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Bitcoin 2022 Exclusive: Building Symbiotic Relationships Between Old And New Finance

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Bitcoin 2022 Exclusive: Building Symbiotic Relationships Between Old And New Finance

Detroit-based Benzinga, a media and data provider bridging the gap between retail and institutional investors, sent its team to Miami, Florida April 6-9, for Bitcoin 2022.

During that time, Benzinga sought to recognize the innovation in digital assets, across the board, and spoke with founders, investors, and beyond.

The following is a conversation with Mark Smith, the CEO and founder of Symbiont, the fintech powering smart markets via enterprise blockchain technology. Check it out!

Benzinga: Mark, it is nice to meet you! Care to start off with an introduction? Can you talk about your foray into entrepreneurship after being inspired by your work with Bill France Jr. to leave banking?

Mark Smith: In 1997, the day trading business was my first foray into entrepreneurship.

We hired some developers and started to build a day trading platform. Soon, we also realized that if we could match buyers and sellers, internally, we could save money on clearing costs.

So, we built a matching engine. At the same time, financial markets were realizing that there was a lot of collusion going on in open outcry and over-the-counter (OTC) market-making.

We thought that, maybe, matching was the solution.

Sure enough, the SEC recognized it had a problem with outsiders building new tech that is in the gray area of regulation – which sounds a lot like what is going on today – and said, “how can we take what they’re doing and solve this problem in markets.”

They gave us a No-Action Relief and we became the seventh ECN approved by the SEC, a company called NexTrade.

What happened after that?

Well, there started to be a lot of interest in what was called the electronification of Wall Street.

As regulation evolved and market makers realized they couldn’t fight the headwind – you have to capitulate to matching and electronic – they started to buy or build their own, which, again, sounds familiar in today’s world.

We started to see other areas to apply our technology and we packaged that company up to sell.

I started another company called Matchbook FX, which was the very first Central Limit Order Book (CLOB) electronic matching platform for spot currency trading.

At the time, in 1999, there were only interbank systems that were electronic. There was Reuters Dealing 2000 and Electronic Broking Services (EBS). Everything else was over the phone, on a squawk box, in the back of a black cab, you name it.

I thought that there should be an electronic market with matching and transparency; I went on the street and talked to every major dealing house and got kicked out until Deutsche Bank AG (NYSE: DB) identified the technology.

We invented the paradigm of trading spot FX, today, and it’s called streaming dealable prices.

We were the first company in the world, and Deutsche was the first bank in the world to take a two-way price from a desk, which we now call automated market-making (AMM) in the crypto world, and stream a price from the desk, into a matching engine, and allow people to trade with those prices.

That was revolutionary and it led to a change in regulation through the Commodity Futures Modernization Act of 2000 (CFMA), in which I helped craft where it identified the need for regulation.

So, in your first two startups, you took “outsider technology” and “turned it into ubiquitous market infrastructure,” to change markets. What happened, then?

We sold that company and I went on for my third startup and became a partner at Lava Trading, the first company to aggregate orders and route them to the floor, which then opened the door to high-frequency trading (HFT).

Off the back of that, I came in and rebuilt institutional spot FX and inserted prime brokers.

I built that business, sold it to Citigroup Inc (NYSE: C), right before the financial crisis, and I spent two years at Citi.

Nice timing. What did the financial crisis do for you, as an entrepreneur?

It made me realize banks were broken. I left Citi to start a de novo bank that was completely electronic with new technology and no legacy systems. We owned a broker-dealer, bought a futures commission merchant (FCM), and tried to buy a clearinghouse.

We opened in 2007 and the regulators came out with Dodd-Frank. We couldn’t make it work and we sold it in 2012.

Then, that’s how I got into Bitcoin (CRYPTO: BTC).

Also Read: EXCLUSIVE from Bitcoin 2022: TradeZing CEO Jordan Edelson Shares Insights About His New Web3 Trading Platform

Why cryptocurrency and blockchain technology?

The narrative was too big to fail, back then, and the regulations that came out centralized.

I thought that everyone needed to diversify that risk and needed data in real-time to solve problems. I started looking for solutions and found Ripple (CRYPTO: XPR), which most people don’t know was invented before Bitcoin by a guy named Ryan Fugger in Canada.

I met Ryan and tried to figure out what he had built, which was an extension of trust, an IOU solution. It was somewhat decentralized with no ability to scale.

Later, the Satoshi White Paper and I read it early on in 2009 but didn’t understand it. I ignored it but came back to it in 2010 and started buying bitcoin on Mt. Gox and off of message boards.

