Brett Harrison, President of FTX US: "I think we're going to see NFTs continue to explode on the Solana blockchain"
A long form interview.
Today, we interview Brett Harrison, President of FTX US, the fastest-growing cryptocurrency exchange in the US. This interview has been edited for brevity and clarity.
So to start, since regulation is on everyone's mind, how is FTX handling the latest news on US regulations?
So, there's a lot of discussion now around the future of the various regulations required for crypto exchanges. In the US, there are two main regulatory agencies that are responsible for regulating different aspects of traditional financial markets.
There is the SEC, the Securities Exchange Commission, and the CFTC, the Commodities Futures Trading Commission. In some cases, the split between them is very clear. So, the SEC regulates Apple as stock, and the CFTC regulates gold futures on the CME.
And then there are cases in the middle that are less clear, for example, stock futures. With stock futures are actually some amount of joint jurisdiction between them, with the futures themselves being represented by the CFTC. But the stocks underlying those futures are regulated by the SEC.
That's what we're going to see in the crypto world, because Bitcoin futures right now are on the CME are regulated by the CFTC, but there is no one-size-fits-all for deciding what a particular cryptocurrency actually is. Except for Bitcoin, the actual future for many of these spot tokens, in terms of its designation as a commodity or security or something else, has yet to be determined.
I think what we will end up seeing is probably some amount of joint jurisdiction between the CFTC and SEC over things like spot cryptocurrency exchanges. Also, some potential registration processes for digital tokens that are more like securities but not full equities.
Is the plan to register FTX US as a securities exchange?
Not until there's more clarity over exactly what the future is of these particular products.
It doesn't necessarily really make sense to register as a securities exchange, because there's no registration process yet for these. There's not really a registration process specifically for digital tokens. I mean, it's possible that Ripple could go through an S-1 and register as an actual security, but I'm not sure if that's exactly what the future is going to hold.
I think the answer is we wait and see. We are, as a company, in dialogue with both the SEC and the CFTC over our plans and their future plans, and hopefully, something more concrete comes out of those conversations soon.
How do you respond to the Gary Gensler critique saying, statistically, if you list a hundred tokens, you're probably listing in security?
For exchanges that have hundreds of digital tokens, yes, I think, not based on statistics, but based on looking at some of the specific things that are listed, it's very likely that some of these things are much more like securities than they are like pure cryptographic currencies like Bitcoin.
FTX US, for example, has listed some of the fewest coins of all US exchanges specifically because we want to be very conservative in our interpretation of things like the Howey test and what we can list.
I don't think that it's as cut and dry as saying register as a securities exchange. It's not like if we register securities exchange tonight, then tomorrow we can just put Ripple on there. (I'm just using Ripple as an example only because there's currently underway a case for Ripple to decide whether it was an unregistered securities offering.) Ripple itself would need to go through a registration process. Otherwise, you're taking unregistered securities and offering them to unaccredited investors, which is not something that we can do. So it's not quite as simple as what's being said, and obviously, there are many fine details here to be figured out.
Okay, but if you had a magic wand to decide on how regulation would move forward, what obligations and disclosures would you like to see disclosures from crypto issuers?
Ideally, there would be some registration process for digital tokens to be digital securities but not require a full S-1. These are cases where it's not quite an equity, but there is some link between the token itself and the performance of the company, and there's some good reason why the company needed or wanted to introduce this particular token as opposed to going for an actual equity offering or a debt offering. There should be a clear registration process for exchanges to be able to list these tokens.
Right now, equity exchanges, for example, have a lot of rules and regulations around them. There's Reg NMS, where you have to make sure that the price is protected across all possible exchanges that implement it.
There are several other different rules that could make sense for a spot cryptocurrency exchange, but many also might not. That's because the infrastructure, the architecture, and the services offered by a crypto exchange are in many ways, very different, and in some ways, a huge superset over an equities exchange.
