“There’s no reason crypto has to be a partisan issue. The great irony is the more we disempower the crypto community, the more we empower the established banking incumbents who are extracting a huge deal of rent from everyday Americans.”
Zach Dexter explains LedgerX’s unique status as a digital currency futures and options exchange and clearinghouse approved by the CFTC. Dexter offers an overview of crypto’s regulatory landscape and explains why it’s incumbent upon crypto industry leaders to engage regulators in order to help shape smart and fair rules. Dexter sees crypto as crucial in upgrading traditional financial infrastructure, applying its technological rails. Dexter describes one of LedgerX’s top products, an overseas crypto perpetual swap, and offers his views around the recent Bitcoin deleveraging event, El Salvador and the future of decentralized finance (DeFi).
LISTEN AND SUBSCRIBE
SPEAKER
Zach Dexter
Chief Executive Officer & Co-Founder
LedgerX
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
TIMESTAMPS
0:00 - Intro and background
5:21 - Bitcoin regulatory landscape
8:10 - The LedgerX product and crypto advocacy
14:53 - Facilitating fair regulations
16:46 - Perpetual swaps
20:44 - Bitcoin’s deleveraging event
23:11 - El Salvador and Bitcoin as digital gold
26:05 - Decentralized finance and collaborating with competing exchanges
30:42 - Effects of crypto crackdowns in China
32:46 - Bitcoin’s status among regulators
34:49 - Politicization of Bitcoin
TRANSCRIPT
John Darcie: (00:07)
Hello everyone. And welcome back to salt talks. My name is John Darcie. I'm the managing director of salt, which is a global thought leadership form and networking platform at the intersection of finance technology and public policy. Salt talks are a digital interview series with leading investors, creators, and thinkers. And our goal on these salt talks is the same as our goal at our salt conferences, which we're excited to resume in September of 2021. This past week, we opened registration for our salt New York event, which is taking place at the brand new Javits center expansion in New York in September. So we hope you can join us there, but our goal at those events and on these talks is 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.
John Darcie: (00:54)
And if you're a regular here on salt talks, you know how keenly interested we are in the digital asset space. We're very excited to bring you the latest installment of our digital asset series with Zach Dexter. Uh, Zack is the CEO of ledger X, which is the first us regulated Bitcoin options platform. Uh, Zack developed and scaled the platform and custody system and led all technical systems, market surveillance and control aspects of the company's, uh, three-and-a-half year exchange and clearing house regulatory approval process. Uh, Zach is now leading the next phase, uh, of ledger X is expansion into perpetual products clearing for other exchanges and international services, uh, prior to returning to ledger X as CEO, uh, Zach led multiple engineering teams at mirror, which is a highly successful direct to consumer fitness brand. Uh, prior to mirror, Zach served as a CTO and co-founder at ledger X, uh, hosting today's talk is Anthony Scaramucci. Who's the founder and managing partner of SkyBridge capital, which is a global alternative investment firm. Anthony is also the chairman of salt. And with that, I'll turn it over to Anthony for the interview.
Anthony Scaramucci: (02:00)
Well, you got a super impressive career Zack. And so I want you to start there, take us back. Uh, where did you go to high school or college? Why did you end up doing this for a living?
Zach Dexter: (02:12)
Well, I'm from Charlotte, North Carolina went to UNC chapel hill and was, uh, was doing some software consulting almost straight out of college start. I'm
Anthony Scaramucci: (02:20)
Calling, I'm calling time out right now. Now I know why John Darcie's been so excited about this song.
John Darcie: (02:27)
I'm going to come out and say, I didn't even know you were Tarheels
Speaker 4: (02:31)
Zack [inaudible].
Anthony Scaramucci: (02:35)
Excuse me. Excuse me. Do we have anybody from long island that we can bring on the salt dog that can you get Billy Joel call or something like that? Jesus,
John Darcie: (02:43)
Zach, for the record I grew up in chapel hill. I grew up in chapel hill. My brother lives in Charlotte. I'm in North Carolina right now, actually. So this is fantastic. I love you even more, but go ahead.
Zach Dexter: (02:54)
Yeah, it's a great place. Great place. So I went from there to New York, it was doing software consulting for various startups and wanted to join something absolutely crazy that had like no chance at all at succeeding. And I thought, all right. Yeah, good coins arrived. This exchange in 2013 is the thing. There's no way that this is going to get approved. Uh, you know, we're, we're all going to get a big trouble. I'm I'm not, you know, but let's go for it. So, uh, joint ledger X is a co-founder and built the platform. We actually succeeded in getting the CFTC to give us, uh, not only the exchange or approval, but the, the required clearing house approvals. So we could hold Bitcoin.
