Chip Stock Rout Deepens on AI Debt Jitters, China Competition

25:52Let's create smarter business. IBM.

26:22Indeed. And this is Walt Lukensworld. He is CEO at the FIA. It's the trade organization that represents markets and options, futures, prediction, and more, not just here in the United States, but around the world. Everybody's watching what's going on with kind of old markets and new markets and how we trade. Walt joins us here in the Bloomberg Interactive Brokers Studio. I want to start with what you said in your keynote in March at your annual conference in Boca. You talked about how for years, you've been doing this since 2012. You talked about for years, you'd go to Christmas parties and stuff, and people would ask you what you did and you started explaining and your, their eyes would just glaze over because they would be so bored with what you're talking about.

26:56Now you go to these same parties and everybody wants to talk to you about this stuff. You're like the bell of the ball now. Yeah, we have, I have a teenage and 20 year old, you know, kids right now. And they, they love the fact that we're involved with poly marketing, Cal, she, and they actually think dad's job is pretty cool, which is unique because it hasn't been that case in the past. So it's, it's fun. And I think part of it is the attractiveness of our regulatory system. It is a strong regulatory system that's flexible, principles-based, gives exclusive jurisdiction so other regulators, either in states or the federal level, can't regulate at those markets.

27:35So it brings regulatory predictability and clarity, which I think is very attracted to these new markets. Well, your kids say this is pretty cool what dad does, but what do your members, like the NASDAQ, the New York Stock Exchange, who are increasingly either getting involved in prediction markets, or at least look again very closely, what do they really think about the disruption that's going on? Well, I think a lot of the prediction markets are very innovative in many ways. This actually, when I was a former regulator at the CFTC, we started to look at these markets in the 2000s because they were incredibly predictive at bringing disparate information together in a market condition to predict things.

28:13And that could happen in economic activity, but also started to work for politics. And obviously sports betting is a big one now too. I think everybody is in agreement that if we're going to do this, let's do it responsibly. And so that's why FIA plays an important role of saying, if you're going to be in the community, let's make sure it's at the appropriate best practices, the highest levels of regulation. And so we think that's a positive. Let's bring these things on shore at the highest levels of regulation. So on that, the conversation around prediction markets that are regulated here in the U.S.

28:49by the CFTC, a lot of questions have emerged about whether or not the CFTC actually has the person power to regulate everything that's happening on these platforms. Do you think the CFTC is able to do this? I do. Of course, if it's clarified that the regulation of crypto markets and clarity around prediction markets, the CFTC should look at their budget and see if more people are necessary. This year's budget, they asked for a 12 % increase, 15 FTEs, more additional people to the marketplace. But they are going to need that manpower if indeed prediction markets and the crypto industry comes into their space.

29:28And they should ask for that. And FIA supports appropriate resources for the CFTC. Do regulators totally get it? Do lawmakers totally get it? As they probably are thinking about their own jurisdictions back at home and people wondering, okay, what does this mean for me if I'm investing or playing around on these markets? The regulators do get it. They certainly understand the importance of well-functioning markets. This is unique, and it is a case of first impression. I think people on Capitol Hill are trying to figure out what activity should be under the jurisdiction of the CFTC. I think there is a strong public policy debate going on whether sports gaming and gambling should be within its jurisdiction.

30:07Right now, my view is that the law does capture that for the CFTC, but that's either going to be decided by the CFTC or the Supreme Court, I'm sorry, by the Congress or Supreme Court ultimately. And that's where it should be. It should be, this is a public policy determination that really should be at the highest levels of what does the public want and what does Congress want. You know, I want you to give us some historical context. The FIA has been around since 1955. And I'm wondering, given that we're talking prediction markets, tokenization, stable coins, 24-7 trading, that's taking a lot of the oxygen right now.

30:45Would you say this is sort of the biggest inflection point in the history of the industry? I wouldn't say it's the biggest, but it's certainly when they moved from agricultural to financial products in 1974. So the Commodity Exchange Act, the CFTC was created at that time, but that opened up the definition of commodity, not just to agricultural products, but to energy, to financials, to equities. And that broad definition of commodities also captured a lot of things. So in many ways, the CFTC has been trying to clarify over time what is in its jurisdiction or out of its jurisdiction since that moment.

