John Palmer Interview - Cboe Digital's Crypto Platform, FTX Collapse, Crypto Winter & Regulations

John Palmer is the president of Cboe Digital. In this interview we discuss Cboe Digital’s crypto platform and services. We also touch on institutional adoption of crypto, FTX collapse and impact on the industry, how long crypto winter will last, US crypto regulations, CBDCS and more. https://www.cboedigital.com/

Transcription

Welcome back to the “Thinking Crypto” podcast, your home for cryptocurrency news and interviews. With me today is John Palmer, who’s the president of Cboe Digital. John, great to have you on the show.

• Great to be here, Tony. Thanks for having me.
• John, I’m excited to speak with you because Cboe has such a strong brand and legacy in the financial markets, and now you’re dabbling in crypto. So lots of questions for you, and lots to talk about with the market, with FTX and much more. But let’s start with your background. Where are you from? Where’d you grow up?
• Yeah, absolutely, so I’m originally from Ohio. I actually grew up in kind of farmland, Northeast Ohio, very small town, and I moved to New York about 15 years ago to get into financial markets after doing my education and a couple undergraduate degrees and jobs, and slowly found my way into the exchange community and Cboe.
• Mm, and you were at Cboe for a good amount of time, and then you left, and then you came back, and now you’re president of Cboe Digital. Can you tell us about that?
• Yeah, 100%, I guess they call me a boomerang employee, maybe is the right term. But yeah, so I joined Cboe as part of the Bats acquisition in 2016. Spent a lotta time working through the technology migration of the Cboe exchanges, the futures, and the options exchanges, onto what was referred to as the Bats technology at the time. And then after that, I moved into more of a business-facing role in the U.S.-listed options side of the business. Did that for about three-and-a-half years, give or take. And then, crypto kind of caught my eye. The market structure was starting to evolve, certainly growing, a lotta folks migrating and trading crypto. And I looked at it as that, you know, I’ve learned a tremendous amount of things over my time building derivatives-based exchanges here in the U.S. You know, there’s still a lot of maturity that I think that the crypto exchange and markets landscape can bring in value to customers. And what are the things that I’ve learned that I can join the crypto regs, the crypto-native regs maybe, and help drive the industry, you know, as it continues to grow and mature? So I took a shot and jumped into crypto, worked in an international platform for just shy of a year, running product strategy globally for them. And that included working with institutions and retails, retail traders, building applications, building NFT marketplaces, you know, kinda all the things that are the hot topics amongst the retail crypto-native folks. And then, as you mentioned, Cboe acquired ErisX. That deal closed in May of this year. And we recently rebranded to Cboe Digital, in October. But before that, an opportunity presented itself for me to come back to Cboe and but do the crypto thing that I had been doing for the past year. So it was a really great opportunity and I was really excited to say, you know, this fits the mold for me really well, and I love my time at Cboe, and I love what Cboe is doing in traditional markets, so I can now come back and do the same thing, but in crypto, and that seemed really exciting to me. So here I am.
• For sure, so on the note of, you know, when you first discovered crypto, what was that, what was your first encounter? You know, everyone has a different story. Sometimes, “Hey, I saw it in a forum,” or “Someone told me about it. A friend told me about it.” And what was like your a-ha moment? Like, “Okay, I get it, it’s not a fad. It’s not, you know, some random magic money, but technology and blockchain and crypto” and so forth.
• Yeah, I would say it was probably a little bit before 2016 or so, as the crypto landscape really started to develop. I saw it the same way, the technology piece, and I think it was just through kind of osmosis, right? You see it in the news, folks are talking about it. You get curious, and so you do your own little digging. And for me it was the technology and the applications to modern financial markets. You know, I spent my career in equities and equity derivatives and index derivatives, and you know, what are things that are center in crypto? Call it distributed ledger technology or blockchains, and how can those be leveraged, maybe, in these, you know, very robust and resilient markets, but, you know, how can we use that technology to make ’em better? And so that was what really interested me to start. And then while I was at Cboe, I was working on the business strategy side for the futures exchange, CFE, that we have. And we were the ones that launched the first Bitcoin contract,
• Right.
• Back in 2017. And so I was actually part of that initiative to bring that to the market. So that was probably my first real foray in the business, even though at the time I probably didn’t consider it. When I do a retrospective, I’m like, “Wow, I actually was in crypto a lot earlier than I was really in crypto.” And then from there, post that, you know, my interest in it just kinda grew. And so again, through my own personal time, I read about it and learned about as much as I could as the time presented itself, until I made the jump, you know, into the deep end. And so then that’s really where all the learning really started to happen. Once you’re doing it every day and it’s part of your job, you’re kinda committed to picking it up pretty quickly if you can.
