BlockTalks with Max Boonen

Thank you very much, Mario. What I do with blockchain specifically is I'm the founder of two crypto businesses. The first one started in 2015, B2C2, well known today as one of the market makers in the space. It's now owned by a bank, SBI in Japan. And PV1, which is a newer business that I started with the co-founder from B2C2 and a few employees from way back, and that one specializes in tokenization. Essentially, we put US treasuries on the blockchain and we're starting to work on corporate bonds. I've been in crypto for a long time. B2C2 in 2015, but that's when I left my day job. I was an interest rates trader at Goldman Sachs in London for a while. I loved that job, but in 2015 the fixed income market wasn't doing so hot. I felt like we're not going to get paid well, etc., so I quit to do crypto full-time. But I'd been trading crypto since I think early 2013, was on early on Bitstamp and others. It was very wild back then. In fact, I often missed those days. I think what I missed the most was the pre-2017 crypto days, when Bitcoin was in like the 50s, the first run to 75, then 230. And after that, the 2017 bubble, everything that's come after that hasn't quite hit the same, unfortunately. But I suppose that's part of the course when it becomes more mainstream. I'm not going to complain either. If we had remained the niche industry, then my businesses would also have been niche.

I had been doing electronic trading on the side for a while, not at my day job because I was a voice trader, I just traded on the phone. But since 2000, I think I'd been doing electronic trading. It's a long story, but through Google I ended up stumbling upon Intrade.com, an early prediction market. In fact, a lot of people involved in prediction markets in crypto today come from those Intrade days. It became the biggest prediction market, it predicted the Obama-McCain US election perfectly, etc. Long story short, I ended up becoming the biggest market maker on Intrade.com at a great run. But then around 2012, I think the CFTC cracked down on it. It was a sneak peek, a preview of things to come in crypto, because it said, 'Well, you're offering derivatives to US citizens or residents, you can't do that.' And the platform died a slow death. That's when my flatmate, who was a quant at the same bank, told me, 'Yeah, you should look into that Bitcoin thing, it seems promising.' And that's how I started connecting my algo market making onto Bitcoin, which was indeed the only thing at the time. In fact, when Ethereum came around, I remember very vividly, and so does my co-founder Flavio, we're just the two of us trading in our garage, right? And he said, 'Hey, there's that new coin' — we didn't have the word 'coin,' it was Bitcoin or nothing — 'it's called Ethereum and they're doing that sort of IPO, and you can buy them for I think it was 10 or 20 cents back then.' He said, 'I'm thinking of just buying a couple, maybe $5,000 worth, you know?' And I told him, 'Flavio, $5,000? I mean, sure, it's at 20 cents, but could go to 5 cents, man. We're quite exposed to Bitcoin as a whole as a business. You know, Bitcoin goes up, we make more money, not because we're long, but because we're market makers, so there's more volume, more business.' And I was like, 'You're right, I shouldn't buy that.' Can you imagine if you would have bought $5,000 worth of Ethereum at 10 or 20 cents? Yeah, I owe him big time. I love that. It's the wild days of, you know, we don't understand what's going on but we're going to play with it anyway. I think people are more nostalgic about that.

