Adapt or Die, How Bitcoin Exchanges Thrive

Obi Nwosu (Coinfloor), Nejc Kodric (Bitstamp), Aaron van Wirdum (Bitcoin Magazine)

[00:00:00] Aaron van Wirdum: Welcome everyone. This is the panel with Bitcoin exchanges, adapt or die. How OG exchanges, thrive. The panelists are Obi Nowsu, Obi- did I pronounce your name right?

Obi Nwosu: You actually got it really well. Yeah, you did it really well.

Aaron van Wirdum: Perfect. Obi from coin floor. And Nejc Kodric from Bitstamp.

Welcome guys. How are you doing,

Paolo from Bitfinex was originally gonna to be on this panel. He didn't make it. So, it's just the three of us. What we're gonna discuss is how do you guys stay relevant with your business? I think both of you Bitstamp and Coinfloor are among the oldest big Bitcoin exchanges around. Nejc let's start with you because Bitstamp is literally the oldest Bitcoin exchange still running.

Right. What's the story of [00:01:00] Bitstamp? How did you guys start? When did you guys start?

Nejc Kodric: yeah,

we're three Halvings old,

quite something in this space, right? because we have been through. This is our third time. so yeah, we started in 2011 at a time. Crypto was way different. I mean, there was no crypto, it was just bitcoin. the industry was Bitcoin enthusiasts, maximalists.  There was no ether.

There was nothing really. also, there was much less divide all of a sudden, you know, we have all this scaling solutions and then opinions, people being so professional about their opinions. Back then it was kind of just small wacky group, one forum where we discussed things and that was it. communications ran through IRC.

Everyone knew everyone, so yeah. Times have changed.

Aaron van Wirdum: and there was also only one exchange. Basically, back then, there was Mt. Gox.

Nejc Kodric: We were the seventh to exist. There was Mt. [00:02:00] Gox, there was Trade Hill. There were a few others. We were the seventh

Aaron van Wirdum: volume wise. It was just Mt. Gox though. Yeah. Yeah. Right. So technically you were the seventh exchange.

okay. OB, What about the coin floor?

Obi Nwosu:  So, yeah, I mean, we're not as old us a Bitstamp. but around 2011 was when I actually first started looking at Bitcoin. And so, I was aware of bit stamp at the time. and I started looking at it when it was around a hundred and then it went down to like, A few dollars. and I fought, it was still a lot of rubbish and forgot about it until two years later, my cofounder brought my attention back cause I had to, I was running my own company at that time.

And at that time, it was in the hundreds of dollars on, I realized something important was happening here. And as a background, I was a CTO for 15 years. So, I was initially attracted by the technology. so, we saw in the UK, [00:03:00] there weren't really any significant players. And we decided to launch in 2013. So, it was just after a little bit.

It was about a, yeah, it was about six or seven months after we incorporated the company, the first Halving. yeah. And then the published, the actual algorithmic exchange launch in early 2014. And so, it was still only about Bitcoin then. and you know, a few years later, few people would come to conferences talking about decentralized exchanges or stable coins.

And again, you'd just be laughed at because all the volume was just Bitcoin via to crypto. And I think eventually to call long story short, we're going to go back to basically, that being the story, we're just going through a growing pain right now.

Aaron van Wirdum: Yeah. And

Coinfloor is

based in the UK, it's mostly focused on the UK or are you also serving customers from other countries?

Obi Nwosu: So, we are based in the [00:04:00] UK. we, from the beginning we focus on sophisticated and professional investors and traders. We just didn't feel it was appropriate to offer. As you know, a school project like cryptocurrency to retail. but now, but we did have customers who are from other countries as well.

international, especially sophisticated tend to be international. more recently we've now started in retail, so we're still focused on UK, but we all are looking at the obvious next step will be Europe as well. Now that we have, we feel that. Bitcoin, not anything else, but Bitcoin is, is mature enough to, to reasonably offered to retail uses

Aaron van Wirdum: Nejc, you are from Slovenia, I think.

And Bitstamp also started in Slovenia, but it has been moving around over the years a little bit.  Why is this? I think one of the topics is adapt or die. Has this got something to do with that?