• Mm, so the Cboe brand, and of course exchange, and the services you offer have been around for a long time. Well-established brand, well-known in the equities markets. You know, what was like the catalyst for them to say, “You know what, we like this new asset class, which is crypto, and we wanna build something that supports it,” kind of what you alluded to and some of the work you did there. You know, what was that catalyst? And this may be a difficult question to answer, because it maybe involved multiple folks, but, you know, maybe what’s the vision for Cboe and crypto?
• Yeah, so first, you know, you mentioned Cboe. We’re a global multi-asset exchange operator. And so that has been something that the company has grown into over, you know, call it the last five years post the acquisition of Bats. You know, Cboe Europe and now through Cboe Japan and Cboe Australia, and then into different asset classes with the purchase of Hotspot that’s Cboe FX today, and then now into digital with ErisX, the Cboe digital acquisition. And so from a Cboe umbrella perspective, you know, we wanna operate competitive, trustworthy, reliable markets in asset classes broadly. So when you look at-
• Sure.
• The global financial system, and you look at all the different asset classes that are out there, if there’s an opportunity for us to compete and offer innovations from a technology standpoint, compete on price and drive value to the end investors and customers, then, you know, we wanna do that. And so, we could say that probably across any asset class. I wouldn’t say crypto’s any different, you know, So in the Cboe lens, getting into digital, especially as it starts to mature, in my mind’s a slam dunk, because we’re already operating very regulatory mindset-type markets globally. And, you know, we believe that’s the value and the way to really unlock further growth in digital. And the reason why I say that is because you really wanna instill confidence, and you really want market participants to have the same experience that they’re used to having in a lot of the other asset classes that they operate in today. And so when we look at saying, “Hey, we wanna operate in digital assets,” we say, “Let’s do it the same way we’re doing it in all the other asset classes.” So that’s the genesis of it, really.
• Yeah, that absolutely makes sense. And I guess my next question’s gonna be, because it’s just so timely with the collapse of FTX, and we see within the crypto industry specifically, there are some missing regulations and guardrails in place. There are some. So does this collapse with FTX really help usher in more of the traditional financial folks like yourself to come in and grab market share and bring, to your point, that pedigree of regulation and accountability and transparency and things like that?
• Well, you know, I think we certainly can say that we’re seeing a call to action from not only lawmakers and regulators, but also industry participants, for us to figure out what the next pathway or the next steps are in the industry, right? So you mentioned, the regulatory clarity, I think, is something that a lot of folks are asking for. You know, you could get down to the end result of, you know, a lot of people will say, “We need to define, what is a security versus what a commodity is,” you know. That’s probably something that we’ll ultimately solve at some point in time, but I don’t necessarily think that we need to solve it today. I think, to your original point, I think providing a framework, guardrails, a box, whatever you want to call it, that allows participants to operate, and what I mean by operate is, you know, either operate an exchange or operate a private broker division, or offer services to their customers in a way that they can get comfortable with, that they know that they can do without any sort of enforcement or any sort of legal action that is gonna take place regarding their services, is really important. And I think what that does is it unlocks a tremendous amount of opportunity for a tremendous amount of firms, specifically in the U.S. that wanna do that, but maybe are unsure of how they do, how they get from point A to point B, because there is no kind of clarity that provides them that. And so, you know, when we think about Cboe Digital, you know, we look at it the same way as, we wanna operate an exchange and a clearinghouse and digital. Provide us with guardrails that allow us to do it across tokens, and we wanna do that, and we wanna do it in the same way that we operate all the other markets and all the other asset classes, that trustworthy, transparent, regulatory first kind of offering and mindset.
• So, John, I’ve been talking about this and I don’t know if you agree with me, but it seems that this FTX collapse is kind of gonna open a door for institutions such as yourself to come in and have a bigger presence in the market. And it’s kind of kind of like, “Okay, the kids had their fun, but the adults are here.” Do you feel there’s a sense, some sense of that? And I may be off base here, but just from my own personal views.