B2C2 from the get-go was set up to continue the work I had done privately, making markets in my own name on crypto exchanges, but to turn it into something professional. But for a long time it was just Flavio and I until late 2016. In late 2016 we expanded the business. Early on we were trading on the likes of Bitfinex, Bitstamp, etc., and we were the biggest market maker. I remember Dan Morehead from Pantera came to our flat in London in I guess 2015. They said, 'Oh, okay, what do you guys do? How much volume do you do?' And we said, 'Yeah, we trade $5 million a day.' And that blew his mind. It's like $5 million a day, that's a single trade today, but back then it was absolutely massive. We had like a 40% market share, which of course eroded over time as more and more people started competing. We knew the writing was on the wall. When all the big HFTs and the banks would come in, the spreads would compress, it was going to become more difficult. So really early on, we didn't go into OTC per se, because you had the Cumberlands, the Circles that were already present, but we went into electronic OTC. So late 2016 we released the first single dealer platform in crypto. What that means is you can trade OTC with B2C2 and it's completely electronic: website, API, web socket, etc. I was going to say I took the market by storm, not quite. Instead of just attacking Circle and Cumberland head-on, we went to Japan because we knew that Japan was quite big for retail speculation around foreign exchange at the time. Through my Goldman days, I was introduced to the guy who ran electronic foreign exchange trading in London from Goldman, and we hired him because he's half Japanese. He set up the Tokyo office and we started providing liquidity to the big retail brokers in Japan. It was quite successful, but difficult because they had extremely high standards and we were at that time maybe a team of 10 people. They viewed us as professional liquidity providers, but we were just some crypto guys trying to interface a very ramshackle crypto market that was in its infancy when it came to the quality of the technology, with retail brokers that traded tens of billions of dollars a day in normal asset classes and were used to that level of quality from big banks and others. It was quite formative. We really had to up our game. When we did take the market by storm is when we entered the US market in 2019. We completely cleaned up because people were used to trading on the phone, but suddenly you got the same prices by clicking buttons, they didn't need to speak to a human. All the human interactions ended up focusing on higher value stuff. Specifically, Circle started losing a ton of business and it sold itself to Kraken something like six months after we entered the US market. That was a major success that paved the way for the company that B2C2 is today, and that's also one reason we were able to sell to SBI. So that was quite a good story. B2C2 remains a big firm now, I think it's got 150 employees. I'm just a little bit involved as a residual shareholder, but day to day I'm not there anymore.

It was the election of Trump that paved the way, I think. There was a lot of uncertainty around 2016, but after two years it seemed clear that Trump wasn't specifically anti-crypto, wasn't pro-crypto either, but the uncertainty had subsided a little bit. So we felt comfortable getting in in late 2018, early 2019.

Good Lord, so many mistakes were made by me. One thing I learned is you got to fire fast when people don't work out. You got to fire fast. That's just the way it is. It never gets better. It's a bit sad, it's a bit of an indictment of human relationships and work ethic, but if it's not a good fit, it's not going to get better. So that's one thing. We also learned to have perfect risk management, perfect accounting. That's really important. There's so many firms that just blew up because they had bad internal practices. FTX is just the most prominent one, but there's so many. I remember when I was at Goldman, we had a big speech by Martin Chavez, the CTO. He went on to achieve greatness. He told us, 'Guys, in finance, to succeed you just have to survive. If you're here 10 years from now, you'll be rich, you'll be taken care of. But it's just a matter of survival.' That's the approach I took to crypto. We always wanted to survive. We were usually not the firm that made the most money because we didn't take the biggest risks, but we always survived. In fact, one of my most awful memories of the journey is that in early 2020, there was the COVID and the Bitcoin crash in March. I remember actually the 13th of March 2020. Whilst we had very good accounting systems, etc., still sometimes things go wrong. What happened is we ended up getting liquidated like many other firms on BitMEX. I remember that cost $2.3 million. We lost $2.3 million just like that in an hour essentially by getting liquidated. We were in a due diligence process with a big firm, and I was afraid that was just going to kill the deal. I thought they were going to look like morons, we're going to look so stupid. In the end, the next couple days were so active that we ended up making something like $1.5 million in two days from the throes, and we ended the month with a positive number. So it wasn't such a big deal at the end of the day, but to me and my work ethic, it was really brutal. That's not the kind of firm I wanted to run. I wanted to never make any mistake. I prided myself in having perfect systems. I remember I thought that was the end of it. I went back to bed because it happened around 2 in the morning in Europe, and I crawled back next to my girlfriend who hugged me, and it was a terrible, terrible night. But it was all right in the end. When you look at the magnitudes, the sums that were lost later in crypto, that $2 million represented maybe a couple weeks of P&L, and then people went on to lose hundreds of millions of dollars on FTX and all sorts of silliness like that. So you want to take it with a grain of salt, but to me it was very, very shameful. That was one of the worst moments of my life. The one worst moment of my life professionally was in 2018 when the bear market really hit hard. We had to let go a quarter of the firm. There were 10 people at the time. It was very difficult. Thankfully, it helped the firm survive, and in fact some of the people that were let go then we still work together and are great friends. So it wasn't so traumatic for everyone involved, but certainly it was the first time I had to let go more than a single person at a given time, and it was gut-wrenching.

