FTX Changed Finance — Now Institutions Want What Crypto Built

I got a call from Sam Bankman Freed, FTX founder Sam Bankman Freed.

He was doing this crazy thing over in Hong Kong having to do with crypto.

One of the things that excited me so much about my short experience at FTXUS is getting to see what it looks like when an entire industry from scratch is able to move as fast as possible and to take that ethos and bring that back to traditional finance.

So instead of doing perpetuals on things like Bitcoin or Ether, we're doing perpetuals on precious metals, on single stocks, get the same kind of exposure.

And most importantly, they don't have to deal with the operational risk and cost of having to roll futures all the time.

In order for anything in finance to grow, that needs to be heavily regulated.

Here are two trends I think we're going to see continue over these 3 to 5 years.

On one side it will be regulated traditional finance related and on the other side will be like the degenerate gambling high risk and these will split farther and farther and farther apart over time.

The second trend is what made you say yes to FTX in the first place and what about Architect after that?

I got a call from my former colleague Sam Bankman-Fried who I had known from Jane Street and he was doing this crazy thing over in Hong Kong having to do with crypto and I had some experience with crypto having helped build a lot of the early systems at Jane Street when they were starting their crypto arbitrage desk in 2017.

But I had never worked on the side for example of an exchange before and had a lot to learn but I had been following the space and was really excited about it and when the opportunity came knocking I decided to take the risk and go and at the time the entirety of the FTX business was in Hong Kong.

It was largely unregulated.

And it was a bit of the wild west.

And so they, the company at the time had decided that the biggest opportunity was to move into the regulated space to move more into the tradey space and build an office, build a company in the US that tried to walk through the front door in terms of getting regulatory licenses that were needed.

And so that's what I did and that's what I decided to work on for the following year.

How difficult was it when you started Architect and what did you gain from the experience that you had when you were heading FTX?

So when I was running FTXUS we did two things on the regulatory side that were really exciting.

So the first was that we built a broker dealer from scratch.

The broker dealer license under the SEC and FINRA, having stable coins as a collateral option we think is going to be absolutely determinative to our success.

That's one trend I think we'll just continue to see to be able to trade and we built that with the with the goal in mind of being able to add stock trading and options trading to the FTXUS crypto trading app.

We were sort of ahead of ourselves there and in having the all-in-one app, you could even use USDC at the time to be able and they'll start to not have anything to do with each other and people will make choices of where they want to trade of having to go through the process of applying for a broker dealer license and setting up that entity and setting up all the required compliance procedures and all of the kind of regulatory oversight and risk management was an incredible experience.

And then the second thing that we did was we had acquired an exchange and a clearing house called LedgerX.

And LedgerX was one of the few companies in the entirety of the United States that had both an exchange license under the CFTC.

The CFTC being the commodity futures trading commission that oversees all of you know commodity futures that includes things like stock index futures and energy futures and also crypto futures in the US.

We had acquired this exchange and clearing house which would have given us the ability to basically launch what were previously kind of offshore unregulated futures products onshore in the US in a regulated fashion and getting the chance to understand that application process to meet with the staff at these regulatory agencies was truly invaluable.

And so that really helped set the stage for when I was starting Architect about one, the fact that we definitely wanted to be regulated and do this right from the beginning.

Number two, we had the experience and the knowhow to be able to do it having gone through that experience with FTXUS.

The decision to be regulated right from the get- go. Does that come from the fact that you saw certain things with FTX?

So I'm just curious about the form of in which you are launching or you have launched Architect. How has that culminated?

Yeah, it's really both, but to really hone in on that second point.

So Architect, we have an exchange now called AX and AX is the first centralized and regulated exchange or perpetual futures on non-crypto asset classes on traditional asset classes.

So instead of doing perpetuals on things like Bitcoin or Ether, we're doing perpetuals on foreign currencies for like the Indian rupee, the Brazilian real, the Mexican peso.

We're doing perpetuals on precious metals like gold, silver, platinum, palladium.

We're doing perpetuals on single stocks like Apple, Tesla.

