When Markets Never Close: Finance for a Global Internet

Transcript

[music] We're going to do our last session before lunch. And for this one, we're going to have an amazing fireside chat with Armani, who is the CEO of Backpack. It's an amazing exchange that is working on building everything ready for the onchain economy to come on. So we're going to share a lot of perspectives on what we think is exciting for the new future financial economy and what Armani's excited about for the future of backpack. So please give Armani a big round of applause.

>> Welcome. >> Hello. >> Ronnie, I'm excited to uh to talk to you today. And uh one of the things that um is going to be a big focus of today and has been today is just understanding where the opportunity is from the regulation side of things in Japan as well as the rest of the world and what builders are doing and what founders are doing to take advantage and just be ready for this. And the first question I have for you is u just having the audience get a little bit more context on what backpack is. Tell us about what made you start the exchange and uh and what are you focused on?

Yeah. So, you know, Backpack and Short, it's a global trading platform. We've got folks and and teams all around the world, everywhere from the UAE to here in Japan to Europe, Australia, the US. It's a global operation. The company was really built off of the back of a bunch of open source work dating back to 2020, 2021. a lot of work on on the Salana network and you know going to you know 22 23 once FTX collapsed uh we kind of somewhat notoriously lost you know 88 90% of our working capital on on the exchange and uh really had to you know stop and reevaluate the world >> and I would say the core view at the

time was that crypto although it was like in a really deep bear was going to grow 100x And a big part of that growth was going to come from the convergence of DeFi and and Trafi and all the second order effects that would mean for for the world economy. And so we set out on this path where we literally sat in an office in Chicago, drew a map of the world, colorcoded it, and said we're going to spend the next three, four years figuring out how to set up regulated companies in every single part of the world so that we can be ready for this when it happens. Uh and so that's what we've been doing for you know the past several years. We you know are super excited about everything that's happening right now in the industry and

uh that's kind of us in a nutshell. >> That's awesome. So maybe we can just sort of get to the point directly. Why is this an exciting time for you and and why go the regulated path? So, right now, I think it's fair to say the most exciting, let's call it meme or narrative or meta or secular trend that's happening in the industry is it's tokenized stocks. Um, and specifically, it's tokenized stocks paired against meme coins, which is hilarious. That's something that nobody would have expected.

And you take a look at a product like tokenized socks and you ask yourself the question, well, how do you build this thing? It requires two really important skill sets. It requires one, the ability to actually operate a brokerage and two, the ability to build a tokenization facility and the ability to get distribution and build all the infrastructure to deal with, you know, 247 markets, real-time settlement and bootstrapping liquidity on on global networks. And that is a skill set that very few people in on Wall Street have.

and you know very few people in crypto have other than the large mainly regulated crypto exchanges like Coinbase, Robin Hood, etc. >> That's a very interesting choice of words. So why is it a skill set and not just a head start? Because it feels like it's a very repeatable checklist that you can get the license, you can build this exchange that has to meet these criterias and then you should be able to offer at least an onpar experience and you have to differentiate on speed or customer support or anything else. But what what kind of is the difference here between how you think about it and and what's already happening.

So, if you look at what the incumbents are actually doing, they're all investing into crypto companies and they're partnering. They're not they're not building, right? ICE made that huge investment into OKX. I think NY just invested in like 100 million market. Yeah. into Payword, you know, that $20 billion round uh for for Poly Markets. >> Um you're seeing this all over the place right here in here in Japan. Binance Japan and I think it was Alipe. Uh uh and so you're seeing partnering happening everywhere and you ask the question why partner uh and why not build right you have all the distribution you you might as well >> the time or why do you think that

they're partnering versus uh building from uh yeah build versus buy kind of the traditional argument. So, I think people underestimate, unless you're actually like deep in the weeds of building in crypto, just how hard it is. [snorts] Like, these are 247 instantly settled, irreversible transaction ledgers, which means that if you lose a dollar and it goes out the window, it's game over. And you see this happening again and again and again.

with even the most, you know, talented teams in the space, right? Uh the the latest example of this, not to throw them under the bus, is just, you know, bit this >> yesterday. Yeah, >> yesterday got I think 300 or something million dollars. Uh there was a big buy bit hack for 1.4 billion. I think there was, you know, that white hat exploit on Kraken for a couple hundred million like last year, a year or two ago, >> like FTX. >> Yeah, FTX. That was fraud, not not an exploit. So, >> fair enough. That's a that's just good oldfashioned uh uh finance dilemma.

