Jesse Powell, CEO of crypto asset exchange Kraken, explains why he publicly rejected then-Attorney General Eric Schneiderman’s request for information from crypto exchanges, why he felt it was a publicity stunt and why Kraken, which stopped serving New York customers after New York’s Bitlicense was introduced, doesn’t see the market as a top priority. He also talks about why Kraken decided to stop operations in Japan after further regulations were imposed and discusses Kraken’s $1 million donation to Coin Center (and its $1 million match). Plus, he gets into why he named the exchange after a Norse sea monster, the dangers of the exchange’s margin trading product, and what steps he recommends everyone in crypto take to keep their tokens safe.
Jesse Powell: https://twitter.com/jespow
Past Unchained episode with Brock Pierce who also had a pre-Bitcoin career involving video game currency (Jesse and Brock were competitors): http://unchainedpodcast.co/this-vc-is-sure-venture-capital-is-about-to-be-disrupted
Kraken’s position on regulation (discussion of New York AG request and Japan + guidance for regulators): https://blog.kraken.com/post/1561/krakens-position-on-regulation/
Kraken donation to Coin Center: https://blog.kraken.com/post/1591/kraken-donates-1m-to-coin-center-with-an-additional-1m-matching-during-may/
Kraken down for 40 hours: http://fortune.com/2018/01/12/bitcoin-price-ripple-kraken-down/
Past Unchained episode on taxation of crypto: http://unchainedpodcast.co/the-tax-rules-that-have-crypto-users-aghast
Kraken blog post on phone numbers being hijacked: https://blog.kraken.com/post/219/security-advisory-mobile-phones/
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Laura Shin: 01:12
I’m recording today from the CoinDesk Consensus conference in New York City and my guest is Jesse Powell, co-founder and CEO of Kraken. Welcome Jesse. What does Kraken do and how does it distinguish itself from the other crypto exchanges in this space?
Jesse Powell: 01:29
Kraken is a digital asset exchange. We trade 17 assets and I’d say we distinguished ourself with our customer service and our security.
Laura Shin: 01:36
And you offer actually quite a number of tokens compared to some of the other exchanges like Gemini and Coinbase. How do you get so many on the platform?
Jesse Powell: 01:46
We’ve got a large team of people responsible for managing the token gateways, which is basically the technical work required to process transactions on those networks and we’ve also got a team of guys that are evaluating the tokens for listing qualifications.
Laura Shin: 02:03
And when you said that one of your priorities is security or one of the ways you distinguish yourself is security. How do you do that when a lot of people talk about how, these exchanges are big honeypots and they’re on 24/7/365, and especially in your case where you have multiple tokens, how do you keep things secure?
Jesse Powell: 02:28
Yeah. Well with, with a lot of hard work and in a lot of diligence and just being extremely careful about everything we do all the time. Not just at the technical level but also at the personal level, in terms of like training our people, how we operate, the length that we go to to keep things private. So that could involve creating proxy entities to contract with our service providers, to using pseudonyms wherever possible. Basically trying to keep the entire operation as private as possible.
Laura Shin: 03:09
Oh, interesting. So contractors don’t know that it’s a crypto exchange?
Jesse Powell: 03:09
Wherever possible. Yeah.
Laura Shin: 03:15 That’s really interesting. That’s smart. And how do you decide which crypto currencies and crypto assets data to your platform?
Jesse Powell: 03:21
So we’ve got a very thorough evaluation process. We’ve got over 100 things that we look at when evaluating a token. The main thing we’re looking at is basically is this token still gonna be around tomorrow and is it a scam. We do some work on, we try to look at like the technical merit as part of that, but the main things are, we want to protect people from things that are outright scams and we also look at the technical difficulty of supporting it and continuing to maintain the protocol. So if it’s something that’s very early stage and is gonna gonna require a lot of work to maintain, that might be something that we wait until a further stage of development to list. So anyway, in all it’s, it’s, it’s a very lengthy process. We spent a lot of resources to evaluate the tokens, so we certainly haven’t evaluated every token, but the ones that we do evaluate tend to be the ones, that our clients are really asking us to take a look at.
Laura Shin: 04:27
What is a Kraken and why did you decide to name your exchange after it?
Jesse Powell: 04:33
Yeah. So a Kraken is a legendary sea monster of Norse mythology. And I chose the name Kraken because, well it helped that I had the domain. I had actually bought the domain years ago, years before Bitcoin. I had been collecting domains for a long time and I thought, “Someday I’m going to do something really cool with Kraken.” So when we got the idea to do a bitcoin exchange, we had a lot of ideas for names and Kraken was always kind of my first choice. And, I really had to convince my co-founder that this was a good name to use. I liked it because it has all the hallmarks of a great brand. It’s short, it’s easy to say, it’s easy to spell, it’s fun. And in terms of the exchange business there are a lot of metaphors that we use when talking about markets that fit like liquidity and depth and whales and sharks and the Kraken biggest, baddest beast in the ocean, so it’s sort of the master of liquidity. So the name was really perfect in my mind. And so, that’s why we went with it.
Laura Shin: 05:51 So Its like a Norse Sea Monster or something like that?
Jesse Powell: 05:51
Yeah. Probably like a giant octopus.