First of all, it was the best. I spent three years doing sweet F all, which I loved. But then we had that idea with Flavio. We thought that a next step of crypto was going to be corporate bonds. We had that crypto credit market where Genesis was number one, they had at the peak something like $8 billion of loans. I think B2C2 was a distant second at a couple billion. There were a bunch of players, most of which don't exist anymore, like Celsius. I thought this doesn't make a lot of sense. Everyone's got those bilateral loans. We got to have corporate bonds. We've got tokens for equity, we got ICOs, etc. We don't have bonds. I can't imagine the crypto market in 10 years time is not going to have bonds. So we thought we ought to try to nudge B2C2 in that direction. We tried. We said, 'Guys, we're going to give you a blueprint, we're going to assemble a team, and then you get to have the business. We just want some upside, like some stake in it.' But we couldn't agree. At the same time, we were speaking to VCs to see what the idea felt like to them, and we got a very warm reception. So we ended up going it alone. We started PV1 with VC backing, and we did assemble a team. The plan was the following, and that's still the plan actually. First, we developed the legal framework to have tokens be represented as bonds. So that's what we have under English law. The tokens that we issue are legally bonds, meaning that if something goes wrong, you go to courts, they're going to be treated like bonds, and you're going to be a creditor. That's going to bring you different rights compared to if you've got an equity stake through an ICO token or some such, or even a stake in a fund like many of the ways that you get exposure to crypto companies work. So that's the first step. We built that with the legal team. The first trial of the tech, if I can call it that, was to do US treasuries. There's many products out there now for US treasuries or risk-free yields: Ondo, Superstate, etc. Our approach is a little bit different because we start from the premise that we want bonds. Whereas most products out there are funds, so you've got a token that you get when you put your money in a pot and then someone manages the pot and they're going to buy US treasuries or the BlackRock fund or something like that. In our case, there's no pot so to speak. When you invest, the token you get back is a bond itself. There's what we call an SPV in the middle. You give the money to the SPV, the SPV goes and buys the actual US Treasury bond, sits on it, and it gives you a bond in return in digital form. So it's very close to the metal. It's as close as you can be to the actual US treasury market while remaining on chain and being denominated in stablecoin, so you can use USDC, Tether, etc. That's what we wanted to do. There's pros and cons compared to a fund. Certainly with a fund, it's more like a buy and forget because someone's managing it. At the same time, we don't manage anything. We're not a fund manager. We just say, 'Hey, there is this US treasury bill. Would you like it?' If you say yes, you end up with a token that represents it, but we don't make the decisions for you. You just go get whatever US treasury bills you want. Of course, we have a bit of a program where we keep giving you the one-month treasury bill, but we're still not managing that for you. We just keep giving you a fresh bill every now and then. The reason we did that also is because our end game, the real vision, is to do corporate bonds. What we mean by that is if you go back to the previous credit market in crypto, it's Genesis lends money to Celsius who lends money to Three Arrows. It's a bit opaque. All the deals are bilateral, so you don't really know, you're not inside the deal if you're not one of the parties. They're not transferable, so it's opaque, not liquid. Where you end up is that when Three Arrows defaulted, no one had realized how much they had borrowed because they went to everyone and said, 'Hey, can you lend us $50 million?' They had a very good reputation, so a lot of people were willing to do that, unbeknownst to them they weren't doing that once or twice, they had like 20 of those loans. So when they blew up, it was really quite a shock. The transparency of having bonds on chain prevents that. If you issue a bond, either publicly, people know your address or they can figure it out. Even if everything is anonymous, when the German government sold a couple million dollars of Bitcoin that they had seized, people were really quick to identify that address as belonging to B2C2. They couldn't confirm it, but it was like, 'Yeah, we know because it's on chain.' So when firms issue bonds as tokens, you can just tally up how much they've issued and also, interestingly enough, who's sitting on them to a great extent. Another problem of the Three Arrows failure was, 'Hey, who's exposed?' And everyone came out and said, 'Yeah, no, we're not exposed, or it's negligible.' Turns out it often times wasn't. Now if everything was a bit more transparent, then you could say, 'Well, look, our wallets are empty of that exposure,' which is on chain. What tokens also bring is that they're just naturally transferable. If Three Arrows had issued a bond to Genesis, we wouldn't have known how much, and Genesis went through, Three Arrows defaulted, or even before could have potentially sold the bond, I suppose not at a great price, but could have sold it nonetheless. There still is a market for claims in all the crypto bankruptcies, and it does work, but the loans are not made for that purpose. Whereas bonds are made for that. So that's the end game, that's the real vision. As you can imagine, you do need bonds if you're going to get B2C2, Galaxy, Coinbase, and others to issue bonds, because if you have funds instead of pools, then it just doesn't work. If I put my money in a pool and you do and other people do, and then someone's got to manage the pool, how do we know how they make the decision what to buy? When it's US treasuries, it doesn't matter much if they buy a one-month T-bill or two-week or whatever. But if it's corporate credit, it matters very much whether they buy General Electric or Celsius or FTX. So you got to have single name bonds as a building block of the market. For sure, funds can be built on top of that. Once you've got bonds out there, you can have pools of capital that just go and say, 'Okay, well, we'll buy this and that because we like the names,' and they create a fund and maybe they have their own subscribers. So that is the end game.