>> Um uh and so the challenge of actually building in these markets is I would say in order of magnitude at least more difficult than building in traditional finance where if you screw up a wire transfer you generally can get the money back. >> All the bank. Yeah. >> Yeah. Exactly. Um and so I think that is the first really important piece of it and that's what unlocks like all the value right if you can build circle or tether right these incredible I I would call them like trust machines uh where everybody is confident that the dollar USDC is going to peg be pegged to a dollar um then on the back of that you

can build net new incredible things right something as simple as just withdrawing from your Coinbase account instantly and not having to wait a day or two is a super underappreciated like herculean accomplishment just from an infrastructure standpoint. There's a bunch of pros of it. There's some cons of it. Happy to talk about the cons, but I think that's like the core thing. And then on top of that, you have net new form factors for a lot of instruments. You know, tokenization is one example of this, but then there's also just, you know, the rich array of financial experimentation that crypto is always on the forefront of.

>> And the best example of this is perpetual futures, >> right? Where if you actually look at the per stack, it's very different than the dated future stack or whatever on CME, right? um there's no margin calls, there's real-time liquidations, there's ADL, there's higher leverage, there's funding rates, and there's importantly a global adversarial audience that in very real terms is trying to attack the system, >> testing the limits of what actually yeah does work.

>> Like you literally have armies of people trying to attack Binance 247 so that they can exploit something in the risk engine to steal all the money, right? Um, and you saw this happen with Drift. You saw it happen with Mango. These are two Salana projects where this happened. Uh, there's the Kelp exploit uh uh with a um and so it's kind of these are net new things and I you know these are it's scar tissue and experience that builds up over a very long period of time. Uh and so I think for the traditional incumbents you know there's not just you know the skill issue which you know okay I [clears throat] think there's a lot of

really incredible talent uh in Wall Street and you know you kind of have to assume that they have the skill but then there's also just you know the innovator's dilemma itself >> like the the institutional knowledge of having been through this in the onchain world just does not come in unless you make those mistakes >> or even if you have that knowledge right or or even if you're willing to get the knowledge the institution itself might not want to get it itself. Um they have you know these huge businesses already. They don't want to take on the risk. Um so I think it's this combination of of things which is why you always have edge to the native companies right it's like why Amazon had edge over Barnes & Noble like maybe they had you know there's a bunch of reasons maybe Jeff Bezos is

just a beast but also they're willing to push you know the envelope >> legacy infrastructure does not have to be maintained and you get to uh start fresh. No, that that's absolutely fair and that's a really good explanation for how uh how others are thinking about it. Um I want to understand sort of how you think about the tokenized markets in general. There's so many versions of what we've seen tokenized stocks look like. There's different variants. They have kind of different ways they can represent the tokenized version of that stock. What do you think is considered good? What do you think is like not good? How do you think a stock should be represented on chain? So the simple test for determining if a stock is tokenized well in my view is really simple. Just can you on and off ramp it to your brokerage

account. So if I buy a stock on Robin Hood or Ethereum or Salon or whatever, can I go and transfer it to my Fidelity account? Um and vice versa and does that incur a taxable event? So it's one, can you do it? And then two, is it the same asset? And do I change my cost spaces the moment that happens? Uh and the reason why this is so important beyond the legitimacy and the marketing and the branding around you know the retail perspective of is the thing I'm holding actually legit and do I trust it? Uh it's just a market structural problem. So if you take a look at for example the Salana DeFi ecosystem right now and all the RWAs on it and you compare you know the the stocks um even to other chains like Robin Hood the backpack security

variant trades at 10x less execution costs than on Robin Hood right so if you're trading uh if you're if you're buying a a stock on Salana uh for one bits of of execution costs you're paying like 10 40 bips on Robin Hood chain right now and you ask the question why is that part of it might be because Salana is so great or whatever, but even if you look at Salana itself and you look at the competitors within the Salana ecosystem, you see the exact same phenomenon happen. And so the one variable is just you have the backpack securities versus, you know, the other securities. And the key difference between what we've done and what basically everybody else has done um at least in the DeFi space, the closed loop transfer agent model is a completely

