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Episode 118


TAGOMI: A ONE-STOP SOLUTION FOR LARGE CRYPTO TRADES



Laura Shin
Posted May 7, 2019 at 3:30 am EST. Updated February 12, 2023 at 3:03 pm EST.

Jennifer Campbell and Kevin Johnson, cofounder and COO, respectively, of Tagomi,
describe how Tagomi helps institutional players make larger crypto trades more
efficiently and at the best price possible, plus analyze how that was executed.
They contrast it with the pre-Tagomi process for doing large crypto trades, how
their software, which functions as a sort of “Kayak.com” for crypto trading,
works on the backend, and how they keep funds held on exchanges secure. Plus, we
compare today’s crypto trading infrastructure to the early days of electronic
trading in traditional financial markets, and look down the road at how they’ll
accommodate trends such as staking and decentralized exchanges.

For more, check out the full show notes on Forbes.com:
http://www.forbes.com/sites/laurashin/2019/05/07/how-to-make-large-crypto-trades-without-moving-the-market/



THANK YOU TO OUR SPONSORS!

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EPISODE LINKS:

Tagomi: https://tagomi.com

Twitter: https://twitter.com/tagomisystems

Forbes article on Tagomi:
https://www.forbes.com/sites/jeffkauflin/2019/02/15/crypto-finance-grows-up-tagomis-new-tools-could-draw-institutions-into-the-crypto-market/#6c9bf98c13a0

Bloomberg video featuring Jennifer and Greg:
https://www.bloomberg.com/news/videos/2019-03-04/meet-tagomi-the-end-to-end-crypto-solution-video

Bloomberg article on comparisons to early days of electronic trading in
equities:
https://www.bloomberg.com/news/articles/2018-12-17/former-goldman-electronic-trading-head-sees-parallels-in-crypto

WSJ Article on Tagomi:
https://www.wsj.com/articles/peter-thiel-backed-venture-to-help-big-investors-bet-on-bitcoin-1525176121

Tagomi receiving BitLicense:
http://fortune.com/2019/03/27/bitcoin-peter-thiel-tagomi-bitlicense/

TRANSCRIPT

Laura Shin:

Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto.
I’m your host, Laura Shin.

In case you didn’t hear, Meltem Demirors of CoinShares and Jalak Jobanputra of
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If the idea of spending a few days in nature enjoying healthy activities and
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Laura Shin:

My guests today are Jennifer Campbell, co-founder of Tagomi and Kevin Johnson,
COO of Tagomi. Welcome, Jennifer and Kevin.

Jennifer Campbell:

Thanks for having us, Laura.

Kevin Johnson:

Great to be here.

Laura Shin:

Why don’t we start with Jennifer? How did you come up with the idea for Tagomi?

Jennifer Campbell:

First, I was working at Union Square Ventures, which is a venture capital firm
in New York, probably most well known for investing in Twitter very early on,
but also spent a lot of time in the crypto space, so they invested in Coinbase
in 2012, invested in other crypto projects like ValCoins and Algorand and
Blockstack, to name a few, so I spent most of my time there looking at the
space.

I guess over time, I became a go-to person when someone wants to buy, say, a
million dollars of bitcoin. I’d be the go-to person they’d ask so how to I buy a
million dollars of bitcoin. I’d send some to some of the exchanges, sometimes to
the OTC desks, sometimes to other folks that I knew that were in my network, but
there wasn’t a great solution for folks who were buying in size, and a lot of
them, because they were more sophisticated investors, had really expected
something a little bit better.

They wanted best execution. They wanted to understand how their trades were
routed, all of which didn’t really exist in this space, and so, my cofounder
Greg previously was head of electronic trading at Goldman, and he was a partner
there for 10 years, and we spent a lot of time together looking at the space and
thought, you know, there really could be a better solution here, and so we
decided to start Tagomi.

Laura Shin:

And you mentioned this phrase best execution. I know that has a very particular
meaning, so can you describe what that is?

Kevin Johnson:

Yeah, so we think of best execution as, you know, the ability to survey
liquidity across many different markets in order to find…you know, if you’re
buying bitcoin, the lowest price possible, and that means you usually having
fast electronic access to those markets and having, you know, your capital and
ability to fund those accounts ready to go in advance.

Laura Shin:

So, it’s essentially a way to give people a bird’s eye view so, that way, they
can get the best price possible, which is especially important when you are
deploying a million dollars in these markets which are pretty small. Is that the
thinking there?

Kevin Johnson:

Yeah, that’s definitely right. You know, in traditional markets, you know, best
execution is really important. It’s something that institutions care a lot
about. They spend a lot of time, sort of, you know, after trades are done,
analyzing did I get the best price possible. They’ll look at, you know, market
data. They’ll compare trades over time. It’s really a process, and it’s, you
know, something that a lot of major institutions really focus on.

In crypto, we sort of have a very young market, but we do think that, as larger
institutions move into this space, they’re going to have the same questions, the
same concerns. They’re going to want to understand, you know, how did their
broker route their trade. Did they get the best price? Was there information
leakage? Was there some kind of adverse impact?

So, we’re going to apply those same kinds of principles that we have learned
from traditional markets to the crypto space.

Laura Shin:

Yeah, so, why don’t you tell you what to Tagomi do?

Kevin Johnson:

We have a couple different things that we do. You know, first and foremost, we
have built a smart order router, as it’s called, which essentially allows us to
monitor market data coming from all the different exchanges or market makers
that we connect to, to understand, you know, what are the prices that are
available on those venues, and then, when we get an order from a client…let’s
say to buy, you know, a large amount of bitcoin, we’ll take a look at all those
different order books and say what’s the right way to break up this order into
smaller pieces and send orders to each of the markets to get, you know, sort of
a piece of the best price bitcoin on each exchange, and what that means is then
sort of the weighted average price of all that bitcoin that we’ll buy will be
the lowest possible for that client.

You know, it’s much better than if you to just go to one exchange at one time
because, if you were to eat up all that liquidity in one place, you’d end up
paying a higher average price, so it’s really important that you have access to
lots of markets, you route your order simultaneously to all the venues, and you
get the prices across the entire street.