Yes, as market makers, Keyrock and B2C2 were the first to invest in the T-bills here. Now the question is of integrating so that the clients of B2C2 themselves can in time use the collateral. They're a bit like exchanges in that respect. They're users of the exchange, so they want to use yielding collateral with the exchanges, but also their clients are users of them, and they want to be able to use yielding collateral as well. So that's underway. Also, they're prime candidates for issuing bonds because especially when the market does well, the capital needs of market makers are great, and they can pay very good rates for safe business models. So that's also something that we're working on.

Personally, I leave that to others. As a trader, it's my experience that the liquidity of an asset is only tenuously related to the technology that's used to trade and transfer the asset. If something is going to be liquid, it's going to be liquid. There are some markets that are kind of clunky but they're very liquid because everyone wants to trade them. There's some markets that are very efficient in terms of how quickly you can settle, etc., but they're not liquid because no one cares about them. To me, that's the first port of call. If an asset is popular and sexy, it's going to be more liquid. To think that you can turn Alaskan real estate into something liquid just by putting it on a blockchain, I think is putting lipstick on a pig. No offense to anyone who lives in Alaska, but commercial real estate in Alaska, I mean who, there's like 20 people in the world seriously looking at that. So you can't really build a market out of that. Real estate is a multi-trillion dollar market, and people look at the size and think, 'Oh, the size is so big, even if we do one tenth of one percent, it's huge, we'll be billionaires.' I don't think it works like that. I think it's a lot more complicated, and I don't go after the biggest notional value markets because I also look at how easy it's going to be to make a market. That's also why when we talk of corporate bonds, we're not interested in tokenizing a Microsoft bond or something traditional. Whereas there's a need in crypto for risk-free rates for US treasuries, German bonds, and things like that, I believe that the crypto market is more barbelled in the sense that on the one hand, when you don't want to be long, you just want some yield on your stablecoins, you just want your 5%. But then when the market heats up, or even if it doesn't, you just want to invest in something that's going to generate great returns, and it's essentially either Bitcoin and shitcoins or just stablecoins and you need some yield on them. So there's that barbell, and I think the middle is a desert. I don't want to be in the middle. So we want to issue crypto bonds by crypto companies, which is interesting and is going to pay more than a Microsoft bond. But I don't think that the crypto clients that want to buy 5% treasuries are going to be interested in getting 5.6% by buying into General Electric. It's not our world. We're doing fine on our own in a sense. I'd much rather see us succeed within crypto as an industry and try to force adoption of some of our methods rather than us try to shoehorn traditional assets into our technology.