different conversation. But in the DeFi space, we're the only one that's not a cash settled debt security, >> right? So there's this concept of like debt securities and equity securities, a bunch of legal mumbo jumbo, but the core idea is that when you actually have a token, what do you get if you go to redeem it? Do you get cash or do you get the actual stock that can go in and out of your brokerage? And from that one feature has a bunch of second order market structure like microructural consequences. And the most important one is that you can trade between NYI, NASDAQ, and DeFi at the speed of a token. So in the same way you can trade between Coinbase and Ethereum by just depositing ordrawing ETH in and out of, you know, unis swap or a or whatever, you can do the exact same thing for

tokenized stocks in the backpack brokerage. And because of that, you can keep prices and markets in line. you can keep liquidity deep because what's we see all the time is people are constantly arbing the pools and and the mark and the prop amms back and forth from DeFi and tradi and that is one of the most important features that that structure brings into the market and it's the only RWA I'm aware of uh that does that today >> that's a very good way to think about it one of um I feel like obviously analogies aren't always the best way to think about these things but this is like the the representation of like passing by reference versus passing by value and uh you have way more flexibility if it's the same ref that's

being uh moved around. Um the thing I'm curious about is in this view how does changing in pricing look like when the stock market is closed but the 24/7 markets work and how do you sort of reconcile or what are the side effects you've observed as as backpack has been doing this? >> Well, so price discovery happens on stratfi. It's going to continue happening on trady for stock on stocks for the foreseeable future. >> The more volume >> that's a very and you fundamentally believe that you don't think if everything is on chain you have better price discovery because the global market should be a bigger actor than the local exchange.

>> I it's going to be a function of TVL like value and volume uh and liquidity. Um I think for the next year that's going to be the case. The next couple years maybe we start seeing it change. I mean already on Salana right now you start seeing some symbols doing more volume than on and NASDAQ. So it is changing for some symbols already spec specifically where there's a lot of speculation in in the memecoin area. Um but but I think in the short term that's that's definitely going to be the case. There's just not enough capital in DeFi yet. Still super small relative to >> yeah just the global market. Yeah.

>> Yeah. Um I [clears throat] forgot the the initial question. >> How does the pricing kind of offmarket [snorts] like when markets are closed look like? >> Yes. So over the weekend, I mean, per have definitely been a big um uh help there, right? Because people can hedge, they can price, they have a reference. Um I think AMMs are kind of doing their job in that world. Liquidity is just really bad over the weekend still. Volumes drop down over the weekend still. So it's still very very early. It's not it's not a solved problem by any means. Um and so yeah, I think it's still like uh in its infancy.

Um, one other thing that you kind of talked about on how you've approached Backpack is you've gone and pursued the process of getting licenses for various countries. Um, how do you kind of reconcile like why you need to do that versus still building for a global market and sort of how does that benefit you if you're trying to move things on chain? >> So, I I I don't think they're mutually exclusive and I think one fuels the other. And the most illustrative example of this is what's happening in the US right now where you have the most pro-innovation CFTC perhaps ever created in the world.

And what they're doing is they're trying to bring derivatives, namely perpetual futures into the US in the same way they did for for prediction markets. If you ask anybody, you know, three years ago if this was even a conversation, you would have been laughed out of the room. but they're like really pushing the envelope on doing like the best possible thing for kind of a US markets and you know you you know you you have this conversation with people in DC and policy makers and you know congressional staff and you know regulators and there's a bunch of really challenging questions where you know especially in the large western economies here in Japan, Europe, US you know regulation is not like a four-letter word which I think has been Maybe you know a lot of

crypto people in the past have have have conflated regulation for bad regulation which is what was happening in the prior uh administration for better or worse where people regulators were suffocating the whole industry to to kill it basically. Um but regulation is just like social values, right? It's just like what is the law and nobody thinks that laws shouldn't exist, right? Um and it's actually the absence of regulation that encumbers >> the gray area of >> yeah it and it encumbers genuine founders that want to build real things for the real world. And so you kind of are in this, you know, limbo state if you don't have, you know, regulatory