It's not really as clear-cut which rules would map onto exchanges. Ideally, there would be some SRO, some Self-Regulatory Organization that is helping design an absolute rule set for exchanges with some teeth -- people would have to be a part of it to be an exchange. But the rules would be tailor-made for the crypto exchanges, instead of trying to take an equities exchange regulation and just slap it on a spot cryptocurrency exchange.
I think those are the two main things I would hope for. Clear rules around being an exchange in general, and also some clear cut path for digital securities registration, that's somewhere in between nothing and the full equities registration.
Moving on a bit from regulation, let's talk about FTX US. What new features are you most excited about currently and over the next few months, let's say?
To start with some background: FTX US is a regulated spot cryptocurrency exchange -- that's our primary business. Even in that core business, we are growing quickly. So FTX US had about $1M a day worth of spot crypto volume on its exchange back in January or so. We're now doing around $200M a day in average volume.
It's growing considerably, and there are many factors in there: more institutions are onboarding, we are reaching out to the retail user base, more from all of the various advertising and partnership efforts that we've been doing. Also, our user base's organic growth as they discover our product and realize that it's well-architected. The technology is good, low downtime, low fees, things like that.
We're excited about some of our significant initiatives for FTX US.
I'll touch on two main ones. The first is that you may have heard that we are acquiring LedgerX, which is a US CFTC-regulated derivatives exchange and clearing house. They have the CFTC licenses that allow them to list and to clear regulated crypto derivatives which includes futures and options. Right now, they do have futures and options on Bitcoin and Ethereum.
The plan is, through the acquisition process and then through many ongoing conversations and approvals with the CFTC, we hope to offer those products on FTX US alongside our spot cryptocurrencies. So this will be the first time that a major crypto native player has been able to bring regulated crypto derivatives to retail and institutional investors onshore in the US. So that's one thing we're incredibly excited about.
Second, on the complete opposite end of the crypto offering spectrum, we are really excited about NFTs. We are building out our own NFT marketplace, and right now, you can mint your own NFT on FTX, and you can have auctions for those NFTs. You can buy and sell them. We are almost finished enabling people to transfer into FTX, NFTs that they've collected outside the platform, and most importantly, in both Ethereum and Solana NFT platforms. The hope is to become a major competitor to OpenSea and some of these other platforms.
Futures open interest is only about 2% of the total spot market (~$40B out of $2T) in the entire crypto market, but it is over 50% of the total volume. Also, total daily volume is around $200B, 10% of the total $2T market cap.
Are crypto investors trading too much? How does FTX see that problem?
Derivatives exist for a very good set of reasons that have been organically developed over time. Derivatives are not new just to crypto. Equity and especially agricultural commodity derivatives have existed for many decades, and they are an excellent vehicle for transference of risk, for hedging of risk, for capital efficiency.
If you have a particular position that you want to put on or to take off, but you don't need immediate delivery, immediate settlement, or full collateralization, futures, for example, are an excellent way to achieve that. Or, if you want to hedge your downside risk, buying put options is an excellent way to do that.
Every day people are going to the market looking to either put on risk or take off risk. When they do that, they are going to look for the most efficient vehicle to do that. If they want to, for example, take off risk to crypto exposure, the most efficient way to do that is going to be through futures. It's not going to be through selling spot cryptocurrency. So that's why you see so much trading back and forth in the derivatives market instead of spot. If derivatives magically disappeared tonight, a lot of that volume would move back into spot.
What we see more is that when people are trading spot cryptocurrency, a significant amount of people trading that particular product are holding for the long term. It's not trading; it's not so much of the transferring of risk day-to-day.
And that's why we see such a large discrepancy when comparing open interest and trading volume.
What about commercial uses of crypto and FTX Pay?
I think the most compelling example of a commercial use for crypto is stablecoins. So sending someone else money is a surprisingly difficult task in 2021.
