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Cryptocurrency assets market

At centre stage: Episode #2

Nejc Bizjak, Chief of Staff and member of the Senior Executive Team at Bitstamp, the world’s oldest cryptocurrency exchange, and Nejc Vrankar, associate at CMS Slovenia, who is well versed in capital markets law and a native in the crypto world, will together be going down the cryptocurrency economy rabbit hole, and shedding some light on the topic from a legal perspective. Two cryptocurrency buffs are the best combination to give you insights into one of the fastest growing markets at the moment.

Below you can watch the video of the episode, listen to the podcast or read the transcript of the lively debate on the topics currently rousing the country’s business, legal and political community.

Episode #2: Cryptocurrency assets market

Over the thirty minutes we touch upon:

  • The current state of the market (adoption & regulatory outlook)
  • Role of crypto exchanges;
  • How to support companies, institutional investors, etc. when entering the crypto market;
  • Security

Transcript

Sašo Papp: Ladies and gentlemen, esteemed listeners, welcome to another episode of At Center Stage, a video series dedicated to emerging and fast-growing sectors. If you’re a professional or a legal advisor operating in the selected industry or a stakeholder in this particular sector, and would like to hear about the trends and forces driving this industry, then you are more than welcome to join. My name is Saso Papp and I'm your host. What's on the menu today? We will talk about the fastest growing market at the moment, the cryptocurrency assets market. My guests today are Nejc Bizjak and Nejc Vrankar, two Nejces. Of course, we did this on purpose just to confuse you. – Of course not. Nejc Bizjak is chief of staff and member of the senior executive team at Bitstamp, the world's oldest cryptocurrency exchange. In his role, Nejc focuses on supporting the development of different strategic initiatives and products.

    Prior to his role as chief of staff, Nejc held various positions at Bitstamp. Most recently, he was the head of the market intelligence department. Before diving into crypto, he started his career in financial advice, working at two of the big four companies. Nejc holds a Master of Laws degree from the University of Ljubljana and is also a CFA charterholder. And on the other side is Nejc Vrankar, associate at CMS Slovenia. He's a representative of the young generation at CMS Slovenia. He's well versed in capital markets law and is a crypto native, with hands-on experience in the cryptocurrency world. Thanks for joining me guys.

Nejc Vrankar: Thanks [crosstalk].

Nejc Bizjak: Thank you Saso, it's good to be here.

Sašo Papp: As I said, the crypto market is one of the fastest growing markets at this moment. On the market, we are seeing the shift towards institutionalization and increasing sophistication, which will attract institutional investors, corporations. And with that, we will see further expansion of the cryptocurrency market, which is at this point estimated at approximately 2.75 trillion U.S. dollars. So, we are not talking about an obscure market anymore. Maybe we can start with this guys, where do you see the market heading in the next three years? What are the trends, developments, and hurdles that define and will continue to define crypto in this timeframe? Nejc Bizjak, maybe we start with you.

Nejc Bizjak: Of course, [inaudible]. I can take this one. So definitely, there are many, many interesting trends taking place in the crypto market, so it's hard to really pin down what the most important ones would be. But, one that especially comes to mind is just the growing utility and increasing use cases of crypto. If crypto currency, a couple of years back, used to be this obscure phenomenon, just used for maybe speculation for the select few. Nowadays, this is a growing market with increasing use cases. So, ranging all from different [kinds of] play and earn, so gaming industries are being disrupted by crypto. We see a lot of financial applications springing up. And so, it's just the pace of development in this industry that is just amazing. And, all of this is coupled with continuous improvements in UX and UI. So, customers find it easier and easier to enter this industry, to use some of these exciting products and so on.

    And of course, there are many different market segments for which we think we're going to see exciting developments. For example, decentralized finance is something that is poised to grow over the coming years, just for the increased efficiency that it brings to decentralized finance. So, we believe that there will be a place and time where centralized finance and decentralized finance coexist in this market. So, it's going to be very interesting to see that. Then of course, are the non-fungible token markets, which right now are mostly focused on the sort of art and music, but we believe that every loan you take out in a bank is a non-fungible token. So eventually, this is going to spread into the sort of more regulated parts of the market. And then, of course, it's the metaverse, I'm sure you've all recently seen Facebook rebranding themselves as Meta and sort of doubling down, or tripling down even on the development of the metaverse.

