Institutional Crypto Adoption Just Hit a Turning Point! | John D’Agostino

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visit the link in the description. Hey everyone, welcome into the Thinking Crypto podcast. I'm your host, Tony Edward and we are recording at Station three in New York's Financial District. And joining me today is John Dagostino, who is the

head of Strategy at Coinbase Institutional. This is John's second time on the podcast, and prior to joining Coinbase, John was the former head of Strategy for the New York Mercantile Exchange, where he led the effort to develop the first Middle East energy derivatives exchange in partnership with the Dubai government, which led him being the subject of two New York Times best selling books.

day that lives an infamy big liquidation event. However, we seem to be bottoming out right now, big coins up a bit. What did your take on everything that's been happening.

And so this is a natural ebb and flow. These asset classes tend there's a ton of potential upside right when momentum is swinging up that tends to attract a certain type of market participant who's less risk tolerant. During those upswing periods, they tend take on excessive leverage. And so then you have this resetting. So you have this sort of upward escalating sign curve. Now, I know we all kind of want to get away with it from that. You know, some people just wanted to go up forever.

It can't, by the way, mathematically it'll be bigger than the US economy. Right at some point, it may just be this is how the asset trades. And I think over time the standard deviation around that sign curve will diminish.

But I think, you know, again, like I keep saying this that before crude oil went negative a few years ago, right, and it's an incredibly important assea class that's wildly liquid and highly institutional, and so it maybe this is just the nature of these acid classes for at least some time. So over tenth horrible cataclysmic. But but again, not everyone I know who's no sophisticated investor. It's not like out of the realm of possibility.

as there always is going to be. But but we we went through a massive tide pulling out that didn't reveal a terror Luna or an FTX stuff like that. That's that's a good thing. That means that in general, at least the larger market participants have matured and managed risk properly. That's a good thing. Right. We didn't see rapid fraud, you know. We so a lot of people were hurt, but not in the way that requires massive regulatory intervention. Right. So so that's a we don't want

to October tenth to happen. But if I look back and say, in a perfect world, it happened in the way that the worst possible scenario weren't realized. So because of that, we went into a kind of retrenchment. I don't know if we've bottomed. A lot of people were saying we needed a catalyst to bottom that. Catalysts might have been some recent regulatory signs of positive political pressure coming to create a fair resolution around the banking stable

cooin issue. But I think it's just it's just all the market participants licking their wounds for a few months realizing okay, we were shaken up, but our risk parameters worked out okay, and then slowly and carefully entering into the market again. And I do think that's what we're seeing.

bipolar as an asset class. And so just look at the numbers recently, right, and in the last couple of weeks, we're seeing increased ETF flows. We're seeing significant price increases, rallying at bit cooin with still negative funding rates, slightly negative funding rates. That's all positive. We're seeing increasing prices, decreasing open interest on the future's and derivative side. These are all signs of a healthy market. Yet the fear

and greed index is still at ten. So I don't want to I hate telling people how to fear, but I would. I've been gently reminding folks for the last i'd say month month and a half, is if you can afford to invest like an institution, and I suggest everyone should. I've had a big proponent of dollar cross averaging, only investing what you can lose. It invests that way because that allows you to think like a sovereign wealth fund or an institution that has you know, three, five, seven,

ten year time horizons. And if you can invest in that way and trade that way and think that way, then then you have the luxury of looking at their behaviors and they're not panicking and they haven't been panicking because they're seeing what I'm seeing, which is nothing has changed in the last six months on the downside. It's

only been upside. We have regulatory leaders now in the US, Paul Adkins and Mike Sellig, who are every day signaling with language that the most optimistic crypto bitcoin Maxie was talking about a year ago. That's an extraordinary Paul Akins came out, I think just twenty four hours ago and said we gonna have zero latency atomic settlement soon t zero. Mike Sellig is is a brilliant and talking about the

cfcc's role in prediction markets in defile. I mean, the political side is fantastic, but but the regulatory side talk about a one to eighty that is consistent now over the over the last six months and a wonderfully bullish catalyst and.

