Digital Assets IN FOCUS 2021
INVESTOR SENTIMENT A dramatic shift in perception
JURISDICTIONS Hong Kong, BVI and Malta poised for digital growth
INFRASTRUCTURE Security and efficiency key to success
Featuring Bitfinex | BVI Finance | CoinShares | Copper | FinanceMalta | Fireblocks | Market Synergy | OSL | RSK | Silver 8 Capital
INSIDE THIS ISSUE… 04 THE BIRTH OF AN ASSET CLASS
By A. Paris
06 QUANTITATIVE TRADING STRATEGY
Interview with Manuel Anguita, Silver 8 Capital
08 BALANCING SECURITY AND EFFICIENCY
Interview with Alex Maslin, Copper
11 A SEISMIC SHIFT IN PERCEPTION
Interview with Christopher Bendiksen & James Butterfill, CoinShares
14 HONG KONG’S REGULATORY INNOVATION AND LICENSED FIRMS PAVE THE WAY FOR DIGITAL ASSETS IN ASIA
Interview with Wayne Trench, OSL Hong Kong
16 NAVIGATING THE DIGITAL ASSET ENVIRONMENT
Q&A with Dr Ian Gauci, FinanceMalta
18 THE MALTA ADVANTAGE
Q&A with Dr Kyle Scerri, FinanceMalta
19 PRIME SERVICES IN DIGITAL ASSETS OFFER INVESTORS A FAMILIAR EXPERIENCE
Interview with Matt Long, OSL Singapore
20 SPEED OF TRANSFERRING ASSETS THE NEXT FRONTIER FOR CRYPTO
Interview with Paolo Ardoino, Bitfinex; Alex Ryvkin, Copper & James Banister, Market Synergy
22 DRIVING INSTITUTIONAL ADOPTION OF DIGITAL ASSETS
Interview with Michael Shaulov, Fireblocks
25 BANKING ON THE FUTURE – STRIKING THE RIGHT BALANCE
Simon Gray, BVI Finance
28 DeFi MOVEMENT GAINING GROUND
Interview with Diego Gutierrez Zaldivar, RSK
29 DIRECTORY Learn more about Building an Institutional Marketplace for Digital Assets at DigitalAssetsLIVE Published by: Global Fund Media, 8 St James’s Square, London SW1Y 4JU, UK
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DIGITAL ASSETS IN FOCUS | Mar 2021
OV E RV I E W
The birth of an asset class By A. Paris
ome say you should never resist the unfamiliar, but until recently, the institutional investor market has staunchly resisted considering cryptocurrencies and digital assets to be an asset class of their own. But as large institutions like insurer Mass Mutual investing in Bitcoin and asset management behemoth, BlackRock filed for two of its funds to invest in the crypto asset, the outlook for digital investments to be classed as an asset class in and of themselves is looking more positive. A research paper by academic Asheer Jaywant Ram concludes: “Bitcoin represents a distinct alternative investment and asset class. There are significant opportunities for investment. The politico-economic profile of the decentralised and consensus-based Bitcoin is 4
dissimilar to other asset classes. The Bitcoin shares little or no correlation with other asset classes. Using Sharpe ratios, it is shown that the Bitcoin provides risk-adjusted returns over and above most asset classes.” Managers and industry participants echo this, having witnessed a change in attitude on behalf of investors. “Increasingly, investors are accepting Bitcoin as a new asset class – the emergence of which is one simple reason to participate – it’s really rare to see a new asset class coming to market,” outlines James Butterfill, investment strategist, CoinShares. Brett S. Messing, chief operating officer, Skybridge, agrees: “We think this is a tipping point in terms of adoption. Bitcoin is being embraced as an acceptable asset class and DIGITAL ASSETS IN FOCUS | Mar 2021
OV E RV I E W
We think this is a tipping point in terms of adoption. Bitcoin is being embraced as an acceptable asset class and we’re seeing interest from hedge funds, mutual funds, endowments, pension funds and insurance companies. Brett Messing, Skybridge
we’re seeing interest from hedge funds, mutual funds, endowments, pension funds and insurance companies. Across our own various products and funds, we have about USD400 million in Bitcoin.” In fact, the notoriously volatile Bitcoin market experienced a rally in early 2021, which according to PwC’s crypto leader Henri Arslanian “was partly driven by the entry of more big, institutional investors into the market.” Messing notes how a few of each institution type have now committed to buying Bitcoin – this includes insurance companies, endowments and pension funds: “We’re not yet at that place where you have to own it. But we’re headed in that direction. There’s a long time to go before all institutional investors will allocate to Bitcoin, but it seems unlikely that these big players buy it and others don’t follow suit.” Performance argument Just considering the meteoric rise of Bitcoin in just 12 years, could be a convincing argument for an allocation to cryptocurrencies. Harsh Jani, business development, Iconic Holding, writes: “Since inception, Bitcoin has been among the best performing assets of the past decade, if not the very best. “Without a CEO, marketing team, or any central company behind it, Bitcoin has managed to appreciate from effectively having USD0.00 in value to an all-time high value of roughly USD20,000. Its market cap, at peak values, exceeded USD250 billion and currently sits over USD100 billion.” Andrea Leccese, president and portfolio manager, Bluesky Capital details: “When you look at performance there is definitely a very good case for crypto being part of institutional portfolios. It’s uncorrelated to traditional asset classes, most of the time. So, a crypto addition to a portfolio is a valuable proposition, especially if it is actively managed by a professional investor like us; we can go DIGITAL ASSETS IN FOCUS | Mar 2021
long-short and capture opportunities in both bull and bear markets.” Leccese and his team conducted a study on the performance of Bitcoin, concluding that small allocations to the asset provide greater risk-adjusted returns compared to portfolios without an allocation to Bitcoin. “During our study’s time frame, adding Bitcoin to a traditional 60/40 portfolio increases the portfolio’s Sharpe ratio significantly. Similar benefits are also observed in portfolios with different sizes of Bitcoin allocation. Investors could benefit tremendously from including Bitcoin in their portfolios, making them more diversified and more resilient to risk”, they noted. Another catalyst for the growing institutionalisation of the digital assets market is the lack of yield in traditional asset classes, leaving investors are still looking for alternative sources of return. Crypto safe haven Messing comments: “Interestingly, macro investors and fixed income investors have embraced Bitcoin. If you’re running a pension or an insurance company, you have targeted rates of returns you have to meet to satisfy financial obligations. Buying fixed income at a 10-year rate of 1 per cent or high yield at 4.25 per cent isn’t particularly attractive. Which is why they’re looking at a small allocation to Bitcoin. If they take it out of their fixed income portfolio, which is already yielding less than its target, then it cannot exacerbate the problem they already have, even if it doesn’t perform as expected.” From the perspective of Bradley Duke, CEO of ETC Group: “Choosing to not engage with the Bitcoin opportunity could be problematic for asset managers and asset owners. They have a duty to their shareholders to deliver a return and protect the value of the money that has been entrusted to them. Seizing this opportunity and allocating some of the assets to Bitcoin or digital assets borders would be considered diligent in this respect.” In addition, as global economic uncertainty due to the coronavirus pandemic persists, institutions are looking for safe haven, store of value assets. Historically, gold has played this role in portfolios but there is growing scope for Bitcoin to also support this objective. Christopher Bendiksen, head of research, CoinShares lays out the reasons for this: “Conceptually, because of its fixed supply and being priced in dollars, theoretically Bitcoin can act as an inflation hedge. The asset has a very predictable supply curve and a finite supply, which remains immutable as the network grows. It’s driven by an algorithm which is transparent, this arguably makes it more robust than the decision making in a central bank because it is not controlled by humans. As people start to understand this, then they start to see actually how Bitcoin and digital assets might have a place in a portfolio.” n 5
S I LV E R 8 C A P I TA L