We have plans to do perpetuals on stock indexes, on commodities, on energy, on weather, on compute power.

It was so critical for us to be regulated from the beginning and to differentiate ourselves from the DC decentralized exchanges because if you look at the traditional futures market, it is anywhere from a 100 to a thousand times larger of a market than the crypto futures market.

And if you ask yourself who are the participants in those markets, it of course there is retail participation but it is by volume you know 95 to 99% institutions.

These are macro hedge funds.

These are pension funds, sovereign wealth funds, sovereign governments, insurance and reinsurance companies and large banks.

And so because of these the the the market itself is dominated by these large institutional participants, we needed to become a venue where those large institutional participants could actually participate and we are still way too early in the space of the kind of DeFi universe for an institution like a big bank or you know a sovereign wealth fund to be able to onboard in a decentralized manner without KYC without centralized risk management without risk controls.

And that's why we needed to be regulated from the very beginning.

The easiest use case that people talk about about when it comes to stable coins is they'll be used for remittances and stuff like that, right?

Payments essentially comes as the first use case, but you can take that and create various kinds of products on top, right? Is that what was necessary for something like Architect to be created?

Yeah, it's a very interesting question because so in the traditional futures world, especially in the US, if you want to be able to trade a future, you obviously have to post margin, some kind of collateral required for margin.

And in the US, there's a variety of things that you can post for collateral.

There's of course US dollars, but sometimes you can also post US treasuries.

Sometimes you can post certain kinds of other securities or even other currencies but you can't currently post stable coins.

Actually there's a very very recent initiative in the US you know spearheaded by the CFTC to start a pilot to allow people to post stable coins for collateral but that really hasn't happened yet.

When we started the exchange, we of course wanted to make sure we were hooked up to like the traditional financial money movement system like, you know, Fed Wire and SEPA and Swift such that, you know, people could send in actual fiat currencies to top up their accounts for this.

But we also thought it was critical to get a second license out of our, you know, in our regulatory jurisdiction in Bermuda to be able to take stable coins as collateral too because we understood a few things.

One, it is so much easier and so much cheaper for someone in a country like Hong Kong or or you know anywhere in the APAC region or anyone in the Middle East region to be able to send us stable coins and to get us dollars.

We had we talked to one customer and we asked them so you know hypothetically when we launch our exchange you can you know maybe send in dollars you can send in USDC which one would you rather do and they said well if I send you USD it's going to take around one week from my bank but if I send you USDC it will get there in around 10 seconds and then the second of course is a critical aspect of stable coins over USD is that they can be sent back and forth at nighttime time and on weekends.

And if you want to organize a 24/7 perpetual market, which is a big advantage over what we're doing over the traditional financial futures markets, you need stable coins.

It's a sort of a must-have.

And so I think I agree with you in your thesis completely, which is that even though it's not technically necessary to run this exchange, having stable coins as a collateral option, we think is going to be absolutely determinative to our success.

In terms of the product itself right the the product and who the customer is how do you make them switch from wherever they are trading right now the CMEs of the world to Architect if you start with the market makers the arbitrageors the ones who typically establish the liquidity in order books at first it's a no-brainer for them because obviously they can trade as much as possible and everywhere as possible and they are doing things like using the price of CME futures to compute a relative fair value to market make around on you know our exchange for perpetuals and then they're going to be trading one off the other.

So for example trading CME gold futures versus Architect gold perpetuals at the same time.

If we then move on to like who are the next traders there's a mix of players here some of whom of course have existing kind of foothold into the traditional financial system and they're trading futures on places like CME or ICE and for them the key is to dig into what is it that they're doing with their futures.

Very rarely are customers of futures exchanges taking delivery of the underlying commodity.

They're not buying cocoa futures to take delivery of cocoa to create chocolate bars.

They're usually trying to hedge out the exposure in a financial sense or speculate on a particular asset in the financial sense only.

And so they are doing the very cumbersome thing every month or every quarter of rolling futures the next month, the next month or the next month and dealing with the basis risk of the futures over the underlying spot given that this is at some point in the future.

