Institutional-Quality Digital Asset Infrastructure with David Mercer, Chief Executive Officer, LMAX Group.
Moderated by Rachel Pether, Senior Advisor, SkyBridge.
MODERATOR
SPEAKER
David Mercer
Chief Executive Officer
LMAX Group
Rachel Pether
Senior Advisor
SkyBridge
TIMESTAMPS
EPISODE TRANSCRIPT
Rachel Pether: (00:07)
I'm doing a fireside chat with David Mercer on institutional quality crypto infrastructure. It's very exciting for me, because we actually did a prerecord for this last week, thinking that David wouldn't be able to make it out from London.
Rachel Pether: (00:21)
But he has indeed been able to make it out from London. Mercer, the CEO of LMAX Group, to the stage. David and Rachel, take two.
David Mercer: (00:45)
Isn't this better?
Rachel Pether: (00:46)
So much better than virtually. Let's start from the very beginning. You have had experience on the FX side, and LMAX Group started off as an FX trading firm exchange, moved to crypto currency. When did you personally have your "Eureka" moment on the cryptocurrency as a legit legitimate asset class?
David Mercer: (01:11)
Well, I'd love to say it was eight years ago. It wasn't. It was actually the tail end of 2017.
David Mercer: (01:19)
Now, look, someone had presented it to us in 2013, and we were just busy building out our FX exchange. So we let that slide. And then, in 2017, some of my biggest trading partners ... So, to give you an idea, all the world's largest banks, 34 banks, are connected to me, all the major proprietary trading firms in the world trade within LMAX Group, when one of our five exchanges.
David Mercer: (01:45)
So, the end of 2017, the sort of first crypto summer, they started knocking on the door and said, "Look, David, we need some institutional grade infrastructure. We need something robust, where we can exchange risk in size with like-minded participants."
David Mercer: (02:03)
These are the biggest prop trading firms in New York, Chicago, Amsterdam, and London. So if you like, we said, "Okay, let's, let's have a look at it."
David Mercer: (02:12)
I engaged Compliance, Risk, Technology, set off the R&D guys at the end of 2017, and said, "Is it feasible? Is it viable?"
David Mercer: (02:22)
What we discovered was the trade formation, the clearing the order book was identical to what we do in our five FX exchanges. So I remember, to this day, we had a sort of all hands meeting at the end of 2017.
David Mercer: (02:38)
The answers had come back positive. I had Compliance in the room, Risk in the room, Liquidity in the room, Sales, Technology. Are we doing this or not? Everyone said yes. So we went from field to fork, as I like to say, in six months.
David Mercer: (02:53)
We launched LMAX Digital, which was the fifth of our exchanges, at the start of 2018. It's our fastest growing exchange. Today, we trade $2.5 billion dollars a day in crypto, and about 30 billion overall in FX.
David Mercer: (03:10)
So, a little bit late to the party, going back to your question about the "Eureka" moment. But certainly, 2017, we knew we had to be in this exciting new asset class.
Rachel Pether: (03:21)
So let's talk a bit further about that, from the FX experience that you've had, that LMAX Group has had, and also the experience on the cryptocurrency side. Are you seeing much convergence between those two asset classes?
David Mercer: (03:36)
The short answer is yes, but then, that would make for a pretty short interview. So look, these are the way to say it is, 40% of LMAX Digital customers trade another asset class within LMAX Group.
David Mercer: (03:52)
What does that mean? They trade FX or us. Our biggest five liquidity providers in LMAX Digital are in my top 10 FX traders, day in, day out.
David Mercer: (04:06)
It was them that pushed us to enter the space and to launch LMAX Digital, because they actually want to trade with each other. We want to trade with each other on a central limit order book.
David Mercer: (04:18)
So I think that's just going to extend. Why I'm super excited overall for the industry, and certainly for us, is that the banks haven't come yet, but I knocked on 34 doors, 34 bank doors, in 2017.
David Mercer: (04:34)
I said, "Hey, any interest in this new asset class?" And they said, "Look, keep us informed, but we can't trade it yet." And today they're not really actively trading yet.
David Mercer: (04:45)
But roll forward to this crypto summer, 2021 crypto summer, 10 of those banks now take my market data, and three are actively onboarding. I expect them to trade, look, within the next six to 12 months.
David Mercer: (05:02)
It all depends on their external/internal approval. I think there's going to be a convergence of, of customers. In terms of the technology, in many ways, that's how many converged.
