Speaker 1:
From the Library of the New York Stock Exchange at the corner of Wall and Broad Street in New York City, you're inside the ICE, our podcast from Intercontinental Exchange on markets, leadership and vision in global business, the dream drivers that have made the NYSE an indispensable institution for global growth for more than 225 years. Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSC and at ICEs 12 exchanges and seven clearing houses around the world. Now here's your host, Josh king, Head of Communications at Intercontinental Exchange.
Josh King:
Today, there are nearly 200 crypto coin exchanges located around the world, over 4,500 types of crypto coins. And according to coin desk, there was over $2 billion in initial coin offerings in March, 2018, just a month ago, compared to just 19.5 million in March, 2017. Think of the difference one year makes. And while some people think this is the wild west of the financial industry and others think it's really the future of payments, finance and commerce in this space has arrived by any standard. An adoption of cryptocurrencies is surging. Reporting requirements will only become more rigid bringing in experts with regulatory and compliance backgrounds and in some cases, as people who've worked for the regulators themselves, just like our guest today, Tim Byun. Our conversation with Tim, right after this.
Speaker 3:
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Josh King:
Tim Byun has been the Chief Risk Officer or CRO and Head of Government Relations of OKCOIN since 2016. He first entered the crypto world two years before in 2014, when he left Visa where he was their Chief Anti-Money Laundering Officer and joined BitPay as its Chief Compliance Officer. Prior to that, he was an examiner with the United States Federal Reserve. Welcome, Tim, inside the ICE House.
Tim Byun:
Thank you so much, Josh. Glad to be here.
Josh King:
What was your role with the Federal Reserve as an examiner and how did that lead into your role at Visa?
Tim Byun:
So my bank examiner days primarily included two rows, financial safety and soundness, which means making sure that the bank is solvent and making sure that the FDIC insurance fund is protected as well as ensuring consumer compliance, whether it's AML or Reg Z, making sure that the banks are fairly disclosing and portraying services to consumers.
Josh King:
And that led into Visa. Why did they say, "We got to get Tim Byun in here,"?
Tim Byun:
What was happening is in early 2009, we had the great financial recession and the financial crisis. Visa wanted someone to head up their AML as well to ensure that all their 16,000 roughly member banks are financially secure. Because if one of those banks do not pay Visa, Visa grabs their own money and makes that credit settlement whole.
Josh King:
You said that you were the luckiest guy alive when you learned about Bitcoin in 2013.
Tim Byun:
I'm still the luckiest guy, not only married to my wife, but because of the migration of my professional career. So I was simply a bank examiner. That's what I did for 16 years and went up the ranks and learned more and more about our regulatory structure and ensuring that rules are applied. And along towards the end of my regulatory career, this thing called Bitcoin comes along. And initially I knew all the negative headlines, negative reputation, horrible use cases such as being used in the drug markets. But a friend of mine said, "Hey, you need to understand the technology." And ironically, the technology had a lot to do with just my professional experience in terms of banking, in terms of payments, in terms of merchant acquiring at Visa. And so that technology, I think, had a glimmer of hope back in 2013, and now it's still being built out. So I'm very optimistic that the use case, bigger and broader use cases will come down the line.
Josh King:
So many of us have this image of Bitcoin that is so superficial. It's that imaginary coin that graphics departments of news companies think of as the coin that they put over the anchor person's shoulder when they're talking about it. How did you learn?
Tim Byun:
First of all, I still have that exact feeling. I feel a code sweat when I see CNBC put out that gold coin with a B in the middle. That's actually a bad service to Bitcoin because there is no physical coin, as you know. And unfortunately, we even call it a currency. I certainly hope that it becomes a currency, but I think we're far from that. It's more of a digital asset. I don't like to call it coin. I don't like to call it virtual currency. I don't like to call it virtual convertible currency. I simply like to call it a digital asset or a digital good. And I think people must remember that. I would hate to tell my mom, "Here's some digital currency for you." It's a digital asset.
Josh King:
Going from that picture of the coin digital asset or digital good, what's the best way to explain to your mom or my mom what Bitcoin is?
Tim Byun:
I think the best way to explain and to experience Bitcoin is to have 0.001 Bitcoin, about $80 today.
Josh King:
Yeah.
Tim Byun:
With roughly about a $8,000 to one Bitcoin implied value or equivalent. So just have a nominal amount. You will experience the full power of the potential of Bitcoin, because it's almost like holding a $10 bill. You need to actually kind of think about it. Do you want to hold it in your leather wallet, which is like a self hosted wallet or do you want to put it in a bank and trust it with a bank what we call a custody wallet or a hosted provider. And it has a lot of potential, but it comes with a lot of consumer responsibilities.
Josh King:
So before I get my custody wallet, what's the easiest, most efficient, safest way for Mrs. Byun to go out and buy a 0.001.
