“[LMAX’s sixth exchange launch, in Asia Q4] will be the first exchange we launch that will have fiat currencies and crypto on the same exchange… I think the partition wall between fiat and crypto will be knocked own within the next 3-5 years.”
David Mercer is the Chief Executive Officer of LMAX Group, a global financial technology company headquartered in the UK, and the leading independent operator of institutional execution venues for FX and crypto currency trading. Following a successful management buyout in 2013, David has built LMAX Group into a key player in both the traditional capital markets and the crypto trading industry. With global client base and offices in 9 countries, LMAX Group was recently valued at $1 billion, following a minority stake sale to J.C. Flowers & Co. A former City banking executive and currency specialist, David is an outspoken industry commentator and a long term champion of the UK’s technology sector as well as a passionate supporter of entrepreneurship.
David Mercer discusses his career and entrance into the crypto space with LMAX. He describes the convergence of fiat currencies and crypto, highlighting LMAX’s soon-to-launch exchange in Asia that will host both fiat and crypto. He explains the advantages of institutional crypto exchanges and how the crypto space will continue to strengthen as adoption grows, banking participants increase and credit intermediation becomes available. Mercer predicts the top 5% coins will win out and see parabolic price growth in the next 2-5 years.
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MODERATOR
SPEAKER
David Mercer
Chief Executive Officer
LMAX Group
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
TIMESTAMPS
0:00 - Intro and background
6:40 - Entrance into crypto
9:51 - Response to crypto critics
16:40 - Convergence of FX and crypto
20:09 - Addressing crypto storage concerns
24:00 - Institutional vs. retail crypto exchanges
27:33 - Wall Street adapting to crypto
30:17 - Bitcoin vs. Ethereum vs. the rest
32:43 - Transitioning to DeFi rails
35:37 - Crypto regulations
40:44 - Projecting crypto prices
EPISODE TRANSCRIPT
John Darsie: (00:12)
Hello everyone. And welcome back to Salt Talks. My name is John Darsie. I'm the managing director of Salt, which is a global thought leadership forum and networking platform at the intersection of finance, technology, and public policy.
John Darsie: (00:26)
Salt Talks are a digital interview series that we started in 2020 with leading investors, creators, and thinkers. And our goal on these talks is the same as our goal at our Salt conferences, which we're excited to resume here in the fall of 2020, in our home city of New York. And we're excited to welcome our guest today to the Salt conference in September.
John Darsie: (00:46)
But that's to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. And we're very excited to bring you the latest in our series of Salt Talks, covering the digital assets or crypto space and how it's also starting to bleed into things like FX markets and commodities markets as well.
John Darsie: (01:06)
With David Mercer, who is the chief executive officer at LMAX group, which is a global financial technology company headquartered in the UK and the leading independent operator of institutional execution venues for FX and cryptocurrency trading. Following a successful management buyout in 2013, David has built LMAX group into a key player in both the traditional capital markets and the crypto trading industry.
John Darsie: (01:31)
With their global client base and offices in nine countries, LMAX group was recently valued at $1 billion, following a minority stake sale to JC Flowers and company. David's a former Citi banking executive and currency specialist. He's also an outspoken industry commentator and long-term champion of the UK technology sector. As well as a passionate supporter of entrepreneurship.
John Darsie: (01:54)
Hosting today's talk is Anthony Scaramucci, who is the founder and managing partner of SkyBridge capital, which is a global alternative investment firm, also with a heavy investments into the digital asset space. SkyBridge was the first 40 act fund. The first fund of hedge funds in the U S to make a substantial investment into Bitcoin in November of 2020. And SkyBridge continues its foray into the digital asset space. I'm sure a lot for Anthony and David to talk about today, with that, I'll turn it over to Anthony for the interview.
Anthony Scaramucci: (02:23)
John, thank you. Well, first of all, David, graduations on an amazing career, but like me, you started in traditional finance. So my first question is, tell us a little bit more about your background that enabled you to expand the universe of your thinking and to move into the business at LMAX, the one that you're currently in.
David Mercer: (02:45)
Hi Anthony, Hi John. Hi everyone. Well, first of all, I'd like to say, not too early with the congratulations. I think I'm just getting started. We're just getting started. I think everything to date has been like an undergraduate degree. But to put it in a picture, I mean, I guess three chapters of my career to date, each chapter's about a decade long.
David Mercer: (03:05)
A decade and investment banking, just learning my trade, learning capital markets, everything from the middle office to the front office, fixed income emerging markets. Learning a lot about credit and sort of the swings and roundabouts of capital markets, the boom and bust, if you like, of capital markets.
David Mercer: (03:22)
Then a decade outside of it, trying to learn how to be an entrepreneur, trying to learn how to run a business. Because sometimes when you're in one of these ivory towers of investment banking, it's hard to ... everyone else does the work for you. It's hard to actually understand what it takes to run a business.
David Mercer: (03:39)
And then the last chapter or the most recent chapter, shall I say, hopefully not the last one, putting it all together. The last decade has been at LMAX. So typical turnaround job there. It was a startup back in the day, standard startup issues. Too many people, some of the wrong people, spent too much money. Hadn't spent enough time on sales and distribution. Hadn't finished the product. So apart from that, it was all easy.
