Recalibrating cryptocurrency for the future: A conversation with Marcus Hughes, the former chief risk officer of BitMEX

Welcome to The Heidrick & Struggles Leadership Podcast. In this new series of podcasts, “Crypto leadership & talent: Evolution of the control functions,” Heidrick & Struggles will be sitting down with leaders in crypto and digital assets to explore the current environment, the evolution of control and governance functions in these areas, expectations for the future, and what they have learned from their work in these areas.

In this episode, Heidrick & Struggles’ Guy Shaul and Sarah Sliva speak to Marcus Hughes, former chief risk officer of BitMEX, one of the world's leading cryptocurrency derivatives exchanges. Hughes shares his perspective on where certain parts of the industry have gone wrong and what effect that has had on the sector's executives, how he assesses the governance and management of this space, and what skill sets he believes are going to be important for leaders to enable their organizations meet their strategic goals in the coming months. He also discusses how he has seen engagement and interest from regulators changing over the past year and shares advice to others who are thinking about coming into the space. Finally, Hughes talks about what he thinks the cryptocurrency industry needs to do to put the recent controversy behind it and how and to whom it can demonstrate the utility of the technology.

Below is a full transcript of the episode, which has been edited for clarity.

Welcome to the Heidrick & Struggles Leadership Podcast. Heidrick is the premier global provider of senior-level executive search and leadership consulting services. Diversity and inclusion, leading through tumultuous times, and building thriving teams and organizations are among the core issues we talk with leaders about every day, including in our podcasts. Thank you for joining the conversation.

Guy Shaul: Hi, I'm Guy Shaul, a partner in Heidrick & Struggles’ London office and the leader of our Web 3 and Digital Assets Practice in EMEA. I'm also joined by my colleague Sarah Sliva from our New York office, who's a member of the Risk and Controls and Financial Services Practice. 

In today's podcast, we're really excited to speak to Marcus Hughes, former chief risk officer of BitMEX. If you don't know who they are, one of the world's leading cryptocurrency derivatives exchanges. Prior to BitMEX, he was the managing director of Europe and the general counsel internationally at Coinbase, where he played a leading role in building and running Coinbase’s ex-US operations. He spent a decade at Morgan Stanley, where he was an executive director in the Legal and Compliance Division, and as part of that role, he focused on electronic trading across equities and fixed income. Worth pointing out that all of the views Marcus shares today are his alone, not associated with any other entity. So Marcus, hopefully that gives you the freedom to talk as controversially as possible. But welcome and thank you very much for taking the time to speak with us today.

Marcus Hughes: Thank you both for having me.

Guy Shaul: Well, to kick this off, walk us through your journey into crypto and digital assets, and we'd love to hear what drew you to the space.

Marcus Hughes: Yes, so I joined Coinbase back in 2018 slightly by chance. I'd be lying if I said I was, you know, looking for a career in crypto, but I was certainly interested in the space, and I had a conviction that blockchain digital assets was going to go somewhere. And so a kind of chance introduction led to, you know, a period of time now working in the crypto industry. And what drew me to the industry was both the intellectual challenge—how do you scale something which is underpinned by cutting-edge technology, but brings with it of course regulatory issues, issues of how do you integrate it within the traditional financial system? Questions around, you know, what should the treatment of certain assets be—and also the dynamism of scaling a business which is very fast-moving and growing at an incredible pace. And so it was a very intriguing kind of combination of things that pulled me in. 

Guy Shaul: I can imagine. And people often enter the space, just given how formative it is, and certainly was back when you first joined Coinbase, with a set of expectations, but clearly a lot has happened in that period. To what extent have those expectations met the reality and what has particularly surprised you?

Marcus Hughes: So I think it's hard to know exactly what to expect when you're entering a nascent industry. I think coming from a traditional financial services background, you are used to a little bit of structure, a bit of process, the regulatory frameworks are very well built out, you know, the machines are kind of well oiled. Coming into the crypto sector, there's a lot that needs to be built. And what I thought would be the case has very much held true, which is that there's a lot of building needing to be done, both scaling businesses, engagement with governments and regulators to set out what does this industry look like going forward, and the actual rolling out of products and services across the world to customers who want to interact with the ecosystem. And so I would say that that was something that I was expecting. I think the sheer pace of change is one thing that has really struck me. I don't think anything prepares you for how fast things move in this sector. Whereas arguably in your traditional financial world securities, whether that's equities or fixed income or other areas, you know, the pace of change is somewhat slower, simply because they're more mature industries. And I think as we've seen, particularly over the last 12months, things can change for better or for worse incredibly rapidly. I think because it's an emerging sector, the other areas, that asset prices are often the focus of attention—what's happening to Bitcoin, what's happening to Ether—and those can move and demonstrate significant volatility over very short periods of time. Again, something that perhaps might be a little unusual if you're coming from a more traditional background. So those things are the ones that come to mind when I think about how were my expectations met or otherwise.