Tim Byun:
OKCOIN USA Incorporated will launch its services soon in the US. And so hopefully we could be another compliant provider out there for people to come and bring in fiat, US dollars, and hopefully trade into Bitcoin or any other digital asset.
Josh King:
We're going to get to OKCOIN USA a lot more later in our conversation. But the press coverage, Tim Byun, and much of the industry focus regarding these initial coin offerings or ICOs, has been around the myriad regulatory issues arising around them. And for Mrs. Byun or other initiated listeners, can you tick through the big ones that would give an examiner for the US Federal Reserve the biggest headache?
Tim Byun:
Sure. First of all, the ICO or initial coin offering explosion, it's really a phenomenon. I think if you look at the underlying activity, it comes down to a fundraising activity. So you have a person with an idea. They might not even have a product, but they need funds for their idea. It's partly crowdsourcing. It might be even donation, given the riskiness of the venture. But it's really a fundraising activity that is really shaking up the entire traditional financial industry. You don't go to a underwriter. You don't go to a bank. It's all done with a digital asset, likely Ether or Bitcoin. And it's, like you said, it's just exploding over a billion dollars in a very short period of time.
Tim Byun:
And so I think regulators are rightfully so looking at this activity and making sure that if and when it goes to the mass public, that the public is protected. But even my wife who is not, I would say, in the financial to industry or very financial savvy, she has a lot of common sense. So if someone tells you, "Hey, I'm building a bridge to go from New Jersey to New York, can you fund it? And if you want to put a thousand dollars or a $100 or $10 million," I think you know that it's actually very risky for this person to complete that feat. But we don't know who's going to succeed. There might be a few Amazons in there. There might be a few Googles in there. And we're just at the early stage of the equivalent of the 1990s or early 2000. And so to say that unfortunately there are cases of outright fraud, they take the money and run away, and those people should be prosecuted. But there's a lot of hardworking startup entrepreneurs. And so they have a dream. They want to build their product. They are trying to get funds. And someone is willing to give them a shot. And I think that spirit hopefully will not be dashed by heavy regulations.
Josh King:
What would you say over the last two years some of the major regulatory hurdles that have been crossed?
Tim Byun:
It all started off in March, 2013 with the US Treasury's [inaudible 00:11:22] coming out with the virtual currency guidance. I think that was actually a very good attempt to regulate virtual currencies. They defined it as a convertible virtual currency. You have to remember back in 2013, they had no idea what this thing is going to be, what it is, but they came out with guidance. So that was a US Federal regulatory framework. In addition, the IRS in April, 2014, came out and said, "It is like a commodity. And therefore, if you sell a good, you will incur short term, long term capital gains. It is not a currency." And so I think that's the best that it could have done that early. So I think it's commendable.
Tim Byun:
But actually the use case today, there's different companies that are using Bitcoin and the technology of Bitcoin to do different things, and it's not fully in line to that old framework. I think the easiest and maybe the best is if you look at the state by state money service business regulations. The one element that I think is simple and easy to execute and maybe pretty effective is the surety bond. So it's just saying, if you want to do business in Georgia, you need a hundred thousand dollar surety bond. Small startups might not have a hundred thousand, so they'll buy a surety bond, maybe it costs 10% or less. But that's the cost of doing business so that state of Georgia could have some insurance in case you go belly up and still fully make the consumers whole. But it's a very hard job. Look at new York's bit license. Applicants are turning in at least an inch thick of documentations. I hear someone turned in a couple feet of documentation. It's just, I think we have to think about it, is it really effective?
Josh King:
One regulatory hurdle that we're facing is there's still this debate on how cryptocurrency should be categorized. We touched on it a little earlier, but when you get down to the core of the matter, are we dealing with a currency, a security, a commodity, or is it something else?
Tim Byun:
I think it's all of the above based on the use case and what the business provides. So if you look at BitPay, my former employer, they help merchants, businesses, accept Bitcoins as a form of payment. So they're using that as a currency to buy goods. So they're helping that great phenomenon. For a trading platform like us, it's simply a marketplace where you can trade goods. It's a tough question, but I think it's all of the above, how it's being used and how it's being marketed.
Josh King:
You said you were the luckiest guy in the world when you got into this business in 2013. How do you see the market developing and what are the factors that will go into it beyond regulation?
Tim Byun:
Yeah, so fortunately I think we're very, very early in this space, the earlier dial up, Comp USA. I don't think we've seen who the Amazon, Google, LinkedIn, Yelp, or the new Instagram. I don't think we've seen kind of the second or third generation of use cases and companies that are going to hopefully provide interesting, fascinating, valuable services to the consumers.
Josh King:
There's no limit on people's fascination even today in 2018. And regardless of the many technical issues that remain and even in the face of the recent bull and bear markets in Bitcoin and other digital currencies, I mean that ...
Tim Byun:
I always tell my friends, if you want to buy Bitcoin as an investment, hopefully as a diversification or a very speculative asset class, you have to know yourself. If the price drops 50% tomorrow, what are you going to do? Are you going to buy more? Are you going to sell it at 50% off? So don't think about what the market will do. Think about what you are going to do. So if your house goes down 50% tomorrow, what are you going to do? Are you going to sell your house? Probably not. Are you going to buy another house? Maybe if you have additional capital. But just know yourself.
Josh King:
Two futures contracts were introduced to the end of last year in crypto. Have you seen a growth in institutional participation in your markets as a result of the availability of these futures?
Tim Byun:
I'm not sure if it's because of the availability of these two futures. I think the availability of these two futures is a great progression. I think it's a great service. I don't follow it too much to see whether these products are taking off or have already stabilized. I can't comment on that. But I think overall, it's a great development. I think the underlying movement though that I definitely see, is that there are more institutional investors coming in. And so whether they're buying it for their private LLC or investment fund or for themselves. But there are definitely more and more institutional investors coming in. The size of the entire crypto market is now noticeable. You can't just not know about it. So it is attracting the bigger, sophisticated institutional investors.
Josh King:
After the break, we dive more into OKCOIN with its Chief Risk Officer, Tim Byun.
Speaker 3:
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Josh King:
Back now with Tim Byun, the Chief Risk Officer of OKCOIN. Tim, we talked a little bit about your trajectory from being a examiner with the Federal Reserve and then being traditional banking and then you move into payments with Visa. Talk about a little bit, the exploding job market in the crypto space, and your thoughts about the type of personalities that it's attracting or it should be attracting.
Tim Byun:
Yes, first of all, here's another reason why I think I am the luckiest guy in the world. I get to live in Silicon Valley, work for a startup. It's a great refreshing environment. You're working with people that want to make a difference. A friend of mine kind of characterized in a startup world, everyone is valuable. You have a team of, let's say 11. There's no room for one person regardless of what they do or what they're responsible for, to not show up or to give 80% effort. So it's really great to be in an environment where kind of the whole team is pushing forward a hundred percent.
Tim Byun:
And the other thing is that there is an explosion and it's continuing in terms of job opportunities. So unfortunately I see the back end of that. It's hard to get people because it's very competitive. Just as an example, we hosted a booth at the UC Berkeley Blockchain Job Fair last Wednesday. There were probably over 500 applicants looking for crypto job, whether to traditional exchange like us or to a ICO company that just raised X millions of dollars and now they're trying to build out the team. It's very, very competitive in the Bay Area at a minimum.
Tim Byun:
But I think also what it has done is the talent is coming from every everywhere. And it's not just the big cities like New York, San Francisco, LA. But it's all these smaller cities that are actually very beautiful and nice to live in. So you're looking at Denver, Seattle, Austin. So I think it's a great growth opportunity for the country as well, given all these jobs and it's new jobs, too. Even though you might be doing the same or similar finance or HR responsibilities, it's a completely different environment.
Josh King:
Tim, you described OKCOIN as a traditional exchange. Where does it fit in the overall crypto environment about all the different types of companies you just ticked off?
Tim Byun:
Great question. And I called it traditional because it's not like the NYSC which is the most traditional and a legacy kind of exchange platform and marketplace. I call it traditional because our business started in 2013, early 2014, so it is one of the older crypto companies. But I used the term traditional because I see ourselves as the foundation service provider. So it's almost like the first or second use case of Bitcoin. We provide a trading medium where people can come and trade into Bitcoins, trade out of Bitcoins, trade into Ether. So I think that's a basic foundational service. From that, we have learned a lot and we're hopefully going to branch into other business lines. So it's kind of like the internet phenomenon. The first business you had was kind of like the browser by Netscape, maybe even AOL. And then all of a sudden AOL had email in it, so the ISPs, probably another foundational internet service provider. So I feel like the exchanges are that base layer.
Tim Byun:
Now we're seeing something else. We're seeing that maybe it's the ICOs more as a fundraising phenomenon. But hopefully I'm eager and anxious to see what kind of products and utility they come out with. I just met with someone that is trying to use blockchain in the concert ticketing space. So when you buy a ticket and now you can't make it to that show on that date and time, you want to sell it, maybe you could do it over the blockchain. And that way you know that that ticket is authentic, that you can trace how many times the ticket has gone from party to party. If somebody says, "I bought it," but there's five transactions to it, you have to wonder.
Josh King:
You buy a ticket on StubHub. You go to the turns style. They say, "No, we've already processed that ticket. Someone else has bought it." And you didn't have any real way of understanding except this UPC code that it really belonged to somebody else or somebody else has already used it.