David Mercer: (04:08)
But the last decade has been trying to narrow the focus, having a singular focus for the business. Hopefully putting together some of what I learnt in the previous two chapters, I say, in banking, learning how to run a business and we've had some success. So today, we run five exchanges, trade about $30 billion a day, and guess what we're here today to talk about most is probably LMAX digital, which is the fifth of our exchanges and has been our fastest growing exchange to date.
Anthony Scaramucci: (04:37)
I want to get to LMAX digital in a second, but for our young listeners, because it's interesting. You talked about three different chapters, each taking a decade. I always tell young listeners an overnight success takes about 15 to 25 years.
David Mercer: (04:53)
Yeah.
Anthony Scaramucci: (04:53)
You and I both know that, David. But what is one of the core tenants of your business principles in terms of the way you try to create the culture of success in the organizations that you're running, or a part of?
David Mercer: (05:09)
One of my favorite quotes of all time comes from one of your founding fathers over there, right? So it's persistence and energy conquers all things. And that's it. Look, you can't speak to the 20-something year old, David Mercer. You just cannot. Because back then, if you told me it would take a decade, I'd move on. I expected everything to happen in six months and 12 months, but not everything works perfectly, but it's just that persistence and energy.
David Mercer: (05:39)
Back to what we do here today, no one believed us 10 years ago, but I had a singular focus. We had a singular focus. I'm very lucky to have a management team and we just stuck at it, but make the mistake. It's a bit like investing in crypto today. There's a majority out there which is telling you you're wrong, that it's the wrong approach.
David Mercer: (06:00)
So just having the persistence and energy to keep going. And don't get me wrong, if you spot that you've taken a wrong turn, it's okay. Right. End it quick, right. So it's okay to succeed slowly. It's okay to succeed fast, but guess what? It's also okay to fail quickly, right? Just don't fail slowly. So if you make a wrong turn, just come back on it. But that's it, just the persistence and sometimes it's the sheer bloody mindedness to stick at it. And I think if you have that, you'll go a long way.
Anthony Scaramucci: (06:37)
Well, listen, I've been there. And I get it. You had a Eureka moment somewhere, where you said, okay, you just pointed it out and Neel Kashkari, who's a fed president, he said this morning that 95% of crypto is garbage and all this nonsense that he said this morning. But you've had a Eureka moment. Describe the Eureka moment. Describe why you're in crypto with LMAX.
David Mercer: (07:04)
Yeah, I wish I was that prescient. And I wish we were that prescient. I guess if we had been, we mightn't be here today, Anthony. We may have all invested back in '09, 2010. Certainly when someone first mentioned Bitcoin to me in 2013, but I guess it was towards the end of 2017.
David Mercer: (07:24)
So you can call us late comers if you like, but we have our work cut out, building our own exchanges. Everything we do at LMAX is proprietary technology. So all my FX exchange is run on that proprietary technology. And 2017, which was the first sort of retail tidal wave or parabolic growth that you saw in certainly the Bitcoin price.
David Mercer: (07:49)
And suddenly the same customers who traded FX with me, and these are the biggest banks in the world and the biggest proprietary trading firms in the world and Chicago, New York, London, and Amsterdam, more than one of them knocked on my door and said, "David, we need you. We need your technology. We need your proprietary technology in this space."
David Mercer: (08:07)
Because we're making markets, we're printing tickets all around the planet and all these retail platforms, but we need some industrial grade institutional infrastructure so that we can exchange risk with like-minded participants. And actually so no real Eureka moment, but it was a case then of moving fast, acting on it, speaking to the right people at LMAX.
David Mercer: (08:28)
I remember, if you want a particular moment, I called my COO, my CTO, my head of software development, my risk officer, into a boardroom. And I said, "Look, are we doing this or not?" And more or less, the way I pitched it was, "Find me a reason why not to do it." And the truth was we had the distribution, we had the liquidity, we had the technology. All we had to do is integrate with a few blockchains and to be frank, that took three to six months.
David Mercer: (08:57)
And from field to fork, as they say, or from concept to delivery, we launched LMAX digital within six months of that meeting, so that's when it happened. And I didn't even for one second think about failure. I guess we never do. Because everything we had in the background, as I say, the distribution, the people, the technology, it was all ready.
David Mercer: (09:23)
So if Bitcoin was going to work, if crypto was going to become a bonafide asset class, then we were going to be in the right place. And you know, just today, just to fast forward a little bit, I know we'll get into this more in more detail later, but look, 40% of my customers also trade FX with me. So I knew I had that. I knew if this thing was here to stay, I knew that we had the customers and we had the framework, the bedrock, if you like, for an institutional cryptocurrency exchange.
Anthony Scaramucci: (09:51)
Is it here to stay? You know, crypto skeptics say that it has absolutely no real utility or no real benefit to the society. Warren Buffet said that it was rat poison. And then they asked him again. He said, "No, it's rat poison squared." His older brother, the 97 year old Charlie Munger, said, "It is the worst thing that's ever happened to the civilization." We've had some bad things happen to the civilization, but this was the worst. What is your reaction to all that, David?