Quantitative trading strategy Ahead of the launch of their new quantitative trading strategy, GFM caught up with Manuel Anguita, CFA (Co-Founder of Silver 8 Capital) to get his views on recent developments What are the most significant changes you have observed in the market? How do these benefit investors and ultimately the industry as a whole? We started researching the space in 2014 and began trading in 2015. Back then, the total market cap of cryptoassets was below USD10 billion. At that time, there was sufficient information on the technology, but barely any professional investment analysis. We had to start from scratch, from developing a valuation framework to setting up every aspect of an investment fund, including new trading, legal and operational solutions tailored towards cryptoassets. Fast-forward to 2021 and the market cap has surpassed USD1.5 trillion! This marks a staggering growth in excess of 150x within a six-year period. The industry is still young, but much more professional, with ample trading solutions, financial instruments, custodians, law firms, research shops, etc. It has never been easier for investors to learn about this technology, evaluate its investment merits, and participate if they so choose. Where do you think the best opportunities are in the digital assets space? What is driving them? In our view, there are three distinct investment angles when it comes to cryptoassets: First, bitcoin has become a macro story: investors are attracted to its economic profile, which has the growth aspect of an asset that is experiencing a process of monetisation. Since the total addressable market of bitcoin as a new form of money is enormous, it does not need to replace any major currency to potentially reward investors with significant returns. In addition, bitcoin has a limited supply that is algorithmically determined (as opposed to discretionary). As such, bitcoin may naturally appreciate if inflation expectations rise. 6
This exposure to growth in its monetary uses, plus an inflationary hedge, provides a very compelling story given the macroeconomic environment that we are facing. Second, the industry is innovating relentlessly. Entrepreneurs are looking into every possible business application of this new technology, as we can see from the several thousand cryptoassets that exist today. From this perspective, cryptoassets offer a risk profile very similar to that of early-stage venture capital: most of these cryptoassets will fail, but a handful will most likely succeed, rewarding their holders handsomely. Investors looking for this type of high-risk/high-reward proposition will therefore be interested in gaining some exposure to the market. Third, purely from a trading perspective, these new assets are extremely attractive. Given the volatility, the industry’s growth rate, and increasing availability of financial products (including a growing number of derivatives), there are plenty of arbitrage opportunities for savvy traders. In addition, some of these assets show interesting statistical properties, which makes them particularly suitable for systematic trading strategies. How can investors best get exposure to these opportunities? It used to be the case that cryptoassets only traded on small and fragile exchanges. Counterparty risk was extremely high and difficult to mitigate, so access was limited to a small group of specialists. Nowadays, there are a number of sound and sophisticated venues where investors can purchase and take custody of cryptoassets. Probably the most well-known exchange is Coinbase, whose shares are about to trade publicly on NASDAQ (Silver 8 is an early investor in the company). Investors can also gain exposure to cryptoassets through derivatives, DIGITAL ASSETS IN FOCUS | Mar 2021
S I LV E R 8 C A P I TA L
Silver 8 Capital is a US-based investment manager with one of the longest track records in the cryptoasset space. Since strategy inception in 2015, Silver 8 has received numerous industry recognitions for its performance, including the #1 multi-strategy hedge fund by net returns for the past 3 years. Preqin, 2020
as well as an increasing number of regulated passive investment vehicles. What role does regulation play in the future of crypto and digital assets within investor portfolios? For any professional investor, regulatory clarity is extremely positive. Investors in cryptoassets want to make sure that they can operate in a transparent market, where price formation is a consequence of the collective views on the future of this technology and its economic profile. These assets, as any other traded asset, should operate under the principles of a fair, open market. At the same time, regulation can be used as a moat for the protection of incumbents’ status quo. From this point of view, it is to be expected that powerful players will use their influence to create artificial barriers to entry. An alternative, borderless form of money is a potential threat to the current state monopoly over monetary systems, so some sort of government backlash should not come as a surprise, particularly among the weaker monetary regimes. As industry participants, we closely follow regulatory developments, support those who promote fair competition and disruptive innovation. Can you outline the primary challenges and risks investors face in the crypto space and how they can be mitigated? In our view, the primary challenge is still that of understanding what cryptoassets are all about and then forming an unbiased opinion on them. It is a new, complex, and controversial industry that requires a fair amount of time to grasp. From our conversations, we are glad to witness how the number of investment professionals who understand the space is growing very rapidly. Investors are attracted to it a number of reasons, such as intellectual curiosity DIGITAL ASSETS IN FOCUS | Mar 2021
with respect to the technology, the search for uncorrelated returns, or the mitigation of risks stemming from the unprecedented global fiscal and monetary expansions that we are living. For these interested investors, it is now possible to benefit from alternative sources of information on this industry, which was simply not possible just a few years ago. In addition, there are specific operational challenges to this asset class, in particular with regard to trading and custody. We are encouraged to see how during the last few years large institutions have entered the space to offer these services. For instance, Bank of New York Mellon recently announced the launch of its cryptoasset custody business, with Fidelity (our custody partner) having entered the market in 2018. In terms of market risk, probably the first that comes to investors’ mind is volatility. Given the level of uncertainty as to cryptoassets’ adoption, the volatility of returns has been significantly higher than that of most other traded assets (sometimes exceeding 100 per cent in annualised terms). On the other hand, investors managing multi-asset portfolios are not only concerned about an asset’s inherent risk, but its correlation to the other assets in their portfolio. In the context of a broader portfolio, cryptoassets have an extremely interesting profile, as they provide returns that have historically been uncorrelated to assets classes whose returns are linked to the business cycle (cryptoassets’ correlation to the S&P 500 typically ranges from -0.3 to +0.3). Do you think crypto and digital assets are more appealing or appropriate for certain client groups rather than other? Is this changing? We believe that bitcoin has now reached a point where it should be seriously considered as part of multi-asset portfolios in search for long-term returns, particularly due to the ongoing macroeconomic uncertainty and global expansion in the money supply. More opportunistic oriented investors may be attracted to the idiosyncratic VC-type risks of smaller cryptoassets, or the trading opportunities that arise from new and rapidly growing markets. n
Manuel Anguita Co-Founder, Silver 8 Capital Manuel Anguita has a 20+ year career in financial markets. He started his career at Goldman Sachs and Merrill Lynch, shortly before moving into the hedge fund arena. Manuel has held leadership positions at multi-billion dollar funds of varying investment strategies, including global macro, volatility, credit and opportunistic investments. Manuel received an MBA as a Fulbright Scholar from the Stanford Graduate School of Business in 1998, and an MS in Engineering from the Madrid Polytechnical University in 1992. He is a Chartered Financial Analyst (CFA).