31:21We had a big inflection point in 2000 with the Commodity Futures Modernization Act that brought principles-based regulation. It brought self-certification for products so exchanges can self-certify products quickly to market, which is a great innovation. That's what the prediction markets are doing. They love it. And I think that is something, while everybody in our industry supports it, self-certification also comes with the burden and the responsibility on the prediction markets to show their homework. You know, they have to show that you can't manipulate this product. You have to meet the 23 core principles of the act.

31:58And I think the CFTC put out guidance recently saying, hey, do your homework. We need to see the proof. The burden is on you. And here's some guidance around how to do that. I think that's going to help clean up some of the products that are being listed around self-certification. Well, Walt, for the prediction market, so much is gambling, right? And sports gambling. Does that have to be off the platform ultimately for it really to be embraced by traditional finance and markets? Well, Congress has told the CFTC and part of the Dodd-Frank legislation that there is certain activity that may be outside the public interest of the CFTC regulating.

32:37That said, terrorism, assassination, gaming was a key word thrown in there. And I think the CFTC has since that time been wrestling with how do we interpret that? What does that capture? What does it not capture? That is why it's uncertain. That's why people are debating this, why Indian tribes, states are concerned about this. Yeah, that's why I think it's ultimately up to Congress to clarify. What did you mean? You know, should it be in? Should it be out? And if they don't clarify, ultimately, I think you'll end up with the Supreme Court. We don't have a ton of time left. I want to talk about some of the new products that are being offered by members of your organization.

33:13We had Kat Doherty on our program yesterday who covers this space. She said she she wrote a story about how CME is launching single stock futures this week. it's not the first time they've done this. They did this, you know, 26 years ago and it didn't really catch on and they ultimately ditched in 2020. They think this time is different and they'll succeed this time. Do you? I do. And I think partly because the tone from the top at the SEC and CFTC is different. I actually was involved. So you think it's about regulation this time? It is duplicative regulation. I think there is the cost of being in the markets.

33:47There's alternatives overseas. There's alternatives. You're talking about a hyperliquid type of? Well, not just hyperliquid, but on-exchange regulated exchanges in Europe offer single stock futures. And so I think this is an opportunity to, again, bring this back on shore. CME is going to do this in a month or so. But let's make sure the regulatory structure is rationalized because you don't want to have both the full burden of the SEC, CFTC on these products. Let's at least recognize each other's jurisdiction. You know, it's funny. I always say that both the SEC and CFTC recognize foreign jurisdictions that we don't need to regulate certain foreign products, yet we can't recognize the two agencies across town from each other.

34:30That has stopped with this administration. They're talking to each other. They're finding out how do we rationalize this to allow those products to launch and be successful. There's so much more to ask you. Will you come back soon? Absolutely. Anytime. We would love to continue. So much of our conversations go into your world. So we'd love to continue it. But Walt Lucan, CEO at the FIA, as we mentioned earlier, it's the trade organization that represents markets and options, futures, prediction and more. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern.

35:02Listen on Apple CarPlay and Android Auto with the Bloomberg Business App. Or watch us live on YouTube. All right. We're going to switch gears. We are. The futures industry getting a lot of attention thanks to prediction markets and the like. Also getting a lot of attention right now is AI. And that's where Lexi Reese comes in. She's CEO of Lanai. It's a tech company that helps monitor how and where, and also crucially, how well AI is being used across big companies. She joins us from Palo Alto, California. Hey, Lexi. Great to have you here with Tim and me. You've got a super interesting background.

35:35You are COO at the payroll services company, Gusto, an executive at Google and Amex. You're a partner at a VC firm. You ran for Senate in California a few years ago. First of all, how would you describe your vantage point as you look at things like technology, AI, the labor market, our economy more broadly? Yeah, so thanks for having me. I have seen technology from a lot of angles. At Big Tech, at Google, I worked on ads, and I saw how a big idea becomes a huge business when you can connect what a customer spends to what they actually earn back. And at Gusto, I helped a small payroll company become a large HR services company for hundreds of thousands of businesses.

36:20And importantly, every big business, medium, small, they don't buy technology because it's cool. They buy technology because it helps them to run a better business. And now I run Lanai, which is an AI accountability company. Think of it as like Workday for your AI workforce. So we see all of your AI workers, whether they're assistants or co-pilots and agents, we measure the impact of what those workers are doing and we help you manage that impact. So Lexi, how are we doing? Like do these companies get, do they get it? Yeah. Yeah. So what I would say, and you know this from companies going, I know my body language said it.

