Dialogue with Backpack Co-founder: From FTX to Backpack, building Web3 super applications is the reason for persistence

In each cycle of Crypto, new CEX (centralized exchanges) will emerge. In this round, we see a fast-growing CEX, Backpack, which is rooted in Solana and enjoys the growth dividend of SOL in this round, while actively responding to the global regulatory and compliance challenges faced in this cycle. Backpack is more than just an exchange. The trinity of wallet + NFT + exchange also gives it more possibilities.

In this issue of Day 1 Global, we are honored to have Can, co-founder of Backpack Exchange, former General Counsel of FTX, senior legal expert and crypto OG, to share with us his views on the global regulatory environment for Crypto and his in-depth and exclusive sharing on Backpack.

This podcast has a very high information density, and many listeners hope to have a copy of the transcript for in-depth study and research. So I spent 1 day to condense the original 17,000 words to 8,000 words, and organized it into 11 parts for easy reading (which is also a process of in-depth learning for me). I also kept the timestamps for each part, and it is recommended to listen and watch at the same time for the best experience.

Xiaoyuzhou: https://www.xiaoyuzhoufm.com/episode/665c9cae63c334a2fbdb67be

YouTube: https://youtu.be/hcNel3U51pg?si=HpE9LJGzDmgX-rE9

This episodes guests hosts

• GuestCan Sun

Can Sun is currently the legal director of Backpack and co-founder of Backpack Exchange.

Double E from Princeton and Yale Law School, and a Crypto OG, spent 6 years at Fenwick West, a Silicon Valley law firm that served many well-known technology companies and crypto startups, and joined the creation of the Backpack Exchange business last year.

• Guest host Pan Zhixiong

Pan Zhixiong is the founder of ChainFeeds, former research director of ChainNews, an Internet product manager with a technical background. He has long been concerned with topics such as public chains, privacy technology, decentralization, and DeFi.

• Host Ruby

Web3 Brand Manager, 10+ years of Internet operation experience, worked in many technology companies such as Amazon. Twitter/X @rubywxt 1 ; Farcaster @rubywang ; rubywang.eth

Transcript Highlights

1. Why did you switch from a PhD in electronic engineering to a career in law and then become a Crypto OG? (03:25)

I was working in EE (electronic engineering) and I was actually more interested in the Internet industry. The Internet is a tool for information liberalization and democratization. Since the advent of the Internet, we have seen that the threshold for information dissemination is very low. Anyone anywhere in the world can spread local information to the world very freely, very simply, and easily. But at the same time, I saw that in terms of value and assets, many rights and interests were not guaranteed. In other words, information liberalization itself is actually not enough to enable people around the world to obtain the rights they want in many aspects.

I think a person, a country or any group should have the ability to make their own decisions. In addition to freedom of information, it also needs to have a certain consensus on some basic legal systems, such as property rights, contract rights, and some democratic concepts. So I decided to transform from a technical perspective and study this issue from a more legal and compliance perspective, so I started to study the law.

I came into contact with Crypto in September 2013. My only regret is that I didn’t buy too much Bitcoin at that time. In the second half of 2013, a client did an ICO very early. The U.S. Treasury Department issued a regulatory announcement for digital currency. At that time, I gave him some advice on this announcement and helped him design the ICO.

Basically, from that time on, when I first came into contact with Bitcoin and blockchain, I became very interested in it because it resonated with my ideal pursuit of various rights and interests. In the bull market of 2016/2017, 100% of my business was basically in the blockchain industry, so I have been in the cryptocurrency circle from 2016/2017 to now.

When I was at Panwei (Note: Silicon Valleys top law firm), I co-founded the blockchain practice with a few colleagues. During the years I was there, I took over 200 to 300 projects that issued coins, including Coinbases listing, some Binance activities, and many exchanges and projects in China and the West. Basically, I was honored to have contact with many big names in the currency circle, which was a great honor.

2. Changes in the global regulatory environment over the past decade and classification in Can’s eyes (10:08)

Compared to 2013 or even 2016 and 2017, the current regulatory environment in most countries is much more mature. When we first started, most countries had no idea about Bitcoin and digital currency, so we started from scratch. In fact, any financial system has an ecosystem, not just regulatory authorities, but also auditing, accounting, custody, investors, market makers, and participants in various financial industries.