Balancing security and efficiency Interview with Alex Maslin
doption and usage of digital assets is growing, however the market is still not fully saturated. This means some managers may look to trade on multiple exchanges to seize on opportunities resulting from slight price discrepancies between exchanges. Accessing all exchanges through a single platform can make these managers more operationally efficient while also safeguarding the assets to ensure high levels of security. Alex Maslin, Business Development Director, Custody and Prime Brokerage for Digital Assets at Copper outlines: “Managers have long complained about the difficulty of having to manage a variety of exchanges at the same time. Operating multiple exchange accounts can also be enormously capital intensive as managers are required to park assets on each platform so that there is capital to trade when an opportunity presents itself. “A core component of Copper’s infrastructure is Copper’s ClearLoop, a sophisticated inter-exchange trading and settlement network we rolled out last summer which is being described as a game-changer. As opposed to holding assets across various locations independently, ClearLoop enables clients to trade on multiple exchanges via a single platform, utilising one pot of assets held in a custodial trading account with Copper.” In addition to enhanced capital efficiency, the platform streamlines and secures the settlement process, allowing traders to maintain full control of their funds. “This is because their assets don’t leave their custodial trading account at Copper, effectively eliminating counterparty risk,” Maslin notes. Price discovery is the primary reason investors choose to trade on multiple exchanges. Some do this simply to access the best price when an asset needs to be traded, others 8
build a strategy around finding and capitalising on these small differences in price. High level of security When trading digital assets, security is paramount. Maslin comments: “A key challenge that many managers face is the balance between ensuring the security of assets while maintaining the speed and efficiency of their operations. “The transfer of assets between the custodian and exchange has historically been highly disjointed and cumbersome. This occurs because very few custodians offer connectivity to exchanges in a secure and convenient fashion. The challenge for managers has been to confidently assure investors that their assets are secure at all times during these movements across the blockchain.” Copper’s solutions can help managers mitigate these risks. The aforementioned ClearLoop is one which allows managers to trade across multiple venues while ensuring assets remain under Copper custody. The firm also provides a Walled Garden solution. “This enables clients to move assets interexchange, or directly from the client’s cold custody account into their exchange accounts, with all other withdrawal routes lockdown. So, assets can only go back and forth between predefined and approved destinations, effectively eradicating the risk of misappropriation of assets,” Maslin explains. This balance between security and operational convenience is one of the most significant challenges managers trading digital assets must overcome. Maslin remarks: “We can all agree that digital assets are fast-moving assets, so minutes matter, and hours cripple a trading strategy. Historically, moving assets from cold storage to a trading environment would take up to a staggering 12 hours, due to the DIGITAL ASSETS IN FOCUS | Mar 2021
security measures in place. This is because it takes time for the private key (required to sign a transaction) to be accessed. Typically, custodians store private keys in a centralised location which needs to be secured.” To support managers in their quest for more efficient trading, Copper designed its architecture to eradicate the central point of failure. Maslin elaborates: “Instead of a centralised private key creation, we employ a cryptographic approach called multi-party computation (MPC) – a decentralised architecture leveraging secure algorithms. Unique private key segments, called Shards, are formed simultaneously and in isolation, before being distributed across 3 separate locations. No one location has ever held the full private key. We are able to perform this task by utilising a sophisticated cryptographic protocol called Zero-knowledge proof. For this reason, we have the ability in conjunction with the client, to move client’s assets from cold storage into a trading environment in less than 10 minutes. The application of MPC technology represents a significant milestone in improving security against both external and internal attack vectors, which has enormous implications for the future of cryptocurrency.” Full prime brokerage offering Evolving client needs continue to shape solutions and product offerings in the digital assets space. To gain advantage in a hyper-competitive sector, custodians have had to expand operations beyond maintaining the secure infrastructure for the safeguarding of assets. Over the past three years, Copper has gradually built a full prime brokerage offering to better meet the needs of its clients. Maslin says: “One product we recently rolled out to satisfy client requirements is our CopperConnect solution. DIGITAL ASSETS IN FOCUS | Mar 2021
CopperConnect enables clients to interact with the highly popular decentralised finance (DeFi) space, without compromising on security. “Typically, trading with a DeFi exchange means holding one’s assets in a hot wallet. This means the private key lives on a server, which isn’t very secure. CopperConnect is a bridge between the DeFi exchanges and Copper’s cold custody solution, ensuring clients can trade on these new venues, while all the time holding their assets in Copper’s award-winning cold custody solution.” He notes that this is one example of many, as the firm is continually listening to clients’ needs and meeting them with innovative products. “This remains a critical success factor today,” Maslin stresses. Bright regulatory future In terms of regulation of digital assets, Maslin is optimistic in his outlook: “I think the stage is set for a bright future. Broadly speaking, the trend we are seeing is that most regulators and leading central banks are exhibiting an interest in understanding digital assets. “A growing number of countries are beginning to realise that at a time of disruptive technological change, a properly-implemented regulatory framework is vital for investor protection and the industry’s continued growth. Of course, overzealous regulation that risks stifling innovation is always a concern. However I’m sure in time the appropriate balance will be met.” n Alex Maslin Business Development Director, Copper Alex Maslin joined Copper in 2020 as Business Development Director. He has over 11 years experience providing institutional sales and prime brokerage services in the FX and multi-asset spheres.
Are A you u in th the L p? TM
Assets have gone digital. Copper ClearLoop connects custodians and exchanges in one secure trading loop — with real time settlement across the network.
A seismic shift in perception Interview with Christopher Bendiksen & James Butterfill
he world of cryptocurrencies has experienced a sea change in the past year. Although the nature of Bitcoin itself is immutable, which is actually part of its attraction as an investment, the sentiment towards these assets has been shifting quite dramatically. “The change in tone we observed over the course of 2020 as well as the difference in reception is unlike anything I’ve seen before. Many investors who were previously either dismissive or negative, have either completely changed their tune or at the very least, they want to hear more about how it works,” outlines Christopher Bendiksen, head of research, CoinShares. Asset managers like CoinShares have played a significant role in making this transition happen. James Butterfill, Investment Strategist, explains: “Until March and April last year, Bitcoin was still, largely, a speculative asset. Part of DIGITAL ASSETS IN FOCUS | Mar 2021
that was because a lack of understanding of what Bitcoin actually is. “A big part of our job has been to re-educate clients and help them understand how Bitcoin can fit in a portfolio. We have been conducting research and talking to investors about the fact that it is its own asset class.” The path from initial interest to eventual investment takes investors on a journey, an essential part of which is this understanding and knowledge. One of the concerns investors often put forward when considering a Bitcoin allocation is its volatility. Butterfill comments: “Its fair for people to comment on the volatility in the Bitcoin market, but we try to help them frame this market movement in the right context. Bitcoin is still a very young asset class, being only 12 years old. Investors need to consider it as they would a small cap company which 11
COINSHARES isn’t yet delivering any earnings. If they have faith in the concept and believe the management will deliver on that concept, then investors have the potential to be more tolerant of a certain level of volatility.” Bendiksen remarks: “We really need to stress how early we are in the development of this asset. Interacting directly with blockchain technology can be terrifying given it’s a completely unforgiving system. This is why having a product which has custody built into it and takes care of everything within it holds a certain allure.” CoinShares offers a variety of ways to access Bitcoin and other digital assets, including exchange traded products, indexed and active strategies. As investors consider Bitcoin more as a store of value, rather than a gamble, the aforementioned volatility is likely to decline. Given some see the role of Bitcoin as an alternative to gold, acting as a safe haven asset within portfolios, Butterfill draws parallels between the cryptocurrency and gold: “Gold is now an established store of value but in the early 1980s, it had 60 per cent annualised volatility. This was a time when there was no algorithmic trading or no high frequency trading to exacerbate volatility. As the gold market has matured as a store of value, so has its volatility declined.” It is therefore reasonable to theorise that Bitcoin may follow a similar trajectory. Societal innovation The need for an inflation hedge within portfolios is driven by the current economic environment. Butterfill says: “Negative interest rates are one of the triggers for the growing appeal of Bitcoin in the developed world. Some banks have said they would start charging negative interest rates on lower tier bank accounts. If a much greater proportion of the public are being charged negative interest rates, the nature and value of cash will continue to erode, caused by quantitative easing. This will cause investors to feel they need an anchor for their assets and something like Bitcoin, which has a fixed supply, would work well.” Bendiksen also observes the impact of the Covid pandemic:
“It was a bit of a reality check for everyone. The unprecedented expansion of the money supply we’ve seen in the wake of the pandemic is causing people to worry. It’s not only negative yields causing concern, but also the prospects of rising inflation when different countries come out of lockdown.” He says Bitcoin represents an important societal innovation: “Separating money and state is a very important thing we need to do this century. Bitcoin presents a credible alternative; a voluntary alternative that exists outside of the system of coercion. It gives society another check and balance on the power of government.” Bendiksen adds there is evidence of this shift in countries with authoritarian regimes or which have had large currency devaluations: “Countries like Turkey and Cambodia have seen rising volumes of Bitcoin. It’s also safer and easier for people fleeing their country of origin to carry a USB stick in their pocket than large amounts of cash.” Positive regulatory steps Butterfill outlines: “For the most part, the steps regulators are taking are quite positive ones. Europe has established MICA, the regulatory framework for cryptocurrencies. Its a step in the right direction that they’re not banning Bitcoin or crypto outright. They’re saying, Okay, let’s regulate this and make sure its safer for investors to buy into. We’re seeing similar steps being taken in the United States too. So that’s quite encouraging.” He warns that Bitcoin prices are still very sensitive to regulatory issues. He gives the example of Janet Yellen making a remark about potential criminal use of cryptocurrencies, a remark which in turn had an impact on the price. However, given the demand for Bitcoin is significant, it makes sense for regulators to be encourag- ing. Butterfill notes: “Bitcoin funds witnessed USD6.7 billion in net new assets in 2020, so the demand is there. If you try to deny people something they really want in their portfolio, if it’s not in a standard regulatory framework, they are going to look for more nefarious areas to invest. And that worries me.” n
Christopher Bendiksen Head of Research, CoinShares
James Butterfill Investment Strategist, CoinShares
As Head of Research Chris Bendiksen oversees the firm’s research efforts and provides internal and external guidance on developments in the crypto industry. Prior to joining CoinShares in 2017, Christopher worked in energy shipping where he analysed global energy markets and international flows of liquefied natural gas. Since 2019, he has given guest lectures for London Business School’s Blockchain Series on the topics of Bitcoin Building Blocks and System Architecture.
