{"id":6938,"date":"2021-03-26T08:46:51","date_gmt":"2021-03-26T12:46:51","guid":{"rendered":"https:\/\/cointelegraph.com\/magazine\/?p=6938"},"modified":"2021-04-02T09:45:03","modified_gmt":"2021-04-02T13:45:03","slug":"defi-derivatives-and-fixing-an-antiquated-financial-system-kristin-boggiano","status":"publish","type":"post","link":"https:\/\/cointelegraph.com\/magazine\/2021\/03\/26\/defi-derivatives-and-fixing-an-antiquated-financial-system-kristin-boggiano","title":{"rendered":"DeFi, derivatives and fixing an antiquated financial system: Kristin Boggiano"},"content":{"rendered":"<p><b>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 Cof\u00e1n people against the Big Oil companies. <\/b><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It was partly due to the GFC that institutions were slow to adopt Bitcoin in the early 2010s, she says.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cI 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,\u201d she recalls, looking back on the early days of crypto markets between 2011 and 2013.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Back then, her clients were not ideological types \u2014 they were institutions that saw opportunities in arbitrage. &#8220;Hedge funds didn\u2019t 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.\u201d<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<blockquote class=\"pullquote align-center\"><p>\u201cAs soon as Silk Road happened, and Mt. Gox, I think institutional participation became questionable from a fiduciary perspective. You don&#8217;t want to participate in illicit activities.\u201d<\/p><\/blockquote>\n<p><span style=\"font-weight: 400;\">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 Cof\u00e1n 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.<\/span><\/p>\n<p>&nbsp;<\/p>\n<blockquote class=\"twitter-tweet\" data-width=\"500\" data-dnt=\"true\">\n<p lang=\"en\" dir=\"ltr\">.<a href=\"https:\/\/twitter.com\/crosstower_ex?ref_src=twsrc%5Etfw\">@crosstower_ex<\/a> Co-Founder &amp; CEO, <a href=\"https:\/\/twitter.com\/KristinBoggiano?ref_src=twsrc%5Etfw\">@KristinBoggiano<\/a> joins <a href=\"https:\/\/twitter.com\/JillMalandrino?ref_src=twsrc%5Etfw\">@JillMalandrino<\/a> on <a href=\"https:\/\/twitter.com\/Nasdaq?ref_src=twsrc%5Etfw\">@Nasdaq<\/a> <a href=\"https:\/\/twitter.com\/hashtag\/TradeTalks?src=hash&amp;ref_src=twsrc%5Etfw\">#TradeTalks<\/a> to discuss institutional adoption of digital assets, structured products and regulation. <a href=\"https:\/\/t.co\/nDJXPaS6BM\">https:\/\/t.co\/nDJXPaS6BM<\/a><\/p>\n<p>&mdash; TradeTalks (@TradeTalks) <a href=\"https:\/\/twitter.com\/TradeTalks\/status\/1349810131056300033?ref_src=twsrc%5Etfw\">January 14, 2021<\/a><\/p><\/blockquote>\n<p><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Apart from being the president of the institutionally focused platform<\/span> <span style=\"font-weight: 400;\">CrossTower<\/span><span style=\"font-weight: 400;\">, Boggiano is also the founder and co-chair of Digital Asset Regulatory &amp; Legal Alliance<\/span><span style=\"font-weight: 400;\">, whose \u201capproximately 90 members are executives, senior legal and compliance officers of financial institutions and blockchain technology companies.\u201d<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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,<\/span> <a href=\"https:\/\/cointelegraph.com\/news\/guggenheim-cio-under-fire-for-the-timing-of-his-changing-btc-sentiment\"><span style=\"font-weight: 400;\">predicting Bitcoin will reach $600,000<\/span><\/a><span style=\"font-weight: 400;\">.<\/span><\/p>\n<h4>Sounds a little derivative<\/h4>\n<p><span style=\"font-weight: 400;\">With her father serving as a doctor in the Air Force, Boggiano grew up on the move. \u201cI lived in Texas, California, Taiwan, New Mexico, New Jersey, Colorado and back to New Jersey,\u201d 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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">After writing a thesis about Texaco\u2019s 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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cI wound up finding the Cof\u00e1n 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.\u201d The difficulty was that the Ecuadorian government owned rights to the oil underneath, which it wanted to extract \u2014 with U.S. oil companies often assisting in the drilling.