what's happening on the institutional side and how the retail masses they're feeling. It couldn't be further apart, because, like you said, there's so much building. I mean, just yesterday Morgan Stanley said, Hey, we're gonna file for our own bigcoin ETF.

negative signs. I struggle to no one can point them out to me, except you know, short term price action, and if you believe, if you believe as I do, that it's just talk a bit bitcoin for a second. If you believe that bitcoin as I do, is a wonderful long term hedge against monetary debasement, Monetary debasement does not occur over weeks or months or even years. It occurs over decades, and so you have to measure your hedge.

Duration should match duration. And so if you're a short term trader, you should like the volatility to some degree, but just be aware. If you're a short term retail trader, you're up against folks who really really know what they're doing. On the other side, who have the ability and balance sheet to hedge with various OTC products and offshore and on shore, so it would just be very cautious about trading it in that way.

the content. Thank you so much. Well, that's the saying goes, bite a blood on the streets right when, and also when many are fearful, that's the time to be greedy. And when the many are greedy, that's the time.

who cares? Right, We're being ridiculous here, and so two best trades in my life. Best tripled my apartment value in five years, because I remember back then, who would ever live in New York?

sentiment works, right, John, And you have to not necessarily look at the narratives, but look at the charts and the principles of markets and investing, because there's an emotional roller coaster. But you have to keep that at bay.

term in assets that you you really shouldn't. So, you know, one of the things I really love about coinbases, uh, you know, I find them to be kind of responsible, like you know, I you know, I'm a spokesperson for the firm, and they know how I feel about this topic. And I've never been told you know, no no push you know, push push speculative you know, irrational behavior like so, So, I do think it's on the It's on the players

in the market, the exchanges, the big asset managers. I do think it's incumbent upon them to continue to push this this narrative, no different if I was talking somebody about deriatives, trading, edi edy, any idiosyncratic, implicitly levered asset. People should do what they want. Ultimately, adults should be able to do what they want with their own money. But I think it's incumbent upon institutions like ours to just remind people that this type of volatility is probably

not going away. It's gonna get it's gonna get better, but it's probably not going away at least in my the rest of my career.

more again, Stanley and a lot of these big institutions, ICE investing in ok X and UH, the SEC and the CFDC putting rules together. It feels like we've crossed the chasm where institutions no longer viewed it as taboo. But they need to have a strategy. It's a must, it's critical, and everybody's on the raceline ready to go. Maybe when the clarity.

it's clear. And I said this on another show recently, but I do think at this point, if you're that person in the boardroom or a senior executive and you're still saying things like you know, crypto's a scam and stuff like that, it's now embarrassing to be perfectly honest. Right. So now I do think some people will like just ride out the rest of their career. I think because

they're embarrassed. They're like they're the if you're if you've been very vocally against this asseat class, it's fine, by the way, I think we have to do a better job like thoughtful, like like Uriel Rebeti is a very good friend of mine. Right, He's a he I take everything he says very seriously. We disagree. He's a thoughtful critic. He's a thoughtful critic. There are non thoughtful critics, and I think if you're one of those people, it's a

bit embarrassing at this point. So you have to either have two choices. You can admit I was as wrong as wrong can be, or you can just ride out your career and hope that you know, you'll never have to deal with it, and you might not. My mother just switched to online banking, just literally this year. She

deferred it for forty years because she hates it. But but yeah, look, I think I think we are you know, I love this notion the coin base talks about this everything exchange, because I do think that we are moving towards uh, you know, call it convenience, call it speed, call it whatever whatever you believe drives human behavior. This notion of collapsing these various silos, it makes sense for me I perspective, like why should I go to three

different systems to buy credit? You know, Muni's equities, commodities, crypto, Like why should I go to four different systems to buy those? So efficiency is great, but just from a practical perspective, when you start to collapse those systems, you

do things like cross margin financing. You can lend against cross collatterized assets, which is what tokenization does, and you just unlock put aside twenty four seven trading, which is also extraordinary, and watching people hedge their exposure to the Iran war on DeFi on hyper liquid, you know, over the weekend prior to the open that frees up tremendous

amounts of value. But there is this notion of you know, do we really think that when my twelve year old daughter is my age, that you'll have to log on to four different websites to purchase these assets. That's that's just silly.