And so for them, it's so for a lot of them, it's a pretty easy thing to see that they can do the same get the same kind of exposure, but they can often get better leverage.

They can trade 24/7.

They can use stable coins if it's easier to get money in and out.

And most importantly, they don't have to deal with the operational risk and cost of having to roll futures all the time.

And finally, I'll say two more things about customers.

One is that increasingly there are cryptonative traders and trading firms that want to branch out into traditional assets and for them perpetuals are the vehicle.

They don't want to trade regular futures.

They don't want to go back to that idea.

They understand per it makes the most sense to them.

They know how to price them.

It's a superior product.

So, of course, they'll, you know, they'll come and want to trade those kinds of products on our exchange versus the existing ones.

And finally, you'd be surprised how few institutions globally have access to places like, you know, the CME, ICE, SIBO in the US, even though they're the largest exchanges in the world.

It can be quite difficult for someone in any one of the, you know, 189 countries outside the US, to be able to get access.

And so having a very easy web-based direct access, you know, no intermediaries, 247 exchange powered by stable coins actually really enable some of these folks to be able to trade these products that couldn't before.

I didn't know that. I thought, you know, most other institutions should be able to create these things very easily.

Yeah, you'd be surprised especially if you're in a country that's deemed you know high risk from a you know KYC perspective.

What would be the TAM of these companies like combined?

One one of the largest class of potential customers for us is CFD brokers.

So CFDs contracts for difference. they're a derivative product that allows people to like trade for example a stock or gold as a swap in which you're trading with a particular broker and this is a large way in which kind of the the retail market trades and gets access to you know these kinds of commodities or stocks outside the US is that they trade with CFD brokerages that is a multi-t trillion dollar business total in total across all CFD brokers.

One of the difficult things as a CFD broker is that if you're taking the other side of these trades, you're naturally going to end up with exposure to whatever that asset is.

So, let's say on a given day the the retail customers are, you know, net long gold.

Well, all of a sudden that brokerage is net short gold and they need to hedge that short exposure maybe by going out and trying to buy gold or buy gold futures somewhere.

And so the idea that maybe every single one of these CFD brokers everywhere from you know South Africa to Dubai to Luxembourg would be able to hedge that exposure easily by trading you know gold perpetuals on AX. I mean every single one of those brokerages could be a customer of ours.

Given that why is it that this kind of perpetual futures are not prominent in traditional finance?

It's an interesting history.

So the perpetual as a concept was written down in sort of an academic paper in the 90s in the US and it existed in certain forms as over-the-counter derivatives that were mostly you know being able offered by banks to very large institutions but it was really cryptocurrency exchanges in like 2012 2013 that first made an exchange product in the form of a perpetual that was available for everyone to trade.

And of course, the idea there being that again, they wanted to give leveraged exposure to Bitcoin, but Bitcoin wasn't a, you know, deliverable commodity tied to a particular date.

They just wanted something that would like forever expose you to sort of the forward rate of Bitcoin at a leveraged amount.

And so that crypto really is the the asset class that made perpetuals an actual understood vehicle.

Prior to that, no one knew what a perpetual was.

And it really took probably the better part of five, six years perpetuals to really catch on in a huge way in crypto such that everyone knew them, understood them and traded them.

And then ended up with exchanges like Binance and FTX and OKX and Bybit and all these exchanges that have, you know, perpetuals out.

Prior to that there there's been issues in in basically every jurisdiction around whether perpetuals have been allowed as a class that people can trade because even for example in the US you know regul regulation in the US around futures primarily contemplates a future as something that has an expiration date.

If it doesn't have an expiration date, that makes it something else.

Maybe maybe it makes it a swap.

And swaps have very different rules in the US than futures.

And so, as a result, you know, people have not tried to kind of push the envelope and try to get these approved by, you know, the the regulatory bodies and get them, you know, added to the rule set and be able to launch.

But there's a second important point here of why this has not taken off a lot, you know, in traditional finance, which is that you have the classic innovators dilemma.

The incumbent exchanges make a lot of money off of people rolling futures every month and every quarter.