Laura Shin: 05:58
I personally had to google that. I wasn’t, I knew it was something in that realm, but I didn’t know exactly. But no, I agree with you. It is a good name. Like, one time I heard Sara Blakely, the founder of Spanx talking about how she became a billionaire and everything and she was saying that she chose the name Spanx because like she realized that a lot of great brands have the sound k in them, which was really interesting. Like Kodak and I don’t remember the other one she listed, but like that was literally like she just played around with different names until she came up with something that had a K sound in it. So yours does too. One other thing I wanted to ask you about was who your customers tend to be like? Just how would you break that out in terms of who they are and then how much they account for assets and trading volume.
Jesse Powell: 06:41
Sure. So we’ve got several buckets of users. There’s the retail trader. There’s the more kind of professional day trader. There’s institutions. There’s people that basically know nothing about Bitcoin but just sort of want to buy one bitcoin and hold it. So we know we don’t cater to all of those equally. I think some other exchanges do a better job of providing that basic buy and sell experience for the extremely novice user. Our target demographic is more slightly more experienced and interested in actually doing more trading. So the whole interface and the tools that we provide are all more geared toward that.
Laura Shin: 07:31
You may not have read this article, but last summer when I wrote this cover story about initial coin offerings, I had a little sidebar about a trader who used the Kraken platform to turn like $8,500 into $7.5 million in six months using your leverage trading. Did you read that? Why don’t you describe the leverage trading product?
Jesse Powell: 07:53
Yeah. So margin trading is basically where you borrow money from the exchange to make a trade. Uh, so let’s say you had like $100 on your account, you could borrow another $400 from Kraken to be able to trade with $500 in total. And there’s some risk in doing that because if we have a formula to determine this, but if it, if it ever appears that you might not be able to pay us back what you’ve borrowed, than we would liquidate your position. So we would sell everything that you had on your account to get the loan back. Basically. So there is some risk that you lose everything when you do this. You know, if you started with 100, you borrowed 400, so you bought a total of 500 bitcoin. Well if your total of $500, bitcoin got down to be $400 worth of bitcoin, you know, just a 20 percent drop, which we see in bitcoin regularly. We would have basically sold the other 400 and then gotten our loan back. But you’d be left with zero.
Laura Shin: 08:56
Well yeah, that guy that I just mentioned, there was one moment where he nearly lost everything and it was super, super close and somehow it didn’t actually happen and then, you know, he became a millionaire. But yes, I definitely see the risk in that and people at home don’t try to do what that guy did.
Jesse Powell: 09:14
Yeah, definitely know what you’re doing before you get into it. And if you’re going to be trading on margin, babysit your position and you really have to be keeping an eye on it. Otherwise, we will liquidate your position if it gets too close to the margin level.
Laura Shin: 09:33
He basically said that he didn’t leave the house pretty much for six months except to go buy a sandwich and that he was just on the computer for like 16 hours a day and then would sleep at night and, was constantly like doing his trades and the second it hit some target point he would, do a buy or sell. I don’t remember all the mechanisms but it sounded intense obviously panned out for him. But like I said, don’t try this at home people because I think that that probably is more the exception rather than the rule. One other thing I wanted to ask you about was your background appears to be in gaming and the arts. What were you doing in those fields and how did you come to launch a crypto exchange?
Jesse Powell: 10:12
I’ve always been a gamer but since 2001. I had a company selling virtual items and currencies for online games, like World of Warcraft Gold, Diablo Swords, Runescape Gold, Maple Story. We did about 20 different games and our model was basically to buy virtual goods from China and sell them in the west to mostly North American and European clients.
Laura Shin: 10:37
And it was like Chinese players that were “mining these digital assets.”
Jesse Powell: 10:45
Yeah. the gold farmers of China who basically guys or bots. Usually bots. It would be like one guy would be supervising 100 bots that would be playing the games. They would produce the gold or the items and then sell to us and we would resell them in the west.
Laura Shin: 11:00
Interesting. So for people who did not listen to the episode with Brock Pierce, he should check that out because he talks about this business model in depth. And did you know Brock from that time?
Jesse Powell: 11:09
Yeah I did know Brock back before Bitcoin we were essentially competitors in the same business line back then?
Laura Shin: 11:15 Yeah. It’s kind of interesting. I wonder if like that experience is why people like you and Brock sort of saw the potential of Bitcoin early. Do you think so?
Jesse Powell: 11:23
Oh yeah, I think so. I mean, when I read about Bitcoin in 2011, the potential was immediately clear to me, you know, Bitcoin was solving problems that we had been dealing with in payments for a decade. It was chargebacks. It was transaction fees. It was taking and making international payments. It was having a client base of kids too young to have a credit card, you know, or have any way to pay for something online. So it solved all these problems with payments, but it also solved, it’s just real problems that real people we’re having, you know, like kids not having a way to make payments online. Even like legitimate people in a country like Nigeria. You could legitimately have a Nigerian prince trying to make a credit card payment to you and you’d be, “Yeah right! No way am I taking your credit card payment.” But, with Bitcoin you could. And so people that have historically been ostracized or excluded from the online payments world. The global financial system now had a way to make payments to engage. And so it was great from that perspective in terms of, you know, financial inclusion. So philosophically like I really was excited about bitcoin as well, apart from just the practical applications.