from a technology perspective, from a American consumer perspective. And I just know eventually, over time that wins out and maybe, you know, maybe we wind up with a clarity act that we don't love. Who knows, but I know over time it'll just get whittled down for the benefit of the American consumer. No different from my new Uber was going to win, right, Remember when all the municipalities were fighting Uber and like for a while it was touch and go. But like then you use the app and

you're like, this is just clearly better. It's clearly better. It's clearly going to win. They can stall it for a while, but eventually the consumer votes with their feet, votes with their vote, votes with their dollars, and you know, you can accept zero point zero one interest rate or you can accept you know, high threes, and you know eventually that that wins out.

a generational shift. Gen Z and these folks, they're more digital than even myself, and I think on myself as digital. But you know, you give the example of your mom, right finally moving to online banking, really growing up in a digital world, and they're going to inherit a lot of money, and they're going to start investing, and it's going to be via the mobile platform, via wallets.

aware of that gap between inflation and earning potential. And so that you know, difference two point zero one percent interest and three and a half percent interest compounded over a lifetime is massive. That's differen between putting your kids into school. That's owning a home and not owning a home. So I think they'll demand it. I do, and I understand why the banks are fighting. I get it. I try to be very sanguine about this stuff. I try not to ascribe malice where where self interest is the

more likely excuse. I get it. It's a fantastic motel. I would love to be able to borrow at zero and borrow it at take in five percent, and lend out at zero. I'd love to do that. Who would love to do that? So I fully expect they're going to completely protect that mote. But their arguments are just silly. They're just silly, like this notion that you're comparing a levered bank that is putting assets at risk in the loan portfolio to a one to one regulated backed narrow bank.

That argument won't win. I know it won't win.

And so I am you know, I have the luck you're saying this, but I am. I am very very optimistic that regardless of which administration wins in midterms or that eventually, the American consumer votes with their feet, votes with their vote, votes with their wallet, and will not be okay with a three and a half percent delta between what they're owed.

I welcome the competition. The rising tide lifts all boats, that's great. I view those entrants as helping my cause. It gets the word out about the integrity of this product. It gets word out about the regulated nature of this product, and it provides marketing, if you will, for a reasonable alternative to a which will run in parallel. Just just like bitcoin is not going to displace gold, stable coins are not going to displace banking. These are very very

different economic functions. This notion of community banks being killed by stable quins, community banks are being killed by JESIP banks and being killed by the JP Morgans of the world, And I think that's a shame too. I think it's community banks are wonderful and some of them offer great interests. So you know, these these false narratives are exactly that I'm confident it'll be it'll I'm very confident it'll end in the right way. I just don't know when.

talked about this. I was there when we went from open ow cry to electronic trading. That took ten years longer than people thought it would for a variety of reasons, some valid Right, these are important systems you can't just change them willy nilly, Right, these are really important systems. Right if you were sitting on a plane and the pilot came out and said, hey, I got I got a great news. The smartest minds in the world have

created a better engine and we're testing it today. You might be like, I believe in science, but maybe we test it before before. These are important systems. Here's the good news. Every time you read about some silly mean coin, you know, going up and down a billion dollars over the weekend, or when you read about hyper liquid facilitated crudel hedging of the like, even if you don't believe

in the underlying product that's testing, it's been tested. We know it works, we know the pipes work, we know the resiliencies there. Millions and millions and millions of transactions are coming nights, weekends, values being transferred, no trade breaks, no no problems. So we have tested it. That's the

good news. A lot of the reasons that it's going to take longer than we want are our inertia, corporate inertia, self self enrichment, and that's okay, we'll get we'll get through that eventually.

don't like when other countries leave progress on progress. And so if we do have a slight pullback because a new administration comes in and they get you know, they get a little scared about everything that happen, they're going to quickly see all this activity moving offshore. They're going

to see the rise of it and the growth. And I think, you know, we don't like losing as Americans, So I think I think we'll you know, again, they may it's a sign curve, right, we may have a slight pullback, but the sign curve generally elevates over time, and I'm very confident that once we have this good thing, we won't want to go without it.

very different type of client. This is even more different, and the technology is different, the infrastructure is different, the pipes are different. So I am I am not at least who knows when I'm when I'm dead and buried,

who knows. But but for the course of my career, in my lifetime, I struggle to see any of these institutions, seeing everything that we do and the hell we had to go through to get here, and saying, oh, we want to we want to replicate that, we want to get that, we want to go hire three thousand, you know, dedicated crypto people and build out that infrastructure. I am particularly as we get, you know, better and better at

it as we scale. It's very somebody like Amazon Web Services, right, Like I remember, I remember when if you worked at a hedge fund, you kept tape decks to do your backups. And I remember when the AWS guys were first coming around saying, oh, you should just outsource that to the cloud and everyone there. Oh no, I take my tape home with me every night. But this isn't nineteen sixty four like this is. This is like two thousand and two, right, and and that was of course I do it myself.

Of course, how can I trust you Amazon to do it? And then Amazon pretty good product and people, I'll do I'll go with you for a bit, but then I'll do it myself. And we all know the economics just don't work. So I think I think it's possible, not probable. Our crypto as a service business is just going gangbusters.

I don't think I'm allowed to give out numbers, but it's but it's it's growing like a weed, and I fully expect it to scale as more and more firms realize I need a crypto offering regardless of what how I touch the consumer financial services business, fashion houses, anyone that has a large consumer retail front facing UI is increasingly getting calls from the customers saying we want the option to use store pay transact in crypto in some way and building it versus leasing it. It's a no brainer.

at that. I mean, it's it would be very, very challenging for even the most greedy, greedy financial institution who thinks they can build it out when when they run the economics on it, and then you have our liquidity, you have the fact that we ConTroll about twelve and a half percent of all custody. Every major government entity trusts US. I mean, I just I really really struggle with anyone replicating this from scratch.

But but I think you know this idea of you come onto coin basis platform, you can do research through Yahoo Finance, you can buy and sell any asset via tokenized model, and we're not the equities aren't tokenized yet, but that's the plan eventually. And then the key is using those tokens to cross collateralize, both reducing margin and also as collateral for loans. That's the key, a one

stop shop for your finances. So ultimately, I think the goal over time for me at least is is is I don't want people spending all of their time thinking about their money. It should be easier, it should be simpler. And so if you can, if you go from having to worry about ten different systems for your mortgage versus your equities trading versus your your loans into one system, I think ironically the goal is you think about us less, and I think that would be wonderful, so you can

pursue beauty and art and culture and all that stuff. Right, my daughter has a show about there's our own show about financial literacy for children. And you know, the goal is to get kids to think about it more. But I'm always telling her, but you want, you want to become second nature to them. It's like exercise or anything else. We don't eve think of it. Get up in the morning, do you push ups, you do your workout. You don't

obsess over that function. And so I think getting to the everything exchange helps people ironically think about their money less because they know it's working for them in a meaningful way.

that agent can do it, seamlessly across one system. Using the efficient mechanism of tokenization as the financial lubrication, we get to that point quicker and then allow the agent to take care of that part of our life so we could focus on the stuff that makes us. You that that's awesome. I have this pipe dream of someday everyone in the world who can scrape together five dollars of savings using tokenization can invest in the s and

P five hundred seamlessly, quickly, easily. Forget about the billions that would flow into our economy and our capital markets. What a wonderful marketing program for the US government. Like, how great would it be if everyone in the world woke up, looked at their phone and had and their future was tied to the economic miracle that is US capital markets? Right, That's what tokenization has the potential to do. So that's why I get excited about the Everything exchange model.