Say you are in Tel-Aviv. If I wanted to wire you $10,000 for some consulting fee or to invest in one of your portfolio companies, it would take two or three days, if you are lucky.
o first of all, maybe it sees you in two or three days, but it actually takes longer than that to settle. Perhaps it gets held up either at the Fed, or it gets held up cross-border. Maybe I have to pay a pretty hefty fee to get that to you, or maybe you have to pay a pretty hefty fee.
There's going to be probably some form of an exchange fee, if you want to receive that in Israeli Shekel. What if, worst-case scenario, I type in the reference number wrong, and then I have to wait some extended period of time for that wire to reverse and get back to me, and then I can send it back to you again? It could be weeks. Whereas if you send me your USDC address, you could receive it in three seconds.
In general, when FTX is doing any transaction, especially larger ones, either with a service provider or an investor, we always pray that they can deal in stablecoins instead of in fiat because it's just so much easier. It's not to say that it's 100% necessary. We can continue to operate in a world without stablecoins, as we have for a very long time. But I think that as a commercial use case for digital currency, it's incredibly compelling.
As more and more people enter the crypto space and they start to accumulate savings and wealth through crypto. They have a massive amount of wealth and want to be able to use that, they want to finance their home with crypto, they want to get a car with crypto, they want to pay their electricity bills with crypto -- I think the growing use of stablecoins will just naturally going to happen.
For that to work, merchants need to be able to accept payment in crypto, or they need to be able to allow their customers to pay in crypto and have that convert to fiat for them, if they don't want to hold crypto on their books.
That's one of the reasons why we created FTX Pay, as FTX Pay is a way for merchants to sign up for an FTX account and then receive either crypto from customers or receive crypto and instantly convert that into fiat. It was really a pretty small extension on top of the exchange services that we already provided. So it all fits together quite nicely.
How do stablecoins like USDC and USDT fit into the regulatory regime?
For example, Circle, which offers USDC, has a number of different licenses that allow them to transact in their daily business of receiving dollars and issuing stablecoins.
I think that the different stablecoins have done different degrees of diligence in getting licensed, and we may see some crackdown over the coming months on stablecoins that aren't as transparent with their holdings and things like that.
That would generally be a good thing for the stable point industry for transparency to be more of a requirement, but hopefully, there is room in whatever regulatory framework will eventually exist for stablecoins because, again, they are extremely useful assets.
You touched on other financial products like mortgages and traditional lending, are those also in the plan for FTX?
So, one thing that we've already been able to do is to partner with some real estate development companies and allow them through FTX Pay to receive payment in crypto for condos. That is actually already happening in Miami.
People have used crypto to buy apartments, so that's something that we can already facilitate. We don't currently offer some mortgage-type product through FTX. I think obviously that would require some particular registrations and licensing that we do not now have.
Can you talk a bit also about the FTX US team and your offices? How many of you are there, and where are you located?
We have a pretty lean team in the US. We are around 25 to 30 or so, and our flagship office right now is Chicago. FTX US started during the pandemic, so everyone was remote and scattered, but we are now trying to centralize on a couple of different primary locations. So we have our office in Chicago, we are opening one in Miami, and we also have several people in California, in San Francisco, and Los Angeles.
Do you share the tech team with FTX International, with your US team focused on US matters?
Yes, the US people are focused on US matters. FTX US and FTX International are affiliates in the sense that Sam Bankman-Fried is the majority owner of both, but we run the companies separately. Separate servers, separate staff, separate compliance staff, separate regulations, separate registrations.
Can we go back to what we were discussing earlier? For average people using crypto, how do you prevent them from sending coins to the wrong address? That's a common complaint we hear from non-crypto natives.
So one thing you always hear when it comes to people who are die-hard DeFi crypto fans is: "not your keys, not your crypto." So we encourage people to learn how to use their own wallets, right?