Nejc Kodric: This absolutely has to do with that. you know, the primary reasons why I started in [00:05:00] Slovenia because I'm, you know, Slovenian national.

so, the cofounder and myself, we launched out of Slovenia, but then as business was taking off, you know, in 2012 as business taken off, we figured out what we're doing is it actually permitted because no one would give us straight answers. So. We collected to FCA at the time was still FSA. whether in asking if the UK was a jurisdiction where we could operate.

And we chose UK because, you know, we both speak English and, you know, there's a direct flight from easy jet, you know, at the time we didn't have means in the early beginning. So with okay. London's cool, so FCA the time gave us kind of the opinion. They don't recognize crypto as a currency. Therefore, we are not, you know, financial institutions so we can do what we do.

So I thought, okay, Let's go. So we started

Aaron van Wirdum: So lack of regulatory clarity was the



[00:06:00] leave Slovenia

Nejc Kodric: keep in mind 2012. Not that all the people actually knew about crypto. So in that sense, we are maybe ahead of time, a little bit. So we started our move to the UK and then in 2013, towards the end of 2013, Luxembourg came out with some sort of announcement about, putting together a framework for, you know, crypto regulation.

So in 2014, beginning of 2014, I actually traveled there and met with the ministry of finance. he regulator for banks. And yeah, this is the place for it because everyone knew, what Bitcoin is. Cause I was, I was used to kind of explain that Bitcoin is not a company. There's no bitcoin building, would have to explain what mining was.

So it was a different feeling when someone kinda knew all of it. so that's when we saw that Luxembourg and say, then we made it, they started our licensing efforts in Luxembourg and migrated to Luxembourg. So [00:07:00] yeah, now we are a global firm. but we have a license for Europe, other Luxembourg management of Luxembourg, and we still have quite a lot of operations, in Slovenia.

Most of the development customer care, and those kinds of departments are based in Slovenia. And then we have some staff in the us as part of our global expansion.

Aaron van Wirdum: Right. So over these years that you, both of you have been operational with your exchanges, what have you found were the biggest challenges in running a Bitcoin exchange?

Obi do you want to go first.

Obi Nwosu: So, I mean, a lot of the things you just said, I could for us, I think if I would break down the two challenges there in two camps, one is education. And basically the last six plus years of being in education and then probably the next six plus years as well. education of everyone, of everyone, from initially from our investors.

[00:08:00] And, and, and that's still ongoing and that's, that will continue. But as an employee,

Aaron van Wirdum: Sorry, this is education of what Bitcoin itself, is?

Obi Nwosu: Well, now

they're more sophisticated, but at the beginning it was what Bitcoin is, but all of our customers are now team of regulators. So that's one big ongoing challenge.

It gets easier and easier. The more people get involved, but that was a massive problem and challenge. For all of our history and talking to banks, whoever it may be. And the other area, which is highly related was regulation. And, and what that meant the lack of regulation. Cause we have the same tools with the FCA and FSA at the time, was that we would have, especially early on, there were lots of challenges around banking.

I'm thinking almost every exchange that's been around for that long realizes that we talked to literally hundreds of banks over the last six years. [00:09:00] Now it's a lot easier. literally only for the last two are three years buts. If you went back three or four years ago, it was still incredibly hard. And part of the reason it's easiest because you've been around for a long time, as well as this virtual circle.

but those were the two biggest challenges, banking and regulation and education. And I think the education one will still be with us for a good few more years to come as new people as a market. The whole process starts again.

Aaron van Wirdum: Right. And do you know why regulation and banking is such a problem? I'm assuming it probably has to do with money laundering concerns.

Obi Nwosu: so yeah, it'd be the, the top of the line reason is, that's publicly stated is always going to be, in the short-term money laundering and terrorist financing. there are other, there's a, there's another concern as well, which is not so obvious, I think until you become a, maybe a more established exchange or dealing with larger volumes, which is fraud.

[00:10:00] and you know, so cause for doesn't come in money laundering, terrorist financing, but no one likes to see, you know, an ATO vulnerable person lose their life savings because, and the problem is the same things that I'm dealing with anti-money laundering and terrorist financing also. Deal with fraud. And even if you don't care about..., we do.

