DeFi, derivatives and fixing an antiquated financial system: Kristin Boggiano
Kristin Boggiano, a lawyer and co-founder of the CrossTower digital asset exchange, developed her ethos on protecting the vulnerable while working and living in the Amazon during the 1990s, helping fight for the rights of the Cofn people against the Big Oil companies.
She later worked creating mortgage-based derivatives on Wall Street right before exotic derivatives shouldered part of the blame for causing the global financial crisis, or GFC. In the aftermath, she put her inside knowledge to good use as a regulatory lawyer helping shape market reforms.
It was partly due to the GFC that institutions were slow to adopt Bitcoin in the early 2010s, she says.
I came upon [Bitcoin] from the perspective of a lawyer, because my clients wanted to buy and trade it. I had to figure out what it was and how to trade it, she recalls, looking back on the early days of crypto markets between 2011 and 2013.
Back then, her clients were not ideological types they were institutions that saw opportunities in arbitrage. “Hedge funds didnt have any philosophical desire to change the world with Bitcoin. They just saw it as an asset class, even as early as 2011 and 2012.
But Bitcoin soon faced a reckoning with the collapse of its primary exchange, Mt. Gox, and the much-publicized arrest of Ross Ulbricht, who was operating the Silk Road darknet market.
As soon as Silk Road happened, and Mt. Gox, I think institutional participation became questionable from a fiduciary perspective. You don’t want to participate in illicit activities.
Seven or eight years later, the institutions are returning in full force. Boggiano considers proper regulation in the name of safety and legality to be critical to integrating the crypto industry with the powers that be. Just as the Cofn people of the Amazon needed environmental regulations to keep their land free of oil waste, she believes retail traders similarly need strong regulations to protect them from financial harm.
.@crosstower_ex Co-Founder & CEO, @KristinBoggiano joins @JillMalandrino on @Nasdaq #TradeTalks to discuss institutional adoption of digital assets, structured products and regulation. https://t.co/nDJXPaS6BM
— TradeTalks (@TradeTalks) January 14, 2021
Apart from being the president of the institutionally focused platform CrossTower, Boggiano is also the founder and co-chair of Digital Asset Regulatory & Legal Alliance, whose approximately 90 members are executives, senior legal and compliance officers of financial institutions and blockchain technology companies.
She previously worked as both chief strategy adviser and senior regulatory counsel for Guggenheim Partners, an investment firm with $270 billion dollars under management. The firm has gotten recent press due to its chief investment officer, Scott Minerd, predicting Bitcoin will reach $600,000.
Sounds a little derivative
With her father serving as a doctor in the Air Force, Boggiano grew up on the move. I lived in Texas, California, Taiwan, New Mexico, New Jersey, Colorado and back to New Jersey, she says. When her parents divorced, she then split time living with each of them, until she left to study developing economics at Sarah Lawrence College, graduating in 1992.
After writing a thesis about Texacos work in Ecuador and the adverse human rights and environmental consequences of U.S. foreign policy on developing countries, she received a grant to travel to Ecuador where she worked for a law firm advocating for the rights of Indigenous peoples.
I wound up finding the Cofn people in the upper-Amazon basin, and then wound up living with them on and off for a while, helping them think through how to acquire the title to their land. The difficulty was that the Ecuadorian government owned rights to the oil underneath, which it wanted to extract with U.S. oil companies often assisting in the drilling.
After two years of fighting for Indigenous rights, Boggiano was inspired to apply to law school. She graduated from Northeastern University School of Law in Massachusetts in 1997, also completing an MBA at the same institution in 1996.
In the process of studying, I became fascinated with the derivatives markets.
While still studying, she worked in the enforcement divisions of both the Commodity Futures Trading Commission and the Securities and Exchange Commission in New York, both tasked with regulating the U.S. financial system.
She soon got a job trading or structuring equity and credit derivatives for hedge funds and high-net-worth individuals on behalf of Merrill Lynch in the late 90s.
I was working 18 hours a day, sometimes seven days a week it was just a really crazy market. [Chair of the U.S. Federal Reserve Alan] Greenspan was keeping interest rates really low, and people were really looking for yield at that time. So they were coming up with creative methods of creating products.
I think 81 was the first swap, Boggiano tells Magazine as she explains the early history of derivatives before she entered the game. Shes referring to financial swaps, which are derivatives contracts that allow parties to trade the cash flow of one asset for another. These exploded in popularity because investors were looking for yield after the reduction of bank interest rates.
Foreign exchange derivatives were the early 90s,” she calculates, adding that equity derivatives started to be used around 96, But they were just starting and they republished the definitions in 2002. Working on the trading floor, this put the young Boggiano in the middle of a financial revolution of the time.
That all sounds familiar
In many ways, Boggianos description of the ’90s and early 2000s Wall Street world invites comparisons to the more recent decentralized finance, or DeFi, boom of the cryptocurrency world. Cryptocurrencies like Bitcoin did not initially offer any opportunities for cash flow beyond appreciation, but that is changing with things like Ethereum 2.0 offering staking rewards of several percent per year.
Today, many lenders such as BlockFi and Celsius, as well as various exchanges including Boggianos CrossTower, offer opportunities to earn interest yield on cryptocurrency holdings. Furthermore, DeFi platforms like Ethereums SushiSwap and Binance Smart Chains PancakeSwap allow users to exchange cryptocurrencies through the use of liquidity pools. These liquidity pools act as decentralized cash reserves to which anyone can contribute, with those contributors then earning yield in the form of trading fees.
