SafetyDetectives spoke with John Barry, Co-founder and CEO of Quantify Crypto, to talk about the world of cryptocurrency trading and its inherent challenges. Barry shares insights on the disparities between crypto and traditional stock markets, emphasizes the role of regulatory bodies like the SEC, discusses the significance of Decentralized Finance (DeFi), and explains how Quantify Crypto assists users in managing crypto trading risks. Finally, he offers his perspective on the biggest opportunities and challenges facing the cryptocurrency trading industry in the coming years.
Thank you, John, for taking some time to talk with me today. Can you introduce yourself and talk about what motivated you to start Quantify Crypto.
I co-founded Quantify Crypto with my son, The short version is that I had a lot of experience in trading after working for the New York Stock Exchange for many years. My son was in college and learning about cryptocurrency, Bitcoin, and information security costs. He was taken in college and learned about Bitcoin and learned everything about cryptocurrency.
I had just left the NYSE and our knowledge and experience was a great combination. We noticed early as on, as we started trading, that the tools to support traders for cryptocurrency were lacking. We saw this as a great opportunity to build support tools for cryptocurrency traders.
You hear about crypto exchange scandals like FTX with Sam Bankman Fried taking 8 Billion dollars of customer funds. This does not happen with stock markets? can you explain why Stock markets are safer than Crypto Markets.
Yes, stock markets have been around for decades. When they started out, they quickly came up with a special structure to protect investors. There are three levels in the structure protection.
- The Exchange Itself: A stock exchange primarily functions to match buy and sell orders at specific price points for trading assets. Notably, stock exchanges do not have control over customer funds.
- Clearing Company: The clearing company plays a critical role by facilitating the transfer of stock ownership when a transaction takes place.
- Member Firm: When an individual conducts a trade on a stock market, they do not directly interact with the stock exchange. Instead, they go through a member firm, such as Fidelity, Charles Schwab, or Ameritrade. It is the responsibility of the member firm to ensure that the customer has deposited sufficient funds, which they can verify, to purchase stocks such as Microsoft or Apple. Subsequently, the member firm approves the trade, allowing the customer to buy a specified number of shares.
Importantly, stock exchanges do not directly hold customer funds. This differs from cryptocurrency exchanges, which can both hold customer funds and execute trades at specific price points. Additionally, cryptocurrency transactions clear almost instantaneously. In contrast, the structure of a stock market involves three distinct components: the member firm, the stock exchange, and the clearing house, providing multiple layers of protection. This layered approach to security is lacking in the cryptocurrency market.
Is the SEC taking the right steps to protect customers in regards to crypto?
No, they haven’t. It’s crucial to understand that SEC regulators have been somewhat accustomed to a specific structure within the stock market. This structure has been in place since the 1940s and 1950s. Therefore, contemporary regulators haven’t had to concern themselves with the structure; instead, their focus has been on determining the legitimacy of stocks. They’ve been monitoring whether people manipulate stock information, misrepresent earnings, or possess insider knowledge that a particular stock is about to release information, allowing them to make advantageous trades. They’ve primarily sought out bad actors or problematic assets within this framework.
Now, let’s shift to the world of cryptocurrency. Instead of evaluating the structure of cryptocurrency trading, regulators have often taken a different approach. It’s almost like they’ve peered into a murky fish tank and scrutinized individual fish, determining whether each fish (in this case, cryptocurrency) qualifies as a security. They’ve pursued cases like XRP but overlooked the broader structural concerns. For example, they seemed indifferent to the fact that Sam Bankman-Fried owns FTX, a cryptocurrency exchange, and is also involved in a hedge fund. This presented a significant conflict of interest.
Furthermore, they haven’t properly examined the structural aspects of cryptocurrency. To illustrate, if we look back in history, the most prominent cryptocurrency hacks have almost always involved corrupt cryptocurrency exchanges. A famous example is the Mt. Gox incident, where the exchange itself was compromised, and funds were misappropriated. U.S. regulators, in the initial stages of cryptocurrency’s emergence between 2015 and 2017, had a substantial presence, with four out of the top 10 largest crypto exchanges based in the U.S. However, due to stringent regulations and the ambiguity surrounding what qualifies as a security, many businesses have shifted their operations overseas.