In 2011, I had a bunch of algorithmic traders that used to work for me explain the math and its importance. They said bitcoin solved the Two Generals’ Problem and guarantees no double-spends and trickery.

I thought, then, if the shared ledger can custody a bitcoin, why can’t it custody other things?

So, at this point, you’ve found Bitcoin. Where did you focus your attention, then?

Michael Novogratz, who was a client of mine in FX at Fortress Investment Group, called me and told me they had been trading bitcoin. I was convinced and went out to tell everybody that I knew that this was going to be something amazing.

No one wanted to hear it except for one of my old partners at Lava who gave me $250,000 to start something.

I then founded, in 2013, MathMoney f(x) and set out to build a transparent marketplace; all the bitcoin is stored on-chain and there’s a five-party audit system, with the crowd being the fifth auditor.

I tried raising but nobody wanted anything to do with it.

That’s pretty discouraging. You didn’t give up, though, right?

I stumbled upon the guys from Counterparty through message boards. Counterparty was the first coin that sat on top of bitcoin that used merged mining, on the bitcoin blockchain, to create a separate asset. They did proof of burn (POB).

If you had a bitcoin and sent it to a wallet address that only received and, in turn, a Counterparty token was created for you.

So, I start working with them before Vitalik released the paper for Ethereum (CRYPTO: ETH) and started building what now is Assembly, our blockchain solution.

If you’re going to be in traditional financial markets, you need to be able to store data in the distributed database, not just in hashes; you need to be able to have complete replayability of any instrument that’s ever created.

We started building our own VM and language and tapped into a Consensus Protocol called BFT-SMART.

We have the strong determinism you need in financial markets to create these instruments and have started to work with the largest financial institutions in the world like The Vanguard Group, which is one of our partners, Citi, who is also one of our investors and partners, and State Street Corp (NYSE: STT) is joining the network.

Nasdaq Inc (NASDAQ: NDAQ) led our Series B round and we’ve been able to build a fintech that solves major problems

I’ve also worked with the SEC on the Transfer Agents rule, went to Delaware, and worked to change state law around distributed ledgers.

Can you describe some of the use cases?

We’re currently managing over $2.3 billion of Vanguard’s passive indices data on our network and that’s growing every day.

We’ve built a collateral optimization product called Smart Collateral, in which we take traditional 30-day forwards in FX and use a smart contract to compress counterparty risk by 80%.

As we’re evolving and [institutions] are adding crypto to balance sheets, it can’t just sit there. You have to do something with it. If bitcoin can be the collateral and, then, I de-emphasize treasuries and cash, I can have a growing reserve asset that supports business.

We can hopefully be sort of the Pied Piper for larger institutions that want to engage, be part of this community, and create more utility than just some speculative asset that seems esoteric.

There was a fight, for a while, between IHS Markit and Symbiont. IHS Markit’s acquisition of Ipreio LTS, a firm you created a joint venture with, breached a non-compete between Ipreo and Symbiont. Symbiont was to receive $78.9 million, not including fees and interest, after the entity was dissolved. That slowed you down, right?

They basically tried to kill us, and it led to a three-year lawsuit and a 126-page scathing decision in favor of Symbiont over IHS Markit, the $44 billion company that was bought by S&P Global Inc (NYSE: SPGI).

The next thing we did was partner with Lewis Ranieri, the inventor of the 30-year mortgage and mortgage-backed securities (MBS). We aligned on fixing what was broken with the [MBS] and we built a full servicing solution … with complete transparency over the creation of RMBS and CMBS securities products where the smart contracts tell the security the status of the underlying loan in real-time.

You could never have a financial crisis happen again if servicers use this.

What’s next?

We’re coming out of the thesis phase and building. We’re going to be that symbiotic relationship between traditional financial markets and these new amazing networks and assets.

We’re going to integrate those in a way in which we can solve major problems as fintech, but also drive adoption for these new assets that are going to lead us into the future.

As a founding member of the Association for Digital Asset Markets (ADAM), what’s your take on attempts to regulate this innovation?

I think there was a big miss by the SEC when Ethereum came out because the offering was shrouded in a Switzerland foundation, and that opened the door to the ICO craze.

The problem may be that they’re going to overreach and try to make up for their ills of the past.

I fear that the rug pulls and bridge hacks are going to pull bitcoin, unfairly, into regulation and that may slow down the movement of making it a ubiquitous part of all financial markets.

 

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Posted-In: Bitcoin 2022 Lewis Ranieri Mark SmithCryptocurrency Fintech Exclusives Markets Interview