IAIC 2021: “Development and Opportunities in Crypto Currency and Digital Tokens” by Zann Kwan, CFA

On the first day of India Alternative Investment Conference organised by CFA Society India, we welcomed Zann Kwan, CFA who is the CEO of Deodi Pte Ltd; Co-founder and CEO of Bitcoin Exchange Pte Ltd to tell us about development of crypto currency and digital tokens over the years. She also talked about regulatory developments pertaining to crypto currencies and decentralized finance. This extremely insightful session of an hour was moderated by Shreenivas Kunte, CFA, CIPM. 

With the increasing complexities in global investment world and more resources with investors, new avenues for landing these funds are being recognized and utilized globally. Crypto currency is a buzz world in the contemporary investment sector that is enjoying recognition from global business tycoons. The session with Kwan was based on three specifics- recap of development of crypotcurrency and digital tokens in the past few years; highlights of regulatory development and their implications; and introduction to decentralized finance.

If you cannot imagine it, you cannot see it

Zann kick started her presentation with a picture of Native American to stress the importance of imagination. She shared how she entered into the arena of crypto currencies eight years back by reading and learning more about it in order to gain exposure. Similarly, picture of Native American underpinned the lack of imagination and exposure which made Christopher Columbus the discoverer of America whilst there are evidences that Native Americans were there before him but they couldn’t imagine a ship housing numerous people on it. Moreover, the second slide pictured an elephant to highlight the unfamiliarity of crypot currency, Bitcoin or block chain amongst people. Zann asserted the differences in perception of people about crypto currencies varied based on their backgrounds similar to the perceptions of people touching different part of an elephant’s body. However, in present world, crypto currencies are not an unusual word in the finance world. This depicted the gradual development of knowledge for public at large with regards to crypto currencies which fueled the emergence of the same as a tool of finance.

Crypto Currency should be used as a tool not a business objective

Zann stated that crypto currencies, digital tokens or Bitcoin should be included in a business to cut costs, change a business model or to streamline business processing. She opined that crypot currency could be seen as a solution for a business not as an objective of a business.  

Walk down the memory lane

• Substantial increase in value of Bitcoin from 2014 to present day
• Increase in Fintech startups- Example of Ant Financial (2016) which took less than a month to become bigger than average money market(MM) US market fund.
• Initial Coin Offering/ Initial token sales in 2017- the sale of digital coins or tokens surpassed VC funding.
• Three kinds of offerings- Initial coin offering (ICO), Securitized token offering (STO), and Tokenized security offering (TSO).
• Crypto-currency market capitalization- from US$ 229 billion in 2018 to US$ 2.2 trillion in April 2021. However, share of Bitcoin is 52% in the crypto-currency market.

Birth of a Crypto Asset-

A quick brief was given on how crypto asset is created through mining. Further, she added that crypto like Bitcoin can be private or public. They can be exchanged on P2P platforms or on a centralized crypto currency exchange.

ABCD of Fintech-

Zann also highlighted the importance of ABCD of finance in development of crypto-currency.

• Artificial Intelligence
• Blockchain
• Cloud
• Big Data

Highlights of Regulatory Development

In the context of regulations for crypto assets, speaker mentioned that from last one and a half year, economies have started setting up regulations. The regulatory system for crypto-currencies globally is expected to include centralized entities in their gambit like- crypto exchanges or crypto intermediaries also known as VASP (Virtual Asset Service Providers).

She stated that recent developments in regulations which have countered various possibilities of money laundering and crypt frauds are-

Need of Know Your Customer (KYC) – VASP have to conduct detailed KYC and customer due diligence (CDD) of their customers. Interestingly, she mentioned that verification on such platforms ask for different gestures and body movements to make sure the subscriber is not a robot.

Transaction monitoring– After onboarding of a customer, the crypto asset’s travel route is tracked in order to investigate if it is from dark-web. If found suspicious, crypto asset is freezed and cannot be converted it in any form. The information is blacklisted and reported.

Information sharing by exchanges– Crypto exchanges are increasingly sharing information to identify suspicious wallets and crypto assets.

Key regulation– Financial Action Task Force (FATF) (7b)

Furthermore, key reasons for regulations of crypto currencies for any country that have been discussed in the presentation were-

• To check on money laundering and terrorism funding
• To safeguard users’ funds in transit
• To ensure interoperability, and
• To manage technology risks though cyber hygiene, encryption, authentication, governance and anti-fraud provisions.

Singapore, one of first few countries that has set up full-fledged regulations for digital payments service providers where, crypto currency or token services transactions are packed together with digital payments under The Payment Services Act, 2019.

Moreover, Zann advised investors of crypto assets to maintain their own wallet in order to safeguard these assets from hacking. She asserted that crypto exchanges have the history of being prone to hacking many a times in a day whilst some are tried to be hacked hundreds of time in single day. So, it is wise for an investor, including institutional investor to save their crypotcurrencies in the wallets unless one is involved in intra-day trading.

She also mentioned that crypto-exchanges that seek regulatory compliance need to be robust in AML/CFT, Travel rules (PSN01, PSN01A, PSN020; internal controls, policies and procedures; records and data rules (PSN04, PSN07); technology risk management; external and internal audits. 

Introduction to Decentralized Finance

Decentralized Finance aka Defi, is a blockchain-based financing that that does not involve any central financial intermediaries like exchanges, banks or brokerages etc. Ethereum is an example of DeFi. On the contrary, centralized finance is lot about exclusive access, censorship, lack of transparency and multiple opaque layers. 

As per Zann, characteristics of DeFi that made it amazing for crypto asset investors are- 

• Permission less: No need of seeking anyone’s permission to open an account
• Programmable: Based on smart-contracts
• Censorship Resistant: No resistance from anyone
• Control and Ownership: Investor is the owner and controller
• Transparent: Smart contracts allows information access of crypto assets

How big is DeFi?

• Market cap- $128 billion
• 24 hours trading volume – $20 billion
• Top decentralized exchange (DEX) 24 hours trading volume- $4 billion

As per the trends represented by Zann, Defi has witnessed tremendous growth in the last one year of Covid-19 pandemic. The figures represented that where in July 2020, total market cap of DeFi was barely $1 billion, it recorded steep rise to $128 billion in April 2021.

Towards the end of her presentation, Zann emphasized on gaining knowledge of crypto-currency and DeFi otherwise, she claimed that one will become an outsider to crypto assets market in coming days.

The presentation was followed by very interactive Q&A session where the speaker gave crisp and insightful answers to the queries of viewers.