Anthony Scaramucci: (03:30)
So I want to stop you for a sec, not to interrupt, but I want you to explain to our viewers and listeners what ledger X is, and then take them through that process of getting the approvals.
Zach Dexter: (03:41)
Yeah. Yeah. So we're a Bitcoin options platform. You can, you can buy calls, sell calls, buy, put, sell, puts on physical Bitcoin. You can do some futures trading. We have a next day swap product. That's kind of like spot. So any kind of Bitcoin derivative, you can trade on ledger X. In fact, we're the only place today in the United States where retail investors can trade physically settled Bitcoin options. So if you have a bunch of Bitcoin and you want to generate deals, you can sell calls on led direction. Can't do that anywhere else as a us retail investor. So
Anthony Scaramucci: (04:13)
Jack, I have to ask this question, can you buy and sell Bitcoin on an exchange in the United States? Yes. And that's Coinbase, where else can you buy it?
Zach Dexter: (04:25)
Gemini crack and FTX. U S there are a ton of platforms for spot trading. That's open and available to us investors. No problem. Easy to do, but the derivative space is much more, uh, constricted. There are very few things you can do today in Bitcoin to read, but it's in the U S as a retail investor.
Anthony Scaramucci: (04:45)
So is it fair to say that you're the only one that can do this? Or do you have competitors?
Zach Dexter: (04:50)
We don't have anyone else doing physically settled Bitcoin options right now in the U S that's w w we're the only one, which is crazy because it's 20, 21 we've been around for a few years now. It's just so tough to get those licenses.
Anthony Scaramucci: (05:03)
And so I want you to then address in your words, the regulatory landscape for Bitcoin. And I had to put a flat jacket on this morning because of the comments that Senator Elizabeth Warren was making. I had a flat jacket on and a helmet like we were heading into a, some enemy fire.
Zach Dexter: (05:22)
Yeah. I, I think there's a lot of, a lot of misunderstanding on what the regulatory landscape is. It's actually not as bad as I think it's portrayed in the media. So you've got the sec and they're regulating security, tokens, and Bitcoin ETFs. You've got the CFTC commodity futures trading commission used to be an agricultural regulator. They've gotten into crypto asset regulation, any derivative on Bitcoin, if theory in any derivative on any crypto, like a future, an option swap that falls into the CFTC bailiwick. So you've got the two financial regulators. The IRS has been chiming in with, uh, how they're going to treat crypto from a tax perspective. And we're starting to see a lot more regulatory clarity from the sec from the IRS, from some of these other federal agencies. But the CFTC has been in this game for five plus years. Now they've had a super clear regime all along. So if you want to do derivatives, they're the place to go.
Anthony Scaramucci: (06:21)
And you also have something called a clearing house and you're working with the other exchanges. Tell us what the clearing house is. And tell us, tell us why it's important to your business.
Zach Dexter: (06:32)
It clearing is, uh, it's not really well understood subject because it's so, it's so new. Uh, after 2008, we had these, these long chains of swap obligations. Still, nobody knew who owned what to whom they were like 15, 20 hops long. It was impossible to track down. What's the total escalating risk of the financial system. So regulators in Congress got together and they said, all right, we're going to have a single entity control all that risk. So every buyer, a derivatives instrument is going to directly face a central counterparty. Every seller is going to directly face a central counterparty. And every time you do a trade, we're going to break that, trade it too. So there's no concept anymore of right. Let's, let's face our counterparty directly, uh, that, that results in a system where you really can't measure the total outstanding risk in the financial system. So a clearing house is a central counterparty for derivatives trades. You have to have a clearing house if you want to offer interesting retail derivatives products. So we had to register not only the exchange, which was tough. We had to register the clearing house, which was very tough. There are very few active clearing houses in the U S those, those, uh, the clearinghouse has managed customer funds. They manage all the risks. So the regulators really have to make sure that if you're operating a clearing house, you've got your risk modeling, uh, down pat.
Anthony Scaramucci: (07:47)
Okay. So it, it sounds like you've put all of the pieces together to build an amazing business. So tell us about the products that you're going to overlay on this business. Tell us about the future of ledger X. I think I need to also disclose that early on. I was a seed round investor in the company, and so I'm very proud. He said, you're doing a great job. We're where are we going?