The concept of DeFi has been called financial Lego, and goes much deeper. The tokens representing stakes in these liquidity pools can themselves be staked on other platforms (or vehicles, as they might have been called in Boggianos early days) to allow for yield farming, often generating tokens in new projects that may vest immediately or over several years.
Just like the 18-hour days Boggiano recounts, there is no shortage of DeFi degens skipping sleep to manage their yield farms across a multitude of newly emerging platforms. FTXs Sam Bankman-Fried famously spends almost every waking moment at his Hong Kong desk and sleeps on an office beanbag.
In 2000, Boggiano left the floor to work at a law firm and help build new products for the new financial ecosystem. It was a wild market. I was doing credit-default swaps on residential mortgage-backed securities, and then putting those into other vehicles, she explains.
In 2007 and 2008, the global financial crisis decimated the market.
Once the market crashed, I became a regulatory lawyer and helped shape regulation from pre-Dodd-Frank [Wall Street Reform and Consumer Protection Act], all the way through rule-making 200-plus rules, Boggiano recounts, recalling the tumultuous era when she worked to create stability by way of regulation and oversight.
It may not be fair to assign all the blame for greed upon the innovators of Wall Street; it was the investors, after all, who demanded returns on their capital despite a difficult economic environment where previously high interest rates had fallen. No longer could you put your money in a bank account and watch it grow as consistently. With the idea that money should earn favorable interest firmly entrenched over generations, the creation of exotic new methods to achieve it seems inevitable.
Bitcoin from the ashes
It was in the fallout of this crisis that many began to question the stability and even legitimacy of the financial system centered largely on Wall Street.
What made this early derivatives market more serious than an anonymous online DeFi casino was that the money flowing through it was not the gambling budget of self-styled degens who aped in to new yield strategies without critical analysis. Instead, the money often represented the life savings and mortgages of average people.
Who better to step into a role as a regulator than someone who understood this crucial area intimately? That person was Boggiano, who retreated from the chaos of the trading floor to a law office where she would work to help rebuild the system in hopes of allowing it to earn back peoples trust.
It was in this position as a lawyer that Boggiano came across Bitcoin in 2011. Major financial institutions she was working with were interested in it, but they were skittish.
The level of scrutiny at the time was very high, not least because the Bernie Madoff Ponzi scheme had recently come to light and the industry was in regulatory flux, Boggiano explains.
Today, things are different.
Were unquestionably seeing the participation and acceptance of Bitcoin from the institutional perspective, Boggiano asserts, listing the likes of Elon Musk, MicroStrategy, Visa and Mastercard, as well as the endowment funds of major institutions like Harvard, Stanford and Yale as recently converted supporters. There is even interest on various national levels, such as China and the United States working on a digital yuan and dollar, respectively.
I think that there’s a natural, healthy competition that Bitcoin has with respect to monetary policy in the United States and elsewhere. That competition is a good thing because it’s forcing countries to think about their economic systems.
We’re gonna see significant adoption and change over the next three to five years it’s going to be a different economy, she says with total confidence.
One question that comes to mind is whether some institutions feel as if they missed the crypto boom, seeing as they were often prevented from making moves in the early years due to the associated uncertainty. Boggiano does not frame this as a missed opportunity but as an appropriate exercise in caution. I think that they’re doing the prudent analysis that they need to do in order to protect their investors. I think you’ve seen more activity from prop desks, who don’t have to report to investors, she says.
I think that the narrative to institutions is that when there’s sufficient adoption, [when] the number of Bitcoin wallets that are being utilized is considerable, it becomes a lot less likely that it’s just going to plummet to zero.
Boggiano says its important to protect retail investors who are playing alongside the institutions. We have a very antiquated financial system and regulatory process I think that there’s a natural struggle that’s happening between innovation, and trying to protect the retail.
Any investment offered to retail, she explains, is more highly scrutinized than those in which only sophisticated investors, like institutions and high net worth individuals, can participate in, as it is assumed that the latter entities are better equipped to understand the investments and manage losses. Those protections are there so there isn’t fraud, there isn’t manipulation.
Still, Boggiano acknowledges, It’s primarily been a retail-driven asset class which is very unusual mostly, asset classes are run by institutions.
More regulation, less privacy?
With respect to Bitcoin, I feel there is a moral obligation to develop a means to encourage privacy, but ensure safety, says Boggiano. While she values privacy, she thinks protecting retail investors and the wider population is a higher priority.
An example of this being beneficial came during the Capitol insurrection, where investigators tracked down Nick Fuentes, who’d received 13.5 Bitcoin from an overseas donor. According to Boggiano, that was a great demonstration of deanonymizing Bitcoin transactions by way of following digital breadcrumbs in the name of public safety.
Coinbase is one company that is said to help authorities follow these digital breadcrumbs by providing crypto surveillance services to U.S. government agencies like the Drug Enforcement Administration and the Internal Revenue Service.
We really need to develop an alternative means of protecting people’s privacy, but also to be able to track down transactions related to human trafficking and drug cartels, because those are not acceptable industries.
Boggiano is, in some ways, the mirror opposite of Erik Voorhees, a previous Journeys interviewee and fellow Bitcoin entrepreneur also running an exchange platform, who said that Institutions and government exist purely to curtail peoples power over money.
Whereas Voorhees viewpoint reflects an individualist ethos of unbridled liberty where collectivist institutions limit the powerful and ambitious, Boggiano instead describes governments and regulations as necessary to protect the vulnerable, like the Cofn people of the Amazon who needed environmental regulations to keep their land free of oil waste.
Left to people’s own devices, you get these imbalances of power and that can be very destructive to people who are in vulnerable positions, she states.