James Butterfill has over 18 years of experience in fund management, investment banking, economics and asset allocation gained most recently as an Investment Strategist at CoinShares. Previously James acted as Head of Research at ETF Securities with prior experience as a multi-asset fund manager and investment strategist at Coutts & Co, HSBC & ING Barings.
DIGITAL ASSETS IN FOCUS | Mar 2021
Hong Kong’s regulatory innovation and licensed firms pave the way for digital assets in Asia
Interview with Wayne Trench
sia has the world’s largest pools of liquidity and is the epicentre of demand for digital assets, with Hong Kong at its heart. With its robust regulatory regime for digital assets, Hong Kong is also a key player in meeting investor appetite for this new asset class. The Hong Kong Securities and Futures Commission’s (SFC) digital asset regulatory regime specifically focuses on investor protections and allows the institutional segment to safely and securely enter the space and trade innovative products like Bitcoin, Ethereum and Security Tokens (STOs). OSL Digital Securities Limited is the first and only firm to receive a license from the SFC to conduct types 1 (dealing in securities / brokerage) and 7 (automated trading systems / exchange) regulated activities for digital assets. Under Hong Kong regulation, access to managed funds that specifically invest in digital assets is limited to accredited investors. Hong Kong regulations allow fund managers an allocation of up to 10 percent to digital assets, without requiring additional approval from the SFC. OSL’s CEO, Wayne Trench said: “The Hong Kong regulator is well respected globally and the territory’s proximity to capital from mainland China positions it well against regional peers to domicile funds. Hong Kong is one of the most important financial markets in the world. It’s a hub for both digital asset innovation and institutional investment. Most major banks, asset managers, funds, and advisors are active or at least represented here and there is a robust ecosystem of digital asset companies in the SAR.” “Because of the SFC’s unique integrated framework, OSL clients receive all the protections and safeguards they are accustomed to in traditional finance. Managers can also take comfort in additional protections under the new regime that have been tailored for the new asset class.” A reliable regulatory infrastructure is a keystone in the foundation of a successful funds market. In the digital asset space, funds offering access to this asset class can utilise the SFC’s framework to trade digital assets safely and securely by working with a licensed digital assets brokerage and exchange such as OSL. Trench 14
continues: “Working with licensed players offers funds a credible and reliable counterparty to lower risk. Because we are fully regulatory compliant, our clients are afforded protections such as KYC/AML protocols, segregated bank accounts and insured custody.” According to Trench, OSL’s security and compliance protocols meet and exceed the most rigorous financial services industry standards. The firm provides insured custody for digital assets, including comprehensive protection of customer assets for cold wallets and insurance for loss, damage, destruction, or theft of digital assets. The OSL Custody service is a wallet based solution that is protected in air-gapped HSM infrastructure and utilises state-of-the-art encryption, private key protection, and multi-layer authentication. It features round-the-clock surveillance and audited operation and control protocols. “With regulation in Hong Kong, the playbook has been provided for institutional and professional investors to securely trade in the digital asset market. They can now invest safely, and with confidence in a sector that was mostly unregulated three short years ago. “In many ways digital assets are speaking for themselves. The performance of the asset class has sparked a rapid increase in interest in OSL by hedge funds, treasuries, and family offices, who are looking to get exposure to Bitcoin, and other digital assets. Interest from independent wealth managers and private banks is growing too, as they seek safe, secure and regulated means for advisors to deliver these digital assets to their clients,” Trench added. n Wayne Trench CEO, OSL Wayne Trench oversees all of OSL’s activities, including trading and brokerage operations, product development and governance. He has more than 15 years of experience in digital assets, investment banking, trading and finance. Prior to joining OSL, Wayne held senior roles in major financial institutions, including as CEO of Octagon Strategy and Asia head of electronic trading coverage for Morgan Stanley. Wayne is also an entrepreneur, co-founding Aspir, a diversified mineral processing technology and equipment supplier in Australia, which was acquired by the Weir Group in 2013.
DIGITAL ASSETS IN FOCUS | Mar 2021
F I N A N C E M A LTA
Navigating the digital asset environment Q&A with Dr Ian Gauci What are the key concerns investors and managers have around security in digital assets? Digitalisation in the past years has been ever-present, in almost all industries, with varying levels of impact. In the digital assets and cryptocurrencies realm, where we have representation of real assets/rights in a digital form, and an enumeration of the latter in digital format, technology assurance, cybersecurity as well as issues related to custodial duties have been key concerns for active players in this arena. Until ad hoc rules and regulations are harmonised and implemented, investors and managers need to assess their risks and set specific procedures. This will allow them to navigate between an environment which remains flexible and userfriendly but on the other hand, focuses on processes and solutions which do not compromise on security. Can you outline the role technology plays in abating these worries? Are there any side effects? The operators involved in the digital assets and cryptocurrencies arena will aim to adopt the best technologies to abate any of these risks. One of the main contenders here is DLT or blockchain. Through blockchain, the aim will be to increase security, ensure more traceability and a level of immutability. The security of blockchain technology occurs when data is cryptographically linked through the chain of blocks. This key feature however also poses challenges to reversing bad transactions or fixing unreliable software artifacts caused by code bugs or user error. Technology assurance and proper code design is paramount as it can also affect issues around cybersecurity. Digital assets comprise of a broad range of items including, rights, personal data, certificates, assets, etc. They will exist and depend on the reliability of the blockchain. The potential risks can be substantial and may affect the users and adopters in each industry where these technologies are deployed in a multitude of ways, from loss or theft of digital assets, access rights, digital identities, 16
personal data, trust in innovation and technology. Looking ahead, what is the expected trajectory for technology and the security of digital assets in terms of opportunity and risk? Technological innovation, as well as the huge potential of blockchain technology will surely open far-reaching opportunities for simplifying processes and augmenting security around the digital assets’ ecosystem. Technological innovation will be the main driver here and can also be infused or automated through regtech and suptech by any Authority leveraging on technological innovation. We are also witnessing new legislative proposals like DORA (which covers operational resilience and cybersecurity), the proposed amendment of NIS as well as the Cybersecurity Act in the EU. I am sure that in the not-sodistant future, regulatory tools will also make sure that the technology meant to be used in the digital assets eco-system, can also be validated and ascertained through an independent audit. This assessment will be based on concrete quality of service parameters before it is deployed, particularly where the risks of any potential failure are very high and thus it would be proportionate to impose such a measure, coupled with periodical audits to ascertain that safety is sustained in the digital realm. n
Dr Ian Gauci Managing Partner at GTG Advocates, a member of FinanceMalta Dr Ian Gauci is the Managing Partner at GTG Advocates, Afilexion Alliance and Caledo Group. He is engaged primarily in technology law, fintech, regtech, electronic communications, fintech, information society, data protection and gaming/gambling. Ian is an advisor to the Malta Digital Innovation Authority (MDIA) as well as the Malta Financial Services Authority (MFSA). He has co-authored the Maltese Electronic Communications Framework, the Maltese VFA Legislation and the DLT Framework. He lectures Legal Futures and Technology at the University of Malta.