Then, the other thing that’s important is, after the trade, kind of going back
and analyzing that. You know, seeing did I do the right thing, doing post-trade
reporting, being able to explain the analysis to your client.

We think it’s critical. It’s something we do as an agency brokerage, and we want
to be very transparent with why we did what we did.

Laura Shin:

And Jennifer, you did describe this very briefly, but can you describe more in
full how it was that, prior to Tagomi or without Tagomi, how people do things
like make very large purchases of bitcoin?

Jennifer Campbell:

Sure. So, before Tagomi, there were really two main options. One, you could go
to one of the retail exchanges, and so, for a lot of these larger clients who
are buying in size, there’s a large liquidity cost to buying in size, so that
means that, while, you know, the price of bitcoin is $1,000, if you want to buy
$10 or $100 of bitcoin, it’s still $1,000, but if you want to buy, say, $500
thousand or a million dollars of bitcoin, the price is actually, you know, maybe
$1,200 or something like that.

And so, the price gets higher as your order size goes up, and so, how you
execute that trade really matters. If you buy bitcoin and the liquidity cost is,
you know, five percent, well, that means you have to believe that, you know,
bitcoin goes, you know, up five percent before you actually want to get into the
market, so that execution cost is really important for some of these more
institutional clients.

So, you know, that wasn’t ever a great solution just because the space was so
fragmented, you’d have to go to, you know, five or 10 different exchanges. You’d
have to sign up and get sell fees at each of these 10 exchanges, you know, and
an institutional client just isn’t going to do that.

Or you know, even for the average person, that’s a lot of operational work, a
lot of hassle to get all those accounts and trade across all these exchanges.

Laura Shin:

And the sell fee is for the know your customer procedures?

Jennifer Campbell:

That’s right. Know your customer, KYC, AML, anti-money laundering, and so, it
was just a lot of operational work just to get a trade done.

The other option was to go these OTC desks, which, you know, sometimes is a
great solution, but also a lot of these clients are looking for best execution,
so they want to understand how your trade was executed, how it was routed, like
why did they get the price they got, and you don’t really get that with an OTC
because, you know, they’re not an agent.

You know, you’re buying from their balance sheets, and so they have a set price.
Sometimes, there can be a pretty big spread there, and so, some clients, you
know, are looking for a different solution.

Laura Shin:

And with Tagomi, how does a large purchase of crypto work?

Jennifer Campbell:

So, it would feel like you would wire a million dollars to Tagomi. You only have
one counter party, which is Tagomi, but we would smart route that across all the
different exchanges and liquidity pools and market makers and other liquidity
sources for you. You don’t have to accounts or have money on any of these
liquidity pools, and then we smart route that, and then you’ll have your bitcoin
in your account at the end of day, and it would really feel like you’re
interacting with just one counter party except we’re routing across all the
different exchanges for you.

So, you know, one analogy I use that’s quite simple is imagine that, say, Kraken
or Coinbase or Bitstamp is Delta or United, but you know, we’re Expedia or you
know, Kayak or something like that, and so, you know, you can go to Expedia and
buy coins from, you know, Coinbase or Kraken or Gemini, but you know, there’s
just one place you can go to get all of those exchanges in one place.

Laura Shin:

Who are your clients, or what types of clients do you have?

Jennifer Campbell:

So, it’s a pretty broad range. We launched in December, and so we’ve mostly been
focused on more of the institutional clients. Our clients have been hedge funds,
RIAs, other broker-dealers who want to sell bitcoin to their clients, but there
are also, you know, a number of high-net-worth individuals and also clients who
just want to use Tagomi because they feel like it’s a better experience, and
they’re not really institutions.

So, you know, we’re going to be expanding to more people, but in the first
couple months, we’ve only been taking the really large institutions.

Laura Shin:

And most of them are from traditional finance, or are they larger players in the
crypto world?

Jennifer Campbell:

I’d say it’s a mix. I’d say half, you know, a lot of crypto funds, and then
half, you know, more RIAs, other traditional broker-dealers who want to offer
coins to their own clients.

Laura Shin:

What is their typical trade size?

Jennifer Campbell:

You know, it varies a lot. It’s hard to say what a trade size typically is
because every time they trade, it’s broken up into a really small, tiny trade,
so if you want to do a, let’s say $30 million trade, you’re not going to do that
all at once. You know, you’re going to break that up into little bits of, you
know, maybe 30 cents or a dollar each, and then spread that out across all the
different exchanges, and so, you know, it’s hard to say was that a $30 million
trade, was that a 10 cents trade because a lot of our algos will split up your
trade into much smaller trades, but I’d say, you know, between $25K to in the
10s of missions. We’ve seen a pretty broad range.

Laura Shin:

How much do you make off of each trade, and how do you make the money off of
each trade?

Jennifer Campbell:

So, we just take a flat commission on top of each trade. There’s no monthly cost
for the software. There’s no yearly fee or anything like that. It’s just a flat
commission on top of your trade.

Laura Shin:

There’s no like scale based on volume or anything like that?

Jennifer Campbell:

Oh, there is, yeah. It ranges from up to 25 bps depending on your volume.

Laura Shin:

And which exchanges do you connect with?

Jennifer Campbell:

We connect with all the exchanges that have USD, so, you know, the top 10 there,
and then also market makers and other liquidity sources as well.

Laura Shin:

So, I don’t know if you saw the Wise report about the kind of real versus faked
volumes on the exchanges, but has that influenced which exchanges you have
decided to integrate with?

Jennifer Campbell:

So, it hasn’t influenced us at all, but it’s actually been very helpful. You
know, previously, a lot of times, you know, clients would log into our platform,
and then I’d show them, you know, the volume for the day, and when they saw that
metric, they’d be really surprised and say what do you mean that’s the real
volume. You know, CoinMarketCap has something that says 20X the volume, and we’d
have to explain, no, you know, we curate all our own data, and we think that’s
the actual volume you can actually interact with and actually execute on, and
they’d be very surprised.

And so, you know, that’s been really helpful for us in explaining, you know, why
that number is so much lower.

Laura Shin:

Oh, that’s interesting. I was going to ask you how you decided which exchanges
to integrate with, but it looks like you were using your own data to make those
decisions about kind of where there was enough liquidity and stuff like that. Is
that how you did that?