In fact, the digital currency industry was relatively unfamiliar at that time, but of course it is very mature now. I think that most regulatory authorities in developed countries now have a certain understanding of digital currencies. For example, the Big Four accounting firms have basically established digital currency departments. There are also many players in the custody or market maker field, and they are becoming more and more mature, and they are all appearing in this industry in a compliant manner. So from my point of view, there have been earth-shaking changes.

Currently, the supervision in the world can be divided into two types. The first type believes that the public has no self-control over the digital currency industry. If there is speculation, they will jump in and throw all their money into it. For this type of regulatory authorities, they will generally take very strict measures against digital currencies, no matter how compliant your project is or how you disclose it.

The second type of regulatory authorities see digital currency as another new financial product. As long as it complies with the existing financial regulatory framework, it does not even need to comply with every item of the legal framework. In principle, if it provides sufficient disclosure to the public and explains its risks clearly, then each of the public, as an independent adult, has the right to decide whether to buy it. For this type of regulatory authorities, they actually do not encourage or belittle digital currency. Sometimes they may even encourage it, but they pay more attention to how to extend some of the protections for emerging financial products that the financial industry has learned over the past few hundred years, especially in terms of disclosure, to the digital currency industry. From my point of view, this type of regulatory authorities and countries are some of the more open-minded countries in the digital currency industry.

3. Dubai’s regulatory model and innovation (13:57)

You may have noticed that our Backpack Exchange first obtained a license in Dubai. I think it is a regulatory agency that is relatively open-minded about the policy on digital currency.

Dubai has become a financial center in the Middle East and even in South Asia and North Africa. For them, digital currency is a brand new financial industry. In February 2023, when FTX collapsed, they launched their own set of regulatory systems for all different players in the industry three months after FTX went bankrupt. Including market makers, exchanges, brokers, issuers, and project parties, basically a relatively complete system was launched.

One aspect I like about Dubai is that even within the second category of regulatory authorities, there are several different types. Some regulatory authorities adopt a rigid model for digital currencies, which is to apply some traditional tradefi concepts and some requirements to the currency circle.

I think there are many fundamental differences between the cryptocurrency industry and the traditional financial industry. For example, its decentralization, including the simplest transaction, is not that it starts from 9:30 to 4 oclock every morning, it is 24 hours a day, there is no closing, no opening, that is, liquidation can occur at any time of the day. So I think it is a bit inappropriate to force some very detailed rules and regulations of the traditional financial industry directly into the digital currency industry.

Dubais regulation actually adopts an approach that I think is more enlightened, which is that it protects user assets based more on several basic principles, such as protecting information symmetry, avoiding market manipulation, and financial crime. Based on these most basic financial concepts, it has introduced a set of regulations applicable to digital currencies. So I personally think it is more advanced.

Regarding MiCA, which will come into effect in the EU at the end of this year, although MiCA itself certainly has some drawbacks for digital currency, I think it is also a remarkable thing that such a large alliance of financial entities in the world can introduce a unified set of supervision for digital currency.

4. BTC ETF approved, ETH ETF on the agenda, but the US still has no clear regulatory principles and is entangled in politics (18:00)

Since 2013, the United States has mainly carried out supervision from the perspective of anti-money laundering. Financial regulatory agencies such as the CFTC started in 2014, and the SEC really jumped in in 2017.

Seven years later, the United States still does not have a unified and clear regulation of the digital currency industry. (If you ask me at the time) I would find it a bit incredible. The United States is a country under common law. In fact, for many new things, countries under common law do not need to have new legislation. They can regulate them according to existing laws. So from the perspective of US regulation, it does not mean that it must formulate a new law, but it at least needs to have a clear, feasible and understandable routine for the digital currency industry.

A fundamental concept of law is that I have to know what the law is before I can comply with it, right? If I don’t know the rules of the game, how can I play? Many digital currency industries, including those that have actually started since 2017, really want to comply with the law and want to be 100% compliant. However, the so-called supervision of the industry in the United States, especially the SEC, is too unclear and too unclear. So I think if I were given the choice of making new laws that are unfavorable to the currency circle, or maintaining the current vague state, as long as it is an acceptable and operational path, many people would choose to have clearer laws to comply with and follow. Otherwise, for many American project parties and exchanges, they are basically walking at night with their eyes covered. They really don’t know which tokens are securities, what kind of behavior is compliant, and what kind of behavior is not compliant.

There are many unclear and ambiguous factors in the US law, which leads to a big difference between the practices and compliance actions of different projects. From my point of view, it is difficult for the general public to trust such an industry that is very uneven and inconsistent in terms of compliance. I think this is a factor that the cryptocurrency industry cannot gain universal recognition in the United States and other parts of the world.