DIGITAL ASSETS IN FOCUS | Mar 2021
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The Malta advantage Q&A with Dr Kyle Scerri How will the EU regulatory framework for digital assets impact Malta’s offer in the space? The introduction of a proposed level playing field across the EU through the Markets in Crypto-assets Regulation (“MiCA”), will undoubtedly test Malta’s competitive advantage among promoters and service providers seeking a regulated forum for the issuance and establishment of digital assets. This, however, is a challenge which should be met with optimism rather than scepticism. Malta’s regulatory bodies and industry professionals have gained industry know-how by actively being on the ground and working with such business models for the past years. This is an invaluable asset which should be showcased. Also, it is to be noted that the introduction of a harmonised framework will not spell the end of the local regime. Rather, it will ‘refine’ it to ensure that the framework meets the minimum standards which will be set out at a supranational level. When you consolidate the aforementioned two notions together, it is safe to say that with the correct optimistic mindset, Malta can retain its competitive offering despite facing increased competition. What do you foresee will be the most significant changes to the island’s proposition? In large parts, the MiCA, as proposed, runs parallel to the standards currently set out in the local regime. However, when considering the detail of the proposed EU framework, it is expected that, on the digital issuance part, Malta’s pre-approval approach to issuers of digital assets is transformed into a more attractive notification process. Moreover, it is expected that the way in which technology audits are performed and the level of information disclosed to investors, on the technical infrastructure of an offer, are aligned across the EU. On the digital asset service provider front, it is expected that heightened consideration is afforded to the concept of market abuse and that the authorisation and supervision of such providers is subject to pre-imposed deadlines and benchmarks. One can also expect that the high standards imposed by the local regime in the fields of AML/CFT, conduct of business and investor/consumer protection are retained, even though, Malta has already made the necessary amendments to its AML/CFT framework to cater for virtual financial assets. How can Malta differentiate itself when European law may seek to harmonise the landscape? Malta’s experience is key here. Being such a disruptive and fast paced industry, the lessons learnt through Malta’s regulation of digital assets and distributed ledger technology, 18
ahead of most jurisdictions at a global level, is an invaluable tool. This can ensure Malta remains and becomes an even more attractive proposition for promoters of digital asset-related ventures. The adoption of digital asset regulation and rules, and the fact they have already been tested within the market, in a number of fields (for example, AML/CFT, remote gaming, system audit and certification of platforms) also provides Malta based professionals and service providers with a ‘boost’ of sorts when it comes to interpretation and application of laws and regulations in practice. On the operations side, it should be noted that despite the onerous requirements associated with this regulation, financial and credit institutions based in Malta are already in an industry know-how position and the labour market is composed of individuals who have gained invaluable experience in this field. This is bound to make the process of setting up shop in Malta smoother. What are the primary benefits for digital asset managers setting up in Malta? As a service provider for virtual financial assets (VFA), a digital asset manager benefits from in-depth guidance on conduct and ongoing obligations pertaining to their day-to-day operations. This guidance has been refined since inception to cater for practical obstacles and the realities within the industry. Additionally, in the form of the Malta Digital Innovation Authority (MDIA), a Malta based digital asset manager has the ability to audit and certify any innovative technology arrangement which it avails of, adding a layer of legitimacy in due course. The growth in number of licensed VFA service providers is also providing asset managers with fully authorised execution and trading venues where such providers may conduct their management activity accordingly in an ambience of similarly applied rules and standards. This minimises risks and impracticalities brought about by varying regulatory regimes. It is also interesting to note that the EU framework has not included ‘portfolio management’ as a service subject to authorisation. Accordingly, should this remain the case, and should Malta retain portfolio management as a ‘VFA service’, then the island will be in a position to offer such service providers an authorisation seal of approval. n Dr Kyle Scerri Regulated Industries and Compliance Advisor at CSB Group, a member of FinanceMalta Dr Kyle Scerri is a lawyer by profession and joined CSB Group in November 2020 as a Regulated Industries and Compliance Advisor. Throughout his career, his main fields of specialisation have always been financial services, capital markets and remote gambling.
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Prime services in digital assets offer investors a familiar experience Interview with Matt Long
arch 2021 will see the inception of the digital asset industry’s first capital introduction conference, the OSL Digital Asset Capital Introduction Conference. The Conference will connect investors, including hedge funds, real money managers, private banks/ family offices, corporates and HNWI with ways to invest into digital assets including a range of leading crypto funds, crypto fund-of-funds, CME Futures and direct investment into coins. OSL is one of the biggest and most experienced digital asset prime brokerages in the world. Hosted by OSL’s Singapore branch, a number of fund managers have committed to participate. The event is Asialed, however, investors from around the world will attend. “As a one-stop shop for asset managers for digital assets, providing access to deep liquidity, secure custody, lending and 24/7 high-touch coverage we are delighted now to launch our Capital Introduction Conference” said OSL Head of Distribution and Prime, Matt Long. OSL Singapore offers managers deep liquidity through electronic and OTC execution, borrowing and lending facilities, insured custody, cap intro, bespoke token services and institutional post-trade settlement and reporting services. Long added: “While still in the early stages of its evolution, prime brokerage in the digital asset space is beginning to resemble the services found in traditional finance. We are seeing an increasing number of digital asset firms bundle products and services together to allow institutional traders to efficiently manage capital. This bundling also allows traders to tap global liquidity pools for execution and block trading, safekeeping assets while also providing cap intro and dedicated account management services. We expect digital asset prime services to continue to evolve and mature over time.” DIGITAL ASSETS IN FOCUS | Mar 2021
With increased institutional participation in digital assets, there is also growing understanding of the need for support services for the sector. “Offering safekeeping akin to traditional custodians is paramount. Safety, transparency, insurance and accessibility are key aspects of our value proposition. The advent of comprehensive regulation and investor protection, and the entry of quality custodians and digital asset insurance has helped remove barriers to entry to digital assets for fund managers,” said Long. OSL has a diverse institutional and professional client base. For fund managers, digital assets are proving to be a new alpha generator, and provide differentiated, uncorrelated and innovative products they can take to market – especially for managers looking to attract the next generation of wealth. Longer term, tokenised securities, also called STOs, are an innovative new product that will create additional opportunities for growth, diversification, and access to capital markets. Added Long: “At OSL, we will experience first-hand the impact of STOs on the digital asset market. Our HK-licensed entity, OSL Digital Securities Ltd., will list and trade STOs in Hong Kong. Accordingly, we will continue to look for opportunities in the regulatory landscape in Singapore and other jurisdictions to offer compliant, complementary services.” n Matt Long Head of Distribution and Prime, OSL Matt Long has over 20 years of experience in financial markets, technology, and investing in disruptive businesses. Matt is focused on developing OSL’s customer franchise across its Brokerage, Custody, Exchange and SaaS offering, and for growing its prime brokerage business. Matt has a history of successfully building and running customer-driven, technology-dependent financial markets and trading businesses. Immediately prior to joining OSL, Matt was the Hong Kong CEO of digital bank and broker Saxo Bank Group. He has also run sales, trading, derivative and asset management businesses globally, with specific expertise in APAC markets, at firms such as Macquarie Bank and ANZ.
BITFINEX • COPPER • MARKET SYNERGY
Speed of transferring assets the next frontier for crypto Interview with Paolo Ardoino, Bitfinex; Alex Ryvkin, Copper & James Banister, Market Synergy
ransaction speed is the next frontier for digital asset trading, enabling institutional investors to seize market opportunities faster. What is more important – speed or security? The debate has divided digital asset traders for years. According to Bitfinex, the digital token trading platform which offers state-of-the-art services for traders and global Liquidity Providers, the answer is both. Through strategic partnerships, Bitfinex has created an institutional calibre offering, providing customers with a robust, fast, safe infrastructure to enable them to offer digital asset trading to clients. Its business relationship with crypto custodian Copper provides the financial plumbing to 20
bridge the gap between DLT (Distributed Ledger Technology) and traditional finance, providing a way to comply with exacting institutional risk management rules in the digital asset world. “Over the last three years we have witnessed a rapid maturation of institutional crypto-assets, due in large part to the growing number of asset managers who are moving into the space from traditional markets. They bring with them high expectations for capital efficiency and greater controls around market access, which has led to technology and infrastructure common in traditional markets being built to meet the unique attributes of crypto-assets. This professionalisation of our industry is having a net-positive impact on the entirety of DIGITAL ASSETS IN FOCUS | Mar 2021
BITFINEX • COPPER • MARKET SYNERGY Ardoino added that it is part of Bitfinex’s ongoing strategy of building a service fit for institutional trading, which began when it selected Market Synergy GmbH to build a bespoke network for Bitfinex to address a gap in the market. “We are now at the forefront of delivering robust, high performance, rapid connectivity for institutional clients,” said Ardoino.
the digital asset ecosystem, making it a more attractive investment space for institutions and large corporates,” said Alex Ryvkin, CPO at Copper. “Our platform’s relationship with Copper is driving uptake of digital asset trading amongst hedge fund and asset managers worldwide, transforming how institutional customers engage with digital assets, by providing market-leading custody and trading solutions,” said Paolo Ardoino, CTO at Bitfinex.