Jennifer Campbell:

That’s right. So, when we looked at where the liquidity was, we ended up with a
very similar set of exchanges, but you know, it was a little bit hard to explain
to clients why that number was so much lower than, you know, what they thought
it was because everyone had gone to CoinMarketCap and seen, oh, you know, the
number’s in the billions, and then, you know, the number we actually had was a
fraction of that, and so it’s been really helpful for us.

Laura Shin:

Yeah, looking at that report, the visuals on it were just so clear. Just looking
at it, I was like, okay, this is like one of those cases where a picture is
definitely worth a thousand words.

So, you guys also custody your customers’ funds, yes?

Jennifer Campbell:

Yes.

Laura Shin:

So, which custodians do you work with?

Kevin Johnson:

Yeah, so we evaluated probably two dozen different custody providers when we
were building out our process. We ended up focusing on the ones that we thought
had, you know, really great security, really great features, and for the most
part, have, you know, some kind of trust license. We work with places like
Coinbase and Bitgo and Gemini, and we’re always interested in seeing, you know,
what other new technologies are out there as we expand.

The coins that we list, as we looked at features like staking or other things to
our system, so you know, as an agent, we’re very happy to, you know, keep
monitoring the market for what’s best for our clients, and we’ll always make
sure we get the best technology, the best security, and the best features for
our clients.

Laura Shin:

Do you spread out the customers’ funds across multiple custodians, meaning that
even one single entity’s funds will be spread out? Like why do you use multiple
custodians?

Kevin Johnson:

Yeah, that’s a great question. So, we generally do spread it out, you know, for
risk purposes, not keeping all the eggs in one basket, and then, the other
reasons for using multiple are, you know, different custodians have different
coins that they list. They have different features in terms of, you know, do
they offer staking, what’s their service level agreement for how fast a
withdrawal can happen, what type of storage is it, so we think it’s prudent just
to be able to have multiple and to be able to offer all those different features
to our clients.

Laura Shin:

Do your clients have any concerns about the fact that they don’t hold their own
private keys?

Kevin Johnson:

Yeah, definitely some of them. You know, if you’re a different kind of fund,
sometimes it’s important, but you know, Tagomi’s able to accommodate many
different structures, so we’re more than happy to use our Covault solution or if
somebody has their own custodian they’ve already worked with, we can always
white list a withdrawal address, and after the execution is done, we can always
send it to their own storage system of their choice.

We’re happy to work with the clients to figure out what’s best for them, and if
that’s what they need, then that’s what we’ll do.

Laura Shin:

Okay, so it sounds pretty flexible on that part. It’s like you can custody for
them if they want that, and then, if they don’t, then they don’t have to use
that service.

Kevin Johnson:

Yeah, that’s right. We’re trying to mimic what you would feel in a traditional
brokerage in equities and futures, right? If you call up your broker and say I
want to buy a million dollars of Apple stock, you know, they don’t send you a
box in the mail with a bunch of stock certificates at the end of the week. You
know, they hold onto that for you, so we’re trying to get more people into the
industry by providing the same types of products and services that they’re used
to having in traditional products, and that means, you know, like Jennifer said,
not having to connect to all the exchanges, not having to worry about how to
smart order route, and then, custody and treasury management is another facet of
that.

You know, they don’t need to worry about where their stocks are held. They don’t
need to worry about moving money around, so Tagomi has figured out ways to
handle that in the crypto space.

Jennifer Campbell:

For example, if you have a prime broker relationship with Goldman Sachs, you
don’t also need an account with BAKKT Exchange or NYSE, right? And so, that’s
the same with Tagomi. We follow similar workflows as, you know, you would if you
were to have a prime broker relationship in traditional equity markets.

Laura Shin:

And how do you make that possible on the backend?

Kevin Johnson:

Really, it’s a combination of, you know, strong technology that was built, you
know, with experience that we have from traditional markets. It’s both a
combination of being able to quickly route orders to the right markets where the
best prices are, and then, you know, building out the sort of settlement and
clearing infrastructure that allows us to handle moving capital between
exchanges, you know, pulling back the bitcoin that we buy for clients into our
own storage system, our own wallets, and sort of managing that balance
throughout the day.

So, we’ve built systems that allow us to do this quickly and efficiently, and
that’s really what I think differentiates us from, you know, some of the other
software providers that are out there.

Jennifer Campbell:

So, we have a veteran team who’s built this multiple times before as a team in
multiple markets, and so, you know, it’s really textbook solutions that, you
know, clients expect, and you know, we think the crypto space will adopt.

Laura Shin:

It seems like you have to have accounts in all these exchanges, and then, you
must prefund at least some of these trades. Is that correct?

Kevin Johnson:

Yeah, it’s actually a mix, so you know, we…the crypto market is evolving, and
it’s changing all the time, so we have to meet the market where it is, which
means that a lot of the major sources of liquidity require prefunding for
trading, so if an exchange requires that, we work with that, but there are also
counter parties out there that will have post-trade settlement arrangements, so
we have some liquidity sources that do that as well.

So, Tagomi figures all this out for the clients while we provide best execution,
and so really, you know, managing that liquidity and that access that we have is
really the main service we provide the clients. That’s really where the secret
sauce is, I would say.

Laura Shin:

And for the cases where you do have to keep funds on exchanges, as we all know,
the history of crypto is littered with exchanges being hacked and customers
losing their coins, so how do you keep the funds that you have on exchanges
secure?

Kevin Johnson:

Yeah, that’s a great question. You know, it starts off with a rigorous review of
which exchanges we connect to, making sure that, you know, their security and
KYC systems make sense, and then, we make a risk-based assessment. You know, we
say, okay, what’s the right balance of our liquidity desires and our desire to,
you know, minimize counter-party risk wherever possible.

You know, there’s really no perfectly safe way to do this. You know, I think
when you’re trading on a centralized crypto exchange, there is that temporary
risk that you take when your funds are there, but again, we try to minimize that
up front. We make sure we don’t have too much in any one place in any given
time, and you know, that’s one of the main services that Tagomi provides for our
clients is, you know, constantly keeping an eye on that, constantly making sure
we’re minimizing risk while still trying to get the best execution possible.