Perhaps the most important thing for the United States right now is not to introduce too many new laws, because the introduction of new laws, whether it is the SEC, CFTC, Treasury Department, or Justice Department in the United States, involves too many politics and too many factors involved in this years election, and it is not so easy for everyone to agree.

5. Backpack’s goal: to reach FTX’s previous license level in 1 year (23:52)

After FTX collapsed, I spent several months thinking: Is this an industry I want to continue working in? If I do, what kind of job should I do?

For me, the core of the establishment of Backpack Exchange is to build a global financial institution that is not only innovative but also compliant, but is completely native to Web3, and does more than just solve problems such as FTXs abuse of user assets.

For exchanges established before 2019 and 2020, they can often do less KYC and even be more lax in compliance to attract users. But I think it is impossible to establish such an exchange or financial institution in 2023 or 2024. We must start with the license.

Many countries have also introduced their own completely different licenses for digital currencies. I took a world map with more than 190 countries (regions), and marked each with a color. I defined each country based on each color. How can we legally enter this country and serve these countries? Some countries require licenses, some countries need to cooperate with local licensed partners, and some countries need to deal with local regulatory authorities. Anyway, there are all kinds of licenses.

Then I set a goal for myself. I hope to reach the level of all the licenses that FTX had within one year of Backpack Exchange launch. When I joined FTX, it didn’t have a single license in the world. Then on the day of bankruptcy, November 8, we basically had licenses or permits or other authorizations in about 40 countries around the world. I set a goal for myself at that time. I hope we can get back to the level we had at that time within one year of our launch. Now it’s May, and I’m still working hard, hahaha.

You may see some big moves from us in the second half of the year. We launched on November 20 last year, and now it has been exactly six months plus three days. I think there are still six months left, and I think it is possible to achieve this goal in the next six months.

6. Backpack is different from other centralized exchanges: the entire trading engine is a blockchain, and users can replay to any point in time to check their assets (30:40)

In terms of protecting information assets, especially as we are victims of FTX (88% of Backpack investors’ money could not be withdrawn due to the collapse of FTX), I think we have really put a lot of thought into this aspect.

Unless users ultimately custody their own assets, I think it is difficult to have a system that can guarantee that users can get their money out immediately when any problems arise. This is also impossible in the traditional financial industry. However, we want to do our best, especially by leveraging some technologies in the blockchain industry to introduce some innovations.

Let me give you a brief introduction. From a technical perspective, we want to build a token custody system and a user ledger system. How can we ensure that this ledger system is real-time, up-to-date, and correct at all times? At the same time, it can allow users to transfer freely and protect user security and privacy.

In fact, we thought about it for a long time and found that a technical solution is a blockchain. Because blockchain itself is used for this purpose, we actually have a very different design for our trading engine from many other exchanges. Our entire trading engine is actually a blockchain. We have several nodes. Any transaction, withdrawal, deposit, sale, etc. is actually like a transaction on a blockchain. Just like you can go back to Bitcoin or Ethereum at any time to see the UTXO of that year, how many coins were in that address, and we also trust that this is true because it is the real record at that time.

The blockchain of our exchange is actually completely consistent. We can replay the entire history of the exchange from scratch starting from the first day of operation on November 20 last year, and we can do this at any time. So users can go back to any time of our exchange and look at any account to understand what assets the user had at that time and what kind of transactions he had made.

At present, all other exchanges are doing asset proof based on a certain point in time. At the point in time when we want to do asset proof, the entire history of the entire exchange starts from scratch, and we can replay all the transactions of the entire exchange.

Compared with a real blockchain, the only thing we lose is censorship resistance, that is, we are not completely permissionless. The reason is because of regulation. For regulatory considerations, we cannot allow people from North Korea or Iran to operate our nodes. All users need KYC, so there is a certain difference. But our goal is to provide users with certain protection for our assets from a technical level through the construction of such an emerging exchange system.

From another perspective, although FTX is unable to repay tens of billions of user assets, all of FTXs prudently regulated subsidiaries actually provide 100% protection for all users. For example, you may have seen that FTX Japan began to clear all user assets in February last year.

All the EU parts of FTX have actually been holding 100% of the users assets from the beginning to now. Even in such a bad situation as FTX, in countries like Japan and Europe, it has actually protected all the users assets from the beginning to the end. Even though we have not obtained the licenses in the EU and Japan yet and are in the process of applying, we have also learned from their requirements for user protection at that time and actively combined them with the operations, finance and auditing that we have been doing since the beginning. In terms of finance, auditing and technology, we actually have a lot of innovations.

