Is FTX the new swear word? How will the world react to the new regulations spreading across the crypto globe? We speak to Angelina Kwan about how she felt the moment she realised FTX was going under. We find out how it's impacted the global crypto markets, from the US to China to Dubai and beyond. Plus we will give you insights into new regulatory announcements hot off the SFC press here in Hong Kong.
Walter Jennings: Welcome to Waves in the Finoverse. In today's episode, our special guest is the prolific Angelina Kwan. Since her time as COO at BitMEX Angelina has been a trailblazer for regulatory reform advising FinTech firms across Asia on digital asset management.
Today we're going to be speaking about the future of crypto and how it plays out across the world from the US to China to Hong Kong, Singapore, Dubai. Plus we'll give you insights into new regulatory announcements, hot off the SFC press here in Hong Kong. Now, regulation is a great concept in principle, but when it falls down, it's the individuals who are left picking up the pieces. Angelina Kwan personally lost crypto in the fall of FTX, so we kicked off asking her personal and professional opinion on what went wrong.
Angelina, I want to thank you for being on Waves in the Finoverse, and I'm gonna take advantage of your background in digital assets and crypto and dive straight into the subject at hand. We're wanting to understand FTX and the implications for the longer term. So if you can kind of take us back to that night, November of last year when you first learned of FTX's collapse. Tell us a little bit about your response to that.
Angelina Kwan: I was sitting in a taxi in New York City and we were receiving the information via Bloomberg that FTX was in trouble, that Binance CZ was working with them to come up with a deal. And then we also then later received the information that the deal had collapsed.
And because of it, there was a free fall in terms of token prices and a number of withdrawals that had commenced already or had already been in process even before the news came out of withdrawals from FTX. And the entire crypto market was stunned and people that I called to see if I can get additional information besides all the main news reporters, we're all just as equally stunned.
And I think my stuntedness was equally part of major discussions amongst all the different exchanges, like, what is the impact? What's going to happen? Can we get our digital assets out of FTX? And a number of the smart traders did get their assets out, and a number of people did not get their assets out because soon after all of the news came out, they stopped sending out Bitcoin that had been stored at FTX. So it was a stunning reversal in fortunes. There was so much fud, which is fear, uncertainty, and doubt in the market. And I think it has been a watershed moment with FTX actually collapsing like this.
Walter Jennings: Yeah, no, Angelina, I know a lot of people had their coins in currency wallet or in on exchange wallets versus in cold storage, a lot of people lost money. Were you impacted by the collapse of FTX?
Angelina Kwan: Unfortunately, I was impacted. I kept my little coins I had and they're gone.
Walter Jennings: So you're one of the debtors in the queue waiting eventually, potentially for ...
Angelina Kwan: Well, that's one of the issues because the different trenches of investors are going in different, shall we say, in in different parts of a line. And that line is not a very clear line of who is in front and who is in back. So for example, if you're in the Japanese line, because the Japanese FSA regulates directly FTX through another exchange, that they had purchased that exchange as clients will get their assets back at some point. Bahamas is also stipulated and held some of the coins and also is looking after their investors as well as the US. But for the international trenches, so for example, people in Hong Kong, people around the world that may have signed up internationally, there doesn't seem to be any line to actually even put your name in. So unless you write directly to Mr. Ray, who is the interim CEO and follow your claim that way, but there doesn't seem to be any way of actually lodging a complaint if you're outside of the United States or some of the jurisdictions that I just spoke about.
Walter Jennings: So the traditional financial services regulations have been carried over into the crypto space and upgraded,and yet they were fashioned themselves after collapses at left investors...
Angelina Kwan: Yes.
Walter Jennings: At a loss.
Angelina Kwan: As well as just good regulation and common sense. So one of the things that I think out of this whole process that we see is if your management is not honorable and if you are not fit and proper, and if you don't have the right attitude in terms of protecting your investors, a lot of this, from what we can read in the newspapers, a lot of FTX's problems have actually happened from this. The fact that there was a back door in the exchange system that allowed for a special preference to be given to Alameda, that seems to be definitely something that borders on not illegal or bad conduct, very, very bad conduct. And that's just not on because the first step in any licensing regime around the world, including Hong Kong, is that your staff and your firm will be fit and proper. And proper means propriety, fit meaning that you have the experience to actually offer, be it trading and securities or in the case of our new licensing regime, digital assets or fund management. So you have this experience, you know how to do it, you set up systems properly, and then from just the moral side of it, you need to be honorable and just basically run your company properly and in the best interest of your investors as well as your clients.
Walter Jennings: No, so Angelina, how did it hit you personally with this collapse, caused FTX? I know you had been a loyal customer and Sam Bankman-Fried had a very high profile, his work with philanthropy. There must have been a real stew of emotions when this full impact really landed.