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<blockquote class=\"pullquote align-center\"><p>\u201cIn the process of studying, I became fascinated with the derivatives markets.\u201d<\/p><\/blockquote>\n<p>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.<\/p>\n<p><span style=\"font-weight: 400;\">She soon got a job \u201ctrading or structuring equity and credit derivatives\u201d for hedge funds and high-net-worth individuals on behalf of Merrill Lynch in the late \u201990s.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cI was working 18 hours a day, sometimes seven days a week \u2014 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.\u201d<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cI think \u201881 was the first swap,\u201d Boggiano tells Magazine as she explains the early history of derivatives before she entered the game. She\u2019s 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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cForeign exchange derivatives were the early \u201890s,&#8221; she calculates, adding that equity derivatives started to be used around \u201896, \u201cBut they were just starting and they republished the definitions in 2002.\u201d Working on the trading floor, this put the young Boggiano in the middle of a financial revolution of the time.<\/span><\/p>\n<h4>That all sounds familiar<\/h4>\n<p><span style=\"font-weight: 400;\">In many ways, Boggiano\u2019s description of the &#8217;90s and early 2000\u2019s 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 <\/span><a href=\"https:\/\/cointelegraph.com\/explained\/ethereum-20-staking-explained\"><span style=\"font-weight: 400;\">Ethereum 2.0 offering staking rewards<\/span><\/a><span style=\"font-weight: 400;\"> of several percent per year.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Today, many lenders such as BlockFi and Celsius, as well as various exchanges including Boggiano\u2019s CrossTower, offer opportunities to earn interest yield on cryptocurrency holdings. Furthermore, DeFi platforms like Ethereum\u2019s SushiSwap and Binance Smart Chain\u2019s 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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The concept of DeFi has been called \u201cfinancial Lego,\u201d 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 Boggiano\u2019s early days) to allow for yield farming, often generating tokens in new projects that may vest immediately or over several years.<\/span><\/p>\n<p>&nbsp;<\/p>\n<script>(function() {\n\twindow.mc4wp = window.mc4wp || {\n\t\tlisteners: [],\n\t\tforms: {\n\t\t\ton: function(evt, cb) {\n\t\t\t\twindow.mc4wp.listeners.push(\n\t\t\t\t\t{\n\t\t\t\t\t\tevent   : evt,\n\t\t\t\t\t\tcallback: cb\n\t\t\t\t\t}\n\t\t\t\t);\n\t\t\t}\n\t\t}\n\t}\n})();\n<\/script><!-- Mailchimp for WordPress v4.8.6 - https:\/\/wordpress.org\/plugins\/mailchimp-for-wp\/ --><form inert id=\"mc4wp-form-1\" class=\"mc4wp-form mc4wp-form-5517 mc4wp-ajax\" method=\"post\" data-id=\"5517\" data-name=\"JNEWS style form\" ><div class=\"mc4wp-form-fields\"><div class=\"jeg_mc4wp_heading\">\r\n  <h3>The best of blockchain, every Tuesday<\/h3>\r\n  <p>Subscribe for thoughtful explorations and leisurely reads from Magazine.<\/p>\r\n<\/div>\r\n\r\n<p>\r\n    <input type=\"email\" name=\"EMAIL\" placeholder=\"Email address...\" required \ placeholder="disabled" disabled="disabled" title="form boxes are disabled in cached version of the site" value="Disabled" style="opacity:0.3;" />\r\n<\/p>\r\n<p>\r\n    <input type=\"submit\" value=\"SUBSCRIBE\" \ placeholder="disabled" disabled="disabled" title="form boxes are disabled in cached version of the site" value="Disabled" style="opacity:0.3;" />\r\n<\/p><br>\r\nBy subscribing you agree to our <a href=\"https:\/\/cointelegraph.com\/terms-and-privacy\" target=\"_blank\">Terms of Service and Privacy Policy<\/a><\/div><label style=\"display: none !important;\">Leave this field empty if you're human: <input type=\"text\" name=\"_mc4wp_honeypot\" value=\"\" tabindex=\"-1\" autocomplete=\"off\" \ placeholder="disabled" disabled="disabled" title="form boxes are disabled in cached version of the site" value="Disabled" style="opacity:0.3;" /><\/label><input type=\"hidden\" name=\"_mc4wp_timestamp\" value=\"1634257607\" \ placeholder="disabled" disabled="disabled" title="form boxes are disabled in cached version of the site" value="Disabled" style="opacity:0.3;" /><input type=\"hidden\" name=\"_mc4wp_form_id\" value=\"5517\" \ placeholder="disabled" disabled="disabled" title="form boxes are disabled in cached version of the site" value="Disabled" style="opacity:0.3;" /><input type=\"hidden\" name=\"_mc4wp_form_element_id\" value=\"mc4wp-form-1\" \ placeholder="disabled" disabled="disabled" title="form boxes are disabled in cached version of the site" value="Disabled" style="opacity:0.3;" /><div class=\"mc4wp-response\"><\/div><\/form><!