People don't realize but I'm a square. My approach to crypto was always I want to not be exposed, just want to make money selling shovels, low risk, bring professionalism like Wall Street techniques and ways of doing things to crypto while respecting also how crypto works. For instance, at B2C2 we built our own accounting systems because we realized that everything that TradFi had to offer was just not fit for purpose, and that's contributed greatly to its success. So a bit of a hybrid approach. But philosophically, I wasn't for a long time very inclined towards crypto, but I've come to my senses more recently. I'm very interested in privacy enhancement, I'm very interested in censorship resistance. I used to think that I'm a bit of a cosmopolitan globalist by design. I went to good schools, I worked at Goldman, I have to be a globalist. But seeing the way that the authorities have treated crypto really I found very infuriating. I sense now that the world is going to a very new place when it comes to whether we citizens are able to use our wealth the way we want to. I'm not a conspiracy theorist by any means, but I saw things like in Canada there was a COVID revolt by the truckers. I didn't really follow it from a close distance, but I learned that bank accounts had been seized of the people who protested, and I thought, 'Wow, that's quite a line to cross.' I think this is going to get worse actually. I see that taxation in Europe in particular is going to get worse, and when push comes to shove, I think the state is going to abandon some of the principles that we've lived by when it comes to your ability to deal with your assets the way you want and how much freedom you have around that. That's something that the crypto crazies have believed in for well almost two decades now, but it's something that I hadn't really embraced until more recently. I do think that stuff like privacy coins are quite important. I remember when we were pitching the authorities around regulation, say around 2018, we tried to convince everyone that, 'Look at crypto, you can see everything on the blockchain, you can track criminals, it's much better, the state can oversee everything.' Everyone you talk to between four eyes, we all agreed that we're doing a deal with the devil here because we're telling them that everything's super transparent, whereas our ethos is one that's more privacy-minded. That's led to things like Monero and Zcash being delisted from a lot of platforms because the deals that crypto companies struck with the regulators are that, 'Okay, well, you can list stuff, there's an approval process, and we let you do your business, but your privacy coins you're going to have to renounce them.' I don't think there was another way, however it pains me to see that we've taken a couple steps back on privacy. But I don't think that it's an issue that's been brushed under the carpet. It's going to come back with a vengeance because we're going to go through, I believe, events like when the Fed seized gold in the 30s. It was apparently mandatory in the US that you had to return your gold to the Federal Reserve. I think we're going to see stuff like that, and it's going to get quite ugly. I believe that crypto and privacy-enhanced crypto have a role to play there in the pursuit of freedom.

I don't know what progress B2C2 made on DeFi, but when I was running the company, I was quite against DeFi. I've revised my thinking obviously because I thought that you would just commingle funds with everyone and there was going to be a money laundering cesspool. It's more complicated actually, in a good way. So I've changed my mind there. But I don't exactly know where B2C2 is now. One of my good friends was at DRW when they launched Cumberland, and even before actually. He was instructed by some of the higher ups at DRW to go buy Bitcoins with bags of cash in shady locations, really early. That was really funny. We were both of the opinion, both being high frequency traders, that a lot of this speed race was a bit counterproductive and socially wasteful. We thought auctions, regular auctions, would actually be better. It's kind of like blocks, right? We thought, 'Hey, every 30 seconds we can have an auction, and the markets are going to be as liquid as when we have continuous order books, but we're not going to have that arms race to be the fastest.' Well, blockchain has kind of implemented that vision, but it didn't work the way we thought because MEV is a little bit like the way that you have to think about it. I don't know how much the audience knows about MEV, but essentially because you have blocks, it doesn't really matter if you're the fastest to get a trade done because everyone gets into the same block anyway. But that's just at first glance, because at second glance, transactions do get into the mempool in a certain order. Even though you will be in the same block, it doesn't matter who submits a transaction to be in the block first because only one of them can go through. If someone sells a big chunk of coins on Uniswap, you want to take the other side, then someone's going to go first. If you both want to take the other side, only one transaction can go through. So you do have speed games now, but they're made worse to some extent because of how transactions are selected based on, for a given block, sometimes it's just the first one that is seen by the miner, but in reality often times the miners have the ability to select the transactions they want to pick. So it creates some strange incentives where you've got even companies that essentially bribe the miners to pick their transaction over others. That's also why it's called miner extractable value or maximum extractable value. Essentially, you're thinking that you're some kind of high frequency DeFi trading firm, you want to take the other side of a trade, the block is going to be closed in 5 seconds, but in those 5 seconds, different firms go to potential miners who might mine the block and say, 'Take my transaction, I'll pay you something.' It's very strange. It adds a layer of complexity related to speed on top of the complexity of using blocks as the unit of time on chain. I don't know if it's a good thing. I think there's some pros for sure, the cons are a bit obvious. But I do like the ability to compete for crypto transactions on chain because it gives outcomes like the following. If you sell on Uniswap, the price is normally determined by how much you sell, and it's going to go into the block. If it's a big sale, then you're going to move the price and you're going to lose money. The algorithm of Uniswap doesn't care whether the market is liquid right now or not, it's just a formula. The market makers that do DeFi can take the other side of your transaction in the same block. Not everyone realizes that, but essentially if you were going to sell Ethereum and move the price from 2200 to 2100, then a market maker can come in and with their transaction, the price doesn't go down as much because the formula of Uniswap gets offset by their own purchase. We would definitely get worse outcomes if everyone was forced to transact on different blocks. First you have to crater the price, then the market makers rush to buy at the new low price. No, within the same block we can have more efficient prices because you can still do transaction in the same block rather than have to wait for the next one. So there's pros there. At the end of the day, what I think doesn't matter because people are going to be people, traders are going to trade, and so they're going to find ways to try to extract value. But the good thing is that usually in financial markets, traders are mostly focused on making money by making the market more efficient. There's of course exceptions, but the example I gave is a good one. They're kind of taking advantage of the system, but in the end the price takers are better off. So I'm hopeful that it's going to be good for the general public. But I can imagine that there's going to be a cottage industry of firms competing on weird aspects of the way blocks are built. I do hope that we're not going to go too far when it comes to sharing value with the miners because that has a definite sort of bribery feel to it, and I'm not super comfortable with that. But of course I'm not smart or educated enough to really opine on that with great conviction at this point.