Zach Dexter: (08:10)
Yeah, we were today. We've got the Bitcoin options. It's a, it's a fully collateralized product. It's a little bit tough to trade, uh, because there's no leverage. So what we want to do is take the most popular derivatives product from the overseas crypto world, which is the perpetual swap. It does most of the volumes, most of the revenue, but you have to have our licenses to offer it here in the U S so we want to take that copy pasted into the U S offered on ledger X initially on Bitcoin, Ethereum, but actually on a all commodities. It's a product that has some cases for some asset classes is superior to traditional futures because you don't have to roll from expiration to expiration. There's no structural volatility. Like we solved the oil price a few months ago, uh, concurrent with exploration. So, so this is the most popular traded instrument in crypto.
Zach Dexter: (08:55)
By far, it's probably the most successful products that come out of crypto. It's not crypto itself. It's actually this perpetual swap. So all this overseas trading that we're hearing about most of that volume is taking place in the perpetual. But again, because of Dodd-Frank, you've got to have our licensing stack to offer that here. So us investors can't trade the most pocketed product from crypto. We're going to fix that problem. Then we're going to take that to all asset classes and take a direct run at the Chicago mercantile exchange and your ex or not structurally capable of offering those products.
Anthony Scaramucci: (09:28)
So explain to our listeners that are Bitcoin skeptics, crypto skeptics, et cetera, why you are not one of those people.
Zach Dexter: (09:45)
I think at this point that there's, uh, it's a new asset class it's here. And if you're, if you're a skeptic, it doesn't matter. Uh, there are enough people who are not that the asset class is here to stay. So there's no point I think in having a personal view on, you know, whether Bitcoin is good or bad, the market has decided that it's an asset class and that's pretty much the long and short of the story, but there's also this aspect that, uh, crypto introduces fundamental improvements in the financial clubbing that would not be possible if we were to rely on centralized infrastructure. What does, whether it's Bitcoin, whether it's a theory or defy, uh, the paradigm shift that's going on right now is we're taking systems that are actually terrible when you build them in a centralized manner, ACH wire, this stuff is 40 years old.
Zach Dexter: (10:39)
It barely works. It's held together by a bunch of duct tape and we're replacing it with a modern alternative using blockchains. That's actually far better from a technological perspective than the centralized alternative, which is a bunch of different institutions trying to coordinate, you know, Hey, who has my fonts? Where's the transfer in progress. All that stuff is public on the blockchain. So it's, it's just a technological revolution. It's the new rails for the financial system it's coming? No, there's not going to be as much change as I think some people think we're not going to live in a dystopian society, uh, where people are out on the street, uh, you know, there's been a nuclear war and we're know, using the lightning network to Paige, other, and Bitcoin like that. That's not where we're heading, where we're heading is regulated institutions using crypto rails to move funds around, to do trading everything we do today, but using a better technology. That's the best way to think of crypto?
Anthony Scaramucci: (11:38)
Well, you're really talking about Zack is what people describe as de-centralized finance. And so it's a reduction of the middleman. It's likely a reduction of transaction costs. Um, there's an integrity to the system. And so there's some safety Insurity, and it's almost like a direct to consumer business if I'm not saying it correctly. And so what your exchange will be is for institutions and individuals to have investments in burying cryptocurrencies, Bitcoin, et cetera, but then also have options and derivatives like they do in the stock and bond market. And so, so why should we be super excited about ledger X?
Zach Dexter: (12:22)
Well, there's never been a, there's never been a regulated version of what's going on at the overseas, uh, crypto derivatives markets. And actually those markets in many cases are more liquid, more efficient, more fun to trade in. They're better for institutions, better for retail. Uh, they have, they have so much liquidity at, at 3:00 AM because they're open 24 7. The products are tradable 24, 7 what's going on overseas is you've got a totally unregulated, but in many cases, better version of the financial markets that we have here, what we're doing is putting our us regulatory wrapper on that same technology. So you're going to have the same kind of quality, uh, in terms of execution quality in terms of liquidity, in terms of asset class choice that you have overseas, but in the highly regulated jurisdictions, that's pretty much it.
Anthony Scaramucci: (13:12)
And when we talk about decentralized finance ledger, X itself is a centralization node. If you want to say centralization network. So explain to us how ledger X fits into that mosaic.