• You know, I think it’s certainly one way to think about it. I might maybe put it in a different lens and in the sense that, crypto has grown so quickly, and we’ve seen the industry go through what you’d call maybe market cycles, at a pace that is much more accelerated than what the same types of cycles we’ve seen, you know, in some of the more traditional financial markets. And part of that, maybe paired with maybe some of the regulatory uncertainty, and you have to think this kinda started in a currency kinda world or an FX almost kinda world, and you have regulatory authorities that maybe don’t have the same exposure or experience in a full kind of equities or equity options or commodities-based marketplace, you know, learning and growing just as much as retail and institutions are learning and growing with cryptos. So you have all these, you know, the entire world is really trying to keep up with the pace of crypto. And so what we’ve seen is we’ve seen platforms, you call ’em platforms, kind of fill the gaps of services being offered to customers. You say, “Hey, I need to grow.” I need to go get a million customers. How do I do that? I’m an exchange. Okay, well, I need to develop an app. I need to start being a retail broker/dealer. I need to be an FCM. I need to be an intermediary. I need to be a prime broker, you know, whatever other services I might need to, because the traditional players that offer those services and all the other assets haven’t got there yet,” right? They’re bigger companies, they have huge roadmaps. They’re looking at it, but maybe they’re a little bit slower to move. And so we’ve seen that happen at significant pace in the entire global picture for crypto. And so I think it’s put pressure on the industry, right? And so you have this kind of, you know, a centralization of all these services that are typically separated, and separated with oversight for a purpose, being centralized, that I think has added a tremendous amount of systematic risk unnaturally to the system. And so that you start to see some of the things that we’ve seen over the last six to eight months happen. And, you know, these aren’t crypto-specific things that-
• Right.
• We see them in, we’ve seen them, or, you know, in the history of financial markets time and time again. The key is, where do we go from here? What did we learn? You know, how do we do it better? You know, so from my perspective, I wanna operate the same way we operate in equities and in options as an example. And I think we’re starting to see at Cebo Digital that folks are getting that, and that there’s value to that. And so we’re really excited about the next steps in the pathway, you know, even though those are coming off the back of really unfortunate kind of industry events.
• Sure, so let’s talk about the Cboe Digital services that you offer. Can you tell us about the different services and products and solutions, and is it mainly for institutions or also retail?
• Yeah, so we offer a spot and derivatives platform to trade crypto products. Our Spot platform, we have 51 states and territories in terms of the MSB and MTL type of licensing, to be able to service customers really across the U.S. And then our derivatives offering is regulated by the CFTC, so we operate an exchange in a clearinghouse under their oversight. And so we, our model is an intermediary focus model. So we wanna work with the retail broker dealers, the FCMs, the intermediaries that customers are accustomed to working with today. Having said that, we do support directly onboarding with retail customers too, if they’d like to come trade at Cboe Digital. We’ve built that capability, and part of the reason was, to do that was to help prime the pump, so to say, as we wait for some of the other larger intermediary partners to get into the space. But, you know, ideally, we wanna service our intermediaries. They’re the experts at the services they provide, and we wanna leverage their expertise and let them to know the customer, and then, you know, let us be experts at running an exchange. And then on the derivatives front, we offer Bitcoin and Ether-based futures trading. Those futures are fully funded, and in the U.S. framework, that doesn’t provide any leverage, and typically people use derivatives for, you know, especially when it comes to speculation for the, for purposes of leverage. And so we’re actually working with the CFTC right now to have approval or to gain approval to offer margin-based futures trading in both Bitcoin and Ether. And we’ve been working with them this year, and we believe we’re in the final stages, and hopefully sometime next year, hopefully early next year, we’ll be able to bring that product set to the market as well. And so we’re really excited about that.
• And you know, I remember you mentioned earlier, before, that we are still waiting from like the SEC to declare what is a security and what’s not. There’s thousands of other coins out there, but even in the top 50, there’s not clarity outside of Bitcoin and Ethereum. So I’m assuming, like many other companies, you’re in a holding pattern until we get that clarity, right, to add more tokens.
• Yeah, we have a very pragmatic, and I would say, conservative approach to how we list tokens to trade on the platform. And as you just alluded to, we list Bitcoin and Ether, and we also list Bitcoin Cash, Litecoin, and then USDC, but those are the five. So there’s a good chunk of the top 10, the top 50, that we currently don’t list, that we do hear demand from institutional investors and intermediaries in the market to say, you know, “I want to trade Cardano or Solana,” a lot of the Layer 1s, a lot of the other top ERC-20-based tokens, and we want to be able to offer them the access to that on our platform. But I think to your point, the guardrails, I think, are really important for us to be able to do that. So, we’re looking forward to working with the industry, and, you know, the lawmakers and the regulators on that process as we kind of march forward together as an industry.
• Any plans to throw your hat in the ring for a Bitcoin Spot ETF? It seems everyone’s trying to get that. The SEC has not approved one yet, but just curious, given an institution of your caliber has the history and a lot of the regulation, traditional financial regulations in place.
• So I think what we wanna make sure that we do is we wanna make sure that we offer the services in the platform that allow participants that want to offer those ETFs to have really the same type of financial systems available for them to use, to be able to present that to the SEC in this example, to say, “Hey, we wanna do this ETF and this is how we’re gonna do it, and these are the partners who are using it.” You know, Cboe Digital potentially could be one of those in terms of the exchange and the services that we provide. So again, I think, going back to the platform-based approach, you know, we’re very cautious and we wanna remain focused on what our mission is. And that’s exchange and clearing, but also heavily working with industry partners to grow the ecosystem. So if and where we can work with custodians, asset managers, participants that wanna create a Spot ETF, we’re happy to service them in the way that we would service any customer. But we believe that our platform, our model, is the type that that’s where you’d want to trade and to hold your custody. So we’re hopeful that we can continue servicing those customers as as they drive that.