-- \/ Mailchimp for WordPress Plugin -->\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Just like the 18-hour days Boggiano recounts, there is no shortage of \u201cDeFi degens\u201d skipping sleep to manage their yield farms across a multitude of newly emerging platforms. FTX\u2019s Sam Bankman-Fried famously spends almost every waking moment at his Hong Kong desk and sleeps on an office beanbag.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In 2000, Boggiano left the floor to work at a law firm and help build new products for the new financial ecosystem. \u201cIt was a wild market. I was doing credit-default swaps on residential mortgage-backed securities, and then putting those into other vehicles,\u201d she explains.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In 2007 and 2008, the global financial crisis decimated the market.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cOnce 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,\u201d Boggiano recounts, recalling the tumultuous era when she worked to create stability by way of regulation and oversight.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<h4>Bitcoin from the ashes<\/h4>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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 \u201cdegens\u201d who \u201caped in\u201d to new yield strategies without critical analysis. Instead, the money often represented the life savings and mortgages of average people.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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 people\u2019s trust.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Today, things are different.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cWe\u2019re unquestionably seeing the participation and acceptance of Bitcoin from the institutional perspective,\u201d 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.<\/span><\/p>\n<blockquote class=\"pullquote align-center\"><p>\u201cI think that there&#8217;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&#8217;s forcing countries to think about their economic systems.\u201d<\/p><\/blockquote>\n<p><span style=\"font-weight: 400;\">\u201cWe&#8217;re gonna see significant adoption and change over the next three to five years \u2014 it&#8217;s going to be a different economy,\u201d she says with total confidence.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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. \u201cI think that they&#8217;re doing the prudent analysis that they need to do in order to protect their investors. I think you&#8217;ve seen more activity from prop desks, who don&#8217;t have to report to investors,\u201d she says.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cI think that the narrative to institutions is that when there&#8217;s sufficient adoption, [when] the number of Bitcoin wallets that are being utilized is considerable, it becomes a lot less likely that it&#8217;s just going to plummet to zero.\u201d<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Boggiano says it\u2019s important to protect retail investors who are playing alongside the institutions. \u201cWe have a very antiquated financial system and regulatory process \u2014 I think that there&#8217;s a natural struggle that&#8217;s happening between innovation, and trying to protect the retail.\u201d<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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. \u201cThose protections are there so there isn&#8217;t fraud, there isn&#8217;t manipulation.\u201d<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Still, Boggiano acknowledges, \u201cIt&#8217;s primarily been a retail-driven asset class which is very unusual \u2014 mostly, asset classes are run by institutions.\u201d<\/span><\/p>\n<h4>More regulation, less privacy?<\/h4>\n<p><span style=\"font-weight: 400;\">\u201cWith respect to Bitcoin, I feel there is a moral obligation to develop a means to encourage privacy, but ensure safety,\u201d says Boggiano. While she values privacy, she thinks protecting retail investors and the wider population is a higher priority.