Guy Shaul: So you weren't or you were expecting so much token price volatility when you first jumped in?

Marcus Hughes: I was expecting volatility. I suppose what surprised me is the volatility over such short time periods. Within the scope of the day, you can have massive, massive jumps or falls in prices. I think the other thing is the extent to which Bitcoin is such an important asset within the ecosystem, and if Bitcoin’s rising, other assets tend to rise too. And that's the case arguably still today. The ecosystem is still not fully mature, and so the influence of certain assets is greater than others. And I think that's a virtue of the fact that this is still, you know, relatively early days and people often forget that crypto is still a relatively young industry; there's still a lot of building to do.

Sarah Sliva: Sarah Sliva here. And, famously, as you mentioned, the sector is very fast-moving, so it’s attracted executives with diverse outlooks and philosophical beliefs, and has recently suffered some damaging setbacks. So, in your view, where have certain parts of the industry gone wrong and what effect has that had on the sector's executives?

Marcus Hughes: So I think in some areas, there's been a tendency to think that this is a technological innovation, and therefore you're scaling tech businesses exclusively, whereas the reality is that this was always going to be regulated financial services, whether that's what some in the ecosystem would like or not. And so there's a tendency just to think we’ll push products out into the marketplace, behave in a way that might be acceptable outside of the regulated space, but certainly isn't when you're looking at a regulatory ecosystem that's still emerging, but will certainly grow to be something equivalent to what we have today in other areas such as e-money, payment services, securities, and so on. I think we should also remember that kind of bad practices—fraud, whatever it might be—are fundamentally wrong in any industry, and it doesn't matter whether that's the crypto industry or other industries. You know, fundamentally you should always treat customer funds with care and hold them in a secure way and so on. And unfortunately, what you tend to find is that bad practices and bad behavior tarnish the industry more broadly, whether in fact you may have stakeholders in the ecosystem that are behaving very responsibly. So I think that is part of the perception problem, and we have to accept that. I think more broadly, not everyone coming into the industry necessarily is prepared for the scale of what needs to be done. I think it's very easy coming from traditional financial services, from investment banks and so on, where you're used to having a lot of the basic frameworks already built out and it's incremental changes, not fundamentally building something from scratch .And that can be a huge challenge, and particularly where you find regulators are not that familiar and a lot of the effort here requires a bit of a teaching for regulators, helping them to understand, advocating for responsible regulation. I think most of those in the crypto space are more than happy to advocate for responsible regulation, regulation that's balanced, that balances the risks with the ability to encourage innovation and so on. So as with anything, it's kind of a delicate balancing act and unfortunately you have these unfortunate incidents that have occurred in the industry that have had a bit of a kind of contagion effect across the whole industry, which has been negative.

Sarah Sliva: And given your extensive experience in establishing and maintaining regulatory relationships across the world and working closely with regulators at different companies as well, how do you assess the governance and management of this space?

Marcus Hughes: So I think what regulators are looking for is firstly a deep understanding of the underlying technology of the assets themselves, of how things like hot and cold storage work. You know, the framework of the ecosystem is not necessarily easy to pick up. And so I think it's the job of stakeholders in the industry to engage constructively with regulators to help them to understand it, and I think that builds trust. I think the other aspect is the extent to which it's not clear how the treatment of certain assets should be managed. It's something that has to evolve over time. And there's a tendency just to look at existing rules and say, well, why don't we just kind of tweak them slightly and that will work fine for crypto assets. But you have unique problems in crypto, such as how do you custody assets? It's very different from looking at equities or FX. And in that instance, you know, regulators are looking for a constructive dialogue, but also responsible proposals. I think where they’re very wary is where they see what they view as irresponsible behavior. You know, not segregating customer assets from corporate inventory would be a great example, not doing proper AML, KYC checks on customers. A lot of the time regulators come from a place where they've got very clear expectations of the issues and risks that they expect to see mitigated, and so I think it's important to go into any dialogue with a sensitivity to those concerns because they will always be the forefront of regulators’ minds. I think the other aspect is that in many ways this is not a case that we need to solve for every problem overnight. And I think if you look at what's happened in countries like Germany and Singapore, they've built out frameworks already that don't aim to solve for every issue. They're iterative processes; they'll have a first layer of regulation and they'll revisit certain issues. They’ll look at how they can also layer in other requirements on top. And I think that we'll be where we land in many countries across the world. Obviously we have MiCA [Markets in Crypto-Assets Regulation] coming in in Europe, which will be a Europe-wide regulatory framework, but in the US right now, there's a great degree of uncertainty as to where regulation is going to land. And so I think it's just a degree of engagement and also a bit of patience, that a lot of these issues are not going to be solved overnight.