• For sure, on the note of custody, obviously that is a big and relevant item for many exchanges and platforms, and users are now more hyper aware, I think, just because of what happened with Celsius, Voyager, and as well as FTX. So can you tell us a bit about how you’re custodying the crypto? Are you using an external custodian, hot and cold wallets, and how that’s set up?
• Yeah, so we actually use BitGo as our custody provider, so we don’t custody ourselves, and BitGo’s a qualified custodian. So, you know, they’ve been a fantastic partners of ours, as we built our platform. And so the important part for us, again, is to maintain that independence and that separation of duty. We feel that that has a lot of value to the customer. You know, we do work exclusively, or we work with BitGo. Our technology is agnostic in terms of custodian providers. So as we see, you know, the custody grow in the world, there’s opportunity for us to offer additional custodian providers in the future, as we grow based on demand. But that’s something that, from our perspective, is not in, necessarily, our purview. And then, you know, every custodian offers services a little bit different. You talk about hot versus cold wallets. So we have both. Traditionally cold is very difficult to do and very difficult to do well, and very difficult to access, which is the entire intent of that. And so we leverage that as much as we can. We want our customer assets to be safe, and so as we think about expansion of custody in the future, those are the types of things that we look at, in terms of the custodians that we want to use. And I would expect those will be the types of things that matter as we get regulatory clarity and additional participants enter the space, enter the custodian space. Right now, I’ll point to, you know, you have Anchorage, you have Bank of New York Mellon, a very large, traditional custodian getting into the digital custody space, and I’m sure there’ll be more to come as the months and years kind of churn through.
• A question just came to mind, because I remember following ErisX, which of course you guys acquired, and they were partnered with TD Ameritrade. I remember TD Ameritrade had a page on their website talking about how the clearing and all these things are done through ErisX. Is that relationship still there? Are you guys connected to TD Ameritrade or any other major partners that you can highlight?
• Sure, absolutely, and that’s a, it’s a fantastic segue. I think, you know, one of the things we just announced yesterday evening via press release release, is the closure of our equity syndication process, which has brought together 14 industry partners as equity participants and minority shareholders within Cboe Digital. And so, you know, I won’t go through the full list, but it’s a really fantastic cross-section of industry participants that are, you know, maybe some folks would consider traditional finance-type firms, and then obviously crypto-native-type firms in there as well. But it also spans from intermediaries and retail broker/dealers to market makers and proprietary trading shops. And, you know, the purpose of this is to really help Cboe Digital’s mission in terms of growing a regulatory first, transparent and trustworthy market in digital assets. And I think the, you know, another important piece of this is, in the light of significant industry events, it still shows the convictions that very major players in the industry have in the future of digital, you know, with this partnership with them. So, you know, there’s firms in there like Robinhood. There’s firms in there like Vertu, B2C2, to name a few. I don’t wanna, it’s a fantastic group of firms, that to your point, I think, we’ll continue to work with as they build out their services and products for their customers, and we service them as an exchange and clearinghouse.
• You know, from your perspective as someone who’s been in the financial services market for a very long time, obviously Cboe, once again, just very well established, and this is a hard question, but I’m just so curious, you know, from your perspective, where do you see this asset class, this market, in maybe five years? And not necessarily price predictions, but you know, as far as growth and adoption and things like that. Do you see any commonalities with, you know, past the traditional equities markets, even though that’s been around for a longer time?
• Yeah, and I don’t have any numbers in front of me, you know, and I wish I did, ’cause I’m a big fan of using, you know, the quantitative side of the fence to kinda help drive some decisions. But if you think about the assets under management or, you know, the type of numbers that churn through some of the modern financial markets like equities or equity derivatives, you know, one stat that I think rings out to me, and I don’t know what the last week or so has shown, but in the international or in the global derivatives world for Bitcoin and Eth, they’re trading roughly $80 billion a day, maybe, per 24-hour period before the FTX collapse. And when I think about what that notional number means in comparing it to modern financial markets, you know, it’s a comparable to maybe the size of the SPX options complex that trades at Cboe. And so, there’s only a small amount of Ether trades in the U.S. kind of arena. You know, if we look at what Coinbase offers or what LedgerX offers, or what CME offers, you know, we’re in the single billion digits or below, so there’s clearly a huge opportunity for U.S. investors, institutional and retail investors to gain access to derivatives, and even gain access to Spot. And I think also when I think about numbers, you know, if only one or 2% of all asset managers in the U.S. wanted to get into crypto for diversification reasons or what have you, there’s a tremendous amount of money that would flow into the industry that currently isn’t there. And I think those numbers would likely dwarf what we’re seeing trade even in the global arena today. And so I don’t necessarily look at it as, “Let’s start up an exchange and grab market share from someone.” It’s more of, “Let’s start up an exchange and let’s grow the pie,” because I think if we do it the right way, the pie will grow. The pie will grow significantly. And you know, we’re not really gonna be fighting over market share per se for the next couple of years. It’s gonna be more, you know, there’s so much growth and so much opportunity that, let’s just continue trying to offer the services the right way to customers as they get more involved into the space.