Laura Shin:

And I believe so far, you’ve raised $27.5 million. Is some of that used as
working capital to prefund those trades, or do you have another source of
liquidity?

Kevin Johnson:

So, we don’t have additional liquidity apart from that. You know, it’s mostly
the clients’ funds that we’re using. We have other financing arrangements where
we can, you know, provide additional backstops into that, so really, it’s a
matter of sort of balancing all that liquidity at the same time, but client
funds are always, you know, fully funded.

There’s a full reserve there, and we’re never in a situation where we don’t have
access to all the clients’ funds that they have with us.

Laura Shin:

And which cryptocurrencies do you support?

Jennifer Campbell:

We have Bitcoin, Ethereum, Litecoin and Bitcoin cash, but we’ll be adding quite
a few more number of coins in the next couple months, so stay tuned.

Laura Shin:

And how do you decide which ones to add?

Kevin Johnson:

Yeah, so there’s a couple factors we look at. You know, client demand is
obviously important, and then, we take a look at, you know, our ability to
technically trade each coin, what exchanges is it listed on, and then, it’s
also, you know, taking a look at the regulatory requirements in all the
jurisdictions that we have clients. You know, so it might be different
state-by-state, for example, in the US or country-by-country around the world,
so we’ll always, you know, work with our legal team to assess how that works.

You know, for example, in the US, the big question is, is it a security or not.
In other jurisdictions, it might be a little bit different, so we look at all
three of those factors when we decide what to list.

Laura Shin:

Oh, wow, so in the US, it could differ from state-to-state, which assets…I’m
just trying to think, well, like what’s an example of an instance where
customers of one state might be able to trade a crypto asset but customers in
another state wouldn’t?

Kevin Johnson:

Yeah, it really comes down to things like money transmitter licenses, so
different states have different rules and regulations around that where, you
know, we’ve got licenses in many different states. You know, certainly the
biggest ones in the US, but places like New York have additional requirements
for cryptocurrencies, for example, so we did recently get our bit license in New
York, which allows us to take New York clients, but generally, the process for
approving new assets there takes a little bit more time, and you’ll see this
with other exchanges, too.

If you look at, you know, Coinbase, you’ll see that some assets are able to
trade in California but not New York, for example, so that’s pretty normal, but
again, we’re always, you know, keeping an eye on what’s available, and we’re
always making sure our clients know what they can do in their jurisdictions.

Laura Shin:

And over the longer term, let’s say that digitized securities really become a
thing, do you see Tagomi adding assets like those?

Kevin Johnson:

Yeah, definitely. So, we’ve been proactive there, you know, talking to the SEC
and FINRA figuring out what does it mean to be a sort of registered
broker-dealer in the crypto space. A lot of us, you know, have our licenses from
previous jobs and understand how to set up those types of institutions, and so,
we’re working very closely with the regulators and other partners in the space,
other, you know, exchanges, different companies that are working on listing
tokens and working with issuers, other ATSs, custodians.

So, all these things are necessary to really bring security tokens to our
clients, and like I said, we think we’re at the forefront of that, making sure
as soon as those approvals start coming through from the SEC, we’ll be ready to
add those to the platform.

Luckily, a lot of the technology, we’ve already built is the same to support
those things. It’s really a matter of getting the right licenses and regulations
in place.

Laura Shin:

Yeah, I feel like that’s the refrain I’m hearing from a lot of these start-ups
right now. What kind of trading volume are you seeing?

Kevin Johnson:

So, it’s been increasing all the time, you know, depending on client demand on
any given day. Like Jen said, we have a lot of different styles of clients, you
know, different needs, but it’s definitely been growing since we launched in
December.

Laura Shin:

As we saw in 2013 and then again in 2017, when there’s a crypto bull run, it
happens at a breathtaking pace. So, how does Tagomi plan to accommodate these
sometimes unpredictable run-up events?

Kevin Johnson:

Yeah, so really, the key there is to be ready, to make sure we’re onboarding
clients now as sort of the crypto winter is thawing, getting their accounts
ready, getting all the exchanges connected so that, when clients are ready, you
know, they’re ready to quickly, you know, deposit money or coin and trade with
us, and then, pretty much everything after that is electronic.

You know, we have an automated system for trading. There’s not a lot of human
intervention that’s needed to trade once the funding is completed, so we think
we’ll be ready for that as soon as it comes.

Laura Shin:

And about that prefunding question that I asked earlier about having the money
ready at exchanges, is that something that would affect your ability to scale,
or in that case, would you just require that the client wire their funds first?

Kevin Johnson:

Yeah, generally, our requirement is that the client just funds with us. The
process for moving to exchanges is fairly quick. We’re working with a lot of
partners in that space, both on the banking and on the wallet side. Technology
is always getting better there, so we think we have a pretty good setup now, and
it’ll keep improving over time.

Laura Shin:

All right, we’re going to discuss the bit license and other trends in crypto
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Laura Shin:

Back to my conversation with Jennifer Campbell and Kevin Johnson of Tagomi.

Let’s just make sure people understand where Tagomi sits in the market compared
to some other similar players. Can you explain how you’re differentiated from
the ODS desk and other types of software that facilitate trading on crypto
exchanges, market makers, etc.?

Jennifer Campbell:

Sure. So, I think there’s three main buckets. One, like you said, are the
software-only solutions. So what that means is that, you know, first of all, you
have to have your own accounts at each of these, let’s say, 10 exchanges, and
then you have to send a wire into each of these 10 exchanges and split your
balance sheet up between each of those 10.

And then, it’ll show you where the good trades are, and you know,  you can buy
and sell in one aggregate interface, but then, to, you know, collect your coin
at the end of the day, you then have to log back into each of the accounts and
then send them back to your own wallet, and so, there’s a lot of operational
hassle there that is just really not familiar to some of these more
sophisticated investors, but you know, even if you’re just the average clients,
you know, it’s a lot of work.