37:09What is impressive is there's lots of wow moments. You know, your kids, yourself, your parents probably have used AI and said, wow, this is really cool. We're really in the third year of AI as consumers, but we're in the first year of true enterprise AI, where companies are not right now able to say for all of this spend, and it's hundreds of millions of dollars of spend, here is what I got back in terms of revenue or profit. So as you, you know, I think we're, it's interesting to see the AI conversation, Lexi, has really evolved. And we are talking a lot more about return on investment, like rather than spend, spend, spend, make sure you are exposing your workforce to AI.

37:58There's still that too. What are you hearing? You guys did a labor report. Talk to us a little bit about organizations, executives, how they are looking at all of this. Yeah. So we released an AI labor report in April, and that has results from talking to 200 business owners who own their technology budget. So these are businesses, a thousand employees or more. And 92 % of them said, we track AI impact. But when you probe, what do they actually track? They're tracking usage. They're tracking, did people log into AI? Did they use AI? And they're getting vendor reports and they're cobbling together dashboards in order to say, are people using the darn things?

38:42What only 2%, 2 % were able to say is as a result of buying AI in this way, my revenue went up or my profit went up. And so that's why 79 % of those folks are worried their AI budgets will get cut next year because they have to show that the spend is returning something. And now this is why Len I exists. We help delineate what you're spending on just activity that isn't going anywhere versus activity that is helping you move a business metric. So I guess the question that a lot of people have right now is about their own jobs and whether or not they will still have jobs in the next few years. Given what you know and what you found in this survey, what is the right thing for people, the right way for people to approach this technology so they future-proof themselves?

39:37Yeah. So I love this question. And let me just say, this is why we talk about AI, not as software. It gets billed and expensed as software, but it is labor. And so as a business owner, I'll talk about it first, and then I'll talk about it as an employee. As a business owner, you are buying a new workforce that is doing jobs for you. You have to be able to see what jobs they're doing. You have to be able to cost what price you're paying for that work. And you have to be able to make good decisions about what should machines do and what should humans do? In the same AI labor report, we had zero, zero of 200 companies saying they actually have autonomous agents.

40:21They had no autonomous agents. What they have is supervised machine labor. Humans had to come in and fix the work, oversee the work. None of that is being managed or accounted for, but it's a huge part of AI costs. So what business owners can do is ask better questions. You should not be investing as much as you are if you can't say, what did you get in return? And obviously, Len, I can help if you don't have that. As an employee, push yourself to the limits to use AI, but to use AI with an idea of if you're a seller, you have to win deals. If you're in customer experience, you have to serve customers well.

41:04If you're in development, you need to develop software that people actually buy. So think about ways you can use your AI colleagues to do that. And then how you redesign your own work to do things you could never have done before. Yeah, you really, now you've got to be kind of smart about all of this. And I think this is what we're trying to figure out. Lexi, listen, we've got to run. But thank you so much. Really appreciate getting some time with you. Lexi Rhee, she's the CEO of Lanai, joining us from Palo Alto, California. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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44:15deep in the work that moves the business. Let's create smarter business. IBM. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App. Or watch us live on YouTube. Charlie says it all the time. One cool thing about working at Bloomberg is we work with the smartest people. We work with amazing people. And I feel like, I don't feel like, I know we learn every day. Dushan Sharwatt is one of those people. He's crypto and digital assets analyst for Bloomberg Intelligence.

44:50Senior analyst, I think it's fair to say. He joins us here in the Bloomberg Interactive Brokers Studio. He's usually based in Boston. I know. I have been eager to get him on our program when he's made a trip down to it. Well, you've been talking to him a lot, right? Because of the crypto show and prediction markets and all. He's on our show every week. I talk to him ahead of our crypto show every week because he's got his hands in everything that we're talking about. And one of the reasons I wanted him to come on with you, Carol, is because you talk about this all the time about the difference between the technology and the actual cryptocurrencies.

45:18Yeah. And what is here to stay? Yeah. When it comes to the crypto part of the conversation, that's where I want to start. Uh, do Sean, it's good to have you on the program. Everybody calls you D we're going to call you D. Um, I want to start with what Carol brings up all the time. And it's this idea of technology. And when we talk about crypto on our program, a lot of time we're focused on like, you know, price action, what goes up, what goes down, how big the moves are. You and I have had many conversations about the underlying technology and what this is bringing to financial innovation in the financial ecosystem.