• Yeah, and I think, you know, a lot of folks are waiting to have the the derivatives access, because I think, look, there’s a lot of people I know who use VPNs and they go to exchanges offshore, which, you know, that should be happening in the United States. You know, they should be trading in the United States, but hopefully the regulators can get it right.
• Yeah, and I mean, I would never tell anyone to do that. Clearly there’s reasons why you’re not supposed to be able to onboard with those platforms, you know, so clearly they’re taking risk, you know, in terms of doing that. But our goal is to hopefully bring those types of products to a U.S.-based platform, that they can have confidence in trading, and so that way they don’t have to use that VPN, and they can use whatever broker/dealer account they have today, whether it’s, you know, Fidelity or TD, or Robinhood or Interactive Brokers, or tastytrade or, you know, Webull, whatever it is, to access crypto, and so that’s really, I think the exciting growth, at least when I, you know, and I’m only looking at my U.S. lens over the next, hopefully 12 to 24 months.
• For sure, so on that note, what’s on the roadmap for 2023? I know some things may be under wraps, NDAs, and so forth, but any hints as to what we can potentially expect?
• Yeah, I mean, first and foremost is the margin-based futures that we talked about. I think that is kind of our entry point into derivatives offering for U.S. customers. Beyond that we’ll look at other styles of derivative trading. Clearly there’s very popular products internationally, and so we’ll look to see whether or not there’s an opportunity for us to offer similar products or similar types of exposure to customers in the U.S. Options is a fair play, you know, that there’s some platforms that offer options today. We’ll likely look at that and say, “Hey, can we compete there? Does it make sense for us to offer options?” And then I think, as I alluded to earlier, you know, we wanna remove as much friction to customers trading in the crypto ecosystem, as much as possible. And one of the biggest pieces of friction is, you know, operational efficiency and capital efficiencies. And so where we can leverage our clearinghouse to provide services and other sorts of offsets or collateral-type services that enhance those or bring efficiencies there for both on the operational side and the capital side, I think are really important. So example, today our clearinghouse offers, you know, takes in USD collateral. We want to expand that to treasuries, which is a pretty normal course of action for any clearinghouse based in derivatives under the CFTC in the U.S. And then, beyond that, it’s what other types of collateral can we bring in that is gonna drive efficiencies? Our platform’s built for spot and derivatives. As we grow that pie, If a customer is trading across those assets, what can we do to provide them more efficiencies? If you’re holding Bitcoin with us and you want to trade derivatives, you know, can you get some efficiencies there, which at the end of the day, especially when you think about a liquidity provider, risk is what they’re showing on the screen, and they want to get as much return on their capital, wherever they have that posted, as possible. And so if we’re able to do this right, all it needs is deeper and tighter markets, better price discovery, which ultimately just benefits the end customer, at the end of the day. So, you know, we’re really excited. Long list of things.
• Right.
• Lots to do, but really excited about what we have in front of us.
• I’m curious, you know, as outside of just crypto assets, there’s a lot of tokenization happening, so tokenization of commodities and things like that. Real estate securities will be tokenized as well, stocks, all that, and you have, you know, this 24/7 trading market that is global. Are there plans to expand eventually to things like that, including NFTs and so forth?
• So I think, you know, we’ll definitely take a very interested approach, when it comes to it. Clearly, you know, we have a market and we have a clearinghouse, especially when it comes to derivatives, under the CFTC. So where there’s ways for us to expand that outside of crypto, you know, those are things that we may look at. I would call that running, maybe. Right now we’re walking. We need to walk, we need to maybe, we maybe need to jog a little bit, and then at some point we’ll be able to get to run, you know, so if there’s opportunities for us to trade other non crypto-style derivatives or even clear other non crypto-style derivatives, those are things that we’ll look at, you know, when the time is right. But I think right now, it’s easy to say that I think our focus is right now just on cryptocurrencies. NFTs, as you mentioned, they provide a completely separate challenge, in the sense of a centralized marketplace, given the non fungibility of them, is definitely a little bit trickier for a lot of different reasons. But you know, we see platforms out there that are servicing the market, and you know, we’ll leave no stone unturned. But right now I think cryptocurrencies are our focus.