And if perpetuals are a superior vehicle, if they were to launch them, they might eat into their own revenues when they don't need to.

A lot of these exchanges have, you know, dominant market share in traditional finance.

And so they haven't necessarily tried to create perpetual derivatives to replace traditional expiring futures.

So I just wonder why someone hasn't created this because just because it's a superior vehicle and reduces the costs for the trade.

The traditional financial system in futures is one of the most critical industries in the world.

It's one of the largest industries in the world and it's one of the slowest moving industries in the world.

So in 2008 post financial crisis the DoddFrank legislation created this notion of you know a regulated swaps facility called a swap execution facility.

It's now been almost 20 years since that legislation and there are you know fewer than 10 you know operating swap execution facilities in the US.

I think the number is even smaller than that and so again the industry moves very slowly.

How many crypto exchanges, you know, rolled out perpetuals, including DeFi exchanges? Can can you guess the number?

Has to be around 50 or more.

It's probably it's probably close to 100 at this point.

It's it's so large.

And so, one of one of the things that excited me so much about kind of my short experience at FTXUS, regardless of what happened there, is getting to see what it looks like when an entire industry from scratch is able to move as fast as possible and what it means to like really push the frontier of market structure.

And we as a company really wanted to take that ethos and bring that back to traditional finance and say we're going to start from scratch, too.

We're going to be regulated, which is going to be hard.

It's going to take us a year and a half to get all the licenses we need, but we're going to move at the same pace after that that digital assets move and try to really kind of bring something new to bear.

And that's that's what I think is, you know, differentiates us from what's going on previously.

If I'm correct, didn't FDX launch interest rate swaps?

Interest rate swaps, I don't think so.

But it did, it did have some uh, you know, there was a famous story where, you know, there was one day where the price of lumber was going crazy and on the same day that people were talking about it on Twitter almost as a proof of concept, a lumber future or a lumber perpetual got launched and, you know, that was sort of, you know, early for its time but I think that was like the right idea which is that you should have a platform by which you can very easily launched launch any kind of cash title derivative as long as you have an index price and so that's exactly what we've built as well in your time when you were at FTX and post that like has that changed how you think of trust transparency risk and stuff like that?

Yeah, I mean look, my my entire career had been in the most heavily regulated space, right, of being a, you know, prop trading firm of trading everywhere from NASDAQ to CME to EURX to Osaka derivatives, trading everything from, you know, ETFs to futures to options and fixed income products.

And so, you know, seeing this world of kind of, you know, unregulated futures products, which is what the world was at the time, it was crazy and and again, it was great to see what could be possible in terms of being able to innovate very quickly, but it was always my understanding that in order for digital assets and digital asset futures to grow, it needed to be kind of brought into the regulated space.

It needed to be connected back to the institutional traditional financial system in some way.

One of the best examples of this is like look how much crypto as an industry has grown since the launch of spot ETFs in the US and ETF is a very very old concept you know these you know whether it's a 34 or 40 act funds are you know they are such an old concept in the US and yet it's that traditional securities product that has enabled the absolutely explosive growth of digital asset participation in the US.

And so, yes, it's important to be able to make innovative products and to not be held back by regulation, but we have to be realistic that in order for anything in finance to grow to any legitimate size, it needs to somehow connect back to the banks and the pension funds and their retirement funds.

And in order for it to do that, it needs to be heavily regulated.

So, that's what was our learning from that whole experience was that we needed to be regulated from the very beginning and as much as possible.

How do you marry that with speed?

I think you know the key is to understand you have to first of all figure out what's the right license that you need to get.

You know what what is the the specific thing that you're going for.

And often that process of getting an exchange license is very cumbersome and hard and costs a lot of money and time and resources.

But then often once you've done the work, if you are, you know, very explicit with how you've spelled out your mandate as an exchange, like here are the kinds of products I'm going to list, then often, you know, regulatory bodies are flexible and they will work with you to say, okay, well, you can launch products that look like this, you know, without coming back to us for an application every single time.

And so you know that that's why it's such so important to have great dialogue with your regulators so that they will trust you and understand and give you the kind of the ability to be able to innovate quickly and to launch new kinds of products while still staying completely within the mandate and within the rules.