Angelina Kwan: Myself and everybody that I've spoken with has been in shock because we all knew Sam. He was a person that was very active in the market and active in social events, active in Hong Kong. And in my previous role as COO, we would have get togethers and he and his colleagues would come to them. So they were people that we knew and we thought we trusted and for all of this to happen, we were shocked beyond belief. And I think everybody in the market has been shocked at the magnitude as well as the impact of what has happened. And I think that's something that everybody that I've spoken to has actually felt the same way because they've been sort of left in the dust. And I think this is something that he's gonna have to live with for the rest of his life, because he's hurt so many people, including his own staff, including people, governments that he's actually talked to or been a part of the people that he's gotten licenses with through his entities. It's basically a huge rug pool.
Walter Jennings: So what does the next generation crypto exchange look like in the aftermath of FTX?
Angelina Kwan: I think we'll all be, within three to five years I think this will be an asset class in many traditional firms. So the big investment banks that are already licensed will have digital asset arms that will comply with rules and regulations set by IOSCO, the International Organization of Securities Commissions. So it will be another asset class. Those virtual asset service providers that embrace doing and following rules will prosper because they will survive out of this. And those that do not will either be in the fringes or have problems and may not be able to survive. So you'll see a shakeout and within three to five years, digital assets will be another asset class that people go. I wonder why there was so much discussion about this. It's another asset class and I have my Bitcoin in so-and-so place and it's safe kept and I can take it out easily.
Walter Jennings: Now, you mentioned Bitcoin. Bitcoin is actually a utility token that allows you to buy work on the Bitcoin blockchain.
Angelina Kwan: Correct.
Walter Jennings: At FTX they had a very large supply of FTT coins, which is their equivalent utility coin to do work on their blockchain. Will each of the exchanges then issue its own utility token? And how has the collapse of FTT kind of shifted the view towards these utility tokens?
Angelina Kwan: I think what you're seeing now is a lot of investors in the space are now kicking themselves and investors are now kicking the tires before they take coin from any specific exchange to see whether or not okay management, what internal controls in place are these coins going to last? Will they still be around if I give them a couple million dollars as an investment? So I think you're gonna see a ratcheting down of angel investors coming in and a lot more checking, the coins themselves, that is a way for them to finance growth.
So for those companies who wish to issue these coins and if they wish to have them traded, for example, in Hong Kong, the SFC proposes in its consultation paper to have whatever firms trading these tokens, they will need to go through a review of the coins. They will need to inform the regulator before they trade, and they will have to have a decision of why they chose these coins to be traded on their exchange.
So there's a process now that the SFC has set out in the consultation paper that you can't just willy-nilly put the FTT coin on or the catcoin on. You have to have a reason. You have to show some kind of due diligence and so on and so forth. So I haven't gone through all of the 306 pages of the consultation paper, but basically..
Walter Jennings: But at least the exchange tokens or exchange coins are being reviewed and looked at there.
Angelina Kwan: By the companies that wish to list them on their exchanges. And I'm sure the SFC will be looking at it because it's a part of the application process.
Walter Jennings: Now, as a little bit of a public service announcement, just explained to people briefly about the concept of a cold wallet and the lessons learned at FTX about cold versus hot wallets.
Angelina Kwan: For those of you who are lazy, do not keep your coins on an exchange. If you trade on an exchange, you should have a cold wallet, which is a wallet separate, which could be a physical wallet like ledger, or it could be a paper wallet or it could be something that's on the app store like Trust Wallet. And you keep your coins in your own wallet, which could be a cold wallet or as I discussed other format of wallet. And then when you want to trade, you then put it on an exchange. And once you're done trading on that exchange, you move the coins back. This will avoid a situation of if an exchange were to go down, your coins would actually be protected.
Unfortunately, the the issue is when you keep your coins outside of an exchange, you cannot stake them.
Walter Jennings: Right.
Angelina Kwan: And from staking people used to receive additional coins based on whatever the coin that was deposited. So if there was more demand, people would give more for staking, for example. I think that staking market has sort of gone out the window right now, but staking still exists, but over investor protection in terms of versus the returns of staking, I think it is better for you to keep your coins outside of an exchange and use the exchange when you trade and then move your coins back.
Walter Jennings: So if I've got this right, an exchange is a hot wallet, meaning that the exchange, you could use it if you've signed up for it for staking, which is like a certificate of deposit, you give it to the exchange for a certain period of time and you get a return.
Angelina Kwan: Yes, that's correct.
Walter Jennings: But a cold wallet is the equivalent of shoving it under the mattress or putting it in the safe in your own house, and getting it off, losing that interest rate, but then being certain about the future of your coin.
Angelina Kwan: Correct.
Walter Jennings: Yeah. You mentioned, when you were COO that would've been at BitMEX. Hong Kong seemed to have at that stage quite a number of exchanges here and they've dwindled away or dissipated, yet do we foresee Hong Kong kind of wooing back any of the major retail exchanges or just sticking to an institutional focus?
Angelina Kwan: Well, number one, I'm really, really happy the SFC issued the consultation paper on the new requirements for regulating virtual asset service providers in Hong Kong.
Walter Jennings: Yeah, that was news as of today.