• Mm, so let’s talk about the crypto market. Certainly we’re in a bear market now. It’s crypto winter, but it’s all market cycles, right? We’ve had bull markets and bear markets, and you layer on top of that, the Fed is fighting inflation, raising rates. So it’s pretty painful out there. You know, I know these questions are hard, and it could be subjective, but when do you think crypto winter may end, and maybe we see spring? Do you think it’s like 2023?
• Well, I think you have to define, you know, the winter and the spring, and I think it depends on what lens you’re looking at. I mean, clearly if you’re looking at it through the price lens, we’re in a winter. I’m certainly not gonna make any sort of educated guess on where the price is going. Because if I was good at that, I probably wouldn’t be doing, I wouldn’t be sitting here talking to you about running an exchange. I’d probably be trading. So, you know, I’m not gonna make any attempts there. You know, the lens that I like to look at it through is just how much interest are we seeing, and interest specifically in the institutional side of the community? And I think what we’re seeing there is growth. So I don’t even want to say we, I don’t know if we’ve ever been in a winter. You know, maybe there was a small time, but I think in general, what we’re seeing is just constant growth in terms of institutions that are interested in getting in crypto, and I would say more than just interested, not just a, “Hey, who are you? Tell me what you do. Okay, that’s great, we’ll talk to you in a year.” But they’re like, they’re more of, “We wanna invest” or “We have a fund,” or “We’re doing this, we’d love to use your platform.” It’s, you know, so it’s more real interest. And so with that, I think we’re already in that spring. It’s just, you know, price. The pressure on price certainly makes market volumes look small, because everything is measured notionally as an example. But if you measured in terms of volume or shares or contracts, like a lot of the other places measure their volumes, specifically a lot of Cboe’s platforms, you know, it’s very possible you might see growth. You know, there might be more trading happening. It’s just the trading of each of those contracts is worth a smaller amount. So it all depends, I think, on how you look at the data from Cboe Digital’s perspective. On that note, you know, we’re seeing a lot of growth, growth both on the notional volume traded level, but then also on the contracts and the amount of trades that we’re seeing on the platform. So I think that that speaks to the, again, the point of the conviction we’re seeing from our partners and industry players, and then also that interest or that increasing interest from the institutional community.
• Now there’s a lot, we touched a bit on it, about FTX earlier, but, you know, I would love to get your thoughts on the impact this has on the industry. Do you think it sets us back a little bit, we take a couple steps backwards? I’d love to get your thoughts on what took place there.
• Yeah, and I think it depends on what party, maybe, you’re looking at when you think about whether we take a step back or not. And so, you know, I specifically look at retail and retail adoption of crypto, retail belief in centralized exchanges, or holding Bitcoin or the value in it, that there’s clearly angst and concern, anxiety, flight to safety, you know, bank runs, people are calling them. You know, so I think that’s certainly, unfortunately, a step back. And so confidence needs to be reinstilled with those investors in order to bring them back. Some of them lost some money, some of them lost a lot of money, whatever it might have been, whether it’s either within FTX or just as part of what we’ve seen in terms of price movement since the top near 70,000. So we need to reinstill that confidence, and that’s gonna take time. That’s not just something that’s gonna happen today or tomorrow. Part of that is gonna be them seeing change, and understanding why the change is good, and then also them having a better experience the next time they come back. And so it’s hard to put a timeline on that, but I definitely think it’s, to your point, I think a few steps forward, a few steps back, and I think in general will continue to push, but certainly a little bit backwards. From the institutional side, I think I’ll go back to, you know, my point on the crypto spring. I don’t know if it’s necessarily a step backwards for institutions. You know, there’s certainly institutions that have exposure and that are dealing with what we’ve seen over the last six or eight months, but a lot of them tend to be very sophisticated in nature. If they’re in the U.S. and they stood up offshore entities to be able to access these markets, they’ve done so understanding what the risks are, and hopefully have very prudent risk management policies in place, so they maybe have limited their exposure or risk. But I still think even in the midst of that, the interest outweighs the pullback. So I think net net, it’s still really growing. But I think, and then if you look at it from a regulatory lens, that there’s clearly this call to action, this need for us to figure this out. And I don’t say that it’s any one person’s job. It’s not just the regulator’s job. It’s not just the lawmaker’s job. It’s not just the participant’s job. It’s us as an industry. We have to work together, and we have to do this because at the end of the day, it’s gonna benefit those institutional customers, it’s gonna benefit those retail customers, and it’s gonna help them see that confidence and move forward. So I do think it’s gonna be a little bit of a step back from a regulatory perspective, because there’s gonna be a lotta questions, there’s gonna be more oversight, there’s gonna be more concern, and a lot more eyes on anyone that’s operating in the crypto landscape. But ultimately I think it’s gonna prove to be better, because I think we exit it in a much more structured, a much more, you know, maybe mature market position when it comes to rules, regs, oversight, disclosures, things like that, that are again, I think gonna instill confidence in the end users.