45:50You think it's here to stay? What's the it? The it is the underlying technology that cryptocurrency brought. Like blockchain? Tokenization, blockchain, stable coins. Absolutely, Tim. I mean, 26 years, most of my career has been an intersection of technology and finance. And if I can break it up in a broader context of what's going on over decades, think about the late 90s, the internet. What did that change in finance? It changed the way we, the UI, UX, it put yellow pages online. It brought the financial advisor, you pick up the phone and place the trade, it brought it online, right? So that was the first wave.

46:30Second wave was mobile and cloud, which was about 15 years ago, which basically changed the way we distributed financial products. This is different because this is building on top of that, but even monumentally more important because it promises it has the potential to change the way financial products are manufactured. That is a transformational change. What does that mean? What does that mean basically is that if you think about the last 100 years, last 50 years of financial services, whether it's, let's keep it simple. There are four major basic functions we have in finance. Payments, borrowing and lending, investing, and insurance.

47:06Those are the four basic activities we do. Everything else is mumbo-jumbo on top of that. Those four activities, when you think about the structure of how those activities are executed, are heavily intermediary-driven. Their intermediaries are standard. New York Stock Exchange for a securities trade. Bank of America for a payments transaction. That intermediary-driven model potentially could be upended by this blockchain technology. But intermediaries provide a very important service for us. Absolutely. And that has, I think, to do with trust. Absolutely, Tim. And this is the crux of it. We are in a phase in the industry where we can have software eventually replacing some of what trust was provided by intermediaries.

47:51Think about it. Like you're getting into a Waymo car, trusting your life with software that's driving you. There's no driver sitting in the seat. I closed my eyes. Thank God. I'm totally all in. But it took a while for us to get over that hump. Took me 30 seconds. That's crazy. Carol, you're ahead of the curve. Yeah. But that's what's happening in finance. Yeah. That absolutely. I'm not saying that bad things are not going to happen when we hand over the driver's seat to software. It's going to happen in finance too. But we are not going back. Well, bad things happen with bodies that we trust and pay fees to.

48:26And there's regulatory oversight and bad things happen. Absolutely. Dare I say the great financial crisis. Absolutely.

48:35So how does it happen? Is it gradual? I mean, it has been gradual. Is it gradual? It's not gradual, actually, if you think about it. And I just want to be clear that we're not just talking about blockchain. because I don't want to be yet another person coming on thing, just, you know, spousing blockchain. I get blockchain, though, I feel like, and the power of it. Blockchain is one part of it, but there's a whole lot of other stuff that's happening. General technology has reached a point where, you know, waves of technology happen. This is the next wave. Blockchain is a very important element of it, and it's most relevant to us in financial services.

49:09But it is, and blockchain allows products to be structured differently than they have in the past. And that basically means, I'll make it real for us, when you think about traditional financial products, they were stuck in boxes with intermediaries, so you could only do so many things with it. If you want to roll out a new derivative contract, you had to go to a CME, right? We just had Perpetual Futures, this esoteric derivative instrument that's finally come on shore. 80 % of world crypto activity is happening in Perpetual Futures that were outlawed till about six weeks ago. So the rest of the world is not waiting for us to catch up, right?

49:48So the rest of the world is moving on. The rest of the world is using stable coins to transfer payments. And if you look at what stable coins has done, that's something we can all relate to. Who can argue with the fact that, you know, do you want to write a check or send money through Venmo? International cross-border transfers, three days,$50. Stable coins, instantaneous, pennies. So then who gets disrupted in this world that you envision? Is it Western Union? Ironically, if you look at what Western Union is doing, they're rolling out their own stablecoin, and they're coming out with a bank. In fact, that's the story here, Tim.

50:19Very importantly, the first wave, two years ago, I was sitting here, the discussion was about the insurgents versus the incumbents. And the incumbents have adopted the insurgent technology. Absolutely. Look at what's happening. I mean, JPMorgan Chase, Jamie Dimon, 10 years ago, says Bitcoin is a fraud. He's never retracted that statement. But as of last check, Connexus, which is JP Morgan's digital asset platform, is processing$2 billion in cross-border payments every day. What does it mean for our everyday life? Like I always joke in, you know, when we just talk about crypto, I have yet to pay my mortgage with cryptocurrencies.