I think the second category is, like you said, the OTC desks, and you know,
there’s sort of a place and time for some of these OTC desks. You know, if you
want to offload a lot of risk instantly, the OTC desk will do that for you, but
for a lot of these larger clients, say if they’re trying to buy, let’s say $200
million of Bitcoin over the course of a year, well, you know, they really need
an algorithm to do that for them, you know, over a period of time, and so, the
OTC desks aren’t a great place there.

And also, for clients who want best execution…you know, essentially that means
best price, you can think about it that way, but you know, they need a different
solution to show exactly how we executed their trades, why we did what we did,
and they need a lot more detail around, you know, why was that price the true
market price that you showed me.

So, I’d say those are the two broad categories.

Laura Shin:

And you guys, you’re not making markets either, like you’re not trading or
anything like that? It’s just all for clients.

Jennifer Campbell:

We’re not making markets, exactly, and so, there are also some desks that are
agency-only, but what that means really is that you have to prefund your trades,
but they only actually route you to market makers. There isn’t another product
in the space that will actually smart route you to multiple liquidity pools, and
you know, aren’t also market making against you as well.

Laura Shin:

So, we have mentioned the bit license. I kind of was pretty impressed because
you guys were recently approved for one, but as far as I understand, I think it
took quite a bit longer for some of the older companies in the states to receive
theirs. Do you have any sense of why yours was approved so quickly? Or maybe you
started applying before you launched, or…? What was the story there?

Jennifer Campbell:

No, actually, we applied in the late summer, around August. Well, we just have a
team that, you know, has really gone through a lot of these applications before.
They’re really familiar with all the processes, you know, the security
requirements, all the operational procedures, and so, we just, you know, sort of
had everything lined up. You know, the team was just sort of really familiar
with all the background checks, etc., and so, it was a well-understood process
for our team.

Laura Shin:

And because we did talk about how the bit license in particular is one example
of a reason why the offerings from state-to-state would differ, and I know
you’re probably not going to want to answer this directly, but I’m just curious
to know, like from a startup’s perspective, what you think the bit licenses
adding or not adding to the experience of being an entrepreneur in this space.

Jennifer Campbell:

Well, I think it adds protections for, you know, you and your clients to ensure
that, you know, any company they interact with who has a bit license has really
thought about every single potential edge case and nuance, and you know, it’s a
product they can really trust, and so, I think, you know, that definitely adds
some value to the space.

Laura Shin:

But do you find it like particularly onerous? I mean, you guys are a pretty
young startup, and yes, you have good funding, but I just wonder what that
experience is like for entrepreneurs who have to, especially in this case, where
you’re trying to service traditional financial players who, you know, definitely
will want to be compliant.

Jennifer Campbell:

Right. I do think, you know, it can be an expensive process, and you know,
that’s part of the reason we raised $15 million in our very first round, and you
know, just because we wanted to get all those licenses, it was part of our
business plan, so…

Laura Shin:

And so, earlier, Kevin said that having the bit license enables you to service
New York customers. Are there any other things that enables you to do that you
couldn’t do without it?

Kevin Johnson:

The main two things would be taking New York clients and then operating out of
New York, you know, so we are able to have a presence there, able to take
clients from there, which is obviously important when we’re servicing
traditional institutions. You know, New York City is the financial capital of
America, for sure, and you know, our goal is to not only service, you know,
crypto native firms but also traditional asset managers and really try to make
cryptocurrency as an asset class for all types of investors.

Laura Shin:

Jennifer did reference Greg Tusar’s background a little bit earlier, and
obviously, she spoke about hers, but you know, when I think of teams in the
crypto space, I really do feel like they’re one of the teams where I can look
and say, oh, wow, it’s very clear how their background has led them here, so can
you just give an overview of the experience of some of the other people on your
team? And maybe Kevin, you could just lead with describing your own background.

Kevin Johnson:

Yeah, definitely. I’ve been involved in trading, whether it’s electronic or
quantitative for my whole career. I’ve worked at places like Citadel, Two Sigma
and then Gecko and KCG. That’s actually where I met Greg, so always been working
with, you know, how do we make trading efficient and more quantitative and
electronic as the industry has changed, and then I got into cryptocurrency
really as a hobby. You know, I was mining Ethereum in my basement for a while
and doing a lot of trading on the side, and so, when I had an opportunity to
work with Greg again and kind of take my finance knowledge and apply it to my
hobby, it was something I couldn’t pass up.

And you’ll find a lot of the people on our team have similar backgrounds.
They’ve worked at, you know, places like Citadel or Two Sigma or KCG in the
past, and they understand, you know, how electronic markets improve experiences
for clients, and then they understand that, you know, cryptocurrencies can
certainly benefit from more efficient markets and better pricing for clients.

Laura Shin:

So, given your background, how would you say the financial infrastructure, the
crypto spaces compare to that of traditional finance at least for now?

Kevin Johnson:

That’s a great question. It’s pretty different, but there are some similarities,
and you know a lot of the solutions we have from traditional finance need to be
applied to crypto, certainly, you know, taking a look at best execution and
smart order routing and ensuring we get the best prices for clients is, you
know, something we know how to do, and we’re trying to apply to the crypto
markets.

Where it differs is, you know, in a lot of the operational aspects that we
talked about earlier. You know, how do you handle exchanges that require
prefunding? How do you store assets for clients after you have them? How do you
figure out cold storage versus hot storage? You know, also figuring out what can
you trade in different jurisdictions? What is a commodity? What’s a security?
Those are what make it different, but I think, over time, we’re going to take
all of those learnings from traditional finance and continue to apply them to
crypto in order to make sure that this can be an institutional asset class.

Laura Shin:

And how would you compare the early days of electronic trading and traditional
finance to the early days of electronic trading now in crypto?

Kevin Johnson:

Yeah, it’s actually probably pretty similar. So, you know, as the equity markets
grew up, you know, you have floor traders yelling at each other across a room.
You start to have more dealers come into the space providing additional
liquidity. Things eventually happen more over the phone, and then eventually, on
screens and electronic platforms, and you know, as you got farther into the ‘90s
and 2000s, you know, the rise of electronic market makers who, you know, really
ended up being the dominant liquidity providers and kind of took over for a lot
of the dealers in most cases.