    So, this goes sort of hand-in-hand with people spending more and more time in the digital world. So I firmly believe that in a couple of years, we're going to have a very similar discussion just wearing our VR glasses in a room somewhere.

Sašo Papp: Just floating around, I guess.

Nejc Bizjak: Yeah, exactly. But as an exchange, so Bitstamp sees growing sophistication of the exchange offering. So it used to only be trading, but nowadays it's lending, it's taking, it's NFTs, non-fungible tokens, sort of end-to-end personal and corporate finance, one could say. And this is of course, coupled and supported by tremendous amounts of capital entering this market. So, I think that this year alone we've had 15 billion overall venture funding being poured into crypto, which surpassed 2020 by five times.

    And at the same time, it's not only investors, that are getting exposure to the market, but it's just every corporation trying to figure out how do we include cryptocurrencies and blockchains into, either our work processes or as a part of our offering to our customers. So that's in very short, but definitely there are some hurdles. So the industry, very fast paced. This approach of move fast, break things, sometimes doesn't end very well. So there is a tremendous space of innovation taking place in the market, which sometimes results in leaving some kind of a depth behind, which then materializes – it might be a technical glitch, it might be a sort of a reputational damage or just loss of information, thefts and hacks.

    But the biggest hurdle probably for this industry right now, is probably regulation. So as an exchange, we operate globally and we see many different regulatory regimes that are far from being the same. And, we are trying to navigate that sort of uncertain waters to the best of our ability. But the regulators, they still have this lack of understanding of the industry and how to approach it. So it's sort of up to us, and to the exchanges in the industry and the regulators to find a dialogue going forward.

Sašo Papp: Yeah. And Nejc Vrankar from CMS, I'm pretty sure you can add upon where Nejc has finished, right?

Nejc Vrankar: Yeah. Well, we certainly didn't start off easy Saso, so [inaudible]. It's really a joy to listen to a perspective from someone who's on the inside, from someone who's really working at the heart of the industry. So just a fair warning in advance, the outlook from regulatory perspective might not really be as interesting as the one from the industry perspective, but the two are definitely inextricably linked. So from a legal, or let's say a regulatory standpoint, the age-old tale that the law is always late, is of course true. But rightly so, because regulators should have no business preemptively regulating something they do not fully grasp yet. So, I think the biggest issue could be if premature or misguided regulation took place, that would certainly hinder the innovation and growth in this promising sector.

    But, it's been now nearly a decade that crypto regulation has been absent or rather scattershot. And now, well, recently this being the past three years really, regulators around the world have been announcing or actually ramping up regulations on crypto industry. And this would really be welcomed by most, if not all stakeholders of the industry, as increased regulation, if done properly, will really encourage widespread adoption. And it would make the industry accessible to many more participants, particularly publicly traded companies, regulated institutions. I would say in the last 10 years or so, basically the same time span that Bitstamp has been in existence, most financial institutions recognize that crypto assets, blockchain and distributed ledger technology are the future. But, their access to them has really been rather limited.

    This is particularly due to the current regulatory landscape, without clear rules, without legal certainty, I would say this has been the biggest barrier. So, regulatory clarity for digital finance is really the key to fostering further innovation. But also at the same time, of course, protecting investors. And so, keeping it EU only. EU regulating digital assets is a part of a larger digital strategy, concerning also the internet data, besides the financial sovereignty. And, there are currently two main regulatory initiatives in progress in the EU that will directly impact the crypto space in the coming years. So the first one is the European Commission's Regulation of Markets in Crypto-Assets proposal or in short, MiCA. And, this is a regulatory framework developed since 2018 to help actually regulate currently out-of-scope crypto assets and first and foremost, their service providers in the EU. And basically, provide a single licensing regime across all member states.