Angelina Kwan: So very, very great news. Hong Kong has actually issued this and the regime is coming in place and as per our financial secretary, we would like to make Hong Kong a virtual asset hub and just to attract the best and brightest to come to Hong Kong to work in terms of digital assets and FinTech and Web3. So this is the first start of this process. And the other nice thing out of the consultation paper, which of course is a consultation paper. So for those of you who haven't downloaded it, please go download it, read it, and if you have comments, please do comment because the SFC will need your comments. After working at the SFC I can tell you that no consultation paper is perfect and it depends on people that come from the market to give comments to make the legislation the best possible.
Walter Jennings: No, certainly I think every consultation paper benefits when the industry and leaders in the industry come out with their perspectives and their insights. So please do if you are interested in this downloaded and do make a comment cause someone at the SFC will read it.
Angelina Kwan: Yes. The SFC proposes to allow all types of investors, including retail investors, to access trading services provided by licensed virtual asset trading platform operators, provided the platforms comply with a range of robust investor protection measures.
Walter Jennings: Right.
Angelina Kwan: And those are the measures that I've been trying to promulgate since, I mean, as a COO of many different organizations and just segregation, making sure that you have safekeeping, making sure you have security in place, all of these measures, which are the great and the good comments and rules are really, really necessary. And I mean, that's how securities firms operate. That's how derivatives firms operate. And now if we're going into virtual assets, virtual asset firms should be operated the same way also.
Walter Jennings: A number of the virtual asset firms have run into challenges since FTX. And even beforehand you were COO at BitMEX in Hong Kong and in May last year, the founder Arthur Hayes was sentenced to six months of home arrest and given a 10 million US dollar fine for failing to establish an anti-money laundering program. Did that surprise you?
Angelina Kwan: No, not at all. I mean, for all of the firms that I've worked with, we've tried to put in the best and the most compliant rules and regulations. And sometimes people don't wanna listen and sometimes people don't wanna do what the regulators say, and sometimes people argue and just stamp their feet that they don't wanna do that. And you can either choose to stay and live with it or you can choose to leave or whatever it happens to be. Or you can choose to be indicted by a regulator and a government. So the government now, as you can see in the United States, is really starting to ratchet down in terms of compliance with rules. But I think enforcement should set the scene.
That's why you see less issues with firms, securities firms, for example, because they have gone through so much regulation, they've gone through regulatory enforcement actions and now, I mean they definitely are a very established asset class. The digital asset area is very much like what happened in the early 90s and 80s with the securities industry in Hong Kong as well as in the United States. And it was a Wild West. And now as products develop as firms develop and mature, they know the benefits of having good regulation and the benefits of having internal controls in place because it protects their investors and therefore their long term viability.
Walter Jennings: Binance are saying that they're pulling back on US investments for now due to US regulators cracking down on crypto companies. Their CEO tweeted that it was likely banks that were being told not to work with crypto firms or they're being overly cautious about working with crypto. Are regulators going too far or is this just banks being cautious?
Angelina Kwan: I think it's a combination of the need for a clearer regulatory path. So for the United States, a very clear path of, for example, a licensing regime. Each state in the United States has their own rules and regulations. And that has been an issue because you need to get a license in Wyoming, New York, you're regulated in New York by the DFS in Washington, it's the CSS. So there's a lot of different regulators that are actually looking into this. Whereas crypto and digital asset providers haven't quite embraced the fact that if you wanna operate in a jurisdiction, you need to get licenses. So if you see all of the big investment banks around the world, they get licenses in every single jurisdiction.
And that has not been the case for digital assets. It's because there were no clear rules. Digital asset firms just sort of started where they were, they were encouraged to grow and now they have to comply with the rules and regulations. So you're gonna see some fallout, some firms may close, some firms will get regulated, some firms will survive and be regulated and probably be the next generation of virtual asset service providers. So you see some of them are already happening in the United States, the bigger ones, and you're gonna see the same in Asia and in Europe too.
Walter Jennings: Okay. Let's talk about three crypto major cities, Hong Kong, Singapore, Dubai. This is a global asset, yet it's being regulated in different ways, in different countries. Where amongst those three markets, do you see progress in highlights? What's the regulatory regime look like between those?
Angelina Kwan: VARA Dubai has been the most recent out there. Oh, and of course the SFC issuing their guidelines at. VARA through Dubai has implemented a full regime and they've seen a number of providers go there and get licensed. So it's quite a vibrant market right now that there are providers there in terms of fund managers as well as exchanges that wish to get licenses. So that has really helped Dubai in terms of becoming a digital asset hub. You're also seeing Singapore, which was the first out to put in a grandfathering scheme and then a full regime.
The issue is there were so many license applications that the MAS has had a lot of backlog in terms of approving them. So I know the team is definitely working on that right now, that is damp and some of the enthusiasm, but there's such a large group already there in Singapore that there is still opportunities and different products and services that are coming outta Singapore now. So it's still very, very exciting.
Walter Jennings: