Crypto is Eating Finance with Arjun Sethi

0:00Alex Thorn:Welcome to Galaxy Brains.

0:25Alex Thorn:Welcome back to Galaxy Brains. As always, I'm your host, Alex Thorne, head of firm-wide research at Galaxy. Bitcoin, not zero. We have a great episode for you this week. Arjun Sethi, co-CEO of Kraken, and PayWord is our guest. Arjun's been on the show once before, but he was remote. We're recording today live from ConsenSys in Miami at the Miami Beach Convention Center. It was a great interview with Arjun. The guy has really dialed in. He's got great thoughts on what I was most impressed with, actually, is the way Kraken balances this institutional-grade company now with the decentralization ethos.

0:58Alex Thorn:They do it and talk about it in a way that's better than most by far in this industry. I think that colors everything that Kraken does, even though they're like a big company in crypto, of course, they're deep in the institutional game and all of that. Still really carry forward Jesse Powell's sort of ethos of decentralization, one of the oldest crypto firms in the world, Kraken. Great interview with Arjun. We'll also check with our friend Bim Netabibi about markets. Before we get to that, I need to remind you to please refer to the link to the disclaimer in the podcast notes. Note that none of the information in this podcast constitutes investment advice or an offer recommendation or solicitation by Galaxy or any of its affiliates to buy or sell any securities.

1:33Alex Thorn:Well, here we are, Phineas, in Miami yet again. We've been to Miami several times. Usually to interview Michael Saylor. That's correct. It's a little bit different being on Saylor's property versus here at the Miami Beach Convention Center. Yeah, this is a very exciting conference. Walking around with you, I will admit, is a little overwhelming. There's a lot of people that are trying to talk to you. It seems like a very positive vibes. I know you were at Bitcoin last week. How is it really quick before we jump in, how is it different than Bitcoin? I know it's a somewhat different community but there's a lot of overlap.

2:06Alex Thorn:It is a different community. I think there are community-specific conferences, the Bitcoin conference, there's ETH Denver, there's Solana Breakpoint, and then there's sort of like crypto broad big tent conferences, ConsenSys and Token, I think are probably the two biggest at this point. And they're different because of that. I think this is much more institutional crypto industry focused. It's a lot of the big companies like Galaxy are here because they serve everyone in the industry. The Bitcoin conference, frankly, has a ton of institutional Bitcoin stuff, but that's really a community a global community bizarre right that is like bitcoin has a genuine global cult following the asset and the network and the bitcoin conference is sort of like an expression of that whereas this is like you know it's got everything right this is more of a financial services crypto conference at this time and they're both quite exciting to me i mean i love both well it's cool i mean this is obviously very appropriate for galaxy to have a presence because Galaxy touches so many different...

3:11We do everything. Yeah, exactly. But it's cool. I mean, we're doing... We've already done three mini-episodes today. We're going to be dropping them periodically in the coming weeks. Some really cool, great guests. Some are repeat guests from the past, but today we start with Arjun, and he's... I mean, it's a huge...

3:30Alex Thorn:I was saying before, he's a huge job. Yeah. I mean, it's sort of like really... Kraken's a massive company in this space, and they've been around, I don't know, for more than 12 years. I forget. I think they were founded in 2013 or something like that. I mean, that was a long time ago. Think about how much has changed. Yeah, and it's got real staying power. I mean, it's really influential as a business. Well, thank you, Phineas, and our friend Chris, and the whole team at Studio Friends for coming to Miami to make this possible. This is, I think, going to go down as our best on-site rapid recording session.

4:00Alex Thorn:We did some in Hong Kong and Singapore once before, and we did it in Bitcoin Nashville 2024. four yes um but this is we're getting better we got a great space we're getting better at it we're getting better at it absolutely let's hop right into it with bimnet abibi let's go now to our friend bimnet abibi from galaxy trading as always bimnet welcome to galaxy brains thanks for having me we're here uh on set in miami at the miami beach convention center for consensus 2026 i don't know what's your first thought of this conference you're not a big conference guy the way i am I am very impressed. I think there's a lot of institutional attendance.

4:40And I think in terms of the quality of the participants, the protocols, the companies here, you know, it's top tier. And I think it's, you know, indicative of a market that's matured. And, you know, when the big boys show up in size and strength, it's probably a good thing for, you know, things to come.

5:05Alex Thorn:Yeah, they are here, aren't they? There's a lot of, it's not, I mean, we keep saying the suits are here, though. The institutions aren't coming. They are present. They're here. Yeah, in size. Yeah, absolutely. You think you're not really a crypto guy. You know, you come from the rates trader from Citi. What's your impression of the banks now where you came up getting involved in crypto? Is it real this time? I think it's very real. A hundred percent. I think they are committing real dollars, time, energy. And, you know, I think actions speak louder than words. And so I think, you know, I've probably talked to at least six different banks like in the last like 24 hours.