Laura Shin: 12:47
And I know at some point in there you also worked in the art. So what exactly happened? You were doing the online gaming business and then how did the arts thing fit in along with your transition to bitcoin?
Jesse Powell: 12:57
Yeah. So by 2007, the gaming businesses was doing really well. I had some spare cash and I had a bunch of friends who are artists and they were the stereotypical starving artists. Working out of their kitchens, you know, their art studio had taken over their apartment and I thought, you know, it’d be really cool to give these guys a space to work in. And I was familiar with like what Andy Warhol had done with the factory and there are other art centers around the country and around the world that brought artists together in one space. And I thought it would just be great to have a place to give these people, so they could get out of their kitchens and into a studio and also to have a collaborative environment because I thought it was, it would be really cool to see what happens when all these artists get together in the same space and can share ideas. I was living in Sacramento at the time and I also wanted to have a really great art gallery in Sacramento that could do shows like what you would see in New York or Los Angeles. So, I found this warehouse, it was about 10,000 square feet. And, I did it and I rented it out. I had a three year lease. I figured we’ll just see how it goes. So I put an ad in the paper offering free studio space to artists and I would get phone calls like, “Hey, why are you trying to scam artists?” You know, “This is evil. Artists are poor, you shouldn’t scam artists.” And eventually, I had some people come by and, some people that were well known in the community started to vouch for the project and so then I started to get more artists coming in and it was great. Because it was free space, I could be selective about who I took in and I really just took people that were really serious and really great artists in the region.
Laura Shin: 14:52
I don’t understand the scam part. How could it be a scam if it was free?
Jesse Powell: 14:55
I don’t know. I guess they thought somehow they were going to come over and I was going to steal all their art supplies or I really don’t know because they’re so valuable or maybe I was going to steal their information. But yeah, please don’t steal from artists, they really don’t have anything to give you
Laura Shin: 15:11
Well, having a lot of writer friends, I can vouch for that as well. But. So then keep going with how did you end up in Bitcoin?
Jesse Powell: 15:22
So Bitcoin, I just randomly read about in March of 2011. And, it was obvious to me that this was going to be huge. I was a little bit skeptical at first because we had seen other attempts at making some sort of a non government currency like Egold or the Liberty Reserve and these things that always just had trouble with regulation and Bitcoin kind of existed outside of that. So I thought, “Okay, maybe this thing actually has a real shot.” And nothing ever had existed like it before. We knew that there was a market for this because you would know that kids are trading their World of Warcraft gold for brownies at school and stuff, you know, this is like their version of paypal. This is where they stored their value. And this is where they kept their money. It was like in their World of Warcraft account. So there was definitely a class of people that was not being served by the traditional system. When we think of the unbanked, we think of people in undeveloped countries, you know, in the countryside, but really like, it’s all these kids under the age of 18 in the United States are part of the unbanked. So there’s that. But then, yeah, there is everyone else in the rest of the world, everyone without a credit card, or who can’t get a bank account because they don’t have proof of identity or whatever. So, just having dealt with payments issues in the virtual goods business for the last 10 years, up until 2011. I just thought, “this has got such huge potential and I really want to do something to be involved with this.”
Laura Shin: 17:03
And so then how did you end up launching Kraken?
Jesse Powell: 17:06
So, at first I was dabbling in mining and we were trying to figure out ways to get gamers to use bitcoin more. But, I think it was just too early and mining turned out to be just too much of a headache. And, as we’ve seen, mining has turned out to be really specialized. And Kind of a scale business, so we got into the exchange thing. We were entertaining the idea of doing either a wallet or an exchange and we decided to go with the exchange after an experience that I had with Mt. Gox in June of 2011, which, they got hacked for what we’re told, at least it was a few thousand bitcoin back then. And the exchange went down for about a week and coincidentally an old friend that I had from the high school days, Roger Veer, who’s the owner of bitcoin.com and a very controversial figure in the community these days. I knew him from playing Magic, the Gathering with him in high school and he happened to be living in Tokyo. Just a few blocks away from the Mt Gox office and he was into Bitcoin at the time as well. And, I was trading on Mt. Gox. I was following the situation closely and I was talking to Roger. Roger went over to the Mt Gox office and discovered that it was just Mark Karpelès and one other person who he had hired yesterday, who were there. Like these two guys, basically one guy, you know, who had been servicing the entire Bitcoin community and he had like 60,000 users at the time.
Laura Shin: 18:47
Do you know what the trading volume or the dollar amount or anything at that time?
Jesse Powell: 18:51
I don’t remember what the amounts were. The Bitcoin volumes were insane though right? They were like hundreds of thousands of bitcoin a day because it, bitcoin was like a dollar. So bitcoin wise it was huge. But dollar wise, I don’t think it wasn’t like the numbers we’re seeing today, like billions of dollars traded. So Roger found like two people in the office and offered his help to Mark and Mark took it and told mark as well that I would be willing to come out and help. Fortunately, the virtual goods business at the time was basically on autopilot and I was able just to take off the next morning and go to Tokyo. And so, they invited me out to help and spent about a week and a half in the office at Mt. Gox in Tokyo. Just helped them get things back together like I wrote the press release for the incident, helped them hire a bunch of people. Help them build a support team to answer all the tickets. And so, by the end of that experience, and I came back to the states thinking there’s got to be another exchange. You can’t have the whole ecosystem dependent on this one exchange because when Mt. Gox was down, everything was down. I mean we had no price discovery. Merchants could not convert their bitcoin into dollars, which was important for them because they were paying their bills in dollars.