David Mercer: (10:19)
Oh, you know, I guess if you've been in capital markets for a long time, you've always answering this question, what good do you bring to the planet? It goes back to when I was in emerging markets in the late nineties. What value do you bring to those worldwide economies? Well, actually, quite a lot. Right? So we funneled a lot of cash there.
David Mercer: (10:41)
But so look, there are people out there that will always criticize it, but you know, Bitcoin and crypto specifically, well, what have we got at the moment without it, right? We have a feat system that looks, if it's not broken, it's severely damaged. And people are now starting to see it, post-2008. And if you like, now post-2020 with the pandemic. People are starting to realize that the hundred bucks they had in their bank account, doesn't get them quite so much as it did in 2019.
David Mercer: (11:15)
And that's just a fact. We live in this inflationary society where governments are just printing more and more of our cash. And you're earning nothing in the bank. So, I mean, I'm scratching my head thinking, "What would I do? What do I do?" People say to me, "Buy fine art. Buy other assets."
David Mercer: (11:33)
So someone invented this new asset and I quite like it because it's just maths right? In that you just solve maths equations and that's it. And it's guess what, okay, if you want to call it digital gold, it's digital gold, right? But it's a finite supply of it. That seems intriguing. If nothing else, it's intriguing. If nothing else, it's a useful alternative to what we've now understood for the last 50 years, which is feat. I mean, the feat dollar's only been around for 50 years. That's nothing right in the history of currency, in the history of markets, that's nothing, right?
David Mercer: (12:12)
So we broke away from the gold standard 50 years ago. Was that the right thing to do? I don't know. Well, this and Bitcoin is, it's perhaps closer to that. So look, it's an alternative. It gives you the three things I guess you're looking for in a currency. It gives you a store of value. Discuss. I mean, is anything a store of value? Really?
David Mercer: (12:31)
It gives you a medium of exchange. I.e. You will accept it from me. Not everyone will just yet, but more and more are accepting it. And it's a unit of account, right? So you and I certainly could go anywhere and someone could price something up in Bitcoin and we'd get it or Satoshi and we'd get it. So it's a good alternative.
David Mercer: (12:52)
And I think my now to the skeptics, if you're still skeptical, I probably can't persuade you. But I'm going to give you another way of thinking about it. Probably if you're an investor, you've probably got some Netflix in your stock portfolio. You've probably got some Tesla. You've probably got some JP Morgan. You might have some Spotify.
David Mercer: (13:19)
Well guess what? The market cap of Bitcoin is bigger than all of those. So you probably need to have in your portfolio, you know, I'm not a maximalist. I'm not saying a hundred percent at all. I'm not an evangelist. Ultimately, what we do is match buyers and sellers. But this is an asset class that today is worth somewhere around $2 trillion.
David Mercer: (13:39)
So something close to Apple or Microsoft. So you're probably thinking, "I need to have something in my portfolio just in case." And then we go back to the former arguments. Well, maybe it can replace. Maybe it can become a part of capital markets going forward and part of our lives going forward, maybe it can replace feat, which as I say is damaged.
Anthony Scaramucci: (14:04)
So I think it's a brilliant assessment, what you're saying. I'm going to tell you my Eureka moment and then I want to get your reaction to it.
David Mercer: (14:13)
Sure.
Anthony Scaramucci: (14:16)
Marc Andreessen said that this is a brilliant evolution of technology, the blockchain, and assets like Bitcoin and Ethereum, because the first time in human history, we will be able to have a permissionless peer to peer transaction with people that we don't know, don't have to trust.
Anthony Scaramucci: (14:39)
And when we're sending money around the world, now we send it to a quote/unquote third party, a JP Morgan, a Citi bank that we trust. And then they send it on to the person that we're trying to send it to, to create that exchange for goods and services.
Anthony Scaramucci: (14:55)
This is completely transformative. It truncates that, and it creates an amazing level of efficiency. And so if you study the history of money, it has all of the capabilities of money, the trusted network of the impregnability of the blockchain. What's your reaction to that?
David Mercer: (15:17)
Yeah. Look. I love the theory. I mean, I guess we wouldn't be in it if we didn't believe in that theory. And I think, like everything, the world's going that way, Anthony, peer to peer. You mentioned peer to peer, that's the way the world's going with everything.
David Mercer: (15:37)
And if you were designing your ideal world, ideal scenario, everything we would do would be peer to peer. And you're seeing that, the likes of eBay guests got there first, right? And other walks of life. So with currencies, with transactions, with asset transfer, with the payments between each other, it makes total sense. Don't get me wrong.
David Mercer: (16:05)
You know, I'm a pragmatist and the evangelists will say, "We can just go now peer to peer," but we cannot. We can for a cup of coffee. We can perhaps for the price of a car. We cannot for the value of your net worth. We cannot for the value of your house just yet. But the scientific experiments are in development. And I think we're going to get closer to that peer to peer permissionless network that you sort of described.