But if they were an exchange that doesn't care about putting in those other processes, you still don't want to see vulnerable people losing their money. And you know that, you know, even if you go through and discuss and explain. You know, they're being, they're being scammed. It's controlled. You have to understand who your customer is to work out.

They, they don't even understand what 2FA is, and they don't have to use the system. Are they really operating in their account, you know? So that is another area that is a concern and banks. You know, also concerned about that they don't want to have on their [00:11:00] consciousness that happening. So that's a foot, I put it as equal level to terrorist financing and money laundering.

Aaron van Wirdum: So how do you actually deal with that problem? You, you talk with your customers, ask them why they're buying Bitcoin or how

Obi Nwosu: you have to get to know your customer. And what we try to do is balance. But you also understand people's desire and need and, and rights to have control over their money and have that perception of control.

So it's, it's a, it's a it's, this is one of the biggest challenges of any financial institution is balancing the, the, the right to have people access to their money when they want access to it. cause it's, it's their money on your effectively their servant and they're giving you the honor of their service, but on the other hand, protecting them from.

A number of different things and the biggest is potential risks around fraud. and so it leads to this conflict and that's the biggest challenge. That's why there's a, They, [00:12:00] regulators and banks look for, exchanges, which they feel have the maturity to, to balance those things off. Because if you just focus on one, you're going to end up with a lot of people, swindle the users on your site, each focus on the other, or you'll end up with a non-commercial site that doesn't make money, which is no good either.

Cause you're out of business. And then the only ones left are the exchanges that don't care about those customers. And so everybody wants this people to strike that balance.

Aaron van Wirdum: Yep. Nejc, banking, regulation, fraud. Are these the same or are there other challenges you would like to add?

Nejc Kodric: Yeah, largely the same, but I would then one more just looking through the whole timeline of Bitstamp.

I would say it was, you know, banks and scams. First of all, you know, if we scroll back seven, eight years ago, there was, we were [00:13:00] all small companies, all immature companies, with, you know, some resources, but you know, custodying, large amounts of money. There was no effect that two factor authentication custody solutions are now.

So, you know, we all know MtGox What happened, and those kinds of things happen all the time. You know, new week, new hack. So that, that did put h a kind of a stain on the industry, but I think it was just, the industry was immature plus close. The companies didn't have resources to really invest in security.

Therefore, the cost of a successful hack was much slower as the industry matured. As us, as companies earned more money, we can more money to invest in, you know, IP security. So that's, that problem kind of went away, relatively quick. But then the, kind of the issues with the bank statements.

So here's where Obi addressed it a little bit. So banks, you know, there was a period where banks were super skeptical to, to work with exchanges. [00:14:00] We now have a network of around 20 banks that we work with. It's much easier. You know, we, if we only had like two or three banks, now we have tier two, and also a tier one banks that we work with.

So it's much easier from that sense. And that's very positive for us because it allows us to scale, have a solid banking counter party. Cause you know, a coupler years ago we were kind of the company, the companies in the space were growing fast and we have to resort to like tier three banks, which are, you know, not as stable as you want it.

But you know, again, this is how this industry is maturing. And now the last item is scams also Obi briefly touched it. You know, this is a big industry and there's a lot of money involved. There are people who are crafty enough to scam those who are, you know, naive or just, you know, deceived. and this is an ongoing battle that we fight the day to day to make sure that, you know, our best numbers customers are the ones that actually want to do business with it.

They're not deceived. So it's kind of a [00:15:00] growing pain.

Aaron van Wirdum: Yeah, there's also a lot of, technical innovation because you mentioned hacks and there's also sort of ideas to maybe limit that like faults, provable reserves that people have been talking about these kinds of things for years now, do you see any demand from customers for these kinds of solutions?

Let's start with Nejc.

Nejc Kodric: Yeah. I

mean, from our end, we are, regulated. therefore we have, you know, external, internal audit. We have all sorts of reviews. We have inspections by the regulators. So I know some customers prefer to have this technical proof of reserves. But on the other hand, I mean, we do have regulators if we answered to and they hold us accountable.