Jesse Powell: 20:10
So I thought, you know, for Bitcoin to really go mainstream, we’re gonna need to see an exchange. It offers more redundancy and exchanges broadly. But an exchange is really doing things the right way professionally, putting security first. Taking a very careful and cautious approach and working with the regulators to kind of build bridges to the traditional financial system. And so I talked to my CTO at Loot, which was the virtual goods business and asked him if he’d be willing to do a crypto exchange and, he was all on board with it. He had been himself writing bots for markets and he’s always been interested in trading and money and also a big believer in Bitcoin. If not for somebody like him, I wouldn’t have even thought to do it because the guys, the best hacker I’ve ever met. The best security mind that I’ve ever met.
Jesse Powell: 21:06
And I knew that that was just coming out of the Mt Gox experience. Security was something that we were going to have to put absolutely first and not compromise on. And he was definitely the guy to do it. So I wouldn’t have imagined doing it without somebody like that because that was the first thing that we would have to get right.
Laura Shin: 21:25
When did you launch Kraken?
Jesse Powell: 21:26
So we launched the exchange actually in Beta in May of 2013. And then with real money trading in September of 2013.
Laura Shin: 21:35
I would have to say if you were mulling between wallets and exchanges that you chose the better option. So you brought up regulation a few times and I wanted to talk about that because you recently refused to answer a request from the former now or then New York attorney general, Eric Schneiderman, which was a request to answer a bunch of questions about your business, about the crypto exchange business. What did you respond and why did you decide to respond that way?
Jesse Powell: 22:07
I saw it as more of a demand than a request and then it came with a deadline of two weeks to produce like 40 point questionnaire. And, I felt like my first reaction when getting that was like, this is a total slap in the face. Like those are the words in my mind. Turns out this guy’s actually slapping people in the face, in his spare tire, right?
Laura Shin: 22:07
Or so they say.
Jesse Powell: 22:36
Or so they say… allegedly. When it came to me, I was just offended by it because we had put all this effort into New York years ago and the BitLicense got like 3000 plus comments on it and what we got out of it was a disaster. And so we left New York and we’ve had no business in New York since then. And this request from Schneiderman, it came out of nowhere. When most regulators or government want to know something, they’ll reach out privately, they’ll try to have a conversation. But this just came out of nowhere. We’d never heard from Schneiderman before and it seems like he didn’t even talk to the DFS [New York State Department of Financial Services] before sending this out. It was like a total publicity stunt. Rather than going to get help from your own government, you’re coming to like put this burden on all the exchanges to produce this. And we all produced most of this back before the BitLicense emerged. So, New York has this information. A lot of it’s on the website. A lot of it’s private. And, frankly, the government doesn’t have a good track record of keeping information private.
Laura Shin: 23:41
But wasn’t that information initially collected like in 2013 or 2014 or something?
Jesse Powell: 23:41
Yeah, by DFS.
Laura Shin: 23:41
Now it’s 2018.
Jesse Powell: 23:52
Yeah, some of it has been refreshed, but you know, what does the AG have to do with any of this? Isn’t the DFS responsible for this and why do you need to make this public announcement out of it? It just seemed like a publicity stunt and that was devoid of any real concern because he had just gone about it, I think the wrong way. He could have had these conversations separately. But to make this public announcement, like he’s, the new law in town. He’s gonna hold everybody to task is, it just rubbed me the wrong way. It came off as a bullying. I just had this smell that this guy is like a bully. And, I probably wouldn’t have said anything. But for the other exchanges coming forward and saying, “This is great, we’re happy to work with regulators and we’re going to respond to this.” And I just felt like this is the wrong kind of attitude to have. I mean, we have to put our foot down somewhere. We can’t just bend over backwards every time any random regulator in the world, you know in this case, not even a regulator, which is like a law enforcement official comes forward and demands things on a deadline. Especially from places where we don’t even have service. So, who is this guy and I can’t stand bullies and I can’t stand hypocrites. And this guy turns out to be both. So I’m glad that I gave him the response that I did.
Laura Shin: 25:17
Have you written off New York completely as a place where you’ll do business?
Jesse Powell: 25:22
We would be willing to come back to New York. It would take probably a dramatic change to the BitLicense to do it. Right now the United States altogether is only 20 percent of our business. So you can imagine what piece of that isn’t New York. We think New York isn’t that significant to our global business. So it’s incremental revenue at this point. And the question for us is with limited resources, should we put them into New York or should we put them somewhere else? We have prime ministers all over the world asking for meetings to help them craft regulation in their countries. Why should we waste time? We already wasted so much time on New York that seems like a lost cause.