You know, certainly even in mature financial markets, there’s a room for both,
you know, liquid efficient electronic market makers, as well as dealers. What
you tend to find are that the dealers focus on, you know, lower volume, lower
liquidity, harder-to-source assets, and then, if you’re looking for something
that’s really liquid and highly traded, like if you want to buy, you know, Apple
or Facebook stock, you’re going to go to an exchange, you’re going to go through
a broker that’s electronic. You’re going to use an algo, and you’re going to end
up interacting with a high frequency electronic market maker.

That’s the most efficient way to buy liquid instruments, and what we’ve seen is
that, over the last couple years, crypto…certain crypto assets are moving into
that category. Certainly, Bitcoin and Ethereum and some of the other more liquid
assets are traded on plenty of exchanges. There are now electronic market makers
quoting in those venues, and so it makes sense then to take the same process as,
you know, building an electronic smart order router to source all that liquidity
for clients.

Laura Shin:

So, this might be a stupid question, but just listening to you talk, I just
realized I’m not sure if I understand the difference between an electronic
market maker versus a bot. I don’t know if you saw…there was like this paper
that came out last week that was talking about bots on DEXes frontrunning
people, but I just realize I’m not really sure what the difference is.

Kevin Johnson:

Yeah, definitely. So, I think the way to think about it is you have to
understand what’s the reason for the trading. You know, if the person’s…whoever
writes the bot, if their primary focus is providing liquidity, if they’re
constantly providing two-sided markets on exchanges in order to capture spread,
you know, that’s what a market maker is, and that’s what a lot of the, you know,
either traditional finance or now crypto high frequency market makers are doing.

They’re trying to be flat. They’re trying to collect spread, and they’re trying
to provide, you know, a great, tight market and liquidity to natural customers.

Trading bots can mean a lot of things. Bots can be market makers, but bots can
also be, you know, what you’d call removing liquidity. They can be making a bet
on a direction of an investment, so you know, they might look at a momentum or a
reversion signal, or you know, they might be scraping Twitter feeds for
sentiment. You know, they’re actually going to make a bet.

So, bots can both provide liquidity, as well as take liquidity, and it just sort
of depends on what their ultimate investment strategy is.

Laura Shin:

Oh, I see, so it’s more like of an umbrella term, and an electronic maker, that
can be one category of bot.

Kevin Johnson:

Yeah, that’s right. People trade for different reasons. Some people trade
because they want to invest. Some people trade because they want to speculate,
and some people trade because they’re providing liquidity.

So, trading is trading, but you know, it all comes down to what’s your model,
what’s your alpha, what’s your style of interacting with the market?

Laura Shin:

All right. So, something else that I was curious to ask you guys is a lot of
people say that crypto is about democratizing access to finance, so why do you
think it’s important to also recreate some aspects of traditional financing in
these markets?

Kevin Johnson:

Yeah, I definitely agree with, you know, crypto’s goal of, you know,
decentralizing different institutions that have rent seeking middle men. At the
same time, you know, it’s really important to realize that anything that touches
our monetary system needs to have, you know, rules and regulations and go
through different types of controls. You know, so in different jurisdictions,
especially in the US, obviously regulators, you know, want to protect investors.
There’s, you know, lots of rules around how to trade equities. You know, you
need to be a broker-dealer to trade directly on exchanges. There’s lots of
great, you know, rules that help protect end users to make sure they get best
execution, and you know, we’ve seen a lot of those play out over the years.

You know, I think eventually, crypto will be subject to the same kinds of
things, you know, making sure that markets aren’t manipulated, making sure that,
you know retail customers especially ultimately get the best prices possible,
and that’s really just to protect the client, so we should expect that
regulators always are trying to make sure that people don’t get ripped off,
aren’t exposed to fraud or manipulation.

Laura Shin:

And would software like yours…so, obviously, we can see that it’s making markets
more efficient for kind of the bigger players, but is it then also having a
similar effect for everyday people that are just buying, you know, like 10…well,
not even 10, but five Bitcoins or something?

Kevin Johnson:

Yeah, absolutely. So, a good example of that is, you know, in a really efficient
market, no matter what exchange you go to, the price will generally be the same,
right? So, when you want to buy Apple stock from your eTrade account, you’re
going to get a very similar price for a small order, whether it gets routed to
the NYSE or to the NASDAQ or to a wholesaler, and so you kind of count on that
as a retail investor. You don’t want to think about what exchange am I trading
on.

In crypto, right now, the current state of the market is that it’s very
fragmented, and the reality is because not everybody has access to all the
markets because there’s not a lot of,  you know, smart order routing going on
from an institutional standpoint, there’s plenty of price discrepancy.

Now, you know, in addition to the bots that are trading and making markets,
there are also bots conducting arbitrage, which actually do provide a good
service in the market. They help make sure that those price differentials
disappear over time as there’s more liquidity and more access to the markets, so
that’s ultimately what’s going to help make sure that retail clients, when they
go, you know, to buy on Coinbase, that it’s the same price they would have got
if they would have bought on Gemini or on Bitstamp.

So, that’s actually sort of a natural progression of the market…bringing in
institutional clients, having electronic market makers, having people conducting
arbitrage. Ultimately, all of those things in an ecosystem make it so that, when
a retail client shows up at any one exchange, they actually get, you know, what
would be the best price for a small order.

Jennifer Campbell:

Ultimately, I see Tagomi as a bridge between the centralized and decentralized
world, so you know, back to your earlier question, you know, once you get into
the centralized world, you know, going from Bitcoin to some other application,
you know that’s very easy for everything to be decentralized, but to bridge the
centralized and decentralized worlds, you know, there necessarily has to be some
centralized solutions, and so, I think that’s okay. You know, it’s just the
bridge, and so, you know, that’s what I’d say.

Laura Shin:

Yeah, it’s sort of like Coinbase being the bridge. Yes, it’s centralized, but
how are you going to get people’s money into the space if you don’t something
like Coinbase?

Jennifer Campbell:

Right.

Laura Shin:

Both of you obviously have been watching these markets for a long time. I’m
curious to know what trends you’ve noticed in the way crypto trades over the
years. Like you know, what were the markets like at first, and how are they now,
and like…or you know, obviously because we had that big bull run in 2017, also
what was that period like? Like if you were to make, you know, observations
about the trends in the trading of crypto, what would those be?