Initially I mentioned that it's in a wide space where you know I don't think there were any players in this market when you started off.

You have exchanges like lighter and hyperliquid that increasingly offer things like gold perps or NASDAQ 100.

So how do you navigate all of this at Architect?

I I'll take those each kind of one at a time.

So the the dexes the decentralized exchanges like hyperliquid and lighter I I just view as complimentary products.

I just don't think we're competing for the same kinds of customers.

You know, again, we're trying to go up market as much as possible to the largest institutions in the world.

In fact, right now, our exchange is open only to institutions.

You know, we eventually will open to individuals, but right now we are only open to institutions.

And that's just a completely different customer set than the kinds of people who are, you know, connecting wallets on arbitrum and, you know, sending into like non KYC exchanges.

And so, you know, we're pretty heavily differentiated there.

We're also differentiated from them on the kind of risk management layer where we are for example very methodically choosing the maximum leverage per product very much tied to the underlying products volatility to to ensure that there are as few you know liquidation events as possible you know that's not our business model so that's sort of the first you know set of of potential you know competitors you talk about.

I also view something like NASDAQ or NYSE going 24/7 or even tokenized as completely complimentary to what we're doing.

So in order for market makers to be able to successfully market make in let's say an Apple stock perpetual on AX they really do need an underlying price that they can trust 247 and they need some place to ideally hedge their perpetuals 24/7.

And so the fact that there might be a market where they can trade stocks 24/7 is is only going to help the growth of our perpetual market.

People might not realize this, but there are already some exchanges in the US that allow you to trade like 245ish and there are a few that are coming online that are going to be like, you know, 247, including NASDAQ and and NYSE's eventual plans.

Still, there are limitations when trading actual cash equities, actual stocks that make them, you know, still not as good in certain circumstances of the perpetual future.

So, for example, if you want to sell a stock short in the US, you have to first get a a borrow or a locate of that stock, meaning you have to borrow from a prime broker or, you know, a bank shares of the stock so you can sell it short.

Well, first of all, access to that borrow market can be very difficult for the average person.

Sure, if you're, you know, Citadel or Jane Street, you have access to the best borrow rates and the best borrows available, but if you're just sort of a, you know, random Joe customer, you might not have access to it at all.

The second is there might not be any shares to locate.

You know, some stock might not be able to be shorted and so, you know, it might either, you know, trade at a premium or so if you want to short, you have to really pay a huge interest rate to do it.

With a perpetual, there's no limitations on that.

It's a derivative, so you can go long and short with ease.

And so, it will allow people to be able to go long and short, you know, without needing to worry about this borrow issue.

The second is that in the SEC regulations limit the amount of leverage that you can have on stocks or portfolio of stocks depending on a variety of you know characteristics of what the customer is.

And so perpetuals again offer kind of a a larger range of potential like leverage opportunities for customers.

And then of course there's the ability for us to in the future cross margin stock perpetuals with gold perpetuals and you know Indian rupee perpetuals and you know crude oil perpetuals all in one exchange which might not be possible in a stock exchange.

So I'm really excited about the 247 developments for for NYSE and NASDAQ.

I think they're only going to help what we're trying to do.

And then of course you know you know the other legacy exchanges again we won't get into it here but there's a variety of reasons why listing perpetuals in the US is not clearly spelled out as something that is allowed to be done under the regulation.

That is part of why we started our exchange by being regulated in Bermuda versus the US although we do have desire eventually to get into the US.

Can you tell us a little bit more about what happened on October 10th where I think more than $19 billion were liquidated and what exactly happened that led to such a big liquidation and how that could have been avoided?

Let's like pause for a second go think about how a traditional futures exchange works in terms of its like risk waterfall.

So number one, every traditional exchange from NASDAQ to CME has these notions of price bands where basically they try to prevent flash crashes where you know if let's say there's a bug in the in the matching engine or if the liquidity just temporarily falls away the last thing they want is a stock going from a 100red to a penny and then back to 99 such that when it goes to a penny a bunch of people get completely wiped out.