Institutional standard connectivity Market Synergy GmbH is a Swissbased organisation which offers institutional standard cryptocurrency connectivity for hedge funds, banks and brokers through a highly secure, reliable network which is monitored and supported 24x7. Any institution wanting to trade digital assets can connect with Market Synergy via a FIX feed or ISP link and access Bitfinex’s wide selection of digital assets. Market Synergy also offers colocation services to any Bitfinex institutional client. James Banister, CEO, Market Synergy adds, “Market Synergy is part of the FXecosystem group of companies and we have over a decade of experience in outsourced connectivity for institutional clients. We have applied the same high standards to our digital asset infrastructure that we use in the FX market.
Being secure, robust, fast and reliable, the network performs without interruption, even with recent, exceptional demand. Since launching our joint offering with Bitfinex, we have built an impressive worldwide client base including hedge funds, specialist crypto funds, professional traders and brokers, enabling both speed and security of transaction.” So what’s next on the agenda? “We are proud to have Bitfinex as a key partner in ClearLoop, Copper’s instant off-exchange settlement and clearing network, commented Ryvkin at Copper. “As the efficiency of crypto-markets improves and regulatory standards evolve, the institutional investment space gets more and more competitive. To keep winning, asset managers will have to prioritise infrastructure that is able to facilitate the full spectrum of traditional strategies, and beyond, alleviating some of the most common risks associated with the crypto-space.” Ryvkin says with more pillars such as Bitfinex joining ClearLoop, he is confident Copper will continue its work to bridge the gap between traditional and crypto-market infrastructure, catering to the needs of the most sophisticated institutions in the world who are now entering this space. n
Paolo Ardoino CTO, Bitfinex
Alex Ryvkin CPO, Copper
James Banister CEO, Market Synergy
Paolo Ardoino joined Bitfinex in early 2015 and now serves as CTO, developing and managing core parts of the Bitfinex backend architecture. Paolo has been building valuable tools and infrastructure for financial innovation for the past 15 years.
Alex Ryvkin is the Chief Product Officer at Copper – a pioneering digital assets custody and settlement provider. His career in financial services spans more than a decade, spent between the UK, Russia and the Middle East, advising globally recognised institutional investors on a range of asset classes and transactions. Since returning to the UK in 2017 he has set up and run two successful fintechs in the investment and digital assets space. He holds an MBA from London Business School, along with a set of professional certifications.
James Banister founded Market Synergy GmbH in 2018 to complement the FXecosystem group of companies. Market Synergy provides institutionalgrade connectivity to the digital asset market place. James has been involved in the FX industry for 25 years with roles at Citigroup and Bear Stearns. He is also a NED of Natterbox, a leading VoIP telephony integrator into Salesforce.
DIGITAL ASSETS IN FOCUS | Mar 2021
Driving institutional adoption of digital assets Interview with Michael Shaulov
ecurity is one of the major obstacles to operational and capital efficiency in the digital asset market. But developing infrastructure and regulatory support is rousing greater interest among investors, which should further drive progress and evolution. Michael Shaulov CEO and co-founder of Fireblocks comments: “While blockchain-based assets by themselves are cryptographically secure, safely moving digital assets between counterparties, exchanges, and liquidity providers for trading and settlement becomes an operational nightmare. “More than USD3.8 billion in digital assets were stolen by hackers in 2020 due to private key theft, spoofing, and compromised credentials.” Shaulov, together with co-founders Pavel Berengoltz and Idan Ofrat, founded Fireblocks after their experience on the task force which investigated the Lazarus Group breach in 2017, which saw the hacking of four South Korean exchanges and the theft of USD200 million of Bitcoin. During the investigation, they took note of the shift in the motivation of cyber criminals from hacking traditional finance to digital assets as well as the complexity and lack of solutions for securing digital assets in an enterprise environment. Shaulov and his colleagues designed a solution that helps organisations operate in a 24/7 market, delivering instant 22
access to capital without jeopardising security or operational efficiency. Today, with over 180 customers, Fireblocks has become the most flexible digital asset infrastructure that helps financial institutions protect digital assets from theft or hackers by using breakthrough multi-party computational (MPC) technology and patent-pending chip isolation technology to secure private keys and credentials while eliminating the need for deposit addresses. “Our customers need secure rails to trading venues, liquidity providers, lending, DeFi, staking and instant posttrade settlement, and that’s what we’re able to solve with the Fireblocks Network. We have over 200 active participants on the network today, so anyone can plug into that ecosystem and launch their operation from day one.” Launched in June 2019, the secure asset transfer network was created by building on the firm’s MPC technology. It enables institutions to quickly and securely find and connect with some of the largest financial institutions and exchanges – in order to safely and securely transfer assets on-chain, and without taking counterparty risk to Fireblocks. The Fireblocks Network is designed to solve one of the core impediments to the adoption of digital assets by financial institutions: the lack of security and speed of transfers. This platform introduces a secure, open network DIGITAL ASSETS IN FOCUS | Mar 2021
where financial institutions can securely find and connect with their peers while streamlining settlement and post-trade operations. By doing so, the Fireblocks Network increases both liquidity and operational efficiency, opening the door for traditional financial institutions to join the digital asset space. Shaulov details: “The launch of the Fireblocks Network made it possible for users to store and transfer assets across the entire institutional ecosystem and removes the need for any middle-men. “We’re redefining on-chain settlement processes by adding an unprecedented layer of security and efficiency, preserving the decentralised nature of blockchain and allowing it to operate at the institutional level.” Institutional interest and regulation Institutional adoption of digital assets is one of the highly discussed issues in the industry. As many attest, the Covid-19 pandemic has accelerated interest in the asset class however, Shaulov notes: “There’s still a lack of familiarity with the market structure of the crypto native space, the industry players, business models, and the opportunities. Once you enter the space, you have to address the operational challenges, because you can’t custody and settle assets the same way as traditional assets.” He underscores that technology will play a major role in the way investors interact with digital assets: “You need a tech stack that is both secure and flexible so your business can continue to evolve with the market. Find a provider with future-proof technology.” DIGITAL ASSETS IN FOCUS | Mar 2021
Regulation will also have a hand in the future of the asset class. Shaulov comments: “The EU region is seeing increased interest from institutions as new regulatory clarity provides a framework for how to compliantly operate in the digital asset space.” In view of this development, Fireblocks expanded its operations in Europe beyond London, adding two new offices in France and Germany. “We are excited to expand our footprint in the region to help our customers launch product offerings for digital asset support and provide the tools that will steward this next phase of growth, innovation, and adoption,” said Shaulov when announcing the launch of the new locations. Across the pond in the US, he highlights: “The recent regulatory clarity by Securities and Exchange Commission (SEC) and the Office of the Comptroller of the Currency (OCC) on Bitcoin/Ethereum and Stablecoins can be considered the most significant change in the market.” In January 2021, the OCC announced that banks can use Stablecoins to settle financial transactions. This means banks can now support Stablecoin payments and use Stablecoins for other bank-regulated functions. And although the SEC does not regulate Bitcoin as a security, in an interview chairman Jay Clayton said Bitcoin is, “more payment mechanism and store of value.” Shaulov observes: “A year ago, people were still conceptualising. What you saw a year ago wasn’t materially different than three years ago but in the last three to six months, it accelerated and everybody is rushing to get those capabilities. Now that the SEC allows broker-dealers to custody digital securities and clients are becoming more open to Bitcoin as an asset, banks have become highly interested in setting up infrastructure for digital assets.” n Michael Shaulov CEO & Co-Founder, Fireblocks Michael Shaulov is the CEO and co-founder of Fireblocks, a secure digital asset infrastructure company. Prior to Fireblocks, he co-founded Lacoon Mobile Security, which was acquired by Check Point, and was then appointed the Head of Products, Mobile and Cloud Security for Check Point. Michael is a serial cybersecurity entrepreneur and investor. He is also a recognised industry speaker, delivering talks at RSA Conference, BlackHat and Infosec. Before his commercial endeavours, Michael pioneered the mobile security field in an elite military technological unit (8200), where he received the Israeli Presidential Excellency Honour for his contributions. He holds a BSc in Computer Sciences and Physics from Ben-Gurion University, Israel.