Anthony Scaramucci: (16:41)
You know, LMAX is focused on both crypto and FX. Do you see an increasing convergence between the two, crypto and FX?
David Mercer: (16:48)
A hundred percent. I mean, I'm impatient, I'm impatient and I want it to happen now. So in fact, we're going to launch our sixth exchange in Asia, in Q4 this year. It'll be the first exchange we launch which will have feat currencies and crypto on the same exchange, under the same or similar regulatory banner.
David Mercer: (17:12)
So I think the partition wall between feat and crypto will be knocked down within the next three to five years, for sure. And in many ways it already is, but there's pros and cons. Neither are perfect. Okay. So if I look at FX, it's not perfect. I mean, actually, we've run hard to keep up with technology and foreign exchange over the last 20 years. In fact, I would say the FX industry, whilst it's been going for centuries is really only 20 years old because that's the electrification of foreign exchange markets.
David Mercer: (17:45)
So it's actually not far ahead of crypto. Now, crypto. I mean, just think, if you landed on Mars or Mr. Musk takes us there and we create societies there. Why are we going to close the stock market at 5:00 PM on a Friday? Why are the banks going to be closed on a Saturday and Sunday? Why can we not transfer money Saturday and Sunday?
David Mercer: (18:05)
So if nothing else, 24-7 crypto markets, that's coming to a traditional capital market near you soon. So at LMAX group, we launched weekend FX trading last year. Now I'm not going to tell you we do much trading on our Saturday and Sunday, but we will. It's there because we see no reason why you can't trade euros and dollars and Mexican peso on a Saturday or Sunday. So that's fantastic.
David Mercer: (18:31)
I think a lot of the technology evolution on the blockchains that backup these cryptocurrencies is great. So look, payment clearing and settlement in traditional feat is clunky, right? You've been around for a while like myself T plus two. I mean, what is all that about? Two, by the way, everyone, in case you're not familiar with it. It's two days. Two days to move your dollars. Two days to move your pounds.
Anthony Scaramucci: (18:58)
David, it was five, when you and I got in the industry, right?
David Mercer: (19:01)
There we go.
Anthony Scaramucci: (19:02)
Then it went to T plus three and you were waiting for these things.
David Mercer: (19:06)
We're talking two minutes here, Anthony. So, you know, still to this day, it's quite unbelievable, Anthony, as you well know. The easiest way, if you want to send Aussie dollars to your relative in Sydney, Australia today, still the best way to do it is to go to the bureau to show engine, get on a plane.
David Mercer: (19:23)
That's still quicker than you wiring them the money. That just can't be right. So, I mean, it's a long-winded way of saying, "Look, there's some great things in the crypto market we can adapt and adopt in traditional capital markets." And likewise, dare I say it to the crypto evangelists out there, there's some bits of traditional capital markets, like credit intermediation, like the infrastructure, like the market access provided, that are useful, that we could port over to crypto.
David Mercer: (19:55)
And I think together, Anthony, look, my impatience is that I just want to trade Bitcoin and Ethereum the way we do euros and Mexican peso and just get on with it and create a better ecosystem for both.
Anthony Scaramucci: (20:09)
Talk about the infrastructure and the brokerage clearing, the storage of these cryptocurrencies for a second. You know, one of my skepticisms in the beginning was I was like, "Okay, my God, if I'm going to," SkyBridge now has about $700 million a Bitcoin and Ethereum across our portfolio spectrum. But I didn't feel comfortable doing that a few years ago, even though I liked the asset class, I feel more comfortable today because I think I can store it safely. What are your thoughts there?
David Mercer: (20:43)
You hit the nail on the head. I mean, the good thing is your investment thesis is correct. That was the biggest challenge you had. And it's still the biggest challenge holding people back today. How do I store it? The biggest challenge for within LMAX group of launching our next digital was, "Wow, I haven't got a Chase. I haven't got a Barclays. I haven't got a Bank of America. Where do I park my client's funds?"
David Mercer: (21:06)
There's no bank for this. There's no custodian. We actually built our own. We happen to think as best in breed, but there are, the one you use is very good. There's lots of other good custodians out, so that's a real challenge. And then if you come upstream from that, so first of all, where do you store it? Let's face it. The pension funds the asset managers in the world. They're not storing it in the mattress. They're not running around with hard drives, storing their private keys. They want to trust a custodian.
David Mercer: (21:32)
But then you move up streams. Okay. Let's say we crossed that one off, but we're not there yet. You know, there are a few good custodian solutions out there, but perhaps they're not all household names and moreover not everyone's using them, which would make it easier. Now, how do we plug those custodians onto exchanges so that you have ease of market access for that real money?
David Mercer: (21:54)
I truly believe there's a wall of money. There's a wall of institutional money waiting to get in, but what they need is that storage you talk about, and then they need the credit intermediation. Now they say to me, one of my better brokerage customers said to me, "David, don't talk to me about private keys. Don't talk to me about wallets, custodians, and blockchains. I just want to trade Bitcoin the way I trade euros,. The way I trade dollars, that's what I want to do."