And so what they'll have are these like circuit breakers, price bands, volatility halts where if it moves more than x% from some benchmark or a previous close, the market pauses for a second.

It gives everyone a chance to take a breath and reestablish liquidity and make sure that the market is either has actually moved down or if it's been unfair, they can move back to the right place.

So that's something that we do that, you know, generally speaking decentralized exchanges don't have.

The second is that traditional exchanges don't generally do auto liquidation.

In fact, the exchanges themselves don't do it at all.

It's all like the intermediaries that do it where if if someone is starting to breach their maintenance margin levels, they get a call, an actual call or an email and say, "Hey, within 24 hours you need to top up your account or else we're going to have to take down your positions."

It's it's rare and only in some of the most retail kind of brokerages in the US does someone actually get autoquidated in real time.

A lot of that sort of like end of day batch processing which it has its pros and cons but it definitely results in fewer kind of like unfair liquidations.

The third is that in traditional exchanges there's this notion of a default fund or an insurance fund where either the exchange itself or the participants will put up capital to serve as the backs stop to serve as the buffer layer to make whole the whole system in case one account gets blown out and there's not enough margin to cover their account.

In a lot of the decentralized exchanges they do this thing called ADL or automatic deleveraging.

In the traditional financial world that's called tearups where you you know you tear up the position you pretend it didn't happen.

And that is often the very very very last resort in a traditional exchange.

Whereas for a lot of dexes it's the first thing they do is they cancel all the winning positions in order to make whole the ones that have lost.

And so what happens here is on October 10th, you know, there was a, you know, a crazy move in one benchmark price from one exchange.

Too many exchanges depended on that one benchmark exchange.

And the second that this thing moved, instead of like it getting paused or bad points getting thrown out or averaging out or taking a breath, it just immediately went to market orders, tons of different different accounts and sold them off and that caused a cascade.

And so again, I love the fact that in the crypto world, you know, we have tried to create market structure that's on the bleeding edge and very much kind of reinvented the traditional financial system from scratch in a way that's hopefully better.

At the same time, you find that people are relearning the risk management learnings of the traditional world that have been hard like baked into exchanges for decades from scratch.

I think, you know, it I think a lot of exchange operators in the crypto space would do well to take a look at how these exchanges are are operated in the US like NASDAQ and CME, learn those rules and try to figure out which one should apply so that kind of thing doesn't happen again.

But that that event on October 10th definitely eroded trust in in Vexes and a lot of exchanges in a way that I think is irreparable.

How do you approach risk management at Architect?

We we basically do every all of the above on our exchange.

I mean we have price bands, we have funding ban limits.

For our institutional customers right now there there isn't liquidation automatic liquidation.

We just do traditional margin calls and we give them the opportunity to you know post and to top up their accounts.

We set margin levels carefully based on volatility.

So something with a of 10 is going to have a lot you know greater margin. So greater leverage ability than something that has a VA of 40.

And so we're know careful about setting margin limits per product.

We have the default waterfall where we've put up some of our own capital to serve as the back stop in case you know an account does go underwater.

We're planning to allow other participants to be able to post you know into that insurance fund and earn some kind of return on that insurance fund but nevertheless they would have the risk of having to you know back stop customers if that were to if a customer were to go under and sort of the ADL procedure is at the very very bottom of all of this.

I would say the other thing that we do as well is that you know our products are all based on like trusted third-party benchmarks.

So you know we are not computing our own rate for the euro for our euro perpetual.

We are using the official 4pm closing rates from Reuters Refinitiv London Stock Exchange Group.

You know we're not using our own prices for Apple.

We're using the official closing prices from NASDAQ.

We're not using our own prices for metals.

Same thing.

And I think that using trusted, non-manipulable third-party benchmarks is what kind of adds integrity to the product's pricing.

What happens when the price moves a lot between close and open?

So yeah, if when when the price moves a lot, basically the the market doesn't allow orders to go in sort of below that price, let's say, for you know, some period of time.

And so what that means is, you know, if it truly did move, you know, more than, you know