Today, only Coinbase remains in the top 10 among cryptocurrency exchanges by trading volume. Interestingly, the SEC is currently pursuing legal action against Coinbase for trading XRP and five other assets that they claim weren’t properly registered as securities. This situation unfolded after Coinbase sought regulatory clarity, to which the SEC initially responded with a claim that it was crystal clear what constitutes a security. A judge, however, disagreed and ruled against the SEC in their case against XRP for that very reason.
Why is DeFi important?
DeFi is important because, when it comes to custody, it puts the control firmly in the hands of consumers. In the world of decentralized finance, consumers actually hold their private keys. This is a stark contrast to traditional finance. Moreover, in the realm of cryptocurrencies, transactions clear almost instantly. There is no need for a centralized clearinghouse corporation, which is a significant departure from traditional finance.
This leaves us with the custody of assets and the matching of price points. When engaging in DeFi trading on an exchange as a consumer, you have direct control over the custody of your cryptocurrency funds. For example, you can visit a leading DeFi exchange like Uniswap with your own funds. The mechanism here differs from the conventional approach employed by most stock and crypto exchanges prior to 2020, which relied on something called an order book with matching engine technology.
Uniswap, on the other hand, operates through trading pools where multiple users provide liquidity, enabling an Automated Market Maker (AMM) structure to function. So, when I make a trade on Uniswap, I’m taking my custody-held funds and moving them instantly. For instance, I might buy Ethereum while simultaneously exchanging it for USD using a stablecoin like USDT. Throughout this process, I maintain control of my private keys, securely stored in what’s known as a software wallet.
How does Quantify Crypto help users understand and manage the inherent risks of crypto trading?
What we do is provide a wealth of information, including analysis of price patterns and the movement of cryptocurrencies. This is crucial because certain trading trends in the crypto market hold significant importance. Often, you’ll observe gradual increases or decreases, and the adage “the trend is your friend” rings especially true in crypto trading due to its inherent volatility. That’s the first level of our service.
Additionally, we offer comprehensive research reports on the top 50 cryptocurrencies. The crypto landscape includes some highly speculative assets alongside exceptionally robust and promising ones. Our reports precisely pinpoint and identify which cryptocurrencies fall into the latter category. These are the ones that are innovative, trailblazing in their efforts, boast a strong customer base, and exhibit growth potential.
In contrast to traditional stock markets, where publicly listed companies are obliged to disclose financial reports and provide extensive data for investors, the cryptocurrency space lacks such stringent regulations. Many crypto companies do not provide adequate information, which can be a red flag given the substantial hype in this industry. Therefore, in the absence of comprehensive news and data, technical analysis indicators become even more crucial.
Our focus on price patterns, technical analysis, and high-quality research reports serves as a valuable resource for conducting your own research, assisting you in making informed decisions about your crypto investments.
Looking forward, what do you think are the biggest challenges and opportunities for the cryptocurrency trading industry in the next 5 years?
I think the biggest opportunity is when we get better regulation.
People are afraid of scams, and to be honest, there have been a lot of scams in crypto. These scams have primarily been associated with exchanges and users who do not have control over their private keys, meaning they lack custody of their funds.
As regulations continue to progress, we will likely see measures such as “proof of assets” requirements for cryptocurrency exchanges. These regulations would mandate that crypto exchanges demonstrate they possess customer assets exclusively for their intended purposes and not for any other use.
As people grow more comfortable and gain a sense of security while understanding how cryptocurrency functions, a significant aspect of the challenge associated with the absence of regulations will be addressed. Cryptocurrency’s intricacies can be quite challenging to grasp, and the majority of individuals lack a deep understanding of its workings.
This complexity is reminiscent of the transition from horse-drawn carriages to automobiles, a shift that required a comprehensive overhaul of driving regulations. In the context of today, the cryptocurrency industry is undergoing a similar transformation. Cryptocurrency exhibits characteristics resembling both commodities and securities. Instead of relying solely on outdated regulatory frameworks like the Howey Test, which originated in the 1950s, there is a pressing need to adapt and modernize these laws specifically for crypto exchanges and crypto assets in the contemporary landscape. This adjustment is crucial to accommodate the unique dynamics and intricacies of the cryptocurrency market in the present day.