Laura Shin: 26:03
But do you think that your response might have hurt the chances that a BitLicense would be revised in a way that’s favorable to your business?
Jesse Powell: 26:11
I don’t think so. Hopefully it sends the message that, we’re not ready to give into this BitLicense. That something needs to be done. And I think some people in New York have recognized that. That there needs to be a change. If New York wants to see more businesses come in.
Laura Shin: 26:27
Did the Attorney General’s office respond to?
Jesse Powell: 26:29
No, there was no official response. There was some response like unofficially. Something about legitimate businesses would love to provide this information or something along those lines. As if we don’t have anything better to do.
Laura Shin: 26:44
You decided to exit Japan as well. And I read that you were saying that your market share, combined with the increased regulation, were the reasons that you decided to leave. But when you couple that along with your response to Eric Schneiderman, do you feel like that might indicate to some people that Kraken is not welcoming of regulation?
Jesse Powell: 27:06
I guess it would give that impression. I think we explained that in the blog post. We worked quite extensively with the regulator in Japan to actually to craft that legislation and to develop the virtual currency act. We spent significant resources into, to basically building that whole industry in Japan. We’re the oldest surviving exchange in Japan and we had every intention to go through with completing the process for a couple of reasons. We didn’t get entirely through it in. I think maybe focus too much on regulation and not enough on actually developing the business in Japan. So we didn’t spend anything on marketing. Some of our domestic Japanese competitors did spend quite a bit more on marketing. Seemed to have gained more traction. Meanwhile, we were distracted with the regulation side of things. So I think what ultimately turned out to be a good thing for Japan was not necessarily a good thing for us and in getting through the process, our global business. We were the only exchange to apply for the license that had a global business. Those were all Japanese exchanges. And so the complexity of our global business turned out to be a big problem because Japan felt like to understand really the risk of our Japanese business, they had to really understand the whole picture, like the parent company and the other subsidiaries in the organization and how everything all worked together. And that was a substantially broader and more complicated task. Then just like auditing the Japanese entity. It was going to be basically many audits on many entities and a lot more work. And it became even more work after one of the largest Japanese exchanges got hacked for about $500 million.
Jesse Powell: 29:02
So we were in most of the way through the process when it happened. But that also dramatically increased the scrutiny on us and the FSA felt like before they give away any more licenses, they were going to have to go even even deeper than they already were. And so it just became this kind of moving goalposts situation where we felt like we had done so much work already and now suddenly we’re being asked to do even more work. We have this global business and we just were not prepared to… There was some deadline to get all this stuff done as well and we just weren’t prepared to divert all these resources to getting this done at that time. So I think what we’ll do is… So we took a step back. We got out of the process of the filing and we decided, “Okay, we’re just going to approach this on our own timeline.” We’ll get out of Japan for now. We’re not giving up much because we didn’t have much market share there. We’ll take our time and work on doing all these things they want us to do, which is like audits on all these various entities. It’s not easy to get an audit in this industry. So we’ll just reapproach it. We’ll probably take the next 6 to 12 months and worked through the process of getting everything together that they wanted and then we’ll go back to them and see if there’s still something to do in Japan.
Laura Shin: 30:25
Oh, interesting. Okay. So you might re enter that market?
Jesse Powell: 30:25
Laura Shin: 30:29
When I combine everything with your letter to Eric Schneiderman a little bit, the Japanese thing, I mean, it sounds like that’s a more nuanced picture that involves business considerations more, but if I think about all those things and then last night it was noticed that you and Kraken are donating $1 million to Coin Center and also matching additional donations for the rest of the month. Putting all that together, it almost seems like you have some statement you want to make here about regulation, but you can tell me if you don’t, but if you do, what is that statement?
Jesse Powell: 30:58
Sure. Actually, we made the commitment to Coin Center even before the Schneiderman thing came up. It was just announced last night. From day one, we knew that we had to engage with regulators. So it’s not something we’re trying to turn away from at all. We’ve spent significant resources on regulation and trying to understand how to comply with the law. Not just in the US, but all over the world. We spend millions of dollars on legal counsel. So certainly not something we’re trying to avoid. The Coin Center donation I think is a reflection of just all the great work that Coin Center is doing. I’m just all the time, always impressed by the work that they do. I’m always able to point regulators to work Coin Center has done. Their thinking on the topic of cryptocurrency and law around cryptocurrency is, it’s just like solid always. And so, having run a nonprofit myself, I know that you tend to waste a lot of time trying to raise money and not actually working on the objective. The actual thing that you’re trying to do. And so, we’re fortunate to have a great year last year and fortunate to finally be in a position to donate back to Coin Center. They’ve given so much to the community and to the industry. I’m just proud to be able to support them even further. And I hope that they can do even more great work with the money.
Laura Shin: 32:30
And so you don’t have a larger statement about regulation?