David Mercer: (22:25)
But they forget that behind the scenes, they're happy that some banks are priming them onto exchanges and are storing their assets for them. So we need more of those developments. I mean, to this day, if you're a crypto only, if you suddenly became a crypto only fund, your banks may not open a bank account for you. They may not open a feat bank account for you. That's how difficult it is.
David Mercer: (22:50)
So we need more adoption there. I talk about the ABC of crypto. Everyone's heard it before, probably. About adoption banking and credit. The adoption's coming. We need the bankers to get more involved and then we need that credit intermediation so that there's less friction in the market. There's a bit of friction on the on-ramp and off-ramp, if you like, into crypto at the moment.
David Mercer: (23:13)
So there's good projects underway and I know you've engaged with a couple yourself and at SkyBridge, and hopefully there'll be more so that we can get this wall of institutional money into the crypto marketplace.
Anthony Scaramucci: (23:28)
Yeah. Listen, I personally have been surprised at the general reluctancy. I actually think Larry Fink has been right when he's interviewed on CNBC, David. He says he doesn't really have clients that have a super amount of interest in it right now. I think the hedge fund managers do for sure and sophisticated managers do.
Anthony Scaramucci: (23:47)
But when the day comes that a large scale pension fund or a public employees' retirement system? Look out, those assets or ridiculously cheap. And they're in short supply of Bitcoin specifically. Let me ask you this question about an institutional exchange and the retail exchanges like Coinbase. What would you say to our viewers and listeners? The key differences are between retail and institutional exchanges?
David Mercer: (24:17)
Too many to mention, maybe. Look, first of all, I take my hat off to those retail platforms out there. You know, I don't actually call them exchanges. They are effectively broker dealers and they have platforms to match. But they need to solve many, many issues for those customers. Technology issues? Right? "Can you send me a statement? Can you show me the chart? Can you give me a price in a thousand coins? Can you give me some nice newsfeeds interview feeds?"
David Mercer: (24:49)
So there's a real technology challenge there, right? So you mentioned a name there, they're very public. They have 56 million customers, 5 million active. If you imagine just 5% of them logging in at one time, that's a big technology challenge. Institutionally, I cater for 500 customers, that's it. And I'm happy there. I don't have to do the KYC, the onboarding that you do with all that ... in the retail environment.
David Mercer: (25:17)
But I process probably more orders a day than all of the retail chain exchanges put together. So for me, the requirements for my institutional customers and they will be the largest banks in the world. Today, they are the largest proprietary trading firms in the world. Some of them are listed vehicles.
David Mercer: (25:36)
What they care about is does it work? Is it fast? That's it. I can't have a down second. I can't be slow. We process something around 4 billion orders a day. Our cancel and replace times are 80 microseconds. What does that mean, David? Well, that'd be about, that's 12 times in a millisecond. That's 12,000 times in a second. Right? And whether the market's going parabolic up or we're in that death spiral down that you saw at the start of the pandemic, the technology has to work. That's the challenge you need to solve.
David Mercer: (26:13)
And you must be able to give them a price in size. So we operate a central limit order book, in depth, and if I allow you to buy 20 million Bitcoin, 20 million dollars worth of Bitcoin at any one time, I've got to have orders there so that you can sell 20 million Bitcoins.
David Mercer: (26:31)
So those are the real challenges. It's really a tech challenge and a distribution challenge. And all we do, I mean to give my ... show a bit of empathy to my retail counterparts, right? My challenges are somewhat less in terms of the questions people could ask me. All they want to see is what is the price and what price can I buy and what price do I sell at?
David Mercer: (26:56)
My job is just to process as many of those, the same message, as many of those a second as I can. Whereas, as I said before, with retail, it's basically horizontal, right? Rather than vertical, in that you could ask one of your retail platforms, any myriad of 100, 200 questions. I need to answer the same few questions all the time, 24/7. So really it's a technology challenge, along with a infrastructure and credit challenge.
Anthony Scaramucci: (27:28)
I'm going to turn it over to my colleague, John Darsie, but I have one last question for you before I do. What happens to old wall street?
David Mercer: (27:38)
Well, you know, Anthony, I think old wall street, I love old wall street, right? We all thought, I liked the city of London. You know, they say that the stock exchange down here is the oldest casino in the world, right? I think wall street, the floors have a great way of reinventing themselves, right?
David Mercer: (28:02)
So big bang, it's probably, there's going to be no traders left. Okay, so the traders, they left the floors and they went to the desks. Well, most of these guys are now retired, so the new traders then are now engineers, right? They now solve problems for a living, they now write algos.
David Mercer: (28:18)
So look, myself, sometimes we hanker back for those noisy days. I grew up on trading floors. People were smashing screens and a buddy of mine, we had a drawer full of spare phones because they'd smash a phone normally about once a month because a trade went against them.
David Mercer: (28:33)
So it's changed. But the skillset, the engineering ability, the problem solving ability, the speed of mind, it's now just transferred into computers and algorithms. So I think wall street has already partly reinvented itself. And the big name let's face it, Anthony, through our three decades, certainly that I've been around, the biggest names in banking, for example, are still the biggest names in banking.