So that is kind of proof by itself. And it's periodically checked. Now every year that we have to produce our financial statements and that's being audited and for all of the serious players in the space, that's kind of the standard, that's [00:16:00] the new kind of baseline. those who do not achieve those standards are, you know, in my eyes considered risky.

Aaron van Wirdum: Right [


Obi Nwosu: I guess

this is an area where we probably are known to be very different from pretty much every other player in the space who, and so way back at the MtGox when MtGox happens, I think, a number of exchanges. had a joint, statements that came out saying, you know, we will perform proof of reserves audits going forward.

cause it was put forward as an idea. I think it was correct. Greg Maxwell actually suggested as an approach, but many people suggested similar approaches at a time as a way to prove in a crypto way, in a Bitcoin way. we solvent. cause effect would be, what's [00:17:00] really interesting about proof of custody is not perfect, but it actually instills a mindset that's similar and runs with the ethos of crypto.

Why I don't trust verify, because in order to use it, you will educate your customers in the mindset of not just trusting a third party. In fact, regulators and auditors. Rick audited, the banks that were once doing what they were supposed to be doing. And it led to the original crash out of which Bitcoin came about.

So. although that process, there's nothing wrong with that. And, and it's, and it's, it's a good idea to do that. what is not good is to have people have the mindset that they should just trust a third-party auditor because we know that didn't work well, at least to at least to, various moral hazard and risk.

And it's also an orthogonal thing. You can do both. You can have this public audit where customers can still verify to some extent and do it. It's [00:18:00] not an argument to not to do the other. So, a number of people came out with that. I included Coinbase, Kraken, blockchain info at the time, BTC China who knows longer around, I believe at the time, but they were big at the time, I think was a Bitstamp and.

I don't think anyone other than Kraken. I think did one proof of reserve audit, the following month said we would do this. and we did offer the following month in April 2014 and in every month since. And in fact, Last month was our 71st. So we've done six years’ worth of it. So we're not the biggest exchange in the world, but we're real in our case size.

But if we can do it for six years, then there's no reason why no one else can do that. Now the question is, why would we not do it? If you have resources that are 10 times larger than ours. The argument, we, why would you not allow your customers to have some mechanism to self-audit [00:19:00] when they store crypto on you?

And obviously eventually not your keys and your coin, they should store crypto themselves, but while they're storing it, and while you have the honor of their service on your exchange, why not give them every mechanism you have for them to self-audit? the only reasons would be. I cannot be resources.

So because we've proven it cannot be resources. So it's either you're not solvent or your hacked, or you're using the, the crypto for other on other exchanges. So you're behaving like a traditional bank, but not licensed like a bank. and so it's effectively fractional reserve banking, or you're not comfortable with the level of transparency we'll give.

I think there's probably the likely thing, but you're not comfortable with the level of transparency we would give to your customers and the rest of the world, because we give radical transparency. People see how many customers have balanced with us. People see what balances we hold. And generally the perception of the amount of balances that companies holding and the [00:20:00] reality are very different things.

And it's often not of business value to not business benefits, to give that level of radical transparency, but this is a new economy. And in this economy, if you are custodying someone else's crypto, you need to give radical transparency because it's all about self-custody. So you have to compensate by radical transparency.

Anyway, that's a quite strong view.

Aaron van Wirdum: I didn't intend this to become a debate, but this is actually kind of interesting thing. Nejc, Obi says, there's no reason not to offer provable reserves. What do you say?

Nejc Kodric: Look, it's I would, I completely agree. You know, it's a good thing, but so little people actually are capable of reviewing that.

I mean, still a proponent, you know, do your own custody, be your own bank, I'm all about financial sovereignty. So if, if you have that mindset, then, you know, have your [00:21:00] hardware wallet and just keep it to yourself. I mean, we already have to do this, proof of reserves for auditors. I mean, to implement a sort of technical solution.

Yeah. There's probably a group of people that will be super satisfied with it. there are some, Some restraints. I mean, when we do kind of the human capital allocation, you know, we, this is what I'm trying to say. This is a service that a few, a very small, small minority of people that actually appreciate.