But there's a risk to that. It's not necessarily simple infrastructure, and what happens if you lose your key? What happens if you mistype an address when you are sending it to the wrong one? What happens if you try to send something to your Solana USDC wallet, but you end up sending it to your Tron USDC wallet? I think these complicating factors make it difficult for people new to the space, but just in general for everyone. I mean, these are easy concepts to mess up.
So this is why we think that a centralized exchange like FTX or FTX US provides a lot of benefit for people new to the industry, because we are also custodians. We manage your wallets for you. We can add various checks on things. We try to validate addresses whenever possible to make sure that, when you say you are sending to an SPL address, we try to make sure it's a valid SPL address first before we send it. Also, if we are managing it, we can try to help figure out how to reverse a transaction if necessary.
If you send the wrong thing to us, for example, that happens occasionally, where people try to send something to us and they do it to the wrong wallet, and we're able to often help them out and reverse it. So this is one of the benefits of using a service like FTX that manages your wallets for you.
Do you guys talk publicly about how you do the security of coins themselves?
To some extent. What I will say is that we do a mix of hot and cold storage for our assets in general, enough assets in the hot wallets to allow exchange activity. Still, we try to keep the majority of the assets in cold storage for security reasons.
Talking about the recent marketing initiative, it seems that you guys are very focused on brand recognition. What results are you seeing, and what are the projections for partnerships for the upcoming months?
We've done a lot of these high-profile partnerships with Tom Brady and Giselle with Steph Curry; that's the most recent one we've announced. We are announcing another huge one very soon that I can't speak to, but you will see that very soon. We're the official crypto change of the Major League Baseball, we renamed Miami's FTX Arena, and although many of these partnerships have already occurred in the previous months. We are still in the early days because getting the most out of these partnerships requires accurate activation of the very various parts of our contracts with these celebrities, these talents, getting promotional material out there, doing ad campaigns, these sorts of activities.
It's still early days, but we see growth that we feel is undoubtedly in part attributable to these mass branding exercises that we've done.
Both in terms of just general brand recognition, as we can measure through some agencies that we're working with to help us understand those metrics, but also in terms of sheer number of downloads, the number of people trading on the platform, average users. They are all a straight line up and to the right, and we think that this is certainly contributing to that.
We hear many young people -- younger than us -- saying they want to get into crypto or even into FTX. What advice would you give them?
My advice would be to start simple.
The crypto world can be overwhelming. There is a lot of different products and different kinds of coins and DeFi pools and all sorts of stuff, and I think if you try to dive into it quickly, all at once, it can just overwhelm you. I know this myself because I'm fairly new to crypto. I've been at Jane Street, at Citadel Securities, I've been purely in the vanilla equities and equity derivatives and commodity derivative space for some period of time, and it can just be a lot of information.
The only way to really learn is by doing and connecting with other people in the community, because it's moving so fast that if you don't plug yourself in, you're going to miss the next thing.
So my advice to people is to start small, learn how to hold a stablecoin in a wallet, and understand what it means to send and receive that stablecoin. Buy a little bit of Bitcoin or Ethereum or Solana or whatever -- I'm not giving advice on specific coins to buy -- but find a couple of the ones that you know, you've heard about. They're not some new project that started three days ago. Something that has legs that has been around for some time, that you understand a little bit about... and buy a little bit.
Buy $10 worth of Bitcoin somewhere and get a sense of what it feels like to hold and trade and invest it, and then work your way up from there. Try to understand some of these DeFi projects, the different blockchains, the pros, the cons. Learn how to buy an NFT somewhere, learn how to move that NFT through different wallets, get a Phantom wallet, get a Metamask wallet.
So work your way up the pyramid, so to speak -- that would be my advice to people new to the space.
You mentioned Solana, and of course, we are focused on Solana too. FTX has been very supportive of the ecosystem. What projects and use cases are you most excited about in Solana?
Well, there is a lot, as you guys know. In the last month, we've seen NFTs on Solana go from zero to a 100 in no time.
