• Joshua Lim (Circle, ex Goldman Sachs)
• Juthica Chou (LedgerX) (Goldman Sachs)
• Bobby Cho (ItBit) (VP of trading at SecondMarket)
• Harry Yeh (moderator) (Binary Financial)

Today we will hear from some people who are traders and also infrastructure providers. Good morning everybody. It took me 18 hours to get here. The Uber dropped me off at the wrong building. They need better signs.

So usually I am the one that sits on the panel. This is actually the first time I get to moderate. I get to ask the questions that nobody else gets to ask. I am kind of curious about this.

Josh, do you trade on coinbase? Yes, we do. We really respect a lot of the great products that are coming out of Coinbase. I think they add a lot to the ecosystem. We want to work more closely with them in the future.

This is more of a trading panel, so I will spend time talking about exchanges and things that I am curious about because I trade on these exchanges.

So Bobby, why is everyone building exchanges? Aren't there so many of them? It seems like a race to the bottom to 0% fees. As an exchange operator what do you think?

Bobby: Yes, you have a large number of people starting exchanges. In China and Asia you do not have that kind of action going on. There are market leaders in that country. Here in the US, nobody has really grasped it. A lot of the exchanges that do trade the USD pair are off-shore. So nobody has cracked the solution here in the US to being a fully regulated exchange, nation-wide. So that's obviously what we're hoping to solve in the coming future.

So that leads me to the next question. Is the United States actually the most important market for Bitcoin? So first off, the United States is a heavily regulated market. Do you guys actually think.. it just doesn't seem that the US is the most important market? Does China lead the price?

Josh: I think this is something that we have observed over the last year. The growth of trading and speculative use of Bitcoin in the Chinese market. If you just observe based on published volume that Chinese published volumes are 5-10x more than the USD volume. I think that's .. that's what, I think that in Asia that's a common use of speculative instruments as a you know, that type of mentality of using it as a speculative instrument. The United States leads in a couple of other ways. I think that in terms of practical applications of Bitcoin in an economic sense, meaning consumers to purchase goods.. I think that's where a lot of the exchanges that are cropping up in the US are facilitating the growth of that organic usage of Bitcoin rather than just a speculative instrument.

Bobby: So basically, I think there's a lot of hope and opportunity in the United States. I think that China may be leading in volume. When you think about broker dealers, hedge funds, alternative asset managers and guys like them, I think the opportunities for Bitcoin to grow in a new market is what we're trying to solve here.

That leads me to my next point. The US is actually leading the way in terms of innovation. So I see it in investment capital, Coinbase just raised $75 million recently, it seems like there's a lot more venture investment. Versus in China, where I spent some time-- even though volume is up, investment is not. Do you think over-regulation is stifling innovation?

Juthica: I wouldn't say that there's too much or too little. I think the biggest difficulty for people starting companies is that there's a lot of uncertainty at the state and federal levels. That's the biggest challenge that new innovative companies are up against.

Bobby: Look, the bottom line when you talk about regulation is what is it trying to solve? Well that's consumer protection. You can lead into the banking sector and other types of markets, really it's about protecting consumers. When you talk about customers or certain people in certain states sending money overseas, where are they going to go? Well they may go to their state representatives. I think that the regulatory bodies-- to basically say, let's look at this as an opportunity rather than just killing it right off, I think that's where we are right now.

Josh: I think Bobby makes a good point about consumer protection. Companies in our ecosystem are struggling against a patchwork of regulations, created by state banking departments. When you want to engage in money transmission activities, you have to go state by state and get licensed. That does impose a heavy burden. I think that the core of this is that each state wants to protects its own citizens. There are also other interests at play for regulators. There's the, I would say the AML kind of like, counter-financing of terrorism angle where there's a need to control the gateways into and out of Bitcoin where it touches fiat currencies. I think that's something that is regulated on a federal level with FinCEN and the Federal Reserve. There's another angle which is the markets regulation piece. That's really the piece that is sort of missing in the United States. It is being built up as we sit here and talk about it. Juthica has more perspective on this, I know that the CFTC is getting very much more and more involved with the kind of development of derivatives exchanges and futures exchanges in Bitcoin and I think that is going to be an important catalyst.

Do you just build a startup and worry about the rules later? You see companies like Coinbase that are building and releasing a product that is dealing with regulation at the same time. Juthica, it sounds like you have product ready? What would you guys suggest or recommend? What is the right path for a startup?