5:47Alex Thorn:And this isn't like, you know, regional bank of East Dogpatch. These are the big boys. And so, you know, like asset managers as well. And so I think, you know, like this is crypto's moment to shine and that there's a lot of good stuff happening. Now, I will say that, you know, because institutions are here doesn't necessarily mean, you know, the price of XYZ token needs to go up. True. It just means that there is adoption of the financial rails that have been innovated by crypto. Let's talk about markets a little bit. Obviously, that's our favorite topic. I mean, my gosh, I don't know if it's the post-Bitcoin Vegas bump or if it's some residual.

6:38Alex Thorn:Maybe you'll tell us. Bitcoin trading almost at$82K. I think it got to like$81.6 or so. So this is the highest it's been since like the end of January, which, by the way, was part of the we were just in a sort of a nonstop free fall into February. Right. The end of January, February 5th was that like 58K bottom. Is this just a local move or is the bear market ending? How do you think about it at this point? I think the structural downtrend that's been in place in Bitcoin since October of last year is still in play. And that this is a healthy correction in the trend because markets don't move in one direction.

7:25And so, you know, I'm still cautiously bullish in the next sort of like week or two on BTC. simply because, one, it's broken through some resistance. Two, I think, you know, with Stretch trading back at close to par, I think there'll be some additional issuance and so some more DAP buying. And to be honest, I'm still constructive on, you know, a potential resolution of the Iran situation. You're constructive on ceasefire. constructive i mean it's still holding even though you know we've had a little tit for tat yeah um and i think the market's willing to look through any kind of turbulence um with respect to the iran iran conflict in the next week or two earnings were really good s &p's trading at all-time highs risk sentiment is very good and so you know i think there's a little pocket here where where the market can continue to do well but if you ask me you know kind of where my outlook is, you know, for the next like three months, I'm a lot more cautious.

8:36I think, you know, my playbook is still the Bitcoin cycle playbook where you've historically had a, you know, 70 to 75 % drawdown from the highs. And so I think there's still a reasonable

8:52Alex Thorn:We only got to like 52 % or so. Correct. And now that, you know, spots rallied so much, you know, in theory, it should be harder to move higher simply because of, you know, math. Right. It's a lot harder to move. More money. Yeah. Yeah. Required to move a big object. Correct. Yeah. Correct. More force, physics, however you want to think about it. Right. And then at the same time, it's getting a lot more cheap to play for downside because vols have been coming lower. And so it's been a spot up vol down tape in terms of implied vols. And so I think you can get some real convexity if you're looking to get some protection on.

9:38Alex Thorn:Interesting. In terms of macro, I'm growing everly concerned with the commodity market and the feedback loop into the fixed income market. And what I'll say is one of the things that I've been paying close attention to with respect to this conflict has been longer dated energy contracts. So call it the end of this year or the start of next year. And essentially what you had happen yesterday was they started trading at local highs. Right. And so people are pricing in higher energy prices for longer. And you have a direct feedback loop into inflation and look no further than gas prices. The AAA national gas average as of this morning or close the business yesterday was around like four dollars and forty eight cents.

10:34Do you want to know where it was a week ago? $4.08. You're talking about a 10 % move higher in gas prices in a week. But did the oil contract, front end oil contract move up 10 %? No. but you're now getting to the point where um you know you're you're seeing prices tick higher in these refined products and goods right and it's not only gas but it's diesel prices diesel prices a year ago were like on a three handle now you're looking at them at like six ish wow right and like how do you transport like food across the country more inflation is coming

11:14Alex Thorn:to the downstream inflation is going to happen. And what you've seen happen, particularly in Europe, is you're starting to price in an aggressive amount of hikes. Right. So the Bank of England is expected to go over three times by March of next year. People still think that Kevin Warsh and this Fed is going to cut. Some people think that. Some people think that. And I think the biggest risk to markets right now is the U.S. might have to hike rates. And so is the near term risk, the market finally realizing that and acknowledging the threat of inflation and the not only because I've heard, you know, obviously, because he's the president's pick, the president has been agitating for lower rates probably his whole life.

11:59Alex Thorn:As far as we know, this guy, POTUS, he was probably in kindergarten calling for lower rates. And so everyone has assumed that Warsh is dovish right out of the gate. But obviously, our pricing has come down a lot for the number of cuts. it's like less than one cut now right yeah but like you're saying if it turns basically even if it turns to hikes that could cause a wobble and risk yeah and you're seeing this like the uk 30-year yield got to like a trend high it's closer to six percent than than it is the five right and so in the u.s like 30-year point of the curve is now like around five percent as well and And so I think if you look at the inflation picture and you marry it with a labor market that's also still pretty tight, right?