Sarah Sliva: And what would you say are the leadership and talent implications to build out these governance frameworks going forward?

Marcus Hughes: So I think from a governance perspective, regulators, as they do in other areas, are looking for proper-minded management of regulated entities. They want to see executives with a full understanding of what's going on in the business, that are on top of all of the key issues that they’d expect to be on top of, that there's a team in place on the ground that is able to effectively discharge its regulatory obligations. And I think as you've seen from certain instances, the lack of management, of control of what you might see as pretty fundamental parts of the business is something that raises huge alarm bells. And if you look again at what the requirements are in the payment services area or in the securities for a broker-dealer, for example, you can extrapolate across from that fundamentally where the concerns of regulators are going to lie. And it's not always been the case that the crypto businesses, which in many cases have operated offshore or have operated in areas where there hasn't been yet a regulatory framework. They haven't always met the kinds of standards that regulators would expect from a governance or controls perspective.

Sarah Sliva: And with these shakeups in the space, how have you seen engagement and interest from regulators changing over the past year? Have you noticed a change in their focus on leadership and management?

Marcus Hughes: Yeah, I think I think regulators have certainly doubled down on their expectations for proper governance and leadership from people who are suitably qualified, who understand how to run a regulated business, who can demonstrate that they've got the capabilities and the competencies. And many regulators operate approved persons regimes around the world where executives have to go through a vetting process and demonstrate that they have sufficient experience and competence, that their time allocation is sufficient in relation to the regulated entity. I think regulators are also adopting a much more assertive posture in many countries around the world, that they're looking at potential enforcement action where they see bad practices. I think the regulatory environment in the US, for example, right now is quite interesting. You've seen a lot of the US regulators become a lot more assertive in their actions, their investigations. We'll see where those land, but there's certainly been a marked step up in those kinds of approaches. And I don't think that's exclusive to the US.I think regulators in a number of key countries are assessing whether they've been rigorous enough and are certainly asking more probing questions now. I think of course that coincides with the introduction of regulatory regimes in many countries, which didn't historically exist, and you often heard complaints from regulators that they didn't have adequate powers to supervise crypto digital asset businesses, you know, a few years ago. That obviously is changing, but it doesn't happen overnight. And so I think you've got that kind of convergence of regulation starting to emerge and regulators feeling that they need to be more assertive in their oversight of businesses that fall within their remit or that should fall within their remit, arguably.

Guy Shaul: And so I mean this is a big question, Marcus, but we're going to ask it anyway. What do you think the industry needs to do to put the recent controversy behind it and start moving for the future?

Marcus Hughes: So my take on it would be that the crypto industry needs to demonstrate that there is utility value for crypto and for underlying blockchain technology. I think that's really important. There's a perception that crypto, in some quarters, that crypto is purely a speculative asset, and I think there are a number of very interesting utility phase use cases for crypto that perhaps aren't receiving a huge amount of attention. So I think it, as a sector, it's important to demonstrate what is the utility of crypto, how does this make financial services better, more efficient, safer, and there's a strong case to make in a number of areas there, and I think that that case needs to be made. I think just looking exclusively at things like, you know, trading Bitcoin, betting on the value of Bitcoin going up is not going to be sufficient to convince the naysayers. I think the other aspect is the degree to which the industry needs to become more professional. There are certain areas of the industry where, as I mentioned before, you know, regulated financial services is a bit of an alien concept. And you have people that are very steeped in technology and are expert at the underlying technological structures that facilitate crypto but perhaps don't appreciate where the sensitivities lie when it comes to rolling this out, particularly to retail customers who are deemed to need greater protection, need to be protected from scams, they need to make sure that their assets are safe, they need to understand that crypto assets are volatile. And I think that the kind of professionalization if I can put it that way, of the industry is going to be really, really key. I think there's also pressure now on some of the smaller businesses operating in the sector, where you see pressure on trading fees, you see the ability to diversify revenue being a challenge as well. So it's a really interesting phase where I think we'll come out the other side with businesses that have kind of really built structures that will stand them in good stead for the long term, and others that really struggle to keep pace with the ongoing cost of compliance, with new regulation, with the ongoing requirements to engage constructively with regulators in a way that perhaps they haven't done in the past.

Guy Shaul: How do you think the industry does demonstrate the utility of the technology and who do you think they need to demonstrate that to first?

Marcus Hughes: So I think looking at the sector more broadly, I think it needs to demonstrate to everybody, right? The general public, you know, other businesses, governments, regulators. I mean the future of the industry really is based upon the conviction that people have that this is something that can make their lives better, and there are a lot of interesting use cases. I mean one example that often comes up in this context is something like remittances, whether facilitated by stable coins or facilitated by other types of crypto assets. It's very easy to grasp the concept that remittances are not very cost-effective today. If you're sending money to your family that live on the other side of the world, and it takes three days and you have to pay 6% in fees, that's not a great outcome. The other area, in developing countries particularly, is the fact that many people don't have access to financial services at all, and yet if they've got a smartphone with an app on it, potentially using crypto, they can for the first time have access to something that resembles a bank account or a savings account that they can transfer money with, that they could perhaps start their own business with. And so there's some of these use cases that often I think get drowned out by the noise in the industry, that I think will help people grasp what the opportunity is. And I think often it's the case that these things don't tend to get the focus that perhaps they do. But to my mind it’s like with any innovative technology, look at the internet when it was first introduced. There was a lot of skepticism as to why people might need to send emails—what is the utility value of the internet? There was huge amounts of skepticism, and it took some time for people to address the value, to realize the value, to build products and services that people value today. I think it's similar, in a similar way, the crypto industry needs to do that, it needs to demonstrate why it's a game-changing revolutionary, you know, technological innovation that will make people’s lives better.

Guy Shaul: It's an analogy you do here, internet, crypto digital assets, Web3. Do you think the potential is as big to be as game-changing for individuals and institutions in due course?

Marcus Hughes: Look, I think the potential is huge and I think what the industry needs to demonstrate is that it can make things faster, better, cheaper, more efficient, more effective. Those are the key criteria that the industry will be judged on, and the reality of course that people don't necessarily see day-to-day what the value is to them. They might have dabbled, they might have bought some crypto assets, they may have engaged in staking services on certain platforms, they may have kind of dipped their toe in the water. The question is how do we convince those people to engage across multiple levels, across multiple products with the industry? And that's not going to happen overnight. But I think providing the regulatory frameworks, providing the kind of communication as to what is the value here is going to be key, and I'm not sure the industry has always been that great at doing it historically.

Guy Shaul: So with all of that in mind, what advice would you give to others that are thinking about coming into the space?

Marcus Hughes: So my advice would be don't expect everything to be neatly structured, to have perfect processes in place. It's definitely a huge challenge. Intellectually it's incredibly fulfilling, working in the crypto space, because it's still such an early stage of evolution. I think a lot of the time people need to be comfortable with the unknown as well. There aren't always clear answers to every single question and part of it is building the future, creating value, and so on. And it's not necessarily for people who like to stay within their box, where they're comfortable doing a very specific role. I think it's very much a case that you have to be comfortable branching out and taking on challenges that may not be necessarily within your wheelhouse. But I think what we're in right now is a very, very interesting phase of evolution, that there are undoubtedly challenges for the industry. But equally, I think it's during this period where the market is down, your assets are priced lower than they were, the skepticism is there that the opportunities also lie to kind of determine what does this industry look like in the next five to 10years.And I think people coming in with skill sets from other industries or other parts of financial services will be absolutely invaluable as we build that kind of structure, and we build out a framework that works and provides security and confidence to people more broadly.

Guy Shaul: And just building on that theme in terms of executives coming in from different industries, what skill sets do you think are going to be really important in leaders in this space for organizations to meet their strategic goals in the coming months ahead?

Marcus Hughes: Yes, I mean it's going to sound like a bit of a cliché, but I think the ability to collaborate effectively across teams is probably the most valuable skill you can have. Intellectual curiosity goes without saying because you don't come into this kind of nascent space without having that, but the ability to build relationships across all parts of a business. And that will often be with very, very technical teams, with product teams, where you'll have people that don't have that familiarity with how a regulated business or a regulated industry works. And you need to bring those people along for the journey, show that you're pragmatic, show that you have the commerciality to address some of the challenges that lie ahead, but equally be able to kind of upskill the organization to operate within this new framework. But I think more than anything, you've got to have that energy and that hunger to build something, and it's not for everybody; it's not easy by any means. As I say, there’s a lot less clarity in certain areas, but part of the enjoyment I think of working in an industry that's still evolving is that you can help shape that future, and you can have a really impressive impact as the industry moves forward and as regulation grows, as businesses grow, and as the industry matures. I think that for me is at the heart of what's so attractive about the industry.

Guy Shaul: Now that makes perfect sense to me. And great pearls of wisdom to finish on there, Marcus. Thank you very much for taking the time to speak to us today.

Marcus Hughes: It's a pleasure.

Thanks for listening to the Heidrick & Struggles Leadership Podcast. To make sure you don’t miss more future-shaping ideas and conversations, please subscribe to our channel on the podcast app. And if you’re listening via LinkedIn, Twitter, or YouTube, why not share this with your connections? Until next time.

About the interviewers

Guy Shaul (gshaul@heidrick.com) is a partner in Heidrick & Struggles’ London office and a member of the global Technology & Services Practice. He leads the Crypto & Digital Assets and Cybersecurity sectors in Europe and Africa.

Sarah Sliva (ssliva@heidrick.com) is a senior associate in the New York office and a member of the Financial Services Practice.