Juthica: I think a lot of companies and exchanges and startups have different vectors or levers to use to be competitive. Well, who is your customer? Our customer is institutions. We have to prioritize trade reporting, centralized clearing, surveillance, and other customer bases may not care about those issues.

Bobby: I think there's a whole spectrum of different companies in the Bitcoin space. Bitcoin touches many different laws and regulations. You definitely want to talk with inside or outside council on this. Yes Bitcoin is a new technology, but for companies like us, we're still touching cash. There are still rules about how to act as a custodian. You can't just dismiss this. You have to acknowledge that.

This leads me to my next point. Is there too much or not enough? I think there's too much, but I think that's mostly because of the bad actors before hand.

Bobby: I don't think there's really that much regulation here in the United States as it relates to Bitcoin specifically. I think there's a ton of regulation on anti-money laundering and money transmission. I think it's rightfully so because it boils down to consumer protection. In my mind that's where it is. With Bitcoin regulation, it's to be decided at least in the State of New York. The BitLicense which I think will hopefully this year come to market and give companies guidance in terms of what they should and should not be doing. I think that after that you will see other states adopt BitLicense.

Josh: I think that the BitLicense is a good case study for how regulation and how the regulatory bodies can do the interplay between them and the Bitcoin ecosystem. When kind of the first draft came out, a lot of people saw a lot of issues with it, like the NYDFS was perceived as regulating software developers. It was perceived as too onerous for startups. Just a couple of guys hacking on a project would fall under the NYDFS BitLicense. I think that after extensive work by the community to reach out to Ben Lawsky and other regulators, there was a lot of concessions made in favor of Ben Lawsky in the Bitcoin ecosystem to the tune of having on-ramps and to the tune of explicitly carving out software developers and things like that. That's a good model for going forward for what we might see. Something else to mention is that there's also a group of conference of.. supervisors who are working on a model framework for how Bitcoin regulation should work on a state-by-state basis. That may provide some level of uniformity in terms of approaching the regulation.

Juthica; I think in the cases of the areas where we see more clarity, it has been more promising. Our regulator is the CFTC and they have extensive history regulating a variety of commodity and currency derivatives. We have had nothing but positive dialog with them. They have been open and understanding and they have really educated themselves about Bitcoin. Some of the uncertainty is still the difficult piece.

So clearly there's a lot of regulation. So I want to transition to derivatives. We used to trade derivatives in the equity market. I think derivatives are exciting. So Juthica, what are your views on Bitcoin derivatives? Will it be beneficial for the price?

Juthica: Listen, I think that a real ecosystem has developed around Bitcoin. I think there are real use-cases and real companies with legitimate exposures. Derivatives provide unique hedging and investment opportunities. I think that it is definitely true here. Historically the advent of derivatives has improved stability and I think we will see something here.

Isn't price volatility good for traders?

Juthica: It creates opportunities for traders. I think not everyone wants that risk. It should sit at the level of institutions that are comfortable managing it. There are certain corporations that are comfortable, but not everyone should be facing the price volatility risk.

Josh: My role at Circle is manging the treasury operations. We see transactions coming from our customers, we access exchanges, we talk with trading partners, and we try to find ways to reduce risk from our customer flow. A lot of risk we can mitigate with derivatives, there's a risk associated with holding Bitcoin and as you know it's a volatile currency, so our market exposure can be reduced by trading options. At a macro level, derivatives can help with this. You can use them as a gauge for how people are pricing risk on a forward basis. You can see how other people think how risky Bitcoin is according to other people's perceptions. You can use this to guide hedging decisions. Juthica alluded to this benefit, but the growths of derivatives markets tends to add liquidity to an underlying spot market, which has been observed empirically.

Bobby: Which part of derivatives do you think will lead forward? The futures market in China is really for- seems more like for gamblers. I wouldn't want to hedge my portfolio with BTC denominated 10 or 20x leverage. And then the clawbacks...

Juthica: I think different types of derivatives offer different exposures. We are starting with options. They offer more targeted and nuanced exposures. I think the real important part is the clearing of derivatives because it's not as straight-forward as a spot transaction. That risk needs to sit with counterparties and are ideally regulated to manage it. I think that the clearing component is going to be an important piece for the market.