Become a Digital Asset leader with Fireblocks. Successful Digital Asset management starts here. Visit fireblocks.com.
Banking on the future – striking the right balance Simon Gray discusses regtech and fintech and the importance of vision, foresight and energy coupled with pragmatism in any regulatory response The future is now Traditional financial service providers have had to grapple with a host of new challengers, from digital entrepreneurs to blockchain and cryptocurrency pioneers. In addition, the pandemic has also positively accelerated digital innovation in all major economies. Reliance on digital platforms has now become an essential part of securing and completing financial deals and transactions in this new norm of remote working. International Financial Centres (IFCs) like the British Virgin Islands (BVI) , provide agile, sophisticated yet cost-efficient financial products within a supportive regulatory and business environment well-suited for the digital world. Key ingredients of success Much of this success rests on the BVI’s social and political stability, as well as important incentives such as tax neutrality, an agile corporate and common law framework and low administrative costs. All these factors come together to provide businesses with the optimal environment for innovation and growth. Over the years, the BVI has carefully protected and cultivated this reputation; enhancing its own regulatory measures while actively engaging in open dialogue and collaboration with international standard-setting bodies to bolster its regime. In many ways, regulations are a moving target; ever-evolving in response to new risks or emerging products such as cryptocurrencies and initial coin offerings. As a result, the landscape is becoming more complex. In the face of shifting global regulations, the BVI has retained its agility and adaptability, keeping track of changes and ensuring compliance. DIGITAL ASSETS IN FOCUS | Mar 2021
Innovative products The BVI’s Incubator Fund can be a worthwhile option for startup funds managing digital assets. These funds are known as 20:20:20 funds as they can have a maximum of 20 investors, a minimum initial investment of USD20,000 and a cap of USD20 million on investments. Incubator funds were set up to be quick to market, with lower costs, fewer regulatory restrictions and no need for mandatory functionaries like auditors or administrators. These funds can operate for two years, with the possibility of one additional year. Therefore, managers would use this structure to build assets and a track record before moving their strategy into a longer-term vehicle. The jurisdiction also offers digital asset start-ups the option of an Approved fund. Introduced in 2015, this hedge fund vehicle can also have a maximum of 20 investors. Within the Approved fund structure however, assets are capped at USD100 million, with no term limit. Further, the fund can continue indefinitely. Both options are well suited to the digital fund space for reasons of cost, speed and benign regulations. Developing the right regulation Regulation can be notoriously difficult to keep up with, let alone enforce, on a sector that is young and evolving fast. Most existing regulations in the region only apply to traditional financial services and products, but when it comes to blockchain technology or cryptocurrencies, these standards need to be updated to ensure good governance and protect consumers. New challenges come with emerging technologies and many governments are 25
BVI FINANCE struggling to put proper regulatory frameworks in place for new sectors like cryptocurrencies. Regulation has not always kept up, especially with digital assets which essentially live on borderless blockchains. Nevertheless, and to nurture further innovation, it is important to interrogate new technologies and make sure the right policies are in place. As a result, it is becoming increasingly attractive to structure investment vehicles in established jurisdictions like the BVI that provide the right balance between stability, robust and pragmatic regulation and attractive economic incentives. Playing in a regulatory sandbox The jurisdiction is keen to support innovation in technology infrastructure underlying digital assets funds. In the BVI, we are actively investing in fintech regulation and in 2020 launched the Fintech Regulatory Sandbox – a testbed for fintech businesses to conduct live-testing and identify areas for improvement before launch. This light-touch regulatory regime is designed to foster innovation and create a cost-effective friendly ecosystem for digital startups to thrive. It is helping formalise the existing significant digital activity already taking place in our business company and funds regimes. A regulatory sandbox aims to promote more effective competition in the interests of consumers. It allows both existing and prospective licensees to test innovative products, services and business models in a live market environment, while ensuring appropriate safeguards are in place. This approach is of particular relevance in the digital assets space given the nascence of blockchain and cryptocurrency as an asset class. A sandbox environment can be considered to be a bridge between the creative innovators and the regulators whose aim is to keep a tight rein on financial activities. Tech focus and the BOSS The BVI has also been proactively exploring opportunities in cryptocurrency and blockchain technology. The jurisdiction actively invests in its own technological capabilities and has deployed leading-edge technology to ensure it maintains global international standards through establishing a more effective partnership with global regulators and law enforcement authorities around the world – driven by technology. 26
The BVI’s Beneficial Ownership Secure Search system (BOSSs) is the gold standard in accessible company registers. This fully searchable platform is decentralised and cloud-based, and uses the highest levels of security and encryption to hold verified data on companies incorporated in the BVI. The digital platform has been lauded by prominent law enforcement authorities like the UK’s National Crime Agency (NCA) and was integral to disclosing information that warranted the UK’s first Unexplained Wealth Order (UWO), obtained by the NCA in 2018. Smart contracts The distributed ledger is a decentralised database where transactions are kept in a shared, synchronised and distributed book-keeping record, which is secured by cryptographic sealing. It can be an important tool for building a fair, inclusive and secure digital economy, as the platform can provide a transparent and user-centric digital service. From its perspective and in support of progress in this area, the BVI is looking to further the use of smart contracts such as the Decentralised Autonomous Organisations (DAO) and Limited Liability Autonomous Organisations (LAO). These which can codify transactions and contracts, and in turn, ‘legally’ manage the records in a distributed ledger. This is a rapidly evolving area and, in the future, we could see smart contracts potentially interacting with multiple financial systems, automatically transferring assets while monitoring for compliance and making sure the terms of a contract are fulfilled. This technology is still in its infancy and the BVI is committed to cooperation and dialogue between industry stakeholders and regulators to foster and deploy blockchain-based applications within an appropriate regulatory framework. n
Simon Gray Head of Business Development and Marketing Simon Gray is a senior financial services’ professional with strong international experience gained in the Caribbean, Middle East and Asia as well as major experience in both public and in private sectors. Combining an investigative background with 25+ years of first-hand experience of international financial services and product innovation and design, Simon has spent much of his working life in the private sector with senior roles including Baring Asset Management and Barclays Wealth. He has previously worked well established organisations including as Director, Supervision (DFSA) within the Dubai International Financial Centre.