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">An example of this being beneficial came during the Capitol insurrection, where investigators tracked down Nick Fuentes, who&#8217;d <\/span><a href=\"https:\/\/www.wsj.com\/livecoverage\/trump-impeachment-house-biden\/card\/vHIedsWP1ZHINSWHhnVD\"><span style=\"font-weight: 400;\">received<\/span><\/a><span style=\"font-weight: 400;\"> 13.5 Bitcoin from an overseas donor. According to Boggiano, that was a great demonstration of deanonymizing Bitcoin transactions by way of following \u201cdigital breadcrumbs\u201d in the name of public safety.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Coinbase is one company that is said to help authorities follow these digital breadcrumbs by <\/span><a href=\"https:\/\/cointelegraph.com\/news\/nevermind-coinbase-big-brother-is-already-watching-your-coins\"><span style=\"font-weight: 400;\">providing crypto surveillance services to U.S. government agencies<\/span><\/a><span style=\"font-weight: 400;\"> like the Drug Enforcement Administration and the Internal Revenue Service.<\/span><\/p>\n<blockquote class=\"pullquote align-center\"><p><i><span style=\"font-weight: 400;\">\u201cWe really need to develop an alternative means of protecting people&#8217;s privacy, but also to be able to track down transactions related to human trafficking and drug cartels, because those are not acceptable industries.\u201d<\/span><\/i><\/p><\/blockquote>\n<p><span style=\"font-weight: 400;\">Boggiano is, in some ways, the mirror opposite of Erik Voorhees, a previous Journeys interviewee and fellow Bitcoin entrepreneur also running an exchange platform,<\/span> <a href=\"https:\/\/cointelegraph.com\/magazine\/2021\/03\/03\/the-reformed-bitcoin-maxi-who-saw-the-light-erik-voorhees\"><span style=\"font-weight: 400;\">who said<\/span><\/a><span style=\"font-weight: 400;\"><a href=\"https:\/\/cointelegraph.com\/magazine\/2021\/03\/03\/the-reformed-bitcoin-maxi-who-saw-the-light-erik-voorhees\"> that<\/a> \u201cInstitutions and government exist purely to curtail people\u2019s power over money.\u201d<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Whereas Voorhees\u2019 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 Cof\u00e1n people of the Amazon who needed environmental regulations to keep their land free of oil waste.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cLeft to people&#8217;s own devices, you get these imbalances of power and that can be very destructive to people who are in vulnerable positions,\u201d she states.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#8220;We have a very antiquated financial system and regulatory process \u2014 I think that there&#8217;s a natural struggle that&#8217;s happening between innovation, and trying to protect the retail.&#8221;<\/p>\n","protected":false},"author":40,"featured_media":6940,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"mc4wp_mailchimp_campaign":[],"_links_to":"","_links_to_target":""},"categories":[156],"tags":[2759,2722,2873,2724,2874,2872],"yst_prominent_words":[225,1668,2000,279,1676],"_links":{"self":[{"href":"https:\/\/cointelegraph.com\/magazine\/wp-json\/wp\/v2\/posts\/6938"}],"collection":[{"href":"https:\/\/cointelegraph.com\/magazine\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/cointelegraph.com\/magazine\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/cointelegraph.com\/magazine\/wp-json\/wp\/v2\/users\/40"}],"replies":[{"embeddable":true,"href":"https:\/\/cointelegraph.com\/magazine\/wp-json\/wp\/v2\/comments?post=6938"}],"version-history":[{"count":11,"href":"https:\/\/cointelegraph.com\/magazine\/wp-json\/wp\/v2\/posts\/6938\/revisions"}],"predecessor-version":[{"id":6955,"href":"https:\/\/cointelegraph.com\/magazine\/wp-json\/wp\/v2\/posts\/6938\/revisions\/6955"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/cointelegraph.com\/magazine\/wp-json\/wp\/v2\/media\/6940"}],"wp:attachment":[{"href":"https:\/\/cointelegraph.com\/magazine\/wp-json\/wp\/v2\/media?parent=6938"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/cointelegraph.com\/magazine\/wp-json\/wp\/v2\/categories?post=6938"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/cointelegraph.com\/magazine\/wp-json\/wp\/v2\/tags?post=6938"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/cointelegraph.com\/magazine\/wp-json\/wp\/v2\/yst_prominent_words?post=6938"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}