David Mercer: (29:05)
And they will evolve. Good companies. You know, they're great by choice. You know, they choose to be great. They choose to stay great and they change their focus and they have the customer there. So I think wall street's here to stay and you know, but guess what, there's always room for some new guys on wall street.
David Mercer: (29:27)
It was only 20 years ago, 15 years ago, you heard about HFTs and proprietary trading firms. They were the new guys on the block. Now you've got some real crypto engineers, scientists, they're putting their size 11's or size 15's in the United States, squarely right bang in the middle of wall street. So I think it's going to evolve. I think it's going to get stronger and it'll probably be better than ever.
Anthony Scaramucci: (29:56)
Well, I appreciate the commentary a great deal, David. I do miss those days. I will confess that. But go ahead, John. The future is yours, John, go ahead.
John Darsie: (30:05)
All right. Fantastic. David, it's a pleasure to have you on and thank you, Anthony for ceding the floor. My question for you, David, is about Bitcoin and Ethereum. And then also the growth of the ecosystem generally. You talked about how your entrance into the digital asset world was driven largely by demand and demand for institutional quality products.
John Darsie: (30:26)
In terms of the demand that you're seeing related to Bitcoin versus the demand you're hearing related to Ethereum and even the emergence of other coins and protocols and digital assets. What's the percentage? Is it still Bitcoin that's dominating the conversation? Is Ethereum catching up at all to Bitcoin?
John Darsie: (30:42)
I'll talk about SkyBridge for a second. We started as a Bitcoin only, we had full intention of only including Bitcoin in our portfolios, but have added Ethereum. And we think that has staying power in the digital asset world. But for you, what's the interest level, Bitcoin, Ethereum, and then other?
David Mercer: (30:58)
So I think it's clear in the institutional space, it's Bitcoin. So we're 70/30 Bitcoin, Ethereum, but there was days in June and July where Ethereum was 50/50. I've seen the stats like everyone else on the retail exchanges out there, that Ethereum just overtook, just shaded Bitcoin. The truth is, as a trading product, Ethereum's too expensive and it's too slow.
David Mercer: (31:26)
Bitcoin is the asset that traders want to trade today. But, why Ethereum? Why is it starting that much? Well, actually it's all about defi. Despite all the other, there's some other coins out there that are sort of seeding the defi experience. But far and away, Ethereum's the winner on that at the moment. It's the utility coin, it's the on-ramp into defi.
David Mercer: (31:57)
So I think everyone, or a lot of people are getting involved in defi, are starting with Ethereum and then switching it up into other tokens. But there's nothing that says it's going to hold that place for forever. I happen to think there's much better experiments out there than Ethereum. But look, it's a bit like gold versus silver. Or in my currency space, Euro dollar versus dollar yen.
David Mercer: (32:25)
So for now I can't see Ethereum shading Bitcoin permanently, but whilst defi is growing and that's the accepted on ramp, then yeah, it's going to have more of a share of wallet than it did, say 18 months ago.
John Darsie: (32:41)
Right. Anthony asked you the question about what you think is going to happen to old wall street. And I want to ask it in sort of a different way. Is that, a lot of people that are looking from the outside, who haven't fully bought into the idea of defi or the idea of this crypto ecosystem that's growing.
John Darsie: (32:58)
They view Bitcoin and Ethereum and other coins purely as speculative assets. But I think the entire defi movement has the potential to greater disrupt sort of the traditional financial ecosystem relating to things like banking, as you talked about before, relating to things like prime brokerage. How do you think those types of business lines, things like prime brokerage, traditional banking functions are going to be different in a decade using blockchain defi type of rails.
David Mercer: (33:25)
They're going to have to catch up quick, John. It's simple as that. I mean, if you go to ... I'm no expert necessarily in defi. I would say that we contribute to the valuation within defi. For me, that's the key. Smart contracts, the key is the valuation of the assets on those smart contracts.
David Mercer: (33:44)
So we started to contributing to pith the network for that. So that's the old world, if you like, capital markets moving into the new world. And so we contribute to that Oracle, I think it's the way forward, but look, step back. What do I like about defi?
David Mercer: (33:59)
The idea that we could be more capital efficient? The idea that we could move our balance sheets to the blockchain and large institutions can move their balance sheets to the blockchain. They can stake their assets that are basically gathering dust at the moment, like your dollars in your bank account or my pounds in my bank account, so to enable individuals and institutions to stake their assets.
David Mercer: (34:29)
Ultimately, when I look at it today, I look at defi, plenty more users than this, but it seems that what's hot at the moment is effectively good old fashioned stock borrowing and lending, right? They call it staking. They call it yield farming, but it's stock borrowing and lending.
David Mercer: (34:49)
So wouldn't it be great if that market access was provided to more people or more institutions and defi has the ability to do that. So I happen to think you will still have, I guess, in defi world, we talk about nodes, so those credit intermediaries, be they prime brokers or banks or credit cards, they can be more dis-intermediated.