Jesse Powell: 32:34
I hope that, that regulators listen to guys like Coin Center because I think they have a very fair and impartial approach to what should be done. They’re kind of defending the technology and defending consumers from the perspective of providing choice in technology and, making sure that this technology doesn’t somehow get suffocated before it really has a chance to flourish. So, my statement to the regulators, well I have a lot of statements I make to regulators. But, I think our industry is global and these regulators tend to look locally and they tend to enforce locally. And I think that governments need to look at crypto more from… really be looked at from like a national security perspective. Because it’s more than just protecting people from fraud. It’s a technology like the Internet. What would it mean to dramatically limit the way that the Internet was used? It could mean that your country joins the rest of the world in some kind of economic revolution or it could mean you’re stuck in the dark ages. So, I think we need to be really careful about how we regulate crypto and make sure that we don’t go too far to exclude our country from participation in this great new technology.
Laura Shin: 34:09
We’re going to discuss a little more regulation plus Wall Street and more, but first I’d like to take a quick break to tell you about our fabulous sponsors.
Token Agency: 34:17
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Laura Shin: 36:41
I’m speaking with Jesse Powell of Kraken. What do you think the ideal crypto regulation looks like?
Jesse Powell: 36:51
First rule is do no harm. I think that there’s already a lot of regulation out there that covers crypto. I think the regulator really just needs to take care. It depends on what are the public policy goals? And, are your objectives already covered by existing law in some way or does existing law in some way impede upon the development of crypto. If there’s nothing there already in the way, I think just taking some time to wait and see how things develop I think is the best way to go. If you can’t wait and see how things develop, I think creating some sort of environment where you can keep an eye on things. Like a sandbox type thing where you can have companies register and you can have a dialogue with them and you can keep an eye on them. I think that works really well. You just don’t want to jump the gun and go too far. Because it’s really hard to predict how things are going to develop.
Laura Shin: 37:56
And I know you work in multiple jurisdictions, like for instance, I think Europe is your biggest market, is that correct?
Jesse Powell: 37:56
Laura Shin: 38:03
So are there any particular regulators that you think are doing an especially good job?
Jesse Powell: 38:07
Europe so far has been pretty hands off with the regulation. So I wouldn’t point to anyone in particular. You know in Europe that has like the perfect crypto regulation. So far, there hasn’t really been any crypto regulation in Europe. Seems like Malta is making a play to be a crypto player. I think the VC act in Japan is really kind of the first decent example of like a comprehensive regulation.
Laura Shin: 38:36
The one that you helped?
Jesse Powell: 38:36
Laura Shin: 38:38
You’re also the only exchange I believe that offers leverage trading of crypto/fiat pairs, at least here in the US market. Is that correct?
Jesse Powell: 38:48
That may be possible. There are some other exchanges that offer it. I don’t know if they’re servicing the US.
Laura Shin: 38:52
What are the challenges in offering that and how do you make it happen?
Jesse Powell: 38:56
Technically, it’s a really difficult thing to do because you have to keep track of these balances and the amount of credit kind of allocated at all times and then what the liquidation points are. So it significantly complicates the technology.
Laura Shin: 39:15
You were taken to task for your servers being offline for two days in January for a system upgrade and you also suffered an Ethereum flash crash due to a DDoS attack. What mistakes did you guys make that allowed those events to happen?
Jesse Powell: 39:30
Yeah. So the Etherium flash crash was not actually due to a DDoS attack. It’s actually not entirely clear that there was a real DDos attack. It’s hard to know. Whenever you have a service outage because of a tremendous amount of traffic. It’s kind of on the scale of things like you don’t know how much of it at least immediately is real legitimate traffic and how much of it is denial of service traffic. So, around that flash crash… I mean, we’ve looked at all the records extensively. We’ve tried to determine whether somebody. It seems like somebody was attempting to intentionally caused that to happen and we couldn’t find any evidence of it. But what it looks like, it was just naturally. There were a lot of people that were very long ether. So they had a lot of margin trades open, they borrowed a lot of currency to buy ether and then when the price of ether started coming down, there were a couple cells just in a row that kind of drove the price down to a point where you had one liquidation and that liquidation… when we liquidate, we sell. So that sell drove the price down a little more, that caused another liquidation which causes another. And so you have this cascade of liquidations that ultimately drove the price down a lot and that is natural market behavior. I mean everything worked as it should have and those are just, that is one of the big risks in trading on margin is that you can be caught up in one of these cascading liquidations and you might be forced to sell your position at a very adverse price.
Laura Shin: 41:14
Yeah, the same thing happened on GDAX. In fact they halted their margin trading and haven’t even brought it back. In general, how do you keep the exchange running 24/7/365? And how do you prevent further situations like these ones we just talked about?