12:46Like because of, you know, a lot of it's immigration, but there isn't like a bunch of new folks joining the labor force and there are some folks leaving the labor force. So the labor market is really tight. And so it's going to be very hard to justify cutting and probably a lot easier to justify hiking. And so I think the market is probably underappreciating that risk right now.

13:09Alex Thorn:All right. We'll leave it there for now. Bimnet Abibi from Galaxy Trading, as always, thank you so much. Thank you for having me. Let's go now to our guest, Arjun Sethis, co-CEO of Kraken. Arjun, welcome back to Galaxy Brands. Alex, thanks for having me. We last saw each other at Token 2049 in Singapore in the fall, which was actually before the October 10th. I think just before, like maybe the weekend before. That's right. So crypto was riding high at that moment. We're obviously in liquid prices, I don't know, down in Bitcoin, 35, 40 percent from there. But it doesn't really feel like a true bear market.

13:41Alex Thorn:Is that your impression? I think there's a difference between feelings, like on a week to week, quarter by quarter basis. And, you know, Trump getting elected and then having the feeling of a bull run for certain assets. But then if you go back five years or 10 years, I think we're in a great place. Yeah, we are. I mean, the slope is still accelerating. How would you describe the atmosphere at ConsenSys here in Miami where we're recording, I don't know, number of attendees or the vibes of the people? How does that fit into your theory about the state of the market? It doesn't. I think you have supply and demand dynamics in any market.

14:24and if you just think about overall market cycles regardless of asset classes you when people are feeling euphoric about a certain type of idea and by the way i think these are good i actually think sometimes it's good to have overfunding more capital in the ecosystem because it actually just drives a lot of innovation faster but you also get a lot of what i call visitors to the ecosystem and so it's hard for me to tell where we are right now i would like to say given where we are in the cycle, there's a lot of visitors that are retreating and that might change. Yeah.

14:55Alex Thorn:Feels like a little bit more durable than if this is a true bear market. It doesn't feel like 2023 or 2019 the way. So I feel like we're setting higher lows. One of the big stories obviously that's happening is we call the great convergence between crypto and TradFi. I've got a bunch of questions around this, but Kraken, among many other things that fit into that bucket, has a tokenized securities product in X stocks. How has that been going? What's the impetus for wanting to bring stocks on chain? So I would go back and take a look at the business model of any company. So for crypto, the first asset that people talk about volatility was Bitcoin.

15:44Then we started talking about Ethereum and then the offshoots of Ethereum and the alternate universe. Then you had meme coins. In between all of this, we talked about stable coins. If you look at the arc of what's happening in the crypto ecosystem, the promise was how do you make an ecosystem that's permissionless? How do you fit outside of the traditional financial institution, not in a way that's nefarious, but in a way where there's not these settlement issues. There isn't counterparty risk in the same way. There's collateral inefficiency. And in many cases, you're bringing, at least from my own personal perspective, you're bringing power back to the individual around the decision-making frameworks they have with their own money or capital.

16:33And so in order to do that, you're going to have multi-product, multi-venue, multi-assets. and our whole goal has been to continue to support that with liquidity onboarding and offboarding kyc aml in a regulated way but within the regulatory environment we can add more ways in which people can build permissionlessly on top of our stack or we can extend that out so we've built products around that like defi earn is one of the things that we added um now to be clear in our ecosystem we say defi earn but my parents are some you know individual in latin america or Southeast Asia, they just look at, can I get a yield on my assets on platform?

17:12It's like a savings account. Yeah. And I think we're always afraid to use these words, especially what's happening with market infrastructure, build, what's happening in Europe. But look, at the end of the day, people want to be able to trade, speculate, gamble, predict, save, store, send, and get yield on their assets. And they want to be able to do something with that, which is why we go into card services. So in order to be able to do that, you are building certain aspects of banking and financial rails. You're building certain aspects of payments. You're building certain aspects of being able to build speculative products.

17:45And so we went on this journey, at least mentally, over the last 10 to 15 years, but we really accelerated that over the last three to five.

17:53Alex Thorn:Yeah, you have another story inside the great convergence is the traditional, not just crypto building traditional assets on crypto rails, but also the traditional companies building crypto stuff on their rails. Is there like a tension, a competition? You're talking about promoting self-sovereignty and more user access. isn't there sort of this battle right now between like who owns the individual? Is it the more long-term centralized traditional banks versus the new entrant, more nimble, tech-focused, you know, the Krakens? And where does that tension, you think, if you had to predict, end or like resolve?