• Yeah, absolutely, and I think the silver lining, to your point, after this collapse, we saw a lot of exchanges rush to put out proof of reserves and Merkle Tree audits and all that, and to highlight, “Hey, we’re, our books are in order.” And it’s almost like, well, why wasn’t this out there before? Why wasn’t this standard there before? But you know, you live and you learn, but I think to your point, it raised the threshold of transparency, and what maybe folks would want to expect or to see from exchanges.
• 100%, and I think we’ll see that grow, right? I think we’re, you know, every platform is different. Every exchange is different. Customers in certain regions of the world, or based on their exposure, might have different needs or wants or desires. And so as we all collectively come out of, call it, you know, what’s happened over this last year, it’s, what else can we provide the customers that’s gonna help them, right? So we have to listen, we have to understand what their concerns are, and then we have to figure out how to develop that. You know, proof of reserves is a perfect example, or the Merkle Trees, and I think there’ll be more. I think, you know, peripheral reserves is just a snapshot. It’s just one view in terms of balance sheets, you know. Publicly traded companies such as Cboe, we have third party audits, and we have to disclose our financials. So there’s different ways to approach it depending on what company you are and where maybe you’re structured and based out of. But ultimately I just see that that transparency, I think, is gonna grow, and it’s only gonna provide benefits.
• Do you think it makes sense to have, and you alluded to it before, it’s not just the regulators, not just the lawmakers, but we as an industry also have to do some policing and raise our standards. Do you think it makes sense to have some sort of association where you have these exchanges, and we self-police a little bit. Like there’s a representative from, I don’t know, Binance and Coinbase and whatever it is, and there’s someone from Cboe, and we’re self-policing, and this way it’s not the regulators coming down with a heavy hand saying, “You guys don’t know what you’re doing,” and this is what we have to do, but we can collaborate better with the regulators.
• Yeah, and I mean, we might see something like that as the guardrails and that regulatory clarity comes out. You know, that’s still TBD. I think you see that clearly, SEC-registered exchanges are SROs, self-regulatory organizations. So they have rules, they have compliance and regulation teams, market regulation teams that are policing not only the exchange and making sure that the exchange is doing what its rule set says, but also that the participants are doing what its rule set says they’re allowed to do. And so to that end, we also see that in the CFTC landscape, under the principle-based approach. And so we, you know, at Cboe Digital, given we’re under the CFTC jurisdiction for our futures business, we already do that. And we actually, as a best practice basis, take that mindset and apply it to Spot, right? So we have a Spot rule book, it’s published, you know, we make our members read it and sign it, and then we police for it, you know, so it’s not necessarily something we have to do, but we look at it and say, “This is best practice. We already have to do it for the CFTC, so let’s do it in Spot.” This is where we think the industry needs to go, and the right way to do it. You know, so is our way the perfect way or the right way? I’m not gonna say it is. It’s one way and there’s probably other ways that we can do the exact same thing. And I think to your point, ultimately we will get to a spot where at least in the U.S., you’ll have these platforms, these exchanges and the participants that are interacting with them, all playing in that sandbox of self-policing and kind of regulation. You know, on the international side, that’s clearly a bigger deal and requires, you know, quite more conversation across a lot of different regulatory bodies. But who’s to say that that’s not doable? You know, an association or something, especially if it’s best efforts, given international regulation across multiple jurisdictions is probably a difficult thing to think about. You know, there’s certainly things the industry can do willingly, I think, to drive that confidence and drive the industry to a better spot.
• For sure. Another tough question for you here, and it’s on crypto regulations. You know, there’s a lot here. You got the Biden executive orders, you got the reports that came in from those executive orders, you had different people in Congress release bills. The Lummis-Gillibrand Bill is kind of the one that has the most attention right now. There’s stable coin regulations apparently being worked on. The SEC/Ripple lawsuit is a high profile lawsuit everybody has their eye on, because it impacts all coins outside of Bitcoin. You know, what are your thoughts? You think 2023 may be the year, given that there’s also this huge catalyst of FTX collapse, that these regulators and the lawmakers are gonna finally get this going?