DIGITAL ASSETS IN FOCUS | Mar 2021
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DeFi movement gaining ground R
Interview with Diego Gutierrez Zaldivar
ootstock (RSK) is an innovative blockchain network launched by veteran technologists and venture capitalists in 2018. RSK offers a unique proposition for its users, combining Bitcoin’s security and userbase with Ethereum’s smart contract capabilities. RSK has its own internal currency, called RIF, which powers many of the network’s services. How has your offering changed in view of the growth of the crypto-currency market? In recent months, RSK has been at the forefront of Bitcoin’s Decentralized Finance (DeFi) movement. This movement is a natural extension of Bitcoin’s technology, involving the development of new technological layers on top of the network. RSK enables the creation of smart contract solutions for Bitcoin users, who are able to transact on the network through a secure bridging mechanism. Recently, we have been able to attain significant momentum with several projects, such as RIF on Chain (Money on Chain stablecoin project) which is considered one of the cornerstones of Bitcoin’s DeFi movement. There are also many other great projects we’re partnering with, such as RSK Swap (exchange), Kripton Market (e-commerce), TEX Money On Chain (decentralised exchange), Sovryn (lending), Liquality (web wallet), and Defiant (wallet), with more to be announced during 2021. We have also witnessed some of the largest DeFi projects join the RSK ecosystem, such as Maker and Chainlink, each of which has a multi-billion dollar valuation. RSK, together with its RIF token, can lead this new wave of decentralised applications by tapping into Bitcoin’s large userbase and enhancing the network’s capabilities. What role does regulation play in the future of crypto and digital asset trading and settlement? The regulation of financial technology is an increasingly prominent topic; blockchain, by the very nature of its foundations, even more so. International bodies are stepping in to encourage the development of regulatory standards across multiple countries. Further, certain countries are taking a much friendlier approach towards cryptocurrencies than others, which creates an unlevelled playing field. Regulation will bring immense benefits to the industry as a whole, though some of the DeFi players will need to adapt in order to embrace the evolving regime. 28
How have your clients’ needs changed in the past year and how have you been supporting those changes? DeFi is clearly a segment in which “bitcoiners” have lacked opportunities, as Ethereum has been dominating the scene to date with a Total Value Locked (TVL) of almost USD40 billion and an annual growth of +4,000 per cent. RSK aims to lead the way in addressing this gap by fostering the development of DeFi applications for Bitcoin users. Integrating the RIF token with Binance has provided a huge amount of liquidity to the RSK ecosystem and together with the RSK dApps that are going to be launched during Q1-Q2 2021, we expect RSK to make a big difference to Bitcoin’s DeFi prospects. RSK will be committing considerable resources to supporting this movement during 2021. What are the key considerations for investors and managers trading in digital assets and cryptocurrency? Risk management remains a primary concern. Cryptocurrencies have made great progress in terms of awareness and mainstream adoption with the incorporation of big institutions into the crypto space, such as Tesla, MicroStrategy and Square (who are now holding Bitcoin in treasury). Further, PayPal and Mastercard have announced that they will support crypto as a means of payment. However, cryptoassets are still very volatile assets and there are many other risks involved when trading these: hacks, technological issues that can lead to the total loss of an investor’s funds, unclear regulations/laws, etc. High risks usually come with the potential for high returns, and as we have witnessed in recent years, cryptoassets are no exception to this rule. n Diego Gutierrez Zaldivar RSK Co-Founder and IOVlabs CEO A pioneer of web development in Argentina and Latin America since 1995, Diego was also one of the first persons to foster and develop Bitcoin and blockchain technology in Latin America, which he has done since 2012. In addition to RSK Labs, he also has co-founded Koibanx, another blockchain company that is aiming to transform the potential of Bitcoin and blockchain technologies into real use cases, which serve as a driver for social and economic change.
DIGITAL ASSETS IN FOCUS | Mar 2021
D I R E C TO R Y
BITFINEX Founded in 2012, Bitfinex is a digital token trading platform offering state-of-the-art services for traders and global liquidity providers. In addition to a suite of advanced trading features and charting tools, Bitfinex provides access to peer-to-peer financing, an OTC market and margin trading for a wide selection of digital tokens. Bitfinex’s strategy focuses on providing unparalleled support, tools, and innovation for experienced traders and liquidity providers around the world.
Contact: Joe Morgan, Senior PR Manager | firstname.lastname@example.org
BVI FINANCE BVI Finance is the ‘voice’ of the British Virgin Islands’ financial services industry; marketing and promoting its products and services, as well as managing its excellent reputation as a premier international business and finance centre. BVI Finance was incorporated as a company limited by Guarantee in December 2016 and has operated as a public-private partnership since then. BVI Finance maintains a strong relationship with key stakeholders including Government and its many partners locally and internationally, media outlets and investors in emerging and traditional markets.
Contact: email@example.com | +1 284 852 1957
COINSHARES CoinShares is Europe’s largest digital asset investment firm, managing billions of assets on behalf of a global client base. Our mission is to expand access to the digital asset ecosystem by pioneering new financial products and services that provide investors with trust and transparency when accessing this new asset class.
Contact: David Andrews | firstname.lastname@example.org
COPPER Copper is transforming how institutional investors engage with digital assets, providing marketleading infrastructure in addition to custody, trading and prime brokerage solutions. Our award-winning custody application leverages the genius of multi-party computation (MPC) encryption and can be configured to support cold, warm, and hot wallet solutions. Asset managers are further protected by our pioneering ClearLoop network, which enables off-exchange trading and settlement at tier-1 digital asset exchanges. An offering enhanced by the availability of uncollateralised lending. Copper’s secure wallet architecture is available as a standalone application, a mobile app, and a browser extension for smart contract signing. With an easy to navigate interface, market making liquidity, and a team always ready to assist you, Copper will change the way you look at crypto. Contact: email@example.com | +44 (0)20 3983 0754
FINANCEMALTA FinanceMalta is the public-private initiative set up to promote Malta as an International Financial Centre. FinanceMalta brings together and harnesses the resources of the industry and government to ensure Malta maintains a modern and effective legal, regulatory and fiscal framework in which the financial services and fintech sector can continue to grow and prosper.
Contact: Andrea Nurchi | firstname.lastname@example.org
DIGITAL ASSETS IN FOCUS | Mar 2021
D I R E C TO R Y
FIREBLOCKS Fireblocks is an enterprise-grade platform delivering a secure infrastructure for moving, storing, and issuing digital assets. Fireblocks enables exchanges, custodians, banks, trading desks, and hedge funds to securely scale digital asset operations through the Fireblocks Network and MPCbased Wallet Infrastructure. They have secured the transfer of over USD300 billion in digital assets and have a unique insurance policy that covers assets in storage and transit.
Contact: Michael Shaulov | email@example.com
MARKET SYNERGY Founded in 2018, Swiss-based Market Synergy provides institutional-standard robust and secure cryptocurrency connectivity to the digital asset market place. Customers include hedge funds, brokers and traders. Any institution wanting to trade cryptocurrencies can connect with Market Synergy to access a wide selection of digital assets. It also offers a FIX feed and ISP link to Bitfinex’s digital asset gateway, giving trading firms the means to trade this asset class. Market Synergy is part of the FXecosystem group, whose wealth of expertise in building and maintaining secure networks for institutional clients underpins Market Synergy’s ability to provide digital asset pricing though a proven infrastructure, monitored around the clock by our dedicated NOC team.
Contact: Jonathan Baile | +41 (43) 588 0258 | firstname.lastname@example.org
OSL DIGITAL SECURITIES Backed by Big-4-audited BC Technology Group (stock code: 863 HK), OSL is the world’s first and only insured and SFC-licensed digital asset platform, providing brokerage, custody, exchange and SaaS services for institutional clients and professional investors. The company offers OTC, iRFQ and electronic trading services giving traders access to the world’s deepest liquidity pools, as well as secure, insured wallets to ensure the safekeeping of digital assets with timely transaction settlement. OSL is the trusted gateway to the digital asset economy. Contact: osl.com | email@example.com
OSL SINGAPORE (PRIME BROKERAGE) OSL Singapore (OSL SG PTE. LTD.) is the Singapore entity for OSL, Asia’s leading digital asset platform. It provides access to large liquidity pools, systematic intelligent Request for Quote (iRFQ) trading, and lending and borrowing of digital assets. OSL Singapore is a member of BC Group (Stock Code: 863 HK), Asia’s leading public technology and digital asset company. OSL Singapore is certified by the Singapore FinTech Association as a blockchain, digital asset and financial inclusion provider. Contact: sg.osl.com | firstname.lastname@example.org
RSK | IOVLABS IOVlabs develops the blockchain technologies needed for a new global financial ecosystem that fosters opportunity, transparency, and trust. The organisation currently develops the RSK Smart Contract Network, RSK Infrastructure Framework (RIF) and Taringa!’s platforms. The RSK Network is one of the more secure smart contract platforms in the world, designed to leverage Bitcoin’s unparalleled hash power while extending its capabilities. RSK Infrastructure Framework (RIF) is a suite of open and decentralised infrastructure protocols that enable faster, easier and scalable development of distributed applications (dApps) within a unified environment. Taringa! is Latin America’s largest Spanish speaking social network with 30 million users and 1,000 active online communities.
Contact: Gloria Vailati | email@example.com | www.iovlabs.org
SILVER 8 CAPITAL Silver 8 is a US-based Technology Investment Manager that seeks to offer concentrated global exposure to innovation within Financial Technology (“fintech”). The manager employs fundamental research to select fintech investment themes with a multi-year horizon. Currently, the manager is primarily focused on blockchain technology developments and applications. The manager uses a hybrid strategy, investing primarily in liquid markets (digital assets such as crypto-currencies), and selected “opt-in” private investments.
Contact: Investor Relations | firstname.lastname@example.org
DIGITAL ASSETS IN FOCUS | Mar 2021