I like Blockworks for news. Then you got to go find people on Twitter. I'm just Max Boonen on Twitter, and I just follow a ton of people there. It's very good. Now, is there a crypto primer? Many books have been written, some are good, some are worse. My friend Anthony Lewis, who was really early in crypto as well, he was at itBit back in the day, now at Tassat I believe, has written a great primer on crypto. Other than that, go find good newsletters, follow the right people on Twitter, avoid people who shill obviously, try to find OGs. Stay away from pump and dump Telegram groups, oh my God, please. But also importantly, keep an open mind. A lot of people come to this industry with a closed mind and they get beaten by the market and the industry. So keep an open mind. That's quite important. There's lots of inspiration that crypto can take from TradFi, but it also cuts both ways. There's lots that we do in crypto that's actually more clever than the way things work in TradFi. I found time and time again that people who came from big banks, etc., had difficulty adapting, and only because they were close-minded. The ones who were open-minded, they crossed the chasm and are here.

I think our industry focuses too much on get rich quick schemes and not enough on just improving financial access for the general public at the margin, cutting fees, things like that. There's so many great problems to tackle. We were talking about funds. When you invest in fixed income funds, I was talking to my parents for their retirement, they're paying like 1.5% to their financial advisor, and those advisors invest them in funds that on top of that charge like one to two percent. It's crazy. How are you going to make money if you start at like minus 3% every year? With crypto, we've got a lot more transparency on fees. We've got, I look at the US Treasury products, the fees are around like 20, 30 basis points, which is not bad. Also, holding crypto is free, you know, just keep it on your wallet as opposed to being charged by whatever broker or bank. So I think we should focus a bit more on that. But naturally, because we attract more risk-loving people, we've been a bit more of a casino for a long time. That's fine, it's important, I love to punt from time to time. But I don't want us to overdo it. If we want to get real big time, huge adoption, we do need to just make little simple things marginally better for the typical investor who's got 20 grand to invest. They don't want to lose it and are not going to just ape into XRP or Doge. The assets of the people we're trying to improve lives for should not be the risk that we all take to improve the industry.

The website is PV01, the letter one. I'm Max Boonen on Twitter, and PV1 is PV01 Markets. That's really where I am mostly. I post on LinkedIn from time to time.

Yes, so much, Mario. Bye.