    I believe it's envisaged to come into force by 2024. So, it's still, still quite a way off. And this framework, when it finally gets adopted, will allow the license providers to offer cryptocurrency and operate crypto exchanges in the EU on a passportable regime. In addition to that, it will also of offer stronger consumer protection standards and it will set out rules for digital asset issuance for public offerings. And last, but not least, also there's a quite a big section of MiCA reserved for specific requirements relating to stablecoins. And while speaking of regulation, and as Nejc mentioned just a while ago, the ‘move fast, break things’ motto of Facebook, it's funny that it was precisely Facebook's announcement in 2019 that they would launch their own cryptocurrency that acted as a big catalyst for EU lawmakers to finally spring into action. And so, the other big legislative initiative is the pilot DLT Sandbox, DLT standing for distributed ledger technology.

    And the proposal basically is a regulatory sandbox for financial products, based on distributed ledger technology, through which this regime aims to create a safe space for market players to experiment with issuing, trading and settling securities using blockchain technology. And, the sandbox will run for about five years. And at the end of this period, regulators will decide on reviewing legislation to ensure it's really fostering responsible innovation. I would say, this is a really exciting legal framework, which will finally allow for a new real world use case of blockchain and DLT. Because really, if we take payments aside and not counting DeFi, where there's a ton of borrowing, lending, issuance of the derivatives. Blockchain has not really had that many real world applications, outside of maybe also supply chain management. So, this will certainly be exciting to see. But of course, it remains to be seen how exactly all this will pan out and what the final proposals will look like.

Sašo Papp: Okay. But we have to say that at the moment, big institutional investors are still hesitant when it comes to crypto, what are the biggest obstacles in your opinion, when it comes to investing in digital assets outside of high volatility crypto? Would you agree that this is changing as we speak? Are you, at Bitstamp, seeing that big institutional investors are kind of warming up, Nejc?

Nejc Bizjak: Yeah, of course. I mean, I would say just for starters that the institutions definitely are warming up to the idea of crypto. So, it is not something that they are looking at from a safe distance, but they are actively exploring the space and trying to figure out the right way them to engage in this space. And of course, other obstacles as they enter this space, of course, they first sort of examine it for what it is, it's a highly volatile market. And, if they first need to wrap their heads around how do I operate in this space in which suddenly I can lose 15% of my portfolio value in a matter of minutes, maybe in a matter of hours.

    So, that's the first thing. And of course, it's a different risk profile. Because digital assets are sort of a separate asset class and they're not really that correlated to other parts of traditional finance. So, it's something they need to solve first as they enter this market. And then, it's of course, the sort of the 24/7 nature of the crypto market, which is you develop certain systems, certain structures, but then it doesn't end on Friday, it goes on over the weekend. So, you need to adjust your operating model as a company, to take into account that these markets never sleep.

Sašo Papp: Never sleep.

Nejc Bizjak: Yeah, of course. So these are somewhat general obstacles that everyone faces, as they enter this market. But then, of course, you have different flavors of institutions and they each face their own challenge when it comes to trying to approximate their business model with a sort of rather traditional background to something that is more crypto. So, how do we solve for connectivity? How do the APIs work for [ACrypto] exchange? How do we store funds? How does custody work compared to traditional finance, compared to securities? What's up with the regulation? Which we just discussed, it's scattered, it's fragmented. Where do my funds sit and how are they regulated? Then, how do I fund my account? In traditional finance, you'll see players being very accustomed to the fact that there is zero pre-funding. So you don't need to put funds up front, rather you trade, and then you settle after the trade.

    I would say, currently, it's more an exception in crypto, so it's not a rule. So these structures are being developed, but are not sort of a general market standard yet. And of course, there are funding, so sorry, there are also questions of how do we execute, how do we manage risks? How do we report to the regulator, to the auditor and other bodies? So, many challenges to solve. Usually, we want to approach them sort of one-by-one, but we've seen it all at Bitstamp.

Sašo Papp: Okay. So, on one side we have investors, companies and other institutional players flirting with the idea of including digital assets in their portfolio. And on the other side, we have cryptocurrency exchanges contemplating how best to accommodate the needs of those players once they enter the market. But there seems to be a lack of dialogue. Nejc Vrankar, maybe you can answer. Do you think law firms could mediate between the two worlds? I mean, from a legal standpoint.

Nejc Vrankar: Well, certainly. That saying or I'm not sure it might actually be a joke, that everyone needs a doctor, a lawyer, and a priest. Now corporations don't have much use for a doctor or a priest, but they more certainly need lawyers, who usually in a sense, act as the whole trifecta. So, I could definitely see a world where the management of corporations turns to their trusted legal advisors, who has a prerequisite, must also be very knowledgeable of the industry to help them then to dive into the crypto world, or well, dip their toes at first. So, it's been for decades that corporations have entrusted lawyers with due diligence in new high risk engagements. And, I can definitely see this going forward.

Sašo Papp: Okay. Nejc, the other Nejc, any thoughts about that?

Nejc Bizjak: No. I share the opinion of my colleague here. So the role of law firms is absolutely fundamental in this market, as in any other market. But I would say that this is even more pronounced in the crypto market, due to the general lack of certainty in this space. So, lack of regulation means it takes a good legal practitioner that understands crypto for what it is. It's a place of innovation. And then, to be able to apply the existing rules to something that might not fit perfectly at a first glance, but it needs to be sort of explored, and well understood and sort of applied sometimes even in a creative way, while still, of course, operating within the boundaries of the law. So, law firms are very important in this space. And they're also important just to facilitate and translate the language of the market participants and explain it to the regulators, so they serve at the crossroads of this market.

    And of course, they're also important just to build the awareness of what is crypto? What does it mean? How do I translate it? If I'm a corporation, how do I translate crypto into my environment? So yes, definitely law firms are super important.

Sašo Papp: We said already, you mentioned already that Bitstamp is the largest Europe-based crypto exchange. Do you think that it's an advantage when it comes to Bitstamp's reputation as one of the most reliable and secure crypto exchanges? For sure, it is, right?

Nejc Bizjak: Absolutely. I mean, we've been around for 10 years now and I like to call crypto years, dog years. So in a traditional years, that would be 70 years in the industry, which is a long period of time for any industry, I would say. But jokes aside, we do take sort of our reputation very seriously and it starts with the regulation. So, we are a licensed institution. We hold licenses in Luxemburg. So, payment institution license in Luxemburg. We obtained that back in 2015 and we are also regulated financial institution with the New York Department of Financial Services, which is one of the most stringent regulators out there. Believe me.

    So, our custody is with a licensed custodian, a licensed trust company, BitGo. And aside from the regulation, we've invested heavily to have sort of that state-of-the-art exchange infrastructure. We use NASDAQ technology. We have a NASDAQ matching engine, which enables us to maintain nearly a hundred percent uptime, even in the times of high volatility. So, I believe we do have leading exchange uptime compared to the sort of peer exchanges. And of course, we want to remain a reliable counterparty to all our customers. We pride ourselves with, I would say leading customer support, once again, within this industry. I have this interesting data point that it only takes 22 seconds to get someone on the phone at Bitstamp customer support. So, we do take that personal approach very seriously. And, I think that that has enabled us to be successful in this market for so long.

Sašo Papp: Great. Guys, obviously, I also have to mention this here. What about the theft prevention or protection? For a long time, it was believed to be practically impossible to steal crypto. Unfortunately, we have seen quite a few attacks on crypto exchanges in the past few years. And the amount stolen, I don't know if I have correct numbers, but in the past seven years, was 12 billion U.S. dollars. That's not a joke. How does Bitstamp tackle this, Nejc?

Nejc Bizjak: I think you're right Saso, it's definitely high. It's too high. But, I think I've mentioned the ‘run fast, break things’ approach to the industry. So sometimes, market participants in that sort of urge to deploy the next hottest, best product or service, they might leave some depth behind. It might be a security issue, it might be just a smart contract flaw, if we are talking about DeFi. And, that might later materialize in funds being stolen. But that being said, there are now, I think very high security standards in place in the market. So for example, Bitstamp implements sort of that triple wallet, multi-signature approach to custody. Meaning that we do have the better part of 95% of our assets sit offline in cold custody, whilst only 5% of funds are online, so to speak.

    And of course, both wallets are insured. So, funds in cold custody are insured, as well as the funds in hot wallet custody have insurance coverage. So God forbid there was a hack, customer funds would always be secure. And aside from insurance, we do it here to the highest standards of security from strict role-based, access management and so on. So I would say that despite the number seemingly being high, I would not say that is a serious problem for serious market participants anymore. But of course, it's very important that as corporates or individuals enter this space, that they do their research. So, who am I doing business with? And, who is that counterparty? What are the measures that they have put in place to prevent funds being stolen?

Sašo Papp: Okay. Encouraging. Nejc Vrankar, any thoughts on this?

Nejc Vrankar: Yeah. I would have to agree, of course, with my colleague here. I would say the general risk, especially when it comes to centralized exchanges is much, much less than the general public perceives. I would say in the recent years, there have really been very few. And as Nejc mentioned, the exposure that's really available, if someone would actually be able to hack into exchanges, really, really small, in addition to being insured and so on. So, I mean, the biggest exploits that the general public might have seen in recent headlines has always been with regards to DeFi mostly. And I would say, a sector of course, that is not close yet to the companies, to the corporate investors. So, it's really a risk that's not really closely linked to them. Still, the risks are existent.

    And there's this phenomena in the DeFi world, if I may just go a bit this way, since Nejc already mentioned everything about decentralized exchanges. There's this notion of code being law. It goes way back to 2016 when there was the first and I don't know, probably by today's prices, it's still the biggest, though there's been one just recently in August, the 600 something million exploits of Polygon Network.

    Well, what I'm trying to say is, sorry, I digress here, the notion of code is law, is widespread among Defi enthusiasts and it's always been these two camps. There's people who would say, if there was a flaw in the contract, in a smart contract that allows for someone to [inaudible] funds out of it, or some other way exploit the protocol, that should be allowed. That's what the self-governing decentralized, peer-to-peer network allowed for. And, it should not be considered as theft. But again, right on the other side and I would, of course, have to agree with this, and I'm sure the majority agrees that we cannot see it that way. Of course, even though if there is no specific regulation with regards to DeFi, yet someone taking advantage of going against the nature of the protocol to basically misappropriate funds, should not be allowed. And, it isn't. Basically, it's the story that led, of course, to the second biggest crypto assets birth as well. The two camps resulted in forking and we now have [TVM] and [TVM Classic].

    So this is an age-old tale, but I think it's mostly the majority view now that, of course the code cannot be law, law is law, but we will certainly have to wait a bit longer for proper regulation to take place.

Sašo Papp: Great. The whole debate was business oriented so far, but to finish on a bit of a lighter note, Nejc Vrankar has prepared a quick fire question round
for Nejc. I don't know, if you didn't know about this. So, let me put out the rules. Short questions, and you will have to answer yes or no. Okay. Once you are allowed to use no comment, to make it up to all of you who participate in the crypto market out of personal interest. So Nejc Vrankar, shoot off.

Nejc Bizjak: Only once?

Sašo Papp: Only once you can say no comment.

Nejc Vrankar: Heads up, there's some are actually choice questions as well, but nothing, so.

Sašo Papp: Okay. That should be interesting. Let's go.

Nejc Vrankar: Okay. So Nejc, supercycle, yes or no?

Nejc Bizjak: Yes.

Nejc Vrankar: DOGE or SHIBA?

Nejc Bizjak: DOGE, Of course.

Nejc Vrankar: 100K by end of year?

Nejc Bizjak: No.

Nejc Vrankar: Flippening within the next 12 months?

Nejc Bizjak: No.

Nejc Vrankar: Trading or Hodling?

Nejc Bizjak: Hodling.

Nejc Vrankar: Last, but not least. And now, I don't want to get Michael Saylor angry if he's listening in on us, but is there a second best?

Nejc Bizjak: No comment.

Sašo Papp: That was fun.

Nejc Vrankar: [inaudible].

Sašo Papp: Necj and Necj-

Nejc Vrankar: [inaudible].

Sašo Papp: Yeah. Big thanks to both of you, that was super great and also funny, which I didn't expect really. But thanks to all of you listening to this episode of At Center Stage. I'm sure you enjoyed it and don't forget, you can always find episodes on Apple Podcast, Spotify and other podcast apps to listen to our debates on the go. Just only, also in audio format. Until next time, stay safe and enjoy life. Thank you guys.

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Speakers

Nejc Vrankar
Nejc Vrankar
Associate
Ljubljana
Nejc Bizjak
Chief of Staff and member of the Senior Executive Team at Bitstamp