Jesse Powell: 41:27
With regard to the outage and the 24/7/365 operation, This is something that traditional markets have not dealt, right. They’re operating nine to five, Monday through Friday. We’ve got to keep it going continuously 24/7/365. It’s very difficult to do that. Sometimes you just need to have downtime. In the case of our two days, we basically were coming off many months of really having a poorly performing service at peak times. Which was a really bad user experience. And we could have done more work ahead of time to better prepare for the transition over to… So we replaced the trading, the old trading engine with a new trading engine that required a significant amount of downtime while we kind of switched over and tested things before we put it back online. And in testing we just discovered that there were some flaws in the production environment that we hadn’t discovered in the testing environment. And the two environments, we’re not identical, they were extremely close but not entirely identical. And we could have… the really right way to do this if you have an unlimited amount of time and resources is just to have your test environments just be identical to your production environments in every way. And you’ll have many sets of hardware in your system replicated many times to be able to do this. But, we didn’t have all that setup and so we could have set all that up, but that would have delayed by several more months the upgrade. And so, we thought from testing, we’re like 99 percent sure this is gonna work. But when we got into production, we started to find things and then it was like one of the strings you like, you pull it it and it starts to like… it revealed like a deeper problem. And it took a long time really to like actually get to what the source of the problem was. And so, we just couldn’t bring the exchange back online. And, rolling back would have been just, we really needed to figure that out in production. There wasn’t a way to really roll back to the old system and then like work out the problem in the test environment further. So we kinda just had to stick with it. We didn’t know how long it was gonna take. We expected it was going to take a few hours to do the transition. It ended up taking two days unfortunately. We definitely didn’t expect it. We certainly learned a lot from it, but now that that’s done, it immediately solve the problem that people had been having for months. And so I think if you ask anybody, they would say it was totally worth it to have now a fully functioning exchange rather than kind of a crippled exchange again for months while we try to work out this perfect test environment.
Laura Shin: 44:15
And if you have to do that type of upgrade again, then are you going to build a test environment exactly the same as the production environment?
Jesse Powell: 44:22
Yeah. Now we have the time to do that. That’s in process now. So any other major upgrade like that would definitely be tested in an environment that’s basically identical to the production environment.
Laura Shin: 44:33
Traders on your site don’t receive 1099Ks that help them calculate their capital gains tax. Do you have a plan to offer such reports or plans to help customers in some other way with their capital gains tax preparation?
Jesse Powell: 44:43
We do have some plans in the works for providing some tax tools for people. We don’t offer anything at the moment. You can export your history. There are a couple other services that do provide log, parsing and tax support for Bitcoin. It’s quite complicated, especially if you’re doing margin trading and especially if you are buying and selling bitcoin outside of a single exchange. You have to identify what your cost basis is and before you transferred it or what you did with it after you transferred out. The picture from one exchange may not be at all complete. You really need to put together all the information from everywhere and I think that some services that provide support for all the exchanges together have a better opportunity to really provide the comprehensive report that people really need.
Laura Shin: 45:39
Yeah, and for listeners who want to know more about this, I covered all things tax and crypto back in January, I think it was, and they indeed did say that some of these reports are misleading from some of the exchanges because you do really need to to calculate it from where you bought it. So if he bought it on a different exchange, then you would need to figure out what your tax base is is from that point. You’ve only raised $6.5 million compared to Coinbase’s 200 million. How does your strategy differ in a way that allows you to not need to raise more money?
Jesse Powell: 46:10
Actually we raised more like 12 at crunchbase or something.
Laura Shin: 46:15
Okay, thanks for the correction.
Jesse Powell: 46:21
We raised about 12. So we did a series A, thats about 5 million. Then we did another round later. Privately, it was about another 6 million. I guess we’ve been more efficient with capital. Coinbase has explored a lot of things. They’re doing a lot of stuff. There’s a tradeoff for that too, right? I mean they were able to continue building through the downturn in the market and that’s because they had all this capital to do it and so that has its advantages in just being well positioned to being strong to be able to handle like a giant wave of growth. And maybe, they might be more prepared than we were, because like the downtime is an example of this. They might’ve had the resources to really develop all the test suite and all this stuff properly. Whereas, there was a period of time where we laid off half the company because things were so tight and because the market was bearish and we were just kind of in this by 2014, 2015. We were just kind of flatlined. The market wasn’t growing and that was when we really scaled back and we were just kind of like in survival mode for like two years. Well, had we raised $100 million, we would’ve been able to continue to build throughout that time really toward the future, you know, instead of being kind of behind and having to like try to catch up when the next wave hit. So I think we’re very strongly positioned today. But, there’s something to be said just for having a giant war chest to be able to build through a downturn and not have to make cuts.
Laura Shin: 48:00
Does that mean you are thinking about taking on more funding?
Jesse Powell: 48:02
No actually. I mean, we’re doing so well now that there would be no reason to take on funding unless there were some like massive, like $500 million acquisition or something like that, that we wanted to do.
Laura Shin: 48:14
What are your revenues?
Jesse Powell: 48:15
I’m not willing to disclose that, but they’re good.
Laura Shin: 48:20
Intercontinental exchange is working on a platform to trade bitcoin and Goldman is also working on opening up a trading operational though they’re apparently not going to be trading crypto assets directly at first. Do you worry about these incumbents from the traditional financial services sector entering this space or would you not consider them competitive with you?
Jesse Powell: 48:39
I think if those guys get in, I would consider it a massive win for the entire industry and ecosystem. I think they will open up crypto to even more users and bring it even further toward the mainstream. So generally I think that’s fantastic. As a business, I don’t see it as direct competition. They’re going to increase the size of the pool by bringing more people in. And I don’t think that they’re going to be as agile as we are. I don’t think they’re going to be able to evaluate and add tokens as fast as we can. I don’t think they’re going to be as understanding of what the market really wants. We’ve got so much institutional knowledge. We’ve been in this space for so long now. The company is nearly seven years old. I think we really understand what people in the crypto space want. I think we’re better able to provide service to them. And so I think we’ve got a strong competitive edge there. I think, if Nasdaq starts trading crypto, that may be the first stop for new people coming in. But I think as they develop more interest in understanding that they’ll come over to us for more kind of specialized services.