• That’s a good question. I’m gonna, I wanna ask you the same thing. I don’t know if I can put a time box on it. Clearly I think there’s certainly a push. You know, we just wrapped up midterm elections. You have new members entering both the House and the Senate. There’s likely gonna be some shifts in committees, and who may or may not share different committees. So I think until all that kind of settles, it’s hard to kind of, you know, maybe see light at the end of the tunnel for something to actually get through. But post all that, you know, is it possible that we see something in 2023, sure. You know, do I think that the events with FTX, maybe apply some speed or some pressure to try to do that, sure. I don’t know if it will impact the ability for that to happen. You know, clearly there’s bipartisan bills on both floors, to your point that you mentioned, the Lummis-Gillibrand and some of the other ones. But still, I think where we sit today versus where we’ll be, call it in February or March, or even beyond that in 2023, you know, I don’t think we see any sort of immediate action, but sometime in 2023, I think. Sure, I think that’s probably fair. So I, from our perspective, you know, we engage with all the parties, you know, whether it’s regulators, whether it’s folks on the Hill, you know, to make sure that the platforms are sensibly and sufficiently regulated. And that’s really, I think, the guardrails we want. All the nitty gritty in between, I think we can solve once we get there, right? If you think about how markets have evolved over the years, the market structure and the rule sets that everyone operates in today wasn’t in 10 years ago, 20 years ago, 30 years ago, 40 years ago. It’s been an evolution. So let’s get something out there that allows participants to operate, and then let’s iterate on it and let’s make it better.
• Yeah, for sure. Final question here before we hit some wrap-up, fun wrap up questions. Every central bank around the world is working on a CBDC, a central bank digital currency. There’s talks of the digital dollar here in the U.S. You know, what are your thoughts on that, and how that may change markets, given monies tokenized on the blockchain? More transparency, maybe, I don’t know if the right word is velocity of money, but what are your thoughts on those upcoming CBDCs?
• Yeah, I like the way you framed it, the velocity of money. I mean, clearly there’s a lot of advantages that cryptocurrencies bring to the ability to move funds around in a more instantaneous, if you wanna call it that, manner than you can, if you wanna move USD or Euro or whatever it is around. So you know that clearly there’s the bridging of the gap of that, and allowing folks to have access and ease of access and movement of whatever currency that central bank is responsible for, via that digital dollar. You know, from my perspective, it’s, you know, I’m a wait and see approach. There’s a lot of folks that are heavy pros on it. There are a lot of folks that are maybe against it. I’m probably in the middle, in more of just the camp of, I love reading about it. I love seeing, you know, different sides of the fence place their arguments. And I love to see how the governments and the central banks are thinking about it. You know, ultimately, I see financial markets digitizing themselves over time. Which markets are first, who knows? You know, I would probably expect more opaque and illiquid markets to go first, only because there’s a lot of benefit there, I think more than maybe very liquid, very robust markets that are already, you know, really, really efficient today. And so how the, how a CBDC works with that, I think, is really interesting. So, you know, I’m certainly gonna be reading along with you as they do it, but no strong opinion either way.
• All right, John, I got some wrap-up questions here for you. So, up first is Rapid Fire. Favorite food?
• Ice cream.
• Favorite musician or band?
• Foo Fighters.
• Love Foo Fighters, favorite movie?
• “Top Gun,” the first one. The second one, the new one, was pretty good. I gotta say.
• It was decent, yeah.
• I’ve been a “Top Gun” fan. I don’t know why. I just love the movie. So it’s cool.
• Yeah, it’s a classic, Favorite book?
• I’m gonna pick, it kind of goes with my favorite band, Dave Grohl’s autobiography. My wife got it for me. And I just, I don’t know, I can’t get enough about Foo Fighters. So that, maybe that’s why.
• I gotta check that out. I am a Foo Fighters fan, but I have not read that, so I’m definitely gonna get that.
• Get it, get it on Audible. He self, he self did it, so it’s-
• Oh, wow, nice. Okay, I’m doing it right after this. And what’s your hobby when you’re not, you know, working at Cboe?
• So, I’m a triathlete, so I do the swim, bike, run thing quite a bit. So that’s, so besides Cboe and family, I fill the rest of my time with training. So that’s the hobby.
• Very cool, and finally, if you could create your own metaverse, what would the theme be? And maybe it’s something that, you know, marathons or something.
• Yeah, I think you know exactly where I’m going. I had to think about this one for a while. Yeah, I think it would be, you know, some sort of immersive experience that lets me train anywhere in the world, right? You know, so wherever that is. And then, I don’t mean like I’m sticking an Oculus helmet on my head and then sitting on my like, indoor trainer. You know, I mean like a really more immersive experience than that. That to me would be where I’d want my metaverse to go.
• John, a pleasure chatting with you. I’m excited to see the future updates with Cboe. Thank you for joining me.
• Thanks a lot for having me, Tony. It’s been a pleasure.