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/
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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.
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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 after the break, but first a quick word from our fabulous sponsors.
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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.