I think people are very interested in NFTs and have finally come around to the fact that, well, why pay for expensive gas fees for every single transaction or operation that I would want to do on an auction exchange? Why not just use something where these transactions are nearly instantaneous, you can handle many transactions per second, and the fees are low? I think we're going to see NFTs continue to explode on the Solana blockchain.
I'm also really excited about gaming. I think everyone's looking at Axie Infinity and saying, "This is the beginning of an inflection point for gaming," where things like NFTs and other crypto-assets can bridge the virtual world with the real world, where in-game collectibles or in-game currency can be traded peer to peer in a marketplace inside and outside of the game. That is an extremely powerful idea. We're going to see a lot of new games appear, new kinds of virtual experiences, in addition to retrofitting older games that we know and love. They will be a part of this growing crypto ecosystem, and I think Solana can play a huge role in that.
That makes sense. At least on our side, we see kids today, much before they get to 18, they already have Metamask and Phantom wallets. So they're getting into crypto much before they're getting into banking, and we see that as very bullish for crypto in general.
Sometimes I get messages on Twitter that say, "Hold on. I can hold my assets at FTX US. I can buy and sell assets. I'll eventually be able to trade derivatives, possibly stocks, and I have a credit card or a debit card that works against my account. Why do I need a bank again?"
I think that is the question people are asking themselves right now.
That's why I asked the mortgage lending question, although I don't know if that's a very core or lucrative part of the business. I imagine not.
It's interesting. I haven't thought too much about mortgages and crypto. It's not something that's top of mind right now for our company, but I've thought about mortgages myself for my personal life.
When you think about the mortgage industry and the securitization of the mortgage industry, the most important thing for a functioning mortgage financial market is transparency: knowing how payments actually occurred, are people late or earlier in their payments? What's the rate at which they're making these payments?
What characterizes when these payments actually come in on time or don't? What are the interests being paid out on these different mortgages? How have they changed over time?
I think it's easy to imagine blockchain technology making transparency around these mortgages much better or ensuring fairness of lending to different demographics. I think there's a lot of potential for mortgages eventually to be upended through some combination of traditional lending and blockchain technology, but we'll have to see.
And again, for someone to be able to get into it, they have to get the proper registrations and licenses to offer those products, and maybe that's just the biggest blocker to take an initiative in that space right now.
So maybe something for next year. We'll see.
So to close with the classic Peter Thiel question: what is the most important thing you believe in crypto that most crypto people disagree with or don't know about?
The most important thing I believe that maybe most crypto people disagree with, or at least most vocal crypto people disagree with, is that regulation will be bad for the crypto industry for DeFi, for innovation.
I think we're at a particular juncture of the development into this space where the market cap on cryptocurrencies is enormous now, and it got there very quickly. We're in this maturing cycle of any industry where it reaches a certain point, and if it hasn't died, it starts to become an actual fixture of daily life and a fixture of healthy financial markets and a fixture of governmental policy and all these things that come along with proper growth.
For it to truly reach, for example, all Americans, and not just some slice of Americans, or for it to reach a huge global population and not just some specifically knowledgeable few who understand crypto, well, there has to be rules.
There have to be good ground rules that help protect people, help protect average consumers, and help protect people who don't understand this stuff that well. Otherwise, there's a lot of noise out there, and it can give the industry a bad rap.
So I think that what we'll see is a bit of turmoil, short term, where in the US, for example, ground rules will start to be laid, and we'll begin to see actual legislation emerge that help clarify what role things like crypto exchanges play in the US.
And then when that happens, the ones that will conform to it will thrive and provide really good places for everyone to engage in the ecosystem, and the ones that don't will eventually go away.
I don't think that's really a particularly bad thing for the long term. We want this industry to survive. We want it to grow and innovate, and I think this is the only real way for that to happen. I think those that don't think so are ignoring the centuries-long history of innovation starting from scratch, but then requiring some control around it to make sure that it's responsible.