50:51I don't go buy eggs and milk with cryptocurrencies. So, but how does it impact kind of our everyday life? Carol, actually, it's not about cryptocurrencies. Cryptocurrency was simply the first manifestation utilization of blockchain. Yeah. It's about basically using software to intermediate between transactions. That's why I went, keep it simple. I need to pay Tim. In the past, I would not pay you directly because there was counterparty exposure, the risk that either of us would renege on that payment. So we did that through Swift for cross-border, through ACH, Fedwire for domestic. The first wave of how that moved was we went from that to PayPal and Venmo 10, 15, 20 years ago.

51:30This is the next wave of that interaction. This, without an intermediary software, intermediating between us would mean we don't need to have even Venmo to send payments to each other. I won't get into the technical details, but it's going to be your software agent interacting with mine, and neither of us can renege on that. That means technically we don't need an intermediary. But then where is the security? Like, do we just have to believe the system is secure? It's software, Carol. I mean, where is the security when you sit in a Venmo and expect a software agent to drive you, your kids, To some extent, you're expecting software is going to work.

52:05And software oftentimes is not going to work. It's not infallible, right? So we have big structural problems that need to be addressed. But what I'm saying is we're on a trajectory that I've not seen very often. And it's accelerated. And you can see that in payments. Beginning to see that in securities trading with tokenization. This has got a potential to transform the way that industry is structured and who competes with whom. I want to talk about tokenization in one second. But before that, I just want to ask you across your universe of companies that you cover, who's making this transformation the best and who's making it the worst?

52:39So who's making it the best right now? I mean, I would say DTCC. I mean, who would have thought two years ago? DTCC for a lot of viewers, they may not be familiar with DTCC. But, you know, every single U.S. equity trade goes through DTCC. 50-year-old entity trade, you know, they clear and settle about$114 trillion in assets. That's more than world global GDP. DTCC is on the ball. They've actually taken, so each time our Schwab of Fidelity account executes a trade, the clearing and settlement happens to this DTCC. DTCC has just put the entire infrastructure on a pilot project till October on chain.

53:18That means we can potentially clear and settle trades not in one day, but instantaneously. That's nuts. How come we don't talk about this company? It's the plumbing. You do, obviously. It's not exciting enough, Garel. Everybody wants to talk about, you know, the front-end consumer-facing stuff. And here's the irony. If you look at the consumer-facing stuff, why are financial institutions catching up? Because consumers have woken up and said, look, if I can send email at any point of time, right? Imagine if I said you cannot send email after 5 p.m. on a Friday because the email server is shut down.

53:51Like, that's unacceptable to you, right? Right. Crypto has shown us, no matter, doesn't matter what we think about crypto. The point is, it's shown us that you can trade an asset 24-7 instantaneously around the world. So crypto showed us that. That's value. But does then crypto, let's just go there. Does that have a future? You're talking about the tokens? Yeah. Does it have a future? Look, I cover crypto market structure. I'm not a crypto analyst or a crypto zealot by any means. Yeah. So the way I, if you might, you know, I'll share the framework that I look at when I look at this space. Yeah.

54:28So we've got this underlying technology, blockchain-related technology. The first manifestation of that was these crypto tokens. That's what most of us woke up to when we thought about, you know, blockchain. Any interaction directly with the tokens is pillar one of that infrastructure, right? There's still a lot of activity there. Pillar two is nothing to do with the tokens. It's due with blockchain technology, taking traditional financial activities, payments, lending, borrowing, investing, insurance, just doing it on faster rails. That's pillar two. That's where stablecoins tokenization fits in.

55:01Pillar three is the Wild West, which is what decentralized finance is about. That is only on the fringes right now. That's a utopian world. It might be realized at some point in time. I don't think regulators and the public are going to allow that. That is no intermediary, everything intermediated purely by software. science fiction stuff. Some of that is beginning to be real. There is a company called Hyperliquid that plays directly in that third realm. Today, most of the activity is in column two. I completely get a lot of people when they think about all this stuff say, but what about Bitcoin?

55:33And the discussion is way beyond that. I'm not a fan. People who watch know. But I just wonder then what is its place? Or is it just useful as showing, look what we can do and think about how we can apply it elsewhere? No, like I said, I mean, who could argue in payments, right? Do you want to go through Swift and spend three days and knowing that you cannot send a transfer over the weekend and cost 50 bucks? Dee, come back soon. Peace out. This is the Bloomberg Businessweek Daily Podcast. Available on Apple, Spotify, and anywhere else you get your podcasts. Listen live weekday afternoons from 2 to 5 p.m.

56:11Eastern on Bloomberg.com, the iHeartRadio app. tune in and the Bloomberg Business App. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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57:44it.

58:07Thank you.