Jennifer Campbell:

Well, I think the biggest change is the shift in market structure, right? So
when you started off, you had, you know, people calling on the phone or Skyping
to buy and sell, and now you have a lot more of the traditional market makers in
the space who are making spreads, you know, really bringing spreads down. It’s
really narrowing. You know, there’s a lot more electronification of a lot of the
markets, and it’s must less dealer oriented than it used to be. That’s really
shifting.

And so, I think at least in terms of market shift, structure shift, I think
that’s the biggest difference for me.

Laura Shin:

Kevin, do you have anything to add?

Kevin Johnson:

Yeah, I definitely agree with all that. You know, we’ve seen the market kind of
take off in 2017 as people were rushing to buy into ICOs. You know, a lot of
that was very sort of retail driven. I think it’s actually a good thing that the
market’s come back down to earth a little bit. You know, I think what we’re
seeing is, you know, higher quality projects surviving, and then, as more
investors get access to the market, you know, through either, you know,
commodities that are, you know, efficiently traded on markets, or you know,
security tokens that are properly registered and are able to be traded through
brokers, you know that’s going to bring more investment in this space, and then,
you know, cryptocurrencies ultimately will be, you know, not only a utility in
and of themselves but also a platform for other digital assets.

So, I’ve seen that change over the last couple years, and I’m excited for this
next phase of growth.

Laura Shin:

And as you see more professionalization come to the crypto space, do you have
any predictions about how that’s going to affect the players who’ve so far
succeeded in crypto?

Kevin Johnson:

I think the people that have been successful through the bull and the bear
market, you know, will continue to provide important services. I think, you
know, we’ll all continue to grow as the market changes. You know, I think all
the major exchanges are continuing to upgrade technology and provide new great
services for their clients.

Firms like Tagomi are now providing the additional services that institutions
really require to access the market, so you know, we partner with a lot of
people to make sure that the industry keeps evolving and improving so that it
can be a, you know, asset class that institutions can get into.

Laura Shin:

Just out of curiosity, do you see a place for OTC desks in the future?

Kevin Johnson:

Always, for sure. You know, like Jen said, there’s different styles of trading
and different needs from a client. If you have a large trade, and you want a
risk price, an OTC desk makes a lot of sense. Also, for less liquid assets, you
know, that might not trade on many exchanges, you know, they might be a great
destination there.

You know, I think Tagomi will focus on the liquid products that are traded
electronically on exchanges, and as more assets become more liquid and with more
volume, we’ll continue to add support for those assets on Tagomi.

Laura Shin:

So, I know you guys haven’t been live for very long, but I was just curious. For
a while now, there’s been this notion that institutional money is sitting on the
sidelines, but that a wall of institutional money is coming in, and I can’t help
but laugh because I think I’ve been hearing these phrases since like 2017,
although maybe a little bit less so now, for good reason probably.

So, you know, just out of curiosity, like even in the sort time you’ve been
live, would you say that the types of financial institutions and traders that
are interested in your product, are they changing at all?

Jennifer Campbell:

I think we need to broaden the term institutional a little bit, and so, I think
in mainstream media, when we talk about institutions, immediately everyone
thinks about the bulge bracket banks, like Goldman or Barclays or another bank
like that, and for those folks, I think it’s going to take some time for them to
enter the space. You know, we’re having a lot of conversations with folks like
that, but it feels like a much longer education process.

There are a lot of other folks who are also, I would say, institutions, but
they’re much more nimble and agile. So, for example, you know, bigger hedge
funds, RIAs, other broker-dealers who trade quite a bit on our platform, and I’d
say they’re the largest category really who don’t have all the requirements that
these larger bulge bracket banks have and who are in the space already.

Laura Shin:

Kevin, were you going to add something?

Kevin Johnson:

I was just going to say that everybody’s waiting for Tagomi. You know, we look
like that broker than you’re used to working with in different classes. You
know, we certainly have had a couple clients obviously come from the crypto
background already, but there are some people that have never traded crypto
before.

They come to Tagomi and say, you know, now I can finally do this in a familiar
way. You handle trading, best execution, and custody for me, so yeah, I
definitely agree with Jennifer thought that a lot of the traditional service
providers in this space, you know, are looking at crypto. They’re interested in
it. They’re studying it, but the more nimble players, you know, some forward
thinking VCs and endowments and hedge funds are definitely getting into the
space.

Jennifer Campbell:

Yeah, exactly, so our first client actually was a very traditional RIA who had
never before been in this space, and you know, what they said was, you know,
I’ve been waiting a long time for a solution that was, you know, compatible with
all the requirements I have, and so you know, he did his first Bitcoin trade
ever, and so that was very exciting, for sure.

Laura Shin:

Kevin referenced this earlier briefly, but one of the trends that started to
pick up in the crypto space is staking, although none of the assets you offer
now are currently staking coins, Ethereum is actually working toward becoming a
proof of stake coin. Is that something that your clientele has an interest in?
And if so, do you plan to offer them some way to stake their assets?

Kevin Johnson:

Yeah, absolutely. That’s something that’s definitely a requirement for Ethereum
when it’s available and for a lot of the other assets that we’re looking at. The
same way you want to get, you know, interest on your cash deposits at your bank,
you know, you need to make sure that your assets that have, you know, some kind
of additional feature are working for you, whether that means staking or even
things like…even for a coin like Bitcoin, being able to lend out your coin in
order to get additional interest.

These are all features that our clients definitely want, and we’re working on
ways that we can provide those services to our clients by working with different
lenders, different custodians, different technology providers. This is
definitely going to be an important thing for us, and it’s really something else
that can differentiate Tagomi because we’re acting as your sort of one-stop shop
for trading crypto, and we handle wallets and custody for you, we can do all of
these other neat things for our clients without them having to go and set all
this infrastructure up themselves.

Laura Shin:

So then, as you know, Coinbase custody is launching its staking solution and
will also offer governance. So, is that the kind of situation where, if you have
a relationship with Coinbase custody, you would use their staking service? Or do
you plan to also do things like run your own nodes and participate in these
networks?