Zach Dexter: (13:27)
Yeah, we're, we're totally centralized today, right? So we're doing centralized to relatives. You know, you have to send us money as, as collateral, post that to the clearing house in order to sell a call or order to buy a put, you've got to post the premiums and a wire transfer to the clearing house, but long-term, I think what we're going to do it, and we've already started working on this is, is we're going to look to run our platform on defy rails. So we're going to take our regulatory wrapper, take our controls, the oversight, and we're going to use [inaudible] technology, uh, to run the exchange, to run the clearinghouse. And it's actually a more efficient way to do things. So it we'll be talking about crypto and whether it's good or bad are here to stay. I think the way to look at it is all of these centralized institutions today, whether it's, you know, banks, even central banks, in some cases, uh, exchanges, clearing houses, brokers, all of those entities are going to move towards a world where they're kind of nodes in this decentralized network. And we're going to be one of those scents. But today, you know, it's a totally centralized operation. We've got to ease into that, uh, that future vision.
Anthony Scaramucci: (14:34)
I, I have, uh, uh, a worry, it's a worry that I share with, uh, lots of people about the future of regulation here in the United States and around the world. And so tell me, uh, why I shouldn't be worried. Tell me what I should be worried about.
Zach Dexter: (14:54)
I think, um, I think a lot of the responsibility for, uh, making sure we get the right kind of regulation actually falls on the industry. And what I mean by that is it's incredible. You know, when I, when I go talk to our regulators, there's, there are very few people who are approaching us, federal regulators with good crypto ideas. Most people are trying to get around the regulatory regime entirely. Most people are trying to skirt the rules and that that's not the way you want to do things. If you want good crypto regulation, you've got to go to the regulators and say, look, here's a solid argument for why we should be allowed to use [inaudible] technology. And you know, we're going to have all these consumer protections. Uh, here is our disaster recovery plan or business continuity plan. You know, here's all the, all the paperwork you need to see. Here's what we're doing. Here's why it works. You know, please sign off on that or at least tell us where we can improve. You've got to engage. And I think that the biggest word for me, it's not that there's going to be excessive regulation. It's that the industry is going to continue to try to skirt all the, all the rules. And they're not going to be there to engage in a two-way dialogue with the regulators. That's the most dangerous thing that I think a crypto is facing right now.
Anthony Scaramucci: (16:04)
John Darcie, fellow tar heel. I know you went to Emory, but you see self as a Tario. I mean, who's kidding. Go, go ahead. Yeah. Um, and by the way, I'm talking over Darcie. I don't care, Zach, if he asks a really good question, don't say, oh, that's a really good question. Okay. Can you promise me that sec? I'm one of your investments. Okay. All right. Go ahead, doors.
John Darcie: (16:30)
As much as I want to just talk about Carolina basketball, I'm going to continue on the current topic, but, um, perpetual swaps. Could you talk a little bit more about, uh, why those exist overseas, why they're not as popular in the United States, how they work and just more of the mechanics around them?
Zach Dexter: (16:46)
Yeah. It's like a traditional future, but it's a lot more fun to trade. The reason is it's really simple, essentially. It's to leverage spot product. So everybody wants to trade crypto, right? And a lot of people want to trade it on leverage the easiest conception, the most simple conception of a leveraged crypto product is the perpetual swap. It's a future that doesn't have an expiration date. So there's no, you know, it's, Hey, it's March 28th. Futures are gonna roll off. You've got a leg into another future. And the following month, uh, you gotta have a trading team for that. It's a pain in the pipe. So essentially it's just a way to give leverage spot exposure. It's super simple. Uh, the other aspect of the perpetual future that I think is not as well understood by the public at this point is the, uh, the margin model behind it.
Zach Dexter: (17:32)
So it turns out that overseas, the way these things trade and the way their margin, you get liquidated super fast. If your position goes underwater here in the U S all of the margin lending at the brokers and the clearing house, most of it is recourse lending. So people can come at your, if you can't, you know, come through on your, on your margin obligations at your broker, with the clearing house oversees, uh, the, the way things work. If you go underwater, you get liquidated instantly. So it's actually a lower risk to, to trade and to clear than traditional futures, traditional options. So there, there's the kind of retail facing benefit, which is you don't have to roll from exploration to exploration. There's less structural volatility for that reason. So it's, it's good to trade, but actually on the back end from the technology side, the clearing side from the margin side for the regulated entities are unregulated entities managing this stuff. It's, it's less risky and you're, you're less likely to blow up, uh, the financial system or, you know, your, your account balance, uh, in some cases, or, you know, the exchange you're trading at, if all they're doing is non-recourse, uh, margin perpetuals, which is super un-intuitive. And you've got to dig into the March model, see why that's the case, but, but actually it's a better product for both the trading in the margin side.