Rachel Pether: (05:14)
What do you think? So you mentioned, you know 10 of those banks have actually come on board, starting to do more in that space. What do you think is holding the institutions back or the banks? I mean, it can't be from lack of client interest, I'm guessing, because there was quite a push.
David Mercer: (05:31)
Well, I mean, let's look at that client interest. So we're here, this is primarily a crypto event, and we're all believers in the future of that, but it's still quite early, it's still quite small.
David Mercer: (05:46)
So the total market cap of crypto today is in the region of one and a half to $2 trillion. Foreign exchange trade's $7 trillion every day. Gold currently is valued at $10 trillion.
David Mercer: (06:02)
So, so far, they've just been exploring it. They haven't had to do it. Now I think they do have to do it, because if you talk to any of the large banks around, people are taking money out of their bank account with those household names, and they're putting it to work on some of the crypto platforms out there.
David Mercer: (06:22)
Look, the biggest thing, really, is you need the ABC of crypto, you need adoption, which is market access. You need banking of crypto entities, and you need clearing and credits, right? And credit is the big thing stopping institutions, enter the space today.
David Mercer: (06:42)
What do I mean by that? They're used to trading multi-asset classes through the same credit intermediary. That's normally a bank or their prime broker. That's the big hurdle at the moment, and part of credit and clearing is the safekeeping, or the custody of assets.
David Mercer: (07:00)
Again, typically the biggest custodians in the world are those banks. That's the real hurdle for say, the real money or the asset managers, with funds of the world. The hurdle for the banks is more internal approval, risk approval, and the slightly hazy regulatory framework that's there at the moment.
Rachel Pether: (07:23)
Yeah. We did speak a bit about that before, on this tension between regulation and innovation, as well. What role, then, are you seeing the institutions play in this transition?
Rachel Pether: (07:38)
You mentioned credit. What else needs to happen, and what impact do you see that having on your business?
David Mercer: (07:44)
Well, I mean, to be clear, there's a lot of people out there, who are sort of crypto evangelists, think, "This should be peer to peer. This should be all to all." In many ways, I believe in that, and that's the ethos of crypto.
David Mercer: (07:58)
But we have to be pragmatic about it, right? We have to, at least in the short term, use existing channels. So every efficient market, every efficient capital market, needs a robust, solid institutional framework.
David Mercer: (08:18)
So if you like, when I entered the space, God help me, I guess, 20 or 30 years ago, people were paying 1% back in the day to buy equities. Now, I guess, you're going to see that you can buy an equity for free, or not feel free to discuss.
David Mercer: (08:36)
But again, so it's, all of that comes down to the framework, and the nature of that institutional trading environment that's been created, that offers greater price discovery, greater market access, all the way through the market segments to the private investors. So it's essential that we build that institutional framework.
David Mercer: (09:02)
I mean, price discovery is key. So if you come to our LMAX Digital today, you're going to see, he price in Bitcoin, and the price in Ethereum is going to be the price of Bitcoin and the price of Ethereum.
David Mercer: (09:12)
Why do I say that? Well, you've got only institutions trading it. You've got 500 institutions trading it. You've got the biggest 20 institutions in the world, trading it, making markets.
David Mercer: (09:24)
And more importantly, they price every other venue on the street. So they price all the retail environments. They see the smaller tickets, and exchange bigger tickets on LMAX Digital, with like-minded participants. So that bit, that liquidity, that price discovery, is essential for this to thrive.
David Mercer: (09:44)
Of course, when you then get into the sort of borrowing and lending market, or what crypto guys are calling yield farming, that starts at institutional level. I think all of those will only help the ecosystem, the overall or the wider ecosystem grow, in the next five to 10 years.
Rachel Pether: (10:08)
But the lending, that's also the part that I feel is getting the most regulatory ...
David Mercer: (10:14)
Sure.
Rachel Pether: (10:15)
Sort of view at the moment. So do you think that will be one of the harder ...
David Mercer: (10:17)
But you know, regulations ...
Rachel Pether: (10:19)
[crosstalk 00:10:19]?
David Mercer: (10:21)
Yeah, sorry to break in. I'm sure it's a question mark right now. Is it a security, is it not a security?
David Mercer: (10:29)
In fact, believe it or not, it's been there for 70 years that it's a security, that a bank account's effectively a security, but then there's a Bank Act that says, "No, it's okay, you can be regulated as a bank."
David Mercer: (10:41)
I think everyone in the ecosystem just needs clarity around the framework. I mean, most of the institutions in the room, most of the institutions I deal with, are heavily regulated, right?