18:32I think the right parallel to draw is what happened with media and newspaper companies in the late 90s, and then what happened with the advent of the internet and what were the types of companies that evolved. Then the second wave of that was, so you think of New York Times and how they used to make their money. And now it's, you know, more advertising and subscription, but there was marketplace dynamics. It was very, you know, they had different business lines within the media company that worked for them and they no longer have that today. And that was taken by new incumbents in the ecosystem.

19:04Now you can draw that parallel out and say, okay, well, that's why tech companies are big. Yes and no. Well, the next phase was e-commerce. Well, e-commerce, there's Amazon, but there's also Walmart. Walmart just was able to figure out how to innovate past the threshold where others were not, and they became larger and they were able to build products and services that were positive to the consumer. I think what you have to think about is the crypto companies, how are they evolving as their market evolves? Traditional TradFi financial services companies, how do they evolve? And are they going to be able to build products and services that serve the customer, not just here in the United States, but worldwide.

19:42And I think that's where people miss the gap, which is the whole advent of crypto was permissionlessly building products. This is why we use the word DeFi. So borrow, lending, trading, new assets. I think the world is moving at a faster pace to innovate. And when we talk about TradFi, we're really just talking about incumbents that are in the United States and Europe that have been used to doing business in a very specific way. And are they going to evolve or not. The faster they evolve, the bigger they get is my perspective. And my sense is many of them won't, but some of them will.

20:12Alex Thorn:Yeah. You launched the first ever regulated tokenized equity perps built on top of X stocks. That's right. How big are perps? Are they super important both for your business, but are they going to be huge in stocks? I mean, they've been huge in crypto for a long time. How important are they in your mind? Look, I think you look at the derivatives market worldwide in crypto or traditional, that is the majority of transactional volume, like upwards of 90%. And if you look at even us as a company, we started with spot moving into perps. But if we were outside the United States, we probably would have started with perps and moving down the stack to spot.

20:53And so the way I think about it is in the US, we're innovative, but outside the United States, we're catching up. And that's one of the reasons why we built these products for the rest of the world in a regulated fashion in Europe. And then part of the binomial acquisition in the United States was crypto perps, eventually equity perps, real perps, not a dated futures contract. So I think those types of products and services are really important. And then to be able to build that off of pricing that's 24-7, I think is really important because that's when you think about benchmarking the assets on a 24-7 perpetual basis.

21:29I think that makes a lot of sense. I think the perps,

21:33Alex Thorn:I feel like TradFi wants perps. I think they see the automated funding reset, the no expiry nature. Are we going to get those fully in the US soon? I know you guys have stuff. Coinbase has something sort of similar. It's like a five-year dated future. It's not quite a perp. CFTC is working on this. What's your sense on how soon it's fully coming in the US? In order for the United States to stay competitive with the rest of the world, we have to do it. That's my take and that's my line whenever I talk to any regulators or partners in the ecosystem. So having a fake futures pretend to be perps is not real perpetuals.

22:12Now you take a step back. Are perpetuals a better product for consumers? And I think the answer is yes, because it's easier to understand. It's easier to educate people on versus some sort of outdated futures contract or even an options contract where people have a tendency to lose money because it's just a complicated financial product to understand. And which is why those types of products are less retail and consumer-oriented, and they're much more institutional-driven. And so when you look at the people that are against these type of products, it's typically institutions because that's where they make most of their money.

22:43Alex Thorn:Yep. Bison, OKX, NYSE, JPM, all these people working on tokenized stock market stuff. Kraken has a partnership with NASDAQ. why does that win the race or is it is that not the right way to think about it i think the question you have to ask is what's the right race to win so yes you can sprint to a destination where you get no yield you can run the marathon where there may or may not be yield and there's multiple tracks that are out there i think everyone so far has taken a very specific approach let's let's take the most basic one is it permissionless or is it permissioned most of these announcements that you've heard are in the permissioned world where it reminds me of how do you create a blockchain that's only internal and is only used at the bank.

23:34Great. Well, you can't, it's not interoperable, but it's a collateral move. It's not actually instant settlement time. So you're basically perpetuating the problem that has existed rather than bifurcating it out where real-time settlement transactions happen 24-7 instantaneously. and for any asset. That is the whole promise of what we're trying to build and what we want to be able to build for consumers. So if a consumer wants to use a wallet like cash, we should be able to help proliferate that and support it. So our whole goal at Payward is how do we continue to support open global financial rails?

24:06I'll say that again, open global financial rails. And today, a lot of it is very internal and siloed. And when you use the word permission, it perpetuates siloed activity.