, they’re not doing anything for you give those assets to, to whoever right we don’t do this, but let’s just pretend that we’re the lending. Let’s pretend were the Celsius right or the Nexo or the block phi. Give us the assets. We’ve got a black box, we’ll go do Some stuff with those assets make a higher return, maybe we make 20%. And maybe we give you eight or 10, or six or nine or 11, whatever the number is. So what does that basic?

Michael Waitze 5:10
What’s the black box doing, though? Is that black box going out and trading? Because it’s taking risks? Yeah, so that’s Yeah.

Hayden Hughes 5:16
So there’s, there’s two, there’s two setups. One is that the firm, whoever it is, is engaged in trading, right. And they kind of classical trade that used to be done to kind of create this yield with something called the basis trade. So it’s a futures arbitrage, where you’re going long and short, the same asset but slightly different products simultaneously. So that’s the kind of traditional way of doing it, where you would be taking advantage of a gap between the prices of two very closely related assets. That’s the kind of the old school way. And just by the way, that basis trade that I’ve just described, was technically what we call risk neutral. So you were long Bitcoin and short Bitcoin at the same time. Yeah. which I know sounds crazy, but does actually work when the Futures Curve is out of whack, which has been forever and Bitcoin and other digital assets. So that trade has been viewed as pretty safe. And you’ve seen a lot of firms pop up, and they literally, they just take your money. And okay, you’re giving me a theory and right, so now I have some Aetherium. Spot. And I can go in short, the Ethereum future at some future point in time that matures at whatever September 1 or October 30. And those assets converge. So it’s it’s technically a pretty safe trade, because you’re long and short the same thing at the same time.

Michael Waitze 6:38
Are these futures listed futures? Or are they OTC futures? If you know what I mean?

Hayden Hughes 6:44
Yeah, so they’re, they’re listed there on by Nance and FTX, there’s an order book you can get in and out, they’re highly highly liquid. So that’s the kind of traditional way it’s the space is trading, right. And in a market where I can make 13% you might give me your theory, I’m gonna give you eight or nine you’re making money, I’m making money, everything’s good, everybody. But there’s another I guess level beneath that where you give money to the firm the block fire the next or the Celsius. And they do all kinds of crazy Dejan risk stuff on defy going into liquidity pools and going into it seems, Tara. So that’s the kind of the, you know, what we might call the ninja black box where you’re doing everything under the sun. And as long as you can pay the customer out, then no one really cares how much risk you’re taking? Because you’re responsible for making things go forward. That’s the kind of door number two, yeah, yeah.

Michael Waitze 7:42
And what’s the implication of the market going down? Or upward? Does it matter?

Hayden Hughes 7:47
Well, under that scenario, you actually have no idea what the firm is doing. Right? So I might be a very responsible, diligent trader, or risk manager. And I’m really monitoring things, right, I might have some exposure where I am, I’m not risk neutral, I’m actually long or short, or whatever the case may be. But I might be a very well disciplined trader, which would mean that you can trust me, or I might be an absolute knucklehead, with no sense of risk management whatsoever. And the scary thing is, Michael, you will have no way of knowing the difference. Because guess what my marketing is gonna say the same thing, whether the trading on the back end is run by super smart people, or super crazy people.

Michael Waitze 8:28
But is this the case of you know, if it sounds too good to be true, it kind of is that it like in an up market, it’s easy to make money, so I can offer you a percent interest because I know not I don’t know, but I feel like Bit Coin is gonna go from 20,000 to 60,000. And when that happens, giving you 8% return when I’m making 25, or 30% is simplistic, right. And in a way, it doesn’t matter if it’s me, my dead grandmother trading or some super sophisticated person, but as long as it’s going up, it’s easy. But when it starts getting more volatile when it’s going up and down. And that black box doesn’t have enough history to know how to trade in that type of volatility, that if the person who’s trading for me, like let’s say, I give money, like you said to Celsius, let’s say Celsius, then gives it to three AC. So now I have two levels of disintermediation between me. And I don’t know what either one of them is doing. But I do know that now, I’m leveraged to two different firms, maybe two different strategies, and that the likelihood of that money coming back to me is just lower because I don’t even know what they’re doing with it. And if you think about who’s buying the crypto, they also run the risk that they’re not informed either and they’re just going Hey, goes up. My uncle told me it goes up, like give my money to Celsius. I keep getting a percent return. So it must be working. And then it just goes away. Do you know what I mean?

Hayden Hughes 9:45
Yeah, yeah, well, it’s I mean, that’s, that’s the third path, right? Is that you can and you have no way of knowing if you’re facing it Celsius or Nexo or a block fire Voyager. Is it a responsible well run trading shop that’s doing this risk neutral stuff? Is it They’re crazy trading shop that’s doing all kinds of crazy stuff, or have they just given your money to someone else, right. And this is where firms like three AC come in. And they were, at the time one of the biggest hedge funds in the space and they had an insatiable desire for liquidity. And so they’d say, look, we’ll, we’ll borrow from you, and we’ll pay you whatever, right? 12% 16% 18% right. 11% 9%. And if if I’m the platform paying you six, and I can get nine somewhere else, that’s the back to back that I don’t need to do much thinking, right. So you would hope again, that the risk management department of whatever firm would say, Okay, well, we can’t give too much to one Counterparty, right. Yeah, we’re gonna give 5% to three AC and 5% to Genesis and 5% of the next guys. I mean, Voyager tech, they were publicly traded, and they their exposure to two, three AC was 60.5% $665 billion to one firm. So

Michael Waitze 11:00
but let’s be clear, $660 billion in market cap that was at the tight, only 3 trillion sorry,

Hayden Hughes 11:07
million million, not billion.

Michael Waitze 11:08
Sorry. Sorry, that’s better. But even so, even $660 million is still what would that be out of trillion? It’s not 1/5? It’s still? Yeah, it’s still 2%? It’s still big, right?

Hayden Hughes 11:24
Yeah, yeah. So so that that’s what effectively happened, right? And you had Celsius who was heavily exposed to, to Luna and ust so then, you know, you start to concentrate risk on top of risk. And you had anchor, the anchor protocol. And all you had to do to make money on Anchor protocol was deposit your USD T, the Terra USD equivalent, and you could get 20%. And nobody thought to ask, well, how is this actually generated? Right? And if anyone did ask and stopped to ask, you’d realize, oh, well, they just print new, us t to pay you. And you can always sell the US T to get Luna. But you know, this, this relies on there being a growing market for Luna to be able to capture the growing market for for us T that’s just being created out of thin air. So the moment that the the supply of Luna stops growing at 20% per year, you’re actually kind of in trouble.

Michael Waitze 12:26
Yeah, I wouldn’t even say I mean, it sounds super Ponzi to me, I hate to use those words, right? Because it’s so trite. But it’s like, it’s like putting trades in a drawer. Right? It’s almost like Bernie Madoff saw where it’s like, Don’t worry, the guys who put in early get their money back, the guys that come in later, they get some of their money back, the guys who come in at the end, get nothing. And then at some point, people figure it out, because Luna liked the terrace of feels like, I’ll just keep printing more and giving more because there’s no central bank involved. It doesn’t cause any other kind of inflation in the real world. Right? So you can keep doing it until people realize you can’t, at some level, no.

Hayden Hughes 13:00
Yeah, I mean, that was the that was the fatal the fatal weakness of the industry. There were all these. I mean, there were all of these. So there’s there’s two levels, right. So the first level is that crypto is is in many respects that kind of crazy Dreamland where fortunes are made and some people make money and I still don’t understand why NF T’s you know, why the monkey NFT is worth more than the the what is it the llama NFT that’s, that’s a field I’m not going to go into. But so crypto goes through these crazy boom and bust cycles every four years. We’re currently in the feels like we’re, I guess 30 to 40% through this bust cycle, which means we should start going flat to sideways soon. But so crypto goes through these crazy cycles. And then on top of that you had in 2020 a ton of liquidity get printed from all of the central banks all around the world, taking a concerted effort not to, you know, kill the economy over COVID, which probably was the right thing to do, but had the unfortunate side effect of expanding the monetary supply so that everything you have that’s denominated in dollars, the denominator just got bigger. That means that the assets tended to increase in price. So there were kind of it’s kind of a double whammy you had both of those things happen to crazy crypto Dreamland, plus all the extra liquidity and that drove things to new heights. I mean, Luna was $140 It’s crazy. Yeah,

Michael Waitze 14:27
now it’s zero. But if you notice this stuff if you’re in the market every single day, right at some point, it’s got to become obvious to someone was this obvious to you?

Hayden Hughes 14:37
So I’ll give you the background. In early May I started realizing that the something was wrong with Luna and ust so like many people in the industry, I shorted Luna I didn’t realize that USD was going to have a problem. I just thought it was a luna issue. So I shorted Luna from you know 80 down On 245 thinking that was the end, went back in again shorted, it tried to get back in way too early. That was just the kind of start. And we had some of the traders on the Alpha impact platform saying, Hey, this is this could be the start of the end, and I’m selling everything. And there was a big rush of traders on our platform, who basically told the community, the health impact, were selling everything and they sold Luna, they sold everything. So that was kind of a start. But then a few weeks later, I started realizing that since the collapse of ust which happened, it felt like overnight, but actually it happened over three or four days, maybe five, the all of the leverage had had compressed. And so the ability of we talked a little bit about the basis trade and being a function of futures. And I’m not going to get too far in the weeds on the math. But it’s safe to say that in the two weeks between kind of May 6, and seventh when this whole thing started with Luna and Terra to two weeks in, so let’s call it like may 21. The ability for these firms to generate yields for their clients was dramatically reduced. So previously, you could have made 21% or 18% or 17%. All of a sudden now you could make like four. And you would expect in that situation, these firms to lower their interest rates that they pay customers. Yeah. I mean, why wouldn’t you? Right? Like, I don’t want to lose money. That’s not my core business. So why wouldn’t if I’m in the business of taking loans, of course, I would change the interest rates. And we saw something like, you know, and I gave a keynote on June 1, saying, I said many things. But one of the predictions I made was that there’s a problem in the lending markets. And I looked at it and I put a slide up and it’s it’s on my LinkedIn, where I said, here’s the four firms out of the 20 or so that we’re tracking that have lowered the rates, they pay customers. And here’s the I don’t remember how many it was exactly. Here’s the 16. That haven’t, right. And those firms had way higher interest rates. And the only reason I could think about that, it would make sense for firms to leave the interest rates there is if they had a massive hole in their balance sheet that they would not be able to service all the withdrawals from clients. So can

Michael Waitze 17:14
you you think we’re worried you think they were worried that if they said, Hey, we’re going from let’s I’m just going to make up numbers 12% to 6%, that people would be like, oh, gosh, well, I’m just going to move my money. That’s just way too big a drop, so I’m just gonna take my money out and move it somewhere else. And they were just worried that if they said that, that people would take the money out, and that they could not fulfill those withdrawals.

Hayden Hughes 17:34
Yeah, so my thesis, that my thesis that I kind of started within, I would say mid May is, was that the only reason it makes sense for these firms to lose money is that they’re actually losing money slowly, right. And before June, there was still some optimism, this was before three AC, this was, you know, it was still the market was still digesting all of this stuff. And so there was a perception that maybe the good times will come back, that became less and less likely as time went on. But there was still a moment in time where we were thinking, okay, markets went down, they’re come right back. And so the only reason it would make sense for those guys to bleed slowly, is that they were actually underwater did not have enough to pay all their clients, but they didn’t want to prompt a bank run and scare people into withdrawing. So they just left their rates there. So I said that on stage on June 1, I had some people and actually there was someone from I’m not gonna say who but there was someone from Celsius that was supposed to be at that conference on June 1, and they pulled him. And I said that on stage, and I didn’t, I didn’t disclose who which firm it was, because I didn’t want to be pointing fingers. But so you know, I think this was actually in the works since May. And I kind of looked at it. And I thought this just isn’t right. So yeah, scary times.

Michael Waitze 18:52
If you look at that I did this a couple days ago. If you look at the zip Mex chart of their own token, it looks like somebody knew something in May, right. I posted that on Twitter a couple of days ago yesterday. I can’t remember. Like, if you look at it now. It was you know, doing its normal thing. It was trending down, but the whole market was trending down. And then it just like fell out of bed. Oh, yeah. In May. 2,

Hayden Hughes 19:13
I’m looking at it. Yeah. So it almost

Michael Waitze 19:15
looks like somebody knew something back then that maybe you didn’t know, or I didn’t know, but they definitely knew. And somebody started aggress. And you can look at the volume spike as well. No. And that’s the telephony when the volume spikes and the price moves. That means somebody knows something, right? Because they’re like, I don’t care. I’m price insensitive, and position sensitive. And they’re just like getting out. Look at it. Yeah,

Hayden Hughes 19:36
yeah. Yeah, I’m, I’m just loading it here. You know what it actually looks like? It looks like the chart of Bitcoin in 2018. But what it really looks like let me just load the volume so I can see. I see what you’re saying. So. So what I’m seeing here I’m looking at the bid Next chart, it looks like from I guess, January 24. Until May 4, that’s when it looks like they were just trying to hold the line in terms of a steady price. It’s like, it’s kind of like to $2.80 something cents. That’s the. And I would bet that they’re market makers who I won’t identify because they’re there. They’re our friends to their market makers. We’re trying to hold the line here. And then something happens on May 4, it looks like yep. And big candle down. And then it just, that’s just that’s the start at the end. And then the volumes actually increase as the price declines after that, exactly.

Michael Waitze 20:45
This is what happens for any illiquid stock, right. So if I try to protect a price, because I have a vested interest in protecting the price, I’m just having to accumulate accumulate accumulate, right, so I get a bigger position, the positions then get concentrated. And historically, what happens in illiquid assets is that as the as the position gets concentrated, the rest of the market just kind of disappears. So the bid goes away in most cases, right? Yeah. And then people just have to start hitting lower and lower and lower bids, the volume massively spikes as people that were short, start going good enough for me, they put in a cheeky low bid, they get hit. And then as long as there’s some liquidity there, the person who’s trying to protect that price goes, I don’t care anymore, because it could go so much lower because I’m the only one buying and then it just drops out of bed. Yeah.

Hayden Hughes 21:31
Yeah. Yeah. That’s, I mean, keep in mind the the market maker who shall not be identified, they, they would have got hit around the same time. So we’re talking about May 4, right, that this market maker reportedly had some substantial losses, beginning three to four days after right after this period. So you have to wonder if that’s related, but I can’t comment too much on that. But But yeah, it’s definitely very interesting looking at the visit Max price and and look, they just closed off their withdrawals a few days ago, they’ve said that it was because of a Counterparty. They will finance I guess. So they, they did what what I think is not a terribly risky thing, which is find a company you trust, who has presumably risk management in place, and give it to them. And look for what it’s worth. I haven’t seen Babel finances. I don’t know if it’s Babel or Babel. I haven’t seen Babel Babel. I haven’t seen payables balance sheet, they could have just had one small loan to to one counterparty that didn’t go well. But apparently, zip Max had given 100 million to Babel, which is a very high number. You know, it could have been Babel finance that had a small problem or a big problem you never know. Right? So we don’t know the scale of the of the issue on the zip Max side. And we don’t know the scale of the issue on the Babel side. And we don’t know the scale of the issue on whoever Babel had given money to on the assumption that Babel had exposure to another third party. Or, but we don’t even know. So any one of those three scenarios where they were doing responsible stuff that dried up, they were doing risky stuff that the market went against them, or they gave it to some third party who might have been doing God knows what it’s very challenging to know at the stage, which of those kinds of paths, you know, sit next in

Michael Waitze 23:27
but what do we think happens to these companies? Particularly because if you think about like, like Bitcoin blockchain cryptocurrency this stuff’s not going away, right? I mean, at some level, we can argue about where it is today and what it really means. But the future of the financial world is digital. Just it just, it just is right. And I don’t carry the word I don’t have. I don’t have a dog in this race. Yeah. So I don’t really care. But I’m curious what you think about particularly at these early stages of the development of this market? What happens to firms? It’s just stopped doing withdrawals. Do you know what I mean? Do people go back afterwards and go, Okay, I trust you now. You don’t even like to Celsius, come back. The zip Mex come back? Does three AC come back? Like what happens? Do you think?

Hayden Hughes 24:10
Well, I think so. I think if there’s something like and you know, this is a really weird comparison to make, and I’m sorry, in advance if it comes across strangely, but I almost think of it like, you know, an airline crash, right? There’s a there’s a shock. They investigate for a long time, things don’t get resolved for very long time. So I think it’s important to remember these these issues involve complex financial dealings between sometimes 123456 counterparties. And you know, what, what effectively happens legally when you declare bankruptcy? I know you know this as a banker, me from the legal side, but you effectively get some shields where you get protection from lawsuits from people that you owe money to right and I think what will happen is I won’t comment on On any individuals, firms specifically, but let’s say I was in the shoes of, you know, Babel or three AC or Voyager or Nexo or Celsius, whoever I would, I would be trading furiously on this market volatility, trying to make as much back as I could. There’s still lots of ways to make money in this

Michael Waitze 25:20
market where volatility is great for trading. Yeah. Oh, totally. Totally.

Hayden Hughes 25:23
Right. And so, there, I mean, it is a mathematical possibility that some of these firms who are now bankrupt actually make enough back due to this crazy volatility, to cover their debts in full. So if I’m a trading firm, that’s paused withdrawals, my trading team would be up. I mean, just to give you an example, TerraForm labs, you know, the Terra guys, yep, they’re advertising for traders here in Singapore, they’re trying to hire. I’m, you know, I’m pretty busy. I’m happy with what I’m doing. But, but but they’re looking right. And so I think that the case would be that these guys are working hard, you know, canceled holidays, trying to make as much back as they can, with the hope that they can actually restore everyone. And if you can restore everyone, you open up the spigot for withdrawals, you’ll take a massive high cut your your business will be I would say, down. Yeah, it would be very hard for you to regain the trust after that. But keep in mind, crypto is pretty forgiving. You know, bit FinEx, you know, under indictment from the government in New York, they went and did this token, the Leo token they raised $900 million pretty quickly. So I think there’s a narrative that the crypto industry is one where we can buckle together if we believe in the cause. And it’s conceptually possible, certainly not today. But it is possible that, let’s say Celsius, figures out how to, you know, refund people and get enable withdrawals again, if they can do that and make the withdrawals happen. And then at some point, again, they’re going to have some innovative product, they’re going to have some reason for someone to trust them. And all it takes is one crazy market cycle for people to forget about this. So I think it’s not beyond the realm of possibility. But within the next six months, let’s say all the lenders just said okay, we’re, we’re good to go. withdrawals are back open, I do not think that any of those firms will be able to get any trust from users for very long time.

Michael Waitze 27:28
Yeah, I don’t disagree with you. I think the airline analogy is an interesting one. The only difference for me is that when a plane crashes, just the people on the plane die. You don’t I mean, so it’s pretty concentrated. Not that that’s good, right? And we don’t want anyone to die. But when financial markets are so interconnected, that almost everybody dies, right? Like nobody kind of gets out and goes, Oh, that thing bounced off the ground. I’m still okay. So it’s slightly different, because it’s much more widespread. But but in a way, you’re right, if they come up with another great financial product, people are very forgiving. On the other hand, I would say this, that if the digital and the crypto financial markets develop in the same way that traditional financial markets have, over time, that the trust concentration is going to be super high. And you’re going to end up with like five firms like Morgan Stanley, Goldman Sachs, you know what I mean? And that firms like Lehman Brothers and Bear Stearns are just gonna end up going away. And I don’t think it matters, what the names are on the door. But the firm’s that have the least amount of trust associated with them. And the ones where there are runs are the ones I think that are gonna go away, just based on the things that I’ve seen in the past, right. I mean, at the end of the day, when Warren Buffett came and gave Goldman Sachs or invested 5 billion was a $4 billion, and Goldman Sachs, he could have done the same, but he could have done the same thing for Lehman and just said, Now, I’m not doing it. Right.

Hayden Hughes 28:48
The first comment I would make is, firstly, that this behavior of crazy risk taking by some some, let’s just say over caffeinated, to use a pleasant term, finance bros. This is not the first time right, you had I mean, close to the first time. I know. And so I mean, even like, let’s forget about the 1800s and the 1700s, like 1907 1929, the 1930s. This, this has gone on 1940s 19 I forget what it was in the 50s. But, you know, 7987 9499, you know, the.com bubble, the housing bubble caused by excessive greed, right? People that want to make a lot of money, and caused by, you know, people that design new crazy investment structures and ways to do things. So I don’t think in the continuum of human behavior crypto has pushed the envelope. It’s a different tech stack that we’re using.

Michael Waitze 29:47
Yeah, I don’t disagree with you at all. But the other the other outcome for that if you go back and look at this historically, kind of except for what happened during I don’t even know what you call it, the global financial crisis. In 2007, yeah. I mean, we could spend hours talking about why that was just such a cluster mess, right? Because for those people that were in the market at the time, he just kind of looked around and went. So I’m making a bet on the bet that you’ve made on the bet that that guy made, which is a reverse bet on the upside down bet that that other guy made. I mean, that’s not what the financial markets are there for, right? They’re there to No, but they’re there to do efficient allocations of capital not so people can make those bets. But the point is that that’s the only time really where the regulator’s didn’t come in and go, Okay, we’re gonna break this up and break that up and reregulating Glass Steagall and do all this stuff. They just kind of went I don’t know, my buddies working at the SEC right now. So we’re just going to call these things a different thing. We’re not going to call them CDOs anymore, we’re going to call them something else, then everybody’s equal, right. And there’s no clawback and nothing bad happens to anybody. But do you think that there’s going to be a deeper look from the regulators? In the space where the crypto people are operating, that will change the way they’re allowed to operate? Like, should you really be able to offer anybody 21% interest in a world where banks are offering to?

Hayden Hughes 31:06
Yeah, I mean, part of the part of the interest rate equation is a function of how inefficient crypto continues to be. And I think the one constant that I’ve observed over the five years in the industry that I’ve been in almost exactly five years now is that this is becoming more mainstream. And the pace at which this is becoming more mainstream has increased. I had lunch with someone from an insurance company earlier today, who runs ventures, and they have, I won’t say the size of the billion, the balance sheet, but it’s hundreds of billions of dollars. And they’ve allocated and they hired this young guy to go invest in crazy defy stuff, because of an appreciation that this is a new tech stack. And it’s not going anywhere. Oh, no. But just to come back to your question. I think regulation is inevitable. You know, the Europeans are talking about it, although, come on, when when did they ever leave the regulation? I guess the the GDPR thing, they’ve done some great things that now require me to click 52 Cookies notifications when I go to any website. But I think the regulation, by the way, but go ahead. Oh, I mean, like, reject the cookies seriously? Who cares?

Michael Waitze 32:18
Like, I really don’t use anyway, like, I know.

Hayden Hughes 32:22
Yeah, it’s like what, what tangible benefit? Is this going to cause me? So? So I think the stable coins will be the first thing and I’ve I’ve talked a lot about this. This was one of my predictions I made in June, I said the regulators are coming. I think the Europeans will hum and haw and try to come to some kind of framework. Look, the reality is in an interconnected financial worlds, it’s very easy to not be, quote unquote, domiciled in a certain place. Sure. If I’m, if I’m a European exchange, I could set up an entity in Dubai. And that that is a structuring solution that allows me not to have to be under European regulations. It’s there’s always ways around it, I think. And by the way, that’s not to suggest that that’s a good thing to be doing. I’m just saying that this is the practical reality of structuring. But the I think it’ll come from the US. They the US appears to be totally gridlocked. That. I mean, our US lawyers have basically said, not only are, you know, these changes not having happening in 2022. They’re also not happening in 2023. And I’m like, well, that’s a pretty pessimistic statement to be making, given. We’re only in July. But they’re quote Capitol Hill than I am and certainly than we are. So I think stable coins will be the thing that gets regulated, I think it’s inevitable that if you have a stable coin, that becomes worth a trillion dollars, that’s a huge risk to the global financial system. And so stable coins will be the first one that’ll that’s for sure going to be what gets regulated. What that actually looks like. I’m not sure what what it will be. But I know that stable coins, it will be something along the lines of actually, if you take deposits of stable coins, we now think that you need to be covered by the US banking regulations. Yeah. Or if you’re issuing a stable coin. Yeah, exactly. So I think I think that’ll be the path they take. And I think that the kind of saber rattling will will start, probably not this year, but I would say early 2023, the US government, whether it’s the FDIC or the Fed, or one of the state regulators, someone will come out and do what the SEC did in 2017 for ICOs and say, we don’t think this is kosher. And I don’t think this we don’t think this is a good thing for the world to have. And we’re intending to regulate it. From that point on, it doesn’t matter if they actually pass regulation, because there’s going to be a perception that we better change our act.

Michael Waitze 34:49
Yeah. I mean, the key to all these markets is not what’s, what is happening, it’s what people anticipate might happen, right? And then that’s going to change that behavior. And we should do this more often. Right? We should just come out and have this conversation more often because it’s really informative, not just for me, but for the people that listen, but I don’t want to give too much information at one time. I’m gonna let you go. This was super awesome. And look, I’ll say this to you. If you’re posting something that’s really thoughtful and really long form and you want to dig a little bit deeper in conversational format, let me know I’d love to have you come back.

Hayden Hughes 35:19
Yeah, sure. I’d love to I post pretty frequently, so I’ll take you up on that.

Michael Waitze 35:23
Awesome. Thank you, Hayden. This was really incredible. Thanks

 

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