John Darcie: (18:50)
What levels of leverage are available internationally? You hear a lot of stories about just crazy wild west types of leverage that are available in places like Asia. And how does that compare to leverage is available in crypto markets in the United
Zach Dexter: (19:03)
Way? Yeah, I mean, effectively, there's, there's really at scale. It can only do like three to five X even internationally. There, there is a hundred X leverage available, but it's for like a $400 position and, you know, a hundred X leverage. The second, the market moves, you get liquidated and, you know, you lose whatever, uh, $5 plus the liquidation fee, or maybe there's a violent move and you lose all of it, but you only risk 400 bucks. Right. So, so who cares? Right? So I think here typically the initial margin requirements on CME for trading are like, you know, 10 to 30% or some variation margin. Uh, you, you get a message and it's like, Hey, give me some more margin. You got set a wire transfer. It's just so inefficient overseas, you get liquidated fast and you gotta, you gotta post that variation margin with stable coins really, really fast. So it's a more efficient market, the safer market, the longer you have an underwater position, outstanding, like over here at CME, you can have an underwater position overnight, you know, it's not good. Um, the more risk there is for the system. So actually in terms of regulation, we should be looking at some of the improvements that the, uh, the overseas market has made in terms of the margining systems. Uh, and in terms of the liquidation systems that they're using, it's, it's an incredible stuff.
John Darcie: (20:15)
So obviously Bitcoin and several, several other cryptocurrencies just experienced real significant drawdowns in the last month, month and a half. A lot of talk has been about how much leverage is in the system and how much of that was an unwinding of leverage and liquidation of different positions that people took in your view and your study of crypto markets in a Bitcoin, how much of that was a de-leveraging event and where do you see Bitcoin now in terms of the health, uh, you know, in terms of how much leverage is in the system?
Zach Dexter: (20:45)
Yeah, there was a ton of leverage defy, a lot of people that wrapping their Bitcoins and deposits say they have a direct Bitcoin and putting them on Ave and then taking loans out against that and borrowing tether and pausing that and taking more loans out there, leveraging over and over again. But actually they basically think about that crash was that was a VAR shock, like a shock to the system that we haven't really experienced in traditional financial markets. I mean, has there been a case where, how many cases can you name where there's been like a 30 to 6% across the board draw down in commodities and the system survived, you know, like in 24 to 48 hours, that's, that's incredible. What actually happened is everybody got liquidated on defy, but the system survived. And many of these protocols, like I've a perpetual protocol. A lot of them didn't even dig into their default fund.
Zach Dexter: (21:31)
They didn't even have to go to their backstop. Everybody got liquidated and there was a buyer for all the liquidated positions in many cases, despite the size of the shock. So it was this really interesting dynamic where all the centralized exchanges like went down, you know, the price started tanking, uh, all the centralized exchanges except for, uh, directs of course, were down. Um, I think, you know, FTX might've been up, uh, as they usually are, but most of these guys never goes down. There you go. But, but most of these guys tanked right. And defy did not defy was online, which was extremely interesting. And not only were they online, cause it's decentralized, they didn't dig into their reserve fund. If you had that kind of shock in the traditional markets, you would have blown out the clearing house default fund, you would have mutualized the loss. So there's something to be, to be learned actually from, from the volatility. It's, it's not always a bad
John Darcie: (22:23)
Thing. Right. You know, it was a stress test that the defy, uh, space pass. And I, that's a great point that you make that it's very positive to see it survive that type of volatility and emerge, uh, still in a healthy state. So we were talking before we went live about El Salvador. So recently the president of El Salvador threw his weight behind Bitcoin. He introduced a bill into the legislature there in El Salvador, um, to make Bitcoin legal tender. It passed with a super majority. It looks like Bitcoin is going to be legal tender in El Salvador. What do you think that news does? Obviously, El Salvador is a small country. It has a, I think it's 103rd and global nominal GDP, but what do you think that move is going to have? Uh, what type of effect it's going to have maybe a domino effect around the world and what are the implications of that move in Europe?
Zach Dexter: (23:11)
Yeah, the question is, is it the micro set strategy by, you know, where there's like one buy and then there aren't a lot of other buys or is it the start to a cascading? You know, if by event for, for central banks and sovereign wealth funds, I have no idea, but I will say that there's a decent chance in my opinion, that this thing overtakes gold, because it is a better gold in many ways. And I think, I think it does go, you know, it does go to the gold market cap maybe beyond, uh, it's, it's, it's more fungible. It's easier to send, you can use it as collateral, like at ledger X, we're going to allow people to post Bitcoin as collateral for other types of derivatives transactions. You can't really ship us a gold bar. We're like, Hey, you know, Zach, let me ship you like 10 gold bars to like cover my oil trade.