Tim Byun:
That's the exact example that my friend told me about. He said, "Unfortunately, tickets are sold five times." So maybe a tip here, if you want to go to that concert and you bought a ticket, you better go in early because the four other people might be redeeming your same ticket. So that's the power of cryptography. If you have the one private key, that's how you signify that you are the owner of that digital good, that ticket. And so I think there's tremendous use cases. He mentioned that they built an app and you can use that app at the turnstile to authenticate that you are the owner of that ticket, and then you can walk in. So I think that's one great use case.
Josh King:
Cybersecurity is a concern for every business, but with cryptocurrencies, it's a critical issue.
Tim Byun:
It is.
Josh King:
How's OKCOIN and other exchanges like yours, evolving its technology to provide against electronic hacks, coin theft? And how does it affect an Exchange's business model?
Tim Byun:
It is hugely important. But I think the first defense of a hack or in terms of security is you need a really smart, no nonsense designer of your firm's security. Because there's a lot of sophisticated tools, there's a lot of sophisticated service providers that any firm can just buy or hire. But you need the good, common sense. And I think that's what we have in our founder, Star Shu. His background is as a kind of cryptographer or encryption. And so I think he has a no nonsense ability to say, "Why would we want to buy that security feature? It actually brings us more risk if we buy that. It sounds great, and it might be the newest flavor of the month." But I think he has a really good sense of using dual controls, segregation of duties. There's a company out there called Zappo. They protect their private keys apparently in the Swiss Alps in a cave protected by security guards. So that sounds pretty good, right? But it's not high tech. It's actually low tech, but it makes sense. So I think you need a good designer like that. And Zappo has gone that way, which is fine. It works for them.
Tim Byun:
Looking at the hacks over prior years, and unfortunately there's more and more, knock on wood, OKCOIN has not suffered a hack. We have never lost consumers' digital assets nor our corporate digital assets. But if you look at how the hacks have occurred in the past, I don't think you're going to see anyone that has hacked the Bitcoin private address. So we all like to say, "Hey, we all got to look at cyber security." But for Bitcoin, no one has hacked the private address, because it's too difficult. What's easier to hack is you. So they'll social engineer and they'll do a Phishing attempt and get into your computer because it's easier. Why would they want to break that long string of alpha numeric to guess the private address of your Bitcoin address when they can just fool you? So if you look at the hacks, I think that's the weakest link that they've actually come into the door. They pretend that they're you, the CFO. They get into your email address. They read your emails. They start looking at how you communicate, maybe a deal that's coming up in your firm. And then at the right time, they come in and say, "yes, we're going to pay today. Send it to this Bitcoin address." And that was not from the CFO.
Josh King:
How do you see your exchange evolving across products and asset of classes? Would you call yourself a pure play crypto market or do you see other opportunities based on the way client demand is going to evolve?
Tim Byun:
We have a refocus to crypto. So I would say it's a hundred percent pure play crypto. Now the business lines of the crypto business will continue to expand. We would love to get into the security token business. But we know that in the US, in order to get to the security token business, we need to be authorized by the SEC. So when we are ready, we will go to the SEC and present what we need to do in order to be authorized. In addition, I think there's a needed product out there is the ETF. The market needs an ETF. It needs to be easier to buy an ETF. And so that's a business line that has to be there, whether by us or by others or many others, it needs to come out.
Tim Byun:
Investment advisory is another business, custodians for institutional investors. Think about the institutional firms. Unlike holding dollars at Mellon bank or BONY Mellon, who's going to hold that private address in your firm? Is it going to be the CFO? Because if that's the case, we just read about another security loss. The CFO ran away with the private keys. So it's actually a very difficult problem. And so I think there needs to be stronger custodians out there. This is the equivalent trust companies. Who are the trust companies that simply can hold your real estate for the long term or your gold bullion for the long term? So there needs to be custodians in the crypto space. I think it goes all the way. The whole finance realm has to be built out for the crypto industry and ecosystem.
Josh King:
What's the next big thing? Where do you see cryptocurrencies in five years time?
Tim Byun:
In five years time, I hope we have a blockbuster use case. And I don't know what it is, but I know that it's coming and it's going to be invented maybe even by a newcomer. Maybe that person is not even in the industry today.
Josh King:
Thanks so much, Tim, for joining us in the ICE House.
Tim Byun:
All right. Thank you for having me.
Josh King:
That's our conversation for this week. Our guest was Tim Byun, the Chief Risk Officer and Head of Government Relations at OKCOIN. If you like what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us at NYSE. Tim, where do people find more about OKCOIN?
Tim Byun:
OKCOIN.com.
Josh King:
Our show was produced this week by Damon Level, Pete Ash, and Ian Wolf with production assistance from Ken Abel and Steven Portman. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening. See you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor it's affiliates make any representations or warranties expressed or implied as to the accuracy or completeness of this information and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security or recommendation of any security or trading practice.