David Mercer: (10:53)
I'm heavily regulated and regulated in four jurisdictions as a broker, as an MTF, which is like a SEF in the UK. So we just need to know, if it's a securities framework? Okay, we'll abide by that. If it's a broker framework, we'll abide by that.
David Mercer: (11:10)
If it's a banking framework, okay, that's a heavier lift, but it's also possible. We just need clarity, and you don't want to get into the situation in crypto, that I see in other asset classes like FX, where you have this regulatory arbitrage between regions.
David Mercer: (11:29)
At the moment, I'm going to tell you that Singapore and the Asia-Pacific region, is very, very crypto friendly. The US can lead, it can lead in crypto, but it needs to be crypto friendly, right?
David Mercer: (11:42)
That doesn't mean allow this free for all, allow a Wild West, just give the major players a framework they can work to. And then the US can be the leading market for crypto. The risk you have at the moment is that the leaders could end up being Asia-Pacific.
Rachel Pether: (12:01)
Yeah, and I think we're really noticing that, I must say, and obviously I'm biased, but Abu Dhabi has done a really great job in the regulatory framework around crypto, and it has based itself on Singapore.
Rachel Pether: (12:12)
There's really no legacy systems to deal with, right? So we can just go on and say, "Let's have a good robust crypto framework, starting from scratch." Are you seeing that I know you're opening, or have recently opened in Asia, is that what you see as one of the [crosstalk 00:12:31]?
David Mercer: (12:30)
Yes, I'm hugely excited by that. So we're going to launch our sixth exchange in Singapore, in Q4 this year. For the first time within LMAX Group, you'll see fiat and crypto on the same platform, fiat and crypto under the same regulation.
David Mercer: (12:54)
The way I see it is, a lot of crypto today, or what you're seeing as crypto today, is basically an on-ramp. So fiat currency is an on-ramp to other investments, right?
David Mercer: (13:05)
Why is Eurodollar the biggest traded currency there? Well, because a lot of US entities need Euros to invest in European companies, or even to buy European stocks.
David Mercer: (13:15)
Today, Ethereum is the on-ramp to DeFi, right? People are now coming to FX exchanges like LMAX Group, and simply, they want to get access, wider market access to, be it something in Bitcoin or Ethereum, or Mexican pesos or dollars, or Euro.
David Mercer: (13:39)
So I think that's the future. By the way, we're not perfect in the UK, the sooner we can get it right in the UK, and get it right in the US, the better it's going to be for the ecosystem, and those institutions I'm talking about, who will ultimately make this asset class grow, and make this asset class fly, potentially, to be bigger than gold within three years.
Rachel Pether: (14:05)
I was just about to ask you for a time frame for that, that you've said within three years. That's quite punchy.
David Mercer: (14:11)
Yeah, Bill Gates said technology never moves as fast in two years as you think, but it was further than you think in 20. It's probably going to be the same for crypto.
David Mercer: (14:22)
I mean, there's no doubt in my mind that you will trade BTC USD as easily as you trade Eurodollar, or sterling or Mexican peso, on LMAX Group today. There's no doubt in my mind that will happen within that three- to five-year time horizon.
David Mercer: (14:41)
It's just going to become de facto. It's going to revolutionize payments settlement. That's the key for capital markets, right? That's where things normally go wrong.
David Mercer: (14:53)
It's going to revolutionize that. Then, for the next generation, they're going to expect to trade Bitcoin as easily as they trade Euros and dollars today.
Rachel Pether: (15:00)
Well, and if you had to look, I know we just have time for one more question. What are you most excited about, then, in the next two to five years?
Rachel Pether: (15:11)
I know you're working on so many different things across the institutional side. What are you most excited about?
David Mercer: (15:16)
Look, I think we're just at the very start. I've absolutely no doubt that Crypto Land will be a multi-DeFi. It's hugely exciting. We recently become a member of the Pyth Network, which I think is going to be the leading oracle.
David Mercer: (15:32)
Now that's amazing, right? You can have all the prices of every asset in the world in one place, from an oracle. That is Pyth. That's exciting for us, a centralized exchange to move into this decentralized DeFi world.
David Mercer: (15:51)
So I think, watch that space, but I think if you're in crypto today, and certainly within LMAX Group, today, it would be 30% of my revenues and 11% of my volumes, but I expect crypto to get on parity with foreign exchange within the next three years.
David Mercer: (16:11)
As I told you already, you know, FX is a $7 trillion a day market. So those are big aims.
Rachel Pether: (16:17)
Excellent. Well, David, thank you so much for your time. It has been a pleasure to do this in person, so thank you very much. Ladies and gentlemen, David Mercer, from LMAX Group.