principles, guidelines, and rules where, okay, the most aggressive person that is happy to take a coin flip on whether they go to jail or not like wins, right? Because, you know, it's like high risk, high reward. Um, and if there's no, you know, rules of the road, right? uh you can have, you know, a car that goes and and crashes, but if you just require the [snorts] car to have seat belts and, you know, uh uh airbags, then you have a much more robust, [clears throat] you know, traffic control system or whatever. Um and so that's kind of my perspective on on regulation. And going back to kind of what you're seeing in the US with the CFTC is kind of the rules of the road are more or less kind

of becoming clear especially, you know, as kind of the rulem is starting to come out where people are starting to understand the importance of, you know, going in and registering and getting regulated with the CFTC. And I think the best example of this is what's happening with Hyperlquid and Kraken right now or Kraken's parent company Payword >> where Hyperlid is very elegantly positioning not as an exchange itself which it might sound a little funny because you think of Hyperlid as a DEX. They're positioning from a US perspective as a technology like services provider as like a platform. And what Kraken is doing is

they're taking their compliance infrastructure and their licensing and they're saying we are going to run our exchange their FCM which is you know you can think of it as like a broker uh in the US their clearing house with Bitnomial and they're just using hyperlid really as an implementation detail saying like this is going to be the stack that we use. Yeah. >> Exactly. to to match trades. Um, but all of the regulatory principles are going to apply to that product in the same way they apply to any regulated uh uh financial institution. And so this is going to be I think a huge unlock to bring in DeFi market structure into the

US and into other countries as well. uh where you have this incredible technology that's been built but it hasn't been able to actually fit into you know the established you know decadesl long like rules that have been created over the past you know century that's not going anywhere right and so I think you know I'm very excited about being able to do a lot of that work in the same way that you know I think companies like Kraken have been doing it um for kind of you know the DeFi ecosystem more broadly to like be able to actually tap into like regulated markets and regulated counterparties and liquidity uh which right now is just like a parallel universe um uh uh really unrelated to crypto. But I don't think that's the future. I think they'll

converge into one and um one fuels the other. No, I think that's a really good way to think about it because my sort of one outstanding question to you was it feels like if we're moving more and more stuff onchain and representing existing securities as as onchain items, you are kind of assuming that it's going to be a big retail market and that's kind of where the world is headed. So in that universe, where do you think the institution comes in? And do they have a role or do they just end up being the party that just makes money off of these retail changes or or is this a displacement?

Why should an institution care? Um and and where do they fit into this new economy? >> So certainly don't think institutions are are going anywhere. And just the simplest example of this is looking at circle. Circle is a financial institution, right? they power what is the trust machine that is that is stable coin. Um, and I think you could apply that same concept to basically any type of financial services business where it's maybe less about the technology um, and more about the human and social elements. And again, you kind of think about regulation as really just a social layer ensuring that the machines are doing the things that you want them to do. Um, and whether it's, you know,

ensuring that you have a great custodian that actually is safe or being able to drive down the street and walk into your local bank and be able to ask, you know, a banker for help on a mortgage or something like that. Um, I think it'll certainly evolve, but I I don't think the financial institutions are going anywhere. >> That's fair. Uh my last question to you is kind of generally sort of having been in this space for many years and also now been on the both crypto native side and also now going to the license approach. I'm curious what you think is something that the crypto industry can sort of learn from the traditional side into kind of the financial existing infrastructure companies on anyone from

best practices to things that they do well that we should kind of incorporate versus this uh this uh in a way this uh wild west sort of approach to things. What do you think is like a good thing to uh copy from the traditional finance industry? I think the one thing I I would say is, you know, the traditional financial industry has over a century of of just scar tissue built up from booms and busts and blowups. Um, the crypto industry has, you know, a much shorter time span and

has had >> probably more events. It's it's had its own share of of blowups, but I think risk management is is the single most important thing I would say in in all of finance. And I [clears throat] think that is not a solved problem by just decentralizing things. That is solved by by by humans. Um and and so I think I think that's like probably the area that I would learn most uh uh from. Um, and I think, you know, whether it's CME or any of the other incumbents, you know, it's the final boss is not making the system go fast, although that's really important. It's it's the risk engine,

>> not losing people's money. >> Um, Exactly. Yeah. Um, and so I think uh I I I would say that's I would say risk management is a first order rule for any financial system is the most important thing. >> That's awesome. Well, thank you so much for this amazing conversation. Please give Armani a big round of applause. >> [applause] [music]