Josh: I am often shocked to see the growth of the Chinese futures market. I don't know if you have experience trading on the retail trading platforms like OKcoin, but the volumes there are stunning. I think recently in the recent rally that there was a one day where 600,000 BTC volume traded on the futures. That's about $150 million. That's published volume so you can maybe take that with a grain of salt. That's very significant volume and that dwarfs the underlying spot market.

Harry: Excellent, so that's most of the questions regarding derivatives. Oh, price. Sure, why not. Usually people ask me about the price, but okay. What do you think about the price long-term? What do you think is the fair price of Bitcoin? I think it will be about $10,000 at some point.

Bobby: I think the current price is at a good level. What would you pay, theoretically, this widget or this tool that could essentially do a whole lot in the future? So you are basically buying for a future utility of this product or technology or whatever you want to call it. So I think the price is right where it should be for now. I don't see a huge spike in the future.

Juthica: I am not going to answer the price question. I think that the next big catalysts will be as regulated US exchanges come online. I think there is latent demand that just can't get exposure to Bitcoin with the current platforms that exist. I think this will be a positive price catalyst.

Joshua: I think the biggest catalyst would be the adoption of large institutional investment community, like Wall Street and hedge funds. You need to have that base of long-term buyers to counteract the steady supply from mining that hits the market every day. That's what needs to evolve and deepen over the next few years before we can see sustained price rallies. I think like the other catalysts that you should look at is the equitized assets for Bitcoin, like ETFs and the Bitcoin Investment Trust recently was approved by FINRA to be listed OTC. I think products like that expand the availability of Bitcoin to certain types of users and people who want to invest in Bitcoin from 401ks. I think that's bullish.

Harry: In China, most of them are retail investors. Do you think more sophisticated investors? Interactive brokers?

Bobby: So, our exchange will and will be open to retail traders ,but our target is institutions. The retail flow is good, but if you are trying to take this to the moon, you need to open up this product to the existing investment world. Hedge funds, multi-family offices, folks like them. I think that for us to take a leap forward in terms of adoption or even in price, you need to start getting the real money guys.

Juthica: Our platform is for institutions as well. Especially on the hedging side, the most important piece first is the natural longs and natural shorts, serving the kind of true hedging needs, and once more of a market develops I could imagine more of a retail presence in the United States.

Joshua: We currently do not service any institutional accounts, we are purely a consumer product.

Harry: You with sunglasses and purple shirt. Can we give him a mic?

Q: How are the back office environments with brokers? Bitcoin infrastructure?

Harry: So the question is...

Bobby: So how are banks integrating with Bitcoin and back office settlement operations?

Harry: Go up to the mic.

Q: What are you seeing in terms of banks, regulators and industry groups like NSCC, Federal Reserve, DTCC, how are they looking to adopt and when, the Bitcoin infrastructure to make things more efficient?

Bobby: I think that they are all interested in the technology. I think as Andreas mentioned in the last session that they have looked past the currency. They have realized there's an interesting, trustless decentralized public ledger that they might want to leverage for tracking or audit or something. They are all looking at it. I don't think banks have integrated. For any bank to dismiss this technology and say they don't want involvement, I think that would be very shortsighted.

Juthica: I think one of the best and clearest use cases for Bitcoin in the Western world in institutions is clearing and settling. It is a fantastic form of collateral. Better than a lot of what exists right now in clearinghouses. This is why we have applied to be a clearinghouse. I think that clearing organizations are looking at it. I think they recognize the potential. It's too early for them to start doing something about it actively.

Joshua: I think collateral is a great application of Bitcoin. You can continuously throughout the day or night, just settle your collateral obligations, I think that's a great use of Bitcoin.

Harry: You get the next question.

Q: Thanks guys. So on OKCoin and Huobi.. I don't know about margin. But 20 to 1 margin on something as volatile as Bitcoin to retail investors is like selling dynamite to little kids or something.

Harry: Yes, that's China.

Q: Is that like, just an interesting development or something that will stop eventually?

Harry: So the question is do we think the leverage trading at 20x is like selling dynamite to children? I think the answer is yes. I think that's gambling. We do not use their futures platform for trading at all. The only futures platform that we think people can use is BitMEX, but that's Bitcoin denominated. I think that 3 to 1 is more reasonable, because that's actually what is considered reasonable. It's ind of like opening up a forex account and saying you can get 100x leverage.