Kevin Johnson:

Yeah, we’ll definitely look for great partners in this space to help up
implement these things. You know, there’s a lot of things we’re focusing on, so
having lots of different custodians that we can look to that provide these
services or other infrastructure providers, you know, are all things that we’ll
look to, to do this for our clients.

Laura Shin:

Another trend is to centralized exchanges. Do you ever see Tagomi using those?

Kevin Johnson:

Yeah, absolutely. I think that’s an exciting space for us to look at over the
next couple months, especially as liquidity grows on them. There’s lots of other
considerations we need to think about though for trading on dexes. We need to
obviously have a great system of wallets that we can interact with. You know,
I’m excited for additional assets being moved onto things like the Ethereum
blockchain, projects like WBTC or stable coins are all critical to making dexes
an interesting place for us to trade, so we’re definitely looking into that.

Laura Shin:

And just so I understand the appeal of using a dex. At the moment, they’re quite
low liquidity, but the appeal would be that then you don’t have the risk of
losing customer funds.

Kevin Johnson:

Yeah, that’s right. Dexes have a couple features, and it’s worth breaking them
out. One feature is the fact that they’re non-custodial and that you generally
don’t need to give up access to your private keys to trade on them. The other
thing that most dexes have is that they’re decentralized in that they don’t
necessarily have some single party who’s deciding what can or can’t be listed.

So, it’s important when you’re looking at dexes to understand which features are
you getting because, you know, some dexes out there provide the sort of
non-custodial aspect, but they still provide, you know, some kind of gatekeeper
for listings or some kind of KYC.

The term dexes is probably used a little too widely now. A lot of these are just
non-custodial exchanges, but even that’s an improvement to not have to worry
about the risk of losing your funds or getting hacked.

Laura Shin:

Okay, yeah. I was just realizing that, in your case, the regulatory issues would
also factor into which exchanges you would use.

Kevin Johnson:

Yeah, that’s right. When we look at exchanges, you know, we want to understand
do they do KYC, do they have a listing policy, so dexes are useful to us because
of the non-custodial aspect, but while we do, to some extent, want to understand
who we’re going to be interacting with, so those are all considerations for
trading on dexes, so we’ll look at all those things before we make a choice.

Laura Shin:

Stablecoins are another big trend. How might you take advantage of those?

Kevin Johnson:

Absolutely. We’re looking at integrating those into the platform. We’ve done
some initial testing with that already. Stablecoins will be our gateway
certainly to dexes, as well as to, you know, different exchanges around the
world. You know, we focused on exchanges like Jen said that do US dollar trading
to begin with, and that requires banking relationships and you know additional
considerations for onboarding, so being able to move into Stablecoins will open
up the places we can trade and can open up the door to things like DEXes.

Laura Shin:

Because then you don’t only fiat exchanges, you can use crypto-to-crypto
exchanges?

Kevin Johnson:

Yeah, that’s exactly right. You know, a lot of our demand initially was for Fiat
to-crypto. These are institutions that are trying to invest dollars into
cryptocurrencies, but over time, as people, you know, build up to those crypto
assets, they’re going to want to trade them for other crypto assets, and as you
know, the base pair for most alt coins is Bitcoin or one of the Stablecoins, so
once you’re sort of, you know, part of the crypto ecosystem, you’re going to be
looking for that coin-to-coin liquidity.

Laura Shin:

Yeah, and I imagine simply for speed, that would be…you know, I imagine once
people enter your system, they might want to keep the US dollar value of their
money in a digital asset, rather than….because just the slowness of the banking
system, I would imagine would be a disadvantage. Is that correct?

Kevin Johnson:

Yeah, that’s definitely right. You know, if they’re looking to withdraw quickly
from our system, you know, Stablecoins are a fast way to do that for sure. We’re
also working with a lot of great banks, though, that provide faster fiat
services as well, so I expect both to improve over time.

Laura Shin:

So, I’m sure you guys are busy adding new features to Tagomi. What are some of
the things that your clients can look forward to in the future?

Jennifer Campbell:

I think shorting margin and lending are things that are definitely on the
roadmap, and we hear clients ask us about those things all the time, and so, you
know, we’re real excited to be building out those features, and stay tuned,
we’ll be adding those features quite quickly in the next year.

Laura Shin:

And for the lending, how would that work exactly? Is that something where you
would have other investors provide that capital, or…?

Kevin Johnson:

It could happen a couple different ways. You know, there are a lot of great
partners out there that we’re starting to work with that can either lend us
coins so that our clients can short or that we can pledge our clients’
collateral to get interest on that, and then, over time, as we grow, you know,
there’s opportunities for us to do that between our own clients as well, making
sure, of course, that we follow all the regulations in different states related
to that and that the clients understand, you know, exactly what we’re doing on
their behalf.

Laura Shin:

All right. Well, it’s been so great having you on Unchained. Where people can
learn more about you and Tagomi?

Jennifer Campbell:

Go to tagomi.com and sign up for our product.

Laura Shin:

All right. Well, thanks so much for coming on the show.

Jennifer Campbell:

Perfect. Thanks, Laura.

Kevin Johnson:

Thanks for having us.

Laura Shin:

Thanks so much for joining us today. To learn more about Jennifer, Kevin, and
Tagomi, check out the show notes inside your podcast player.

If you are not yet signed up for my weekly newsletter, go to
unchainedpodcast.com right now to get my thoughts on the top crypto stories of
the week, and be sure to check out our new channel on YouTube. Unchained is
produced by me, Laura Shin, with help from Raelene Gullapalli, Fractal
Recording, Jennie Josephson, Daniel Nuss, and Rich Stroffolino Thanks for
listening.

Posted in: Business
Tagged in: crypto investments OTC Tagomi
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PREVIOUS COVERAGE ON UNCHAINED

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   THE UGLY TRADEOFFS OF LEDGER’S NEW RECOVERY SERVICE

 * Episode 493
   
   BITCOIN’S BRC-20 MANIA: IS IT SUSTAINABLE?

 * Episode 491
   
   THE IRS WANTS $44B FROM BANKRUPT FTX. HOW IS THAT POSSIBLE?


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