Laura Shin: 49:55
And you recently hired Steve Hunt, the former CTO of Jump Trading, which is a high speed trading firm. And obviously, you know, as I mentioned, we’re seeing this convergence of traditional Wall Street and crypto. So how do you think that will play out? What direction would you like to take the company in the next few years as the ecosystem develops?
Jesse Powell: 50:12
Yeah, so actually we’ve hired quite a few people out of traditional financial firms lately and we’re seeing even more interest coming in. Like a lot of people coming in from traditional finance on Wall Street who want to work at Kraken.
Laura Shin: 50:28
Just reaching out to you cold?
Jesse Powell: 50:31
Yeah. I mean it’s really surprising. It’s completely the opposite of where we were like five years ago. I think it’s really exciting. I think we’ll see more of that and I think that this is maybe another reason why the traditional players may have a harder time getting into the space because, their best and brightest are leaving to go join crypto companies now. So, it’s great for the crypto companies to have traditionally… I don’t come from the world of financial services and neither does my co-founder and having those people with that institutional experience, coming to Kraken. Teach us everything that they know from that world is really great. I think it’s going to help us professionalize and help further going to build those bridges to the mainstream.
Laura Shin: 51:30
When you think about like how this is going to develop with both sides kind of coming together, how would you like to position Kraken?
Jesse Powell: 51:37
I hope to continue on with the original mission which was to really be a professional compliant service that people can look to and trust and is seen just as capable as any of the traditional financial institutions out there. That people trust and can rely on for their crypto exchange.
Laura Shin: 51:58
Alright, last question, which is sort of like tips for listeners. I know that you think security is a big focus and have also written a number of blog posts that talk about how people should secure their coins. What tips would you give people for securing their crypto?
Jesse Powell: 52:17
Yeah. Well, you know the hack that everyone is getting hit with these days is the mobile phone hijacking. We have a blog post about this and how to secure your mobile phone. We see mobile phone numbers are stolen and that’s used to get access to email accounts and then the email account is just to get access to everything else. So, I’d say is the prime problem. Say like use two factor on everything. Don’t use SMS for two factor. Try to use a UB key or Google authenticator. Try to keep your involvement with crypto private as much as he can. You know, don’t advertise over your LinkedIn profile if it’s not necessary. You know, that you’re into crypto because the hackers are scouring LinkedIn and they’re scouring twitter and this is how they build their target list for people to go after. Keep as much personal information about yourself and your family off the Internet as a possible. It has come to light more recently with all the Facebook stuff, but really, most people have just revealed everything about themselves online and service providers are still very far behind in how they handle security. They’ll ask you questions about your personal life that are available to the public on Facebook. Like, “What’s your mother’s maiden name?” Well, I can just go to your Facebook account and see what your mom’s name is, and then answer that question and that’s like a “security question.” So people I think need to just take more care of their privacy online and we’re seeing how much this really matters now with how the data is being used against people.
Laura Shin: 53:56
It amazes me that you said that the most common attack vector is still the phone hijacking one because I wrote the article about it too and that came out like a year and a half ago.
Jesse Powell: 54:10
I think they haven’t taken it seriously, you know, it’s something like if it hasn’t happened to you or someone you would immediately know, you think like, “Oh that’s not gonna happen to me. I’m not a target or whatever.” But, they have their list and they go down it and in some cases people even have called their phone company to ask them to put security codes on it, but you call them 100 times and you just get that one agent, most of the time there’s not like a technical impediment to doing this. It’s just like the agent is supposed to follow the notes on the account and one and 100 times you get that agent that just doesn’t read the note and he does the change and then you’re screwed.
Jesse Powell: 54:51
Yeah, this happened to Ryan Selkis. Yeah, we both surmised that maybe it has to do with his appearance on my show where we criticised XRP, but who knows, it’s not clear. His phone number was stolen and then his twitter was hacked. But he got everything back as far as I understand, but you’re right, they impersonated him and they probably tried a bunch of times but it was somebody in like a foreign country that went into a store. We’ve seen yet people showing up with fake ids to stores as well, so it’s not just calling online.
Laura Shin: 55:26
Well on that sort of depressing note, it’s been great having you on this show. Where can people get in touch with you or learn more about Kraken?
Jesse Powell: 55:31
Thanks for having me. You can follow me on Twitter @jespow And then go to https://www.kraken.com/ or https://blog.kraken.com/ for more information about the company.
Laura Shin: 55:40
Great. Well thanks both of you for coming on Unchained. Thanks so much for joining us today. To learn more about Jesse, check out the show notes inside your podcast episodes. New episodes of Unchained come out every Tuesday. If you haven’t already, rate, review and subscribe on Apple podcasts. If you like this episode, share it with your friends on Facebook, Twitter, or LinkedIn. Unchained is produced by me, Laura Shin. With help from Elaine Zelby, Fractal Recordings, Jennie Josephson, Rahul Singireddy and Daniel Nuss. Thanks for listening.