And, you know, we have a finite amount of resources that we have to allocate, and they simply just didn't come up to the priority. We do it anyways to do the auditors. I get the point technology allows it. It just, you know, there are only so many things you can do.

Obi Nwosu: Well, I just, I mean, my only final point is we are thinking about. one 10th of the size of you as a company and we can do it. [00:22:00] And what we find is our customers. When you explain that it allows you to learn, to, learn the mindset of don't trust, verify you.

Nejc Kodric: I mean, you're just proving the asset. You're not proving the liability.

You have to open your books to also show the liability. I mean, our cold storage address is public. You can go on.

Obi Nwosu: Completely agree, It's not perfect. It's not perfect, but it's not perfect, but it's, but it, it, but it's, it's still better than, but I don't think the argument that by unless it's perfect, I do nothing is not a strong argument.

And the alternative is, and also you, you wrote, you wrote, it's a joint, a joint statement after MtGox. Do it every month. You didn't even do it once. I mean that this, these are things that build trust. And also if you're sending transactions in and out of the blockchains to try and cheat the system, it's a very hard thing to do because people will be able to analyze the blockchain [00:23:00] just before the audit money flows in and the money flows out over a period of multiple years.

It's, it becomes something that will leave a fingerprint on the blockchain, which will also be to analyze. And again, just like Bitcoin, most people don't run nodes. Eventually most people should, but it's like levels of education first own Bitcoin. Then learn to start to get into the mindset of don't trust.

Verify, then learn to have your self custody and get a hardware wallet, and eventually have your own nodes. That's the sort of education path. But, the same thing we see happens with all customers over six years, initially it was a few people, but we perfected our instructions, made them simpler and simpler, and there were more online tools where people can click through the instructions and we find that a greater and greater percentage of people do it over time.

So it is possible. And I would, and this is not about Coinfloor. I really think that for crypto to get to the next stage, we [00:24:00] need to educate people in the mindset of don't trust. Verify. And even as an exchange, provide tools to allow people to at least to some extent, verify themselves. Anyway,

Nejc Kodric: I would advocate a different approach.

People do their self-custody, implement lightning, and then fund your account when you want to. And when you need to do you know, on the other side, I think we'll see growing population of stable coins. Sorry, Aaron, we cannot hear you.

Yeah, what I'm saying is, I mean, I'm a bigger advocate of doing their own custody. Be sovereign, you know, have your Bitcoins on, on your hardware wallet. I think there is, you can never, you can never, have a hundred percent certainty if you have a, Bateman's that bitcoin on an exchange. Even if we do, proof of reserves, look, we only prove the assets that we hold.

We don't prove the [00:25:00] liabilities, right?

Obi Nwosu: Yup. That is correct. All correct.

Nejc Kodric: You always need an, you always need an Oracle that checks, what is the actual, liability. So as soon as you get to that step, look, I mean, in our case, we have auditors. We have regulators, they hold us accountable. We actually would go to jail if we wouldn't be covering up.

I mean, we have responsibilities.

Obi Nwosu: Just as background, of the exchange's in the space, Bitstamp is one of the exchanges I respect Highest.

 I think that you've been around for a long time. You have great people in the team. I have, I have a lot of respect for Bitstamp. I think as a general States, we've now coming to the retail space and as we've come into the space and we have revenue from our institutional customer and sophisticated customer base, we can do, if we have the freedom to sort of.

say, speak your mind in terms of how we think retail should be done. And we'll be doing that over the [00:26:00] coming months and years. So one we think, yes, we can. So one thing that it's really important to, if you can do something, you should do it. Definitely don't trust, verify self-custody. No, your keys. No your coins.

Completely agree. However, if someone is storing crypto on our exchange, even for five minutes, we should provide them tools to be able to self-verify to the best extent allowed by technology. That's one, two, we should not be offering anything other than Bitcoin to retail. So sophisticated users fine. But to retail, we know every OG knows that really, it's laughable to compare anything to Bitcoin.

Bitcoin is just about good enough to offer to retail just about anything else is a million miles away. So we only it for retail. Also, we do a sophisticated investors and traders. We know for six years; these people are also [00:27:00] trade in traditional markets. And many of them lose money trading. So to offer a trading, offering to retail is also disingenuous.