David Mercer: (35:14)
They're can be more of them. There can be more credit nodes around the place to enable this capital efficiency. So I think the incumbents need to move quickly if they want to hold onto that space. If not, there's plenty of crypto projects out there that are looking to replace them or certainly supplant them when it comes to crypto.
John Darsie: (35:36)
Right. As Anthony mentioned, Neel Kashkari a fed governor, the former fed chairwoman, Janet Yellen, now the treasury secretary, has expressed very skeptical views about the crypto ecosystem. There's sort of old world, old wall street banking regulators across the U S and across the world, frankly, who have skeptical views about the nature of trading that takes place in the digital asset ecosystem. They characterize it as money-laundering or nefarious in some way.
John Darsie: (36:06)
And so it's creating obstacles for unfettered growth of a lot of these industries. How do you view regulation, in the UK, in the United States, and other jurisdictions that you do business? And what do you think they ultimately land on, in terms of how they regulate defi and how they regulate the digital asset world?
David Mercer: (36:25)
It's a two things there, and everyone puts them in the same bucket, right? Regulation and AML. They are different things, but AML is part of regulation. And I object highly to anybody that says that trading in crypto is money laundering or nefarious. Because when I launched LMAX digital, I had to implement the fifth money laundering directive before it was even a law.
David Mercer: (36:50)
As part of my regulation, but what does that really mean? You just KYC your customer, right? You have to ask them for the source of funds, source of wealth. That's just the way it is in capital markets. So there's no more risk of money laundering in the cryptos, if you're a regulated counterpart like ourselves in crypto, than if we're in feat. In fact, we can go a step further.
David Mercer: (37:17)
I don't KYC the coin. I KYC you. I need to know where you got your money from, source of funds, source of wealth. And if you don't give it to me, well, I can't open an account for you to trade feat or crypto. And in crypto I can go a step further, right? I can use the tools that are out there and I can check where the coin has been before.
David Mercer: (37:38)
I can't do that in dollars. I can't do that in pounds. So, I think people, sometimes when the politicians they have a stage and they don't know enough and they haven't researched enough before they pontificate, it's a challenge. You know, there were people and they're being investigated right now, who were letting you open an account with an email address. That's wrong. That's in breach of global AML guidance. Every country in the world is signed up to that global FATCA AML guidance, right?
David Mercer: (38:10)
Only one country in the world isn't, you can probably guess what it is, right. Everyone has signed up and we all use it. You've got to give me nine pieces of paper to open an account. With your lawyer, with your accountant, with your banker, with your broker. Now regulation. Again, let's get down off for soap boxes. It is right that we regulate and that we protect private investors. That's important.
David Mercer: (38:33)
I happen to think you don't ... banning things doesn't protect it, but doing things that they're doing in Europe and the UK, like limiting leverage, it's entirely sensible. We do something in the UK and FCA guidance called a suitability test. Do you understand this product? And if it comes back and says, "No, you don't." You can go off and do training courses, to get up to speed, so that this does become suitable.
David Mercer: (38:59)
"Do you understand leverage?" Most people actually initially say no. And then you say, "Well, have you ever bought a house? There you go. You've got some leverage in there because you didn't pay for it in cash. Most of you." So that type of thing, suitability test, allowing people to protect themselves, protect their investors. I think protecting private investors is important.
David Mercer: (39:19)
And a lot of what you see in regulation is doing that, and that makes complete sense. Outlawing it doesn't work because what you then do is drive your own citizens offshore into the hands of people who don't have this stringent regulation and protection mechanism or protection blanket that we surround the world, certainly in the UK and the United States, for example.
John Darsie: (39:45)
Right.
David Mercer: (39:45)
Otherwise, regulation in the wholesale environment, we're all regulated. We're highly regulated. They just haven't quite got a framework yet for what is crypto. Certainly in the U S, "Is it currency? Is it a security? Is it a commodity?" For me, it's definitely a currency, but you know, some of them, some of the crypto assets, they could look like a security.
David Mercer: (40:10)
So be careful when you're launching your token, if you pay dividends, for example, is there anything that resembles a security? You're going to come under SEC law, but the frameworks are there. So I think don't confuse the two, but generally we are fans of regulation. I'm highly regulated.
David Mercer: (40:27)
As an MTF, as a broker, by the FCA in the UK, in Gibraltar for digital and in three or four other jurisdictions around the planet. We're a big believer. Normally it protects private investors and it gives us, the wholesale guys, the rules of engagement.
John Darsie: (40:43)
Yeah. I mean, I think in the space, the exchange space, you have people that started off as crypto native and are struggling to grapple with traditional regulation, AML type stuff. And you're seeing growing pains there. I'm not going to single anybody out, but you probably know the types of people that I'm talking about.
John Darsie: (41:01)
And you have people like yourselves who are coming from an institutional background and responding to demand within the digital asset space. And I think one is certainly a better fit for institutional business, hence why you're growing so quickly on the institutional side, related to some of your competitors, I would imagine.