Zach Dexter: (23:56)
Like, how are you going to do that? That's, that's actually a tough one of the problems with the gold. Um, you can send Bitcoin like this. So it's, it's a more useful gold. It's a better gold from that perspective, you should expect that, you know, to the extent that it continues to gain legitimacy everyday it's alive. It does that. Uh, there's a higher probability that central banks, sovereign wealth funds, you know, treasuries will, will start to adopt this as a reserve asset. So it, I actually think it's not the micro strategy by, I think it's, it's more of a, a star to a cascading event. It's going to be a trickle and then probably turn into a flood. And, you know, the thing we'll probably, we'll probably replace gold in the end. So simple as that.
Anthony Scaramucci: (24:35)
And I want to interrupt the volatility though. You're not worried about the volatility. Gold is not as volatile as Bitcoin.
Zach Dexter: (24:43)
I think it's just due to how young Bitcoin is. I mean, gold as a reserve asset has been around for thousands of years and Bitcoin, uh, you know, a dozen or so. So I think that that gets smoothed out. And the reason is, you know, I think most of volatility is going to shift to some of the, uh, some of the stuff further out on the risk curve, like, like defy, you know, it's going to show up in Solano, it's going to show up in a theory of, it's going to show up in the ERC 20 tokens that are doing a lot of the lending. Uh, that's where the volatility is going to shift because Bitcoin has, is, has started to say, all right, here's my purpose. I'm digital gold, right? If they're even starting to say, here's my purpose sign, the best smart contract platforms salon is saying, well, I'm a, I actually have a competing smart contract platform as XYZ advantages. So you're starting to see a divergence of crypto. And I think you're there. They're going to be less correlated over time and you'll see a lot of volatility and stuff out on the risk curve, but in Bitcoin, you know, it's probably going to probably going to decrease over time.
John Darcie: (25:42)
Do you think ledger X has a path to, and you've already gotten there with some of the licenses that you guys have, uh, in terms of the exchange that you operate, do you think you're sort of a happy medium between full on defy, where you have all these wrapped, uh, you know, cryptocurrencies wrap stocks, wrapped commodities, um, you know, are you guys sort of a bridge to a fully decentralized financial system in the United States? Or how do you view yourself, uh, relative to other pure [inaudible]?
Zach Dexter: (26:08)
Yeah, I don't think we're going to have a truly fully decentralized financial system. I think we're going to have a defy rails, but there's always gonna be a need for, you know, transferring your assets to your beneficiaries when you die. Right. There's always going to be a need for recovering your private keys. If something happens to you, or if you lose them or your house, you know, experience the house, fire, like basic stuff like this, it doesn't work right now and define that's a huge problem. So, you know, when people are thinking about whether the financial system is going to be decentralized, like step back a minute, we've been at this massive bull market for financial intermediaries, like whatever a hundred years. And they're not just going to go away overnight because they actually do serve a purpose in many cases. I mean, in a lot of, a lot of cases, they're just extracting rent.
Zach Dexter: (26:54)
Uh, but in other cases, they're helping consumers, you know, recover their assets. Um, and, and you don't want to turn the, the economy into like a bearer bond economy. And, you know, if your house gets burned down, if you die and it all disappeared. So you've got to have a way to inject these third-party services onto the defy rails. And those third-party services are going to be banks. They're going to be, you know, the backup key for your wallet. Uh, JP Morgan is probably going to come in there and help you transfer your, your assets, your beneficiaries, even if this stuff does take over. So I think the financial intermediary stick around, but they do different things and same with us. So we're going to be there as an exchange as a clearing house. I don't think those regulatory conceptions are going away, but actually from a tech, a technology perspective, those two things work better in defined. So the defined implementation of a bank implementation of a clearing house is better strictly better than the centralized implementation, but there's still that, you know, customer support aspect, right? So it's not going to be everybody for themselves. Pull out your ledger, nano and put all your wealth on there. I don't think that's where this
John Darcie: (28:00)
Right. Why have you guys made the strategic decision to let competing exchanges work with your platform as opposed to purely trying to pump the ledger X extreme?
