We're seeing a very healthy flow of institutions coming to trade crypto: FalconX CEO

FalconX CEO Raghu Yarlagadda joins Yahoo Finance to discuss cryptocurrency as an institutional asset as more companies start to incorporate Bitcoin as a form of payment and FalconX’s plans for the future.

Video transcript

MYLES UDLAND: Hi, welcome back to Yahoo Finance Live on this Monday morning. Been an interesting couple of months for the crypto space. We saw Bitcoin's rally last weekend and now we see the price of the cryptocurrency sitting closer to 40,000 here after having traded down towards 30,000 during most of the month of July. And joining us now to talk about the state of institutional adoption within the crypto space and sort of where the bull cycle is headed from here, we're joined by Raghu Yarlagadda, the CEO at FalconX.

Raghu, thanks so much for jumping on this morning. Let's just start with how you think about crypto as an institutional asset, especially, you know we were just talking to an analyst about Square. We see Coinbase will be out with its results. On the back of a couple of major public companies, MicroStrategy, so on and so forth, incorporating Bitcoin into where they sit, how does that change things for you guys on your part of the business?

RAGHU YARLAGADDA: Absolutely. First off, great to be here, Myles and Brian. So in terms of international adoption, just to give you a little bit of context on the timeline, May 2020 is when we saw the flurry of US institutions coming into crypto.

Finally, around the matter of Bitcoin being a good inflationary hedge. As that happened, around November is when the diversification happened to Asia and Europe and around the January frame, corporate treasuries, we began seeing a lot of corporate treasuries coming in. And the core use case and the core narrative is what started as an inflationary hedge.

That diversified into stable coins and now there's a lot of focus around the yield generation, especially around this macro regime of we're printing a lot of money. So to answer your question specifically, institutional demand over the last one month is cautiously optimistic. They are definitely concerned about where and what is going to happen next, especially on the regulatory front.

But that being said, the new cycle around Amazon, the new cycle around yield generation through different vehicles within crypto, that is definitely growing a lot of attention. Specifically for FalconX, we haven't seen a drop in institutional customers coming in. We're seeing a very healthy inflow of traditional institutions coming up and signing up to trade crypto.

BRIAN SOZZI: Raghu, when you say you have the institutions coming in and trading-- trading crypto right now, how would you define an institution? Is-- is that a hedge fund?

RAGHU YARLAGADDA: Oh, that's a great question. So we've seen a very diverse set of personas, Brian. All the way from some of the world's largest hedge funds, crypto native funds, retail aggregators, new banks and commercial banks. Right now, most of the activities is around the hedge funds and the prop shops.

MYLES UDLAND: Raghu, I'm curious what you make of the stable coin market now and what role that is playing. Because I think it-- covering the US financial markets, basically equities, I see these stable coin headlines. I don't worry too much about them, but from your vantage point, operating an exchange in the space, how do-- How does Tether fit into you creating a stable and really trusted crypto institutional market at this point?

RAGHU YARLAGADDA: Absolutely. A lot of US traditional institutions who are coming into this space, that we haven't seen a ton of their activity in Tether. They've been focused on USDC-- the Circle stablecoin. Some US institution-- US institutions and also quite a few of Asian institutions, they definitely do have exposure to Tether, but I also think the important point to note is, while everyone is watching what's happening with Tether on the regulatory front, a lot of the exposure to Tether is very transactional or temporal.

As the new cycle about Tether came in about two, three, four weeks back, a lot of institutions move to USDC. And some institutions came back again into Tether. So to answer your question, definitely Tether has a sizable role to play in the crypto macro ecosystem, there's no question about it. But because of the contractual nature, I think crypto as an ecosystem is a lot more robust around the new cycles concerning Tether.

MYLES UDLAND: And then also on the yield side, certainly big news that we saw last week out of FTX and there's been a lot of conversation around just DeFi platforms and yield farming, all of these kinds of ideas. And has that generated questions, concerns, interests from your vantage point and how do you see that sort of right sizing? I mean, you get 0% lending, basically, in the US market. How much longer till we see spreads compress from the crypto side?

RAGHU YARLAGADDA: Oh, that's a fascinating question, Myles. There's a lot of conversations around yield generation through decentralized finance. Specifically, the US traditional institutions, I mean, the regime of commercial banks being anywhere from 40 to 80 basis points of interest rate, on the device side, they're seeing about 4%. And building on the DeFi momentum, Coinbase and Circle offered institutional treasury products that-- that generate about 4% interest rate on an annualized basis. So that triggered, that stoked a lot of interest from the US institutions, specifically.

Now as they come in, they want to understand the underlying mechanics. I mean, how are we generating 4% yield? All of it is to the creating activity. Bitcoin volatility generates a lot of demand for US dollar for momentum traders to basically borrow. That is one source of yield generation.

The second source of yield generation, which you're referring to, is around the decentralized finance. So protocols like Compound and Aave. So right now, institutions are watching it very closely. They have a lot of questions, right? I mean, what's the soundness of the protocol?

They're getting comfortable. We see a lot of institutions touching Compound through intermediaries like us and-- but at the same time, I wouldn't say that they are completely fully on board on the decentralized finance side, because they're waiting for clarity on the regulatory side of things, Myles.

BRIAN SOZZI: And Raghu, I'm-- I'm interested in your firm. Last thing I saw, or last numbers that I saw, you raised $50 million in March, valued the company at $675 million. Are you back in the market trying to raise more capital? Do you want to IPO sometime this year?

RAGHU YARLAGADDA: Yeah, I mean, there's a lot of demand coming from both traditional venture capitalists, hedge funds who are looking into the crypto space and the broader tokenization narrative, and also crossover funds, Brian. So there's a lot of involvement. We're having conversations, like any good firm that's growing incredibly fast, but at the same time, like in the new announcement to make at the moment, we'll be-- Stay tuned. We're excited to be talking about that.

MYLES UDLAND: A masterful way, having conversations. Love that, Raghu. We're all having conversations all the time, of course, right?

About all sorts of things. I appreciate the time this morning, Raghu Yarlagadda, CEO of FalconX. Raghu, I'm sure we'll have you back. Thanks for jumping on.