John Darsie: (41:20)
But the crypto ecosystem is growing rapidly, I think by any measure, but it's often done sort of in fits and starts and in bursts of sort of exponential adoption, both in terms of the price of coins and in terms of market penetration. As you look out over the next year or 24 months, what part of the cycle do you think we're in today, as it relates to adoption, as it relates to price of something like Bitcoin, Ethereum, and other sort of defi protocols? And where do you think we'll be in that one to two year timeframe?
David Mercer: (41:52)
Ah. Short timeframes, they're always tough, right, when you're commentating anything. I always like five or 10, but look, genuinely on a longer timeframe, call it a decade, we're just at the very start. I think any chart you grow in terms of number of years, you show in terms of number of users or value of any asset, it won't register. It'll be a flat line compared to what it's going to be 10 years from now.
David Mercer: (42:17)
There's certainly a wave right now. So if you want a shorter timeframe in the next couple of years, look, it's all I see is every day I open more accounts than I did in the corresponding day, the previous month. And these are institutional accounts, right? I'm not in retail land. So I get more inquiries every day, just three years ago, I have 34 banks connected to LMAX group, trading foreign exchange.
David Mercer: (42:42)
We knocked on all of those doors three years ago, we launched LMAX digital and everyone said, "Thanks, but no, thanks. Not now." Now 10 of them are taking my market beta. Three, I've gone through conformance testing. They're not trading actively now. I know all the proprietary trading firms that could move more quickly or have maybe smaller bureaucracy. They're all trading.
David Mercer: (43:03)
So my biggest customers in foreign exchange of trading crypto. So that tells me it's coming. So look, there's $110 trillion of assets under management out there. If 5% was allocated to crypto, and that's the type of number you're talking about with pension funds and asset managers, allocating on their portfolio of 5%. Then it means the value of crypto assets has to be $5 trillion. Today, it's one and a half to 2 trillion.
David Mercer: (43:32)
That tells you where the price of crypto assets are going to be. You know, and going back to some of the common debt, as you mentioned earlier, not everything's going to win. It's like dotcom. Not all of these coins are going to win, right? Probably the bottom 95 to that 95% number the bottom 95, probably will go by the wayside and will fork into something else. But the top five, one of the top five certainly, will win out. And they will ... the price you see in two years now in five years from now will be parabolic compared to what it is today.
John Darsie: (44:02)
Yeah. I mean, you had a Marcy Frost, who's the CEO of Calpers, which is $500 billion asset owner that manages retirement assets in California this morning on CNBC. She didn't say that Calpers is imminently going to get involved in Bitcoin, but she says in five years, I wouldn't be surprised if Calpers has exposure to Bitcoin.
John Darsie: (44:22)
You know, it's something that I think there's social proof that's being demonstrated within the crypto space. Almost every big bank now has some sort of solution for clients based on demand. A lot of what you experienced as you got into the space.
John Darsie: (44:35)
And so I think that the stigma around Bitcoin is starting to fade away and you know, it could become exponential at a certain point, but David, it was a pleasure to have you on Salt Talks. We look forward to hopefully seeing you in September. If president Biden will let you in the door. We're certainly trying to help you in that regard, but look forward to having you involved in Salt in person, as well as sharing this Salt Talk with everyone. Anthony, you have a final word for David before we let him go?
Anthony Scaramucci: (45:00)
The next time you come on, I want you to smash one of these phones. Okay. I want you to help me relive my youth. Okay? I feel like we haven't smashed the phone in twenty-five years, David.
David Mercer: (45:11)
No, absolutely. I'll bring a drawer full.
Anthony Scaramucci: (45:14)
Please. Bring a phone to Salt and let me smash one on the podium, just so I can relive what it was like in 1990 at Goldman Sachs and the J Aron commodities area.
David Mercer: (45:25)
I think they made them the right size deliberately, so they just snapped in half.
Anthony Scaramucci: (45:27)
Right, exactly.
David Mercer: (45:27)
One side, you know, they weren't made-
Anthony Scaramucci: (45:27)
The Hollywood version.
David Mercer: (45:31)
They weren't made with 2020 technology.
Anthony Scaramucci: (45:34)
Listen, you built an amazing business, congratulations to you and your people and your team and culture. We look forward to seeing you in person at our event.
David Mercer: (45:43)
Thank you both for your time today. Thanks Anthony. Thanks, John. All the best.
John Darsie: (45:47)
Thank you, David again, and thank you everybody for tuning into today's Salt Talk with David Mercer of LMAX group. Just a reminder, if you missed any part of this talk or any of our previous Salt Talks, you can access them all on demand on our website salt.org/talks and on our YouTube channel, which is called salttube.
John Darsie: (46:05)
We're also on social media. Twitter is where we're most active at Salt conference, but we're also on Instagram, LinkedIn, and Facebook as well. And please spread the word about these Salt Talks. We think this digital asset ecosystem is growing tremendously, firms like LMAX doing a great job bringing institutional credibility to the space and driving adoption in that segment of the market as well.
John Darsie: (46:24)
But on behalf of Anthony and the entire Salt team, this is John Darsie signing off from Salt Talks for today. We hope to see you back here again soon.