Zach Dexter: (28:11)
Yeah, I mean, it's really simple for 30 years now, people have been trying to compete with the established exchanges in the U S and everybody fails. Everyone's like, Hey, I've got a do product. I've been enlisted. Uh, it's, it's some exotic product. Uh, and, and the traditional guys are not going to be able to adapt it. Of course they will. You know, they have a huge regulatory mode. They have a lot of market power. They're going to list anything you live. So you have to, you have to come at the competitive landscape in the U S and derivatives from the clearing angle. If you, if you go there with a new product, you try to list it on an exchange. You're going to get run over every time. So what are you got to do is what the big boys do. You got to build up a large network of exchanges that work with your clearinghouse and offset the collateral requirements for trading on any of those exchanges with positions on any of the other exchanges it's called cross-market basically they'd be used to trade any product, you know, instead of posting 20% initial margin, if you're on exchange ex and that exchange is clearing through ledger X, you can use your positions on exchange, Y which is also clearing through by directs and don't, you don't suppose that additional markets, so it's more capital efficient to trade.
Zach Dexter: (29:14)
No one has successfully set up that community of exchanges that are working together to give the traders a, the benefit of a lower initial margin requirements. So that's a, that's a technical thing it's in the weeds, but that's why no one has succeeded in competing with the big established players in the U S for such a long time. We're now clearing for four exchanges, which is crazy to me, you know, a year ago, we were clear for just our own exchange who since signed up three others. Um, it's, it's a big deal because no one has done that. Uh, really since the demutualization is of, of CBOs, as far as I can tell,
John Darcie: (29:49)
Right. And geographically, you know, there's a lot of concentration of, you know, Bitcoin and crypto trading in Asia, for example, definitely outside the United States. You have exchanges like FTX, like Binance, uh, plenty of other examples that are based in Asia, because they've been able to operate more freely. Um, but now you see China cracking down on Bitcoin, basically lifting all mining out of the country. In addition to banning the use of cryptocurrencies for exchange or investment in China, um, you have India that's mulling over how they're going to regulate Bitcoin, even though they've now said it's not going to be a full-on ban. Do you see the balance of power as it relates to crypto trading, crypto mining, moving westward, uh, to places like the United States, especially as the CFTC and sec, start to get more comfortable with certain elements of, you know, defy and crypto.
Zach Dexter: (30:42)
Yeah. I call it the regulatory flipping. I think it's ongoing right now. A lot of the exchanges that are, uh, that were operating out of jurisdictions in Asia, Asia are seeing those jurisdictions start to clamp down and they're saying, Hey, you know, where do I go? And my answer is you gotta register, like go to the regulator. You fill out the paperwork. It's actually not that bad. It just takes awhile for them to review your application and make sure you're doing all the right stuff, which you should probably be doing anyway. Um, and say, look, Hey, you know, can you please accelerate this? We're we're trying to get to market. It's not a bad process. That's my message to the industry of crypto wants to succeed. We have to work with the regulators, not work against them. You don't want to be antagonistic and say, Hey, can I have an exemption from all the laws that apply to everyone else?
Zach Dexter: (31:27)
They're not going to give that to you. So you've got to be proactive. And I think we see more and more of that, or more people registering, applying for licenses. You know, it's, it's a good thing in general because the more engagement there is, the, the more two-sided dialogue there is, the regulators could figure out, okay, this is what's safe. This is, what's not, here's, who's legit versus not. And things start to move faster and the whole thing becomes better lubricated. So I think you do see people moving into, uh, more respectful jurisdictions over time. It's as simple as that, I think that all plays out over the next 12 to 18 months.
John Darcie: (31:59)
So as Anthony mentioned, our sort of house view is that the biggest threat to Bitcoin and crypto is always going to be regulation. You know, you might not be able to completely stop Bitcoin. But if, if the United States, for example, decided to come down with heavy handed regulation, whether it be taxation or an outright ban or whatever, it may be, obviously it would, it would have a detrimental impact to the momentum that, that Bitcoin and other cryptocurrencies have. But do you think that that Bitcoin specifically and other cryptocurrencies to a certain extent have released, uh, have reached a point of regulatory capture in the United States, whereby you have pensions endowments, wealth management companies, uh, corporate balance own this asset to the point where they almost face no choice, but to regulate it in a constructive way?