Bobby: There are reasons why the SEC denotes people as qualified institutional buyers. Because they meet certain requirements. These other exchanges are empowering the retail investor to feel like a quib or an accredited investor, to get 25 to 1 or 50 to 1. We wouldn't do it, I think it's a gambling mentality. I think it's just a different way of looking at things.

Juthica: Philosophically, I think that exchanges should not be competing on margin.

Joshua: I get enough excitement out of 1 to 1 leverage. 20 to 1 sounds kind of crazy to me. Even traditional FX markets have been extremely volatile lately, and this has had bad consequences for margin trading platforms that offer high leverage to even traditionally stable safe-haven currencies like the Swiss franc.

Harry: So yeah, I hope you don't trade on those exchanges. Yes you may have the next question.

Q: The mots important advantage of Bitcoin seems to be a currency with trust. But when we convert Bitcoin into fiat currencies we have to introduce trust again. So you guys run Bitcoin exchanges. What do you think about trust on Bitcoin exchanges? Is there any way to mitigate the problem of trust in Bitcoin exchanges?

Harry: So the question is that Bitcoin was designed to be trustless, but when you go to fiat you have to introduce trust.

Bobby: We are regulatory compliant in every district that we operate in, and this will happen in the United States in the near future. So it's the way you build the trust. Why do you trust TD Ameritrade or Schwab? Well it's because they have capital requirements, banking licensing requirements, I think that's the way you get people to trust you. You meet some requirements from regulation, and in turn this is why nobody asks Schwab to mail them their certificates. For better or worse, Bitcoin exchanges, and I was the same way when I was trading at Second Market, I never wanted to have any exposure on the exchanges... I think that what we're trying to do is build a company that people trust, and it starts with management, our board and the folks we bring into the company.

Harry: I don't think you will have trustless money. Bitcoin is a protocol for transfer. If someone is going to wire you $5M to buy Bitcoin, you have to trust that they wont run off with your $5M. Technology does not replace trust, it just makes it more convenient. Next question?

Q: So the question is about derivatives and bubbles. So we have had for four centuries.. tulip mania and systematically wiped out assets and ecosystems. As China ... regulation.. are we at a point where we could cause disasters? Is the system in place to protect the evolution and growth of Bitcoin? Or is that a big fear? A bubble will be in everything. Is there fear with this group? Do you believe there are systems in place? From a speculation and derivatives standpoint.

Harry: I don't think we're at that point yet. The drop from $1000 to $155 and back up, that's just the way Bitcoin is because there's no way to hedge yet. I think that once hedging comes in. I think you will see big massive price swings... big events will cause the price to drop.

Juthica: Healthy derivatives markets have a good mix with speculators and derivatives.

Joshua: We see that the underlying Bitcoin trading infrastructure has not yet been made yet. We are trying to build the foundation for this. It starts with a spot market. You get price discovery. Then you can move on to derivatives.

Harry: There is no WMD of derivatives yet. Okay, mic.

Q: So one of the things that came out of MtGox was heavy accusations from the Willy Report that there were trading bots that were pumping up the price. What is the next generation of Bitcoin trading institutions doing to prevent those things again?

Harry: I like the way you said MtGox. Empty. The question is what is going to be with... with exchanges in the future.. to mitigate trading bots?

Bobby: Any exchange that is running principal money against their customers is in my mind a huge ordeal and bad. I think that exchanges doing this are taking advantage of their customers. We don't do that. We don't run proprietary trading bots. We do have market makers. But we would never run against customer orders.

Juthica: Regulated derivatives exchanges are subject to extensive trade surveillance to identify fraud. I think we will see more surveillance.

Harry: Okay last question.

Q: This is regarding.. it is great there's a lot of trading happening. Do you guy have a view on what is the ratio of real useful transactions versus trading transactions on the blockchain?

Harry: So the question is it's almost utility versus speculation?

Joshua: There are many ways to approach this question. How much is transacted per day in Bitcoin? I think this is a better question for merchant processors like Coinbase to answer. I would estimate like a few million or less per day. And of course you have the mining volume which is real economic value that needs to be transferred, so that's probably a few million. I think a lot of that.. you can gauge that ratio by looking at Chinese volume versus US volume, that might be a good ratio to figure out speculation. You can also look at these fundamental metrics like mining activity versus exchange volume traded.