If, if the best and the most professional find a challenge to make money, you should offer them a regular saving product, like dollar cost averaging only Bitcoin, and provide them and provide them proof of custody. Those are the three and that's what will, and I don't see any strong arguments to say no to any of those points.

Aaron van Wirdum: Obi, Nejc. I had some difficulties apparently, but thanks for keeping the discussion going. Let's move to the last point because we don't have a lot more time left. I want to ask about lightening. Are you guys working on implementing lightning? When are we going to... when lightning?

Nejc Kodric: Yes. I'm personally a big proponent.

We have many, employees in the firm that are super enthusiastic, cannot tell you when, but there [00:28:00] is a group of people in the form that is super passionate about lightning and it's pretty much all they talk about. So, yeah, we're super bullish on lightning.

Aaron van Wirdum: We wants to hear

an ETA Nejc.

Nejc Kodric: Yeah, I know everyone wants to hear an Eta. This is the part where I cannot say because I'm just keep your eyes and ears open and you'll, you'll hear and see the announcement.

Aaron van Wirdum: Alright, Obi? any plans?

Obi Nwosu: Yeah. I'm a big fan of lightening but it's coming probably further down the line. So we have no ETA on lightening right now.

Aaron van Wirdum: What about

something like


Are either of your


about integrating liquid.

Obi Nwosu: liquid is

something that we, we are in. I mean, again, I love the stuff that Blockstream do and we are talking to the Blockstream guys.

so they'll, they'll probably be more information on that all the [00:29:00] time down the line.  but it'd be great to have other people like Bitstamp on that in terms of flows.

Nejc Kodric: Blockstream.

and what they're doing currently, we're not at the stage. They're implement liquid yet, but, we, we followed their development. A

Aaron van Wirdum:


Last question then I think Obi, you already mentioned this. Coinfloor doesn't offer any altcoins is that correct?

Obi Nwosu: Absolutely none.

No, we went, we announced last year, December that we were going bitcoin only, we, we listed Ethereum for about 11 months. And also that was 11 months. It was long enough.

Aaron van Wirdum: Why didn't you stop listing Ethereum?

Obi Nwosu: Because,

the developers of Ethereum basically stated that Ethereum and one wasn't good enough. And they were coming out with Ethereum two.

And at that point, we have four things we check for. Is this currency, does it actually aim to be a value [00:30:00] currency? is it technically mature enough? Is the community strong enough? And is there a regulatory clarity around it? Ethereum was almost there, but when the developers themselves say is not technically strong enough, then it's not technically strong enough.

They can't objectively state that it's technically strong enough when they're stating it's not. And so we had to delist it.

Aaron van Wirdum: Right. So Bitcoin only. What about Bitstamp offers some altcoins, I think, right. Nejc.

Nejc Kodric: Yeah. I

mean, we are super conservative, not as conservative.

Aaron van Wirdum: When are

you are going

to delist Ethereum?

Or are you

even listing Ethereum?

Nejc Kodric: Yeah, we have five, five cryptocurrencies. Right now. We're adding some, the, towards the end of this month, we announced a short list of a few cryptos. We are on the more conservative side when it comes to your listing. We focus more on stability, robustness rather than being first to list a newcoin.

So that's our kind of, thesis. currently we have [00:31:00] Bitcoin, we have XRP. Ethereum, and the Bitcoin cash. and Litecoin


Aaron van Wirdum: this, is this an important part of the business? Is there a lot of volume on these coins or is it mostly Bitcoin?

Nejc Kodric: I mean, I think more, more cryptos your ad. You have a kind of a long tail. most of the liquidity concentrates and, top one, top two, maybe top three cryptos. I think what it gives, it gives customers reasons to stay and not move elsewhere where there's more cryptos available.

But I think majority of the trading is done in the, in the, you know, the top three, top five cryptos. the other suggest reasons to pick your platform that offer the has a more kind of a larger variety.

Aaron van Wirdum: Got it. All right, guys. I think that's our time. Thanks for being on. Thanks for the interesting discussion.

Happy halvening.