Zach Dexter: (32:46)
No, I, I don't think it's regulatory capture. In fact, I can tell you, it's not because our regulators still give us to give us a, uh, an appropriately tough time, you know, whenever we want to do something new. So I think that's a good thing. It's healthy, but it's definitely not captured though. So my view is the biggest threat to Bitcoin is, is not regulation. It's Bitcoin itself. Like how do you construct the narrative? What good is this doing for the world? Why is it better than the fed system? You know, what are the guard rails that consumers actually need? Because consumers, you know, they do need guard rails. You don't want to be holding your private keys. You don't want to live in a world where everybody has no recourse, no one has any recourse that they lose their assets. Uh, and they've got their little hardware wallet.
Zach Dexter: (33:25)
They lose it, that's it. You know, now, now their life savings are gone. That's not a good thing. So there, there's a reasonable way to engage with regulators. It's important that people start doing that. And the U S people are trying to file for no action relief on, on every regulation in the book it's not productive. So my message to the industry would be get out there, start talking to the regulators and start applying for licenses. It's, it's a totally reasonable process, and it will become more reasonable. The more you do it. So Olympic point is the greatest threat to us. Yeah.
John Darcie: (33:55)
Elizabeth Warren, who's obviously been a tough cop when it comes to financial regulation has recently come out with the most aggressive words yet that she's had about cryptocurrencies basically stating her intent to root them out of the U S financial system. At the same time, she's a big critic of wall street and a big banks, which, uh, I would say a lot of Bitcoiners think that Bitcoin presents a compelling alternative to the traditional banking system. How do you also, she also hides
Anthony Scaramucci: (34:22)
Behind her staff when she departs or boards or the planes from a private plane, that's fine. Keep going, Joe.
John Darcie: (34:31)
Right. But how do you, uh, view, you know, sort of the political politicization of Bitcoin, are you worried at all about this becoming a, you know, perceived right versus left type of issue, or what message would you have for Elizabeth Warren if she was tuning into the salt talk, which I can guarantee you, she is not,
Zach Dexter: (34:49)
Well, I am definitely worried about it becoming a partisan issue. I think that would be a huge mess, and there's no reason to have to become a partisan issue because it's just a new technology. And this technology has as you know, properties that are arguably not as environmentally unfriendly as has been, has been portrayed. So I totally disagree on, on that part. You know, I think it's, it's not burning up the world's carbon resources in the way that, uh, people have detected. Um, and in addition, the great irony here is the more we disempower the crypto community, the more we empower the established banking incumbents, and those incumbents are extracting a huge deal of rent from everyday Americans through overdraft fees, through wire transfer fees, you know, ACH fees, fees for this fees for that. And you know, I'm going on Ave and I'm taking out a loan and tether or USB-C for, for whatever 3%.
Zach Dexter: (35:45)
And no one is, uh, banging down the door, no loan charts of banging down the door, trying to repossess my house. But if you did that in the traditional financial system, I guarantee you all you will be dealing with, uh, are, are regulated loan sharks. So you've gotta be really careful because you've got this new empowering technology. And to the extent that you try to overregulate that you're actually going to end up creating a huge moat for the established incumbents. And so I look at that criticism, you know, in some ways, and I'm, and I'm thinking, you know, there's only one way that you can get on board with, uh, with over-regulating crypto. And that's, if you're trying to preserve the, you know, monopoly oligopoly that these established incumbents have on financial services, that's not a good thing for the American people, right? So there's a happy medium here. Uh, the, the extremes are not going to give us the answer on either side are not going to give us any good answers here.
John Darcie: (36:41)
Right? Well, Zach, it's been a pleasure to have you on salt talks. Anthony have a final word for Zach before we let them go.
Anthony Scaramucci: (36:47)
No, we're super excited about your business. Zach wish you the best of luck. We'll see you at our conference in September, and I like your optimistic view of where things are going. We, we, we agree. All right. Thanks a lot guys.
John Darcie: (37:02)
And thank you everybody for tuning into today's salt. Talk with Zach Dexter of ledger X, who a very forward thinking in terms of, uh, crypto exchanges and, and the clearing process of, uh, of all kinds of different commodity assets in the United States. Uh, just reminder if you missed any part of this talk or any of our previous salt talks, you can access them on our website on demand@sault.org backslash talks or on our YouTube channel, which is called salt too. We're also on social media at salt conference is where we're most active, but we're also on LinkedIn, Instagram, and Facebook. And please spread the word about these salt talks. Uh, we love educating people about a variety of different topics here on, on salt talks. Uh, but particularly we think exciting things are happening in the digital asset space and love bringing new people into the fold of that asset class. But on behalf of Anthony and the entire salt team, this is John Darcey signing off from salt talks for today. We hope to see you back here again soon.