the future. There's no We'll sort out that other stuff. So again, just this notion of you know, a person scrapes together five dollars of savings and says, where do I put this? I want to invest in the US economy in a cheap, simple, clean way. I think we should We should give that away for free. I think we should be it should be zero commissioned trading as, just as the US government should subsidize it as as the best marketing program in the world for believing in the US government and economy.

of our country? That just seems like a wonderful place to live. And I want I want an FTS to work because I want, you know, a young artist to be able to finance. I want it to be more. I can't I can't play a note, I can't draw a circle on a piece of paper. I want the world to have more of that. And so if tokenization and n FTS can finance the creation of beauty, art and culture in this world, I'll probably get fired for this. But if if crypto does nothing else but that, it

will have accomplished a wonderful a wonderful thing. Yeah.

lot harder, it's a lot more expensive to integrate. Uh. But but yes, but we are you know, we do encourage folks to use to use Base.

are tend to be oligopolies, not monopolies. They probably won't be one hundred of them, but they're probab won't be just one. But I think we have we're in the lead, I think, to be one of the let's say five to ten that sort of dominate globally over time.

house these assets and obviously are international exchange is headquartered there. UH, so massive fan. He's they have a great tech team as a guy there it goes by g who's just who's really extraordinary. So Bermuda really has just been before I'm a big fan of the UAE, but before the UE, even before the UAE kind of sort of waving in this business. The Permutan government and I think even as I think Premier Bert as he leaves his office will

continue that legacy. And they've just been fantastic, fantastic partners. So what does that encompass.

And you know what, it's a good place to do it, right. It's a relatively small economy. They've got a very very progressive innovative leader in premieer Bert. They've got a government that's backing the initiative. You know, Bermuda's It's funny permuting

came and kind of have this ongoing rival. I worked for Cayman Company for a long time and like Bermuda used to be the center of excellence for hedge funds and then came and kind of stole it, and so Bermuda, I think this is their way of sort of leap frogging other other offshore jurisdictions and kind of winning back

that that massively profitable business. And again, I just I've just been blown away with their technical proficiency and their their openness and their willingness to stick with it, right because crypto has gone through these cycles and it had been really easy to say quietly kind of just shelve

all of that. But I think Bert and his administration understand that, you know, this is this is the future, this is you know, and the countries that put work on it now it's like it's like when coinbase went public, you know, in decades whatever long ago, right, that was not a popular position to be, and it wasn't a

good position to be. I was, I was I joined a little bit later, but it took a lot of courage to go through that, and I think I think I give kudos to the Bremnian government for never losing faith and being just a very, very great ally of the industry.

renewed my license like this. And so to some degree, some of these countries that maybe didn't have the infrastructure historically already built out, they can just leap frog easier. So you know, it's not as I think if Bermuda gets it right, It's not as simple like you know, for I think America to just kind of upgrade and get to that model. But it certainly creates a burning platform for the other offshore territories to move fast, and

then that kind of spreads through. Look at by places like the UAE and just how hyper efficient that process is. I mean, expats move there and they're kind of fully set up with all their government services and days, not even weeks or months. So so yes, there was a burning platform created by that successful integration.

seven years old more or less. I know it's existed longer, but in terms of accessibility, right, it's been accessible to the average consumer for about that time. We are right there, like we are, we are there, so now it's up to us. Now it's up to us to improve the UIs, make a cleaner, more efficient, better for the type of person who doesn't they have the ability to learn the system. They just don't have the time or energy. I am just now, finally, after a decade of fighting with my wife,

I am just now learning Apple. I just got my first iPhone and I refused and what my daughter turned twelve and she got her iPhone and that was that was the burning platform to make the forcing function. And I hate every second of it. And it's not that I can I'm fairly technical. I can do it. I just can't be bothered. Man, I just don't want to learn a new system. Command P versus control P. Oh

my god, I keep doing the wrong one. And you know, people have to We can't force people to shift attention away from their families, their hobbies, their careers to learn a new system. We have to meet them somewhere. And we are, we are. The interfaces are getting demonstrably better.

alternatives to speed up onboarding and AML surveillance things like that. That's going to be a windfall for that, and I think it's always wonderful when when you can improve efficiency but also improve the outcome. Right, So it's it's one thing to improve efficiency and we're going to be massively more efficient, have to give up a little bit of, like you know, quality.

In this case, it's the opposite. It's it's it's a better system than manually monitoring and making subjective judgments on your personal financial activity, like who am I to determine whether a payment that you're making is good or not right? And by definition, when you put humans in charge of that, and you know the the negative outcome if you don't catch something and it's awful, the consequences are severe, and so any human being will set two tight risk parameters

because they're scared. I completely understand if here's here's Tony, here, welcome to your new job. Your job is to monitor people's financial spending and highlight bad potential bad actors. And most of the time you're gonna be wrong. Most of time, we'd be totally innocent, Tony. But if you miss one and it's terrorism financing, you're responsible for people dying indirectly. Right, what are you gonna do in that situation. You're gonna you're gonna be hyper hyper vigilant, and you're gonna air

on the side of cut everything off. Right. Well, that's not efficient that that doesn't necessarily just the best outcome. Right. So the combination of human judgment and especially when you have to look at millions and billions of transactions, right, So clearly it's bet And Christian Carlo's got a really great thesis about this of he talks about the toll

booth on a highway. It's like, right now, we go make you through hell to open up an account, but then we don't really want you, right, you speed all you want versus the reality is when you go on a tote with an highway, you just give that you pay the toll quickly, and then you have cameras and you have helicopters and right, and you have people, and so you pluck out the bad actors. Right. We don't make you sign a piece of paper at its hold

with pledging that you won't speed. We actually watch what you're doing, and if you're speeding and driving recklessly, we stop you and we find you. So AI allows us to do that with financial services. Right, So let's look at your actual behavior, and let's let's target the folks who are bad actors as opposed to penalizing people and not letting them on board to the highway to begin with.

So I think Coinbase's thesis is let's let's be as safe, but let's switch it and make it open architecture so anyone can on board, which they should be able to do the billions and billions of people who are under banked, and then let's monitor and make sure that they're conforming to reguatory rules. That that seems to me be a lot more fair than the current model.

It's just so much better these open chains, public chains that it will win eventually, but they'll have to be gradual compromise over time.

As you have you make these instruments more fungible, You make them more easily be used for collateral because they can be understood priced by the lender, They can be liquidated by the vendor in the case of in the case of price movement or default, and they can be moved between systems, and they the correlations of the of the assets can be better constructed, so you can give margin, offsets and whatnot based on the collateral the client has

with us. So coinbase is making a big push. I think that was part of our reset of presentation, and we've put on money where our mouth is, and we've I can't give you these act numbers, but we've we've put on money where our mouth is in terms of issuing that balance sheet out to the industry. So you

know that that is that function is essential. We I'd argue, to the point of it would be it would be disingenuous to say we believe in tokenization and we believe in the improved fungibility and speed and flexibility of these assets and then not put our money where our mouth is and say we're willing to lend against this better form of asset. And so that's there for retail, and that's there for institutional and it's people are making themselves.

They're availing themselves of that of that function, which is great.

every major exchange is now is now looking at. So I think it's a bit of a race to get all that done and the idea again to collapse all of this onto a unified tokenized system where you just bring down these silos, you improve speed, improve flexibility. Twenty four seven three six at least for now twenty four seven five trading and twenty twenty four five trading moving to twenty four seven three sixty five trading, we are What's great is Coinbase gets to be in the position

of the entity that's pushing the envelope. And I know because I've worked at these exchanges, they're smart people there. They will be aggressively competing with us, and I like being in that position. Right, We get to push the envelope and have everybody else catch up. So I think those are those are the big things, increasing lending, increasing project tokenies, getting our our you know, systems all together so we can start to buy and sell every asset through tokenization on a single platform.