7. The Web3 industry will be extremely polarized, either completely decentralized or compliant with regulation (35:45)

From a regulatory perspective, across the entire spectrum from centralization to decentralization, I think our industry may end up being more polarized.

Either it is completely decentralized, without a centralized entity, supervision will be easier, or even non-existent. But this requires the project to be completely decentralized. Even if you have a centralized front-end, a page, a node, or a group of nodes, I think it is actually not able to meet the regulatory requirements, so you may have seen that Uniswap received a notice from the SEC a few weeks ago; or your centralized part needs to comply with the regulation.

I think there are many projects right now that are in this gray area in the middle, and it may be difficult to continue operating in the long run.

So you two may have noticed that some well-known decentralized protocols, including Ethereum and Solana, have recently started to look for partners, compliant partners, or apply for licenses in various countries. Because as long as you have a team operating a centralized system, it is not a completely decentralized technology. If you are a centralized technology, it actually needs certain supervision.

8. Backpacks ultimate vision: a one-stop service platform for Web3 native like the App Store (38:07)

For us at Backpack, we actually have on-chain and off-chain, two different routes moving forward, but everyone knows that exchanges are completely centralized, and they have supervision, licenses, and fiat currency, so they have everything.

On the other hand, we also have the Backpack wallet. What we ultimately want to achieve is to combine our Backpack wallet, which is the Web3 wallet and the exchange, so that users can use it as a one-stop service platform to participate in all the Web2 Web3 activities you want to do, and all of them can be completed through our Backpack App. This is the long-term vision.

As you may know, Armani invented a new standard in 2022 called xNFT. What is xNFT? It is not just PFP, but it can tokenize an entire code and put it on the Solana chain, allowing anyone to access and use the code in a decentralized way at any time.

So what is it actually paving the way for? It is a completely Web3 native App Store. We can put all kinds of communication, chat software, games, and all kinds of things on a decentralized platform, such as Solana, so that users can interact with it without going through any centralized platform. This is a relatively long-term vision.

There are probably more than 200 xNFTs now, or less than 200. The only xNFT we made ourselves is MadLads, and the remaining 100 or so are actually made by the community. Our ultimate vision is to combine WEB2 and WEB3, and at the same time have a Web3 native App Store that allows users to basically be like an iPhone, you go to it every morning, at noon, at any time, it is the center of your entire life, maybe the exchange is the Robinhood in your iPhone, or Apple Wallet, you can trade, invest, and pay.

We have a Web3 wallet, which you can use for staking, mining, and many other activities on the chain; we also have these xNFTs, such as Web3 native telegram chat software, games, or various platforms. This is our longest-term vision. Of course, there is still a lot of work to be done.

9. Backpack team identified 3 contradictions in Web3 projects and how to deal with them (41:06)

Let me share the three contradictions of the Web3 project summarized by another co-founder of ours:

The first one is the contradiction between compliance and growth. Many exchanges, especially those outside Europe and the United States, may be relatively lax in compliance. In some markets in Europe and the United States, because of strict supervision, many exchanges actually spend a lot of time. As you know, Coinbase has been working on compliance and supervision for a long time to reach its current level, but what it sacrificed is that, as you may also know, Coinbase does not have that many users and trading volume outside Europe and the United States. So I think among exchanges around the world, the first contradiction is between compliance and growth.

The second contradiction is the contradiction between technology-based and cultural projects. Most NFTs are cultural projects, which you may know as CryptoPunk or Bored Ape. It is more of a community and a culture, allowing a group of people to have a certain recognition of a set of NFTs with a common recognition point and consensus, and even extend this recognition to the consciousness of all other people in the industry.

On the other hand, I believe both of you have seen that there are many founders who pay more attention to the development of technology, but are still relatively lacking in the culture of Web3. There are many projects that I find regrettable sometimes, that is, the technology is really good and very down-to-earth, but they do not use a Web3 approach to promote it to the digital currency industry, so I think this is another contradiction, that is, people who usually do technology do not understand culture; people who understand culture do not understand technology, and it is difficult to combine the two together.

The third point is a contradiction in the integration of China and the West. Many projects can be done well in local areas, but a team that can do well in the world actually needs a lot of experience, connections, and accumulation of knowledge and experience, that is, to be able to launch a brand and a product to China, the West, South America, the Middle East and other countries, so that everyone can believe in it and use it.

For us, we actually had a bigger vision from the very beginning. Then we made wallets and NFTs to prove that we can stand firm on both the technical and cultural contradictions mentioned earlier.

This is actually a very remarkable thing about Armani. He is very strong in technology. Anchor, xNFT and other protocols were all developed by him. At the same time, perhaps because he was born in California and had a lot of such influences since he was a child, he is very sensitive to this culture, which really surprised me. So he was able to make an NFT like MadLads during the most difficult period of Solana in March and April last year. He was able to make an NFT at this point and did it so well. I admire him very much.

The second contradiction is the contradiction between compliance and growth. This may be where I can help. I really believe that exchanges or other projects in the cryptocurrency ecosystem can achieve good growth without sacrificing regulation. I really think it can be done. We have attached great importance to compliance from the beginning, but at the same time, we can also find highlights to attract users and achieve certain growth through compliance.

The last point is the combination of different cultures of China and the West. Our team is actually very international, and it is also very unique to be able to promote our products in various countries. There are only 60-70 people in the world now, and we may have at least 20 to 30 nationalities in the entire team, so it is a very international team that allows us to find our own foothold in various parts of the world.

10. Solana is the main base, and plans to expand to more Layer 1 in the future (50:54)

We are well-known in the Solana ecosystem, especially since we have been with the entire Solana ecosystem since FTX, so many founders of Solana actually have a sense of brotherhood, so after we went online, they actually recognized us very much and were willing to support us very much, so you may see that Wormhole and Pyth have given us a large share, because we have been together.

Solana is definitely our home base. We want to achieve such a mentality that whenever you want to do anything in the Solana ecosystem, buy or sell coins or conduct any on-chain transactions, the first thing that comes to mind should be Backpack. If the project side wants to list coins, do IEO or issue coins to users, they should also think of Backpack first.

As for other ecosystems, we are currently considering several directions. We attach great importance to the interaction between exchanges and Layer 1. The entire ecosystem of exchanges actually serves different Layer 1 ecosystems. In addition to Solana, we also hope to gain a more decisive position in other Layer 1 ecosystems, so that users in other ecosystems will first think of Backpack transactions, and some new Layer 1 project parties will first think of interacting with our users.

11. Future plans: Do you plan to follow the Coinbase IPO or Binances BNB issuance path? Maybe it will be to create a new way of playing (52: 48)

We think these two paths are not contradictory and can even be pursued together. Because Coinbase actually wanted to issue coins during its listing process, which has actually been verified that this path is feasible. I personally think there is a path.

Binance and Coinbase have already achieved a very decisive and strong position in some markets. We are competing directly with them. We are many years behind them. They have gone through several bull markets before us. For us, some highlights that make us very excited are that we want to open up some new tracks and launch some new products and new experiences for users. In other words, we don’t compete according to the traditional way of playing. We want to create some new ways of playing ourselves, to see if we can attract everyone’s attention. Thank you.

This is also the reason why I like the cryptocurrency world very much. I feel that it is changing with each passing day, and too many new things emerge every day.

We have just started operating this exchange for half a year, and there are still many aspects that need to be improved and promoted. We hope that everyone can continue to pay attention to Backpack and try our products if possible. Our current products are still far from the expectations we want to achieve. We hope to launch a set of products that can satisfy every WEB3 user in the short term and give everyone a brand new experience.

Reference

• Further reading: The entrepreneurial story of Backpack MadLads xNFT

• Fenwick West, headquartered in Silicon Valley, is a leading law firm in the high-tech and life sciences fields. From representing Apple in its registration in the mid-1970s to assisting Facebook in its IPO on NASDAQ in 2012, Fenwick West has helped many world-renowned companies become industry leaders and maintain their leadership.

• Coinbase is an American crypto exchange. The company was founded in 2012. As of March 2021, Coinbase is the largest cryptocurrency exchange in the United States by trading volume. On April 13, 2021, Coinbase was listed on the Nasdaq exchange, becoming the first listed cryptocurrency company in the United States.

• Absolutely Not: FTXs Former General Counsel Says He Never Approved Loans of Customer Funds

• Solana Ecosystem Project Backpack Develops Exchange and Obtains Dubai Compliance License

• EU MiCA Regulatory Framework

• Armani Ferrante , CEO of Backpack MadLads

• Wormhole , Pyth (some of the Solana ecosystem projects mentioned in the podcast)

This article is sourced from the internet: Dialogue with Backpack Co-founder: From FTX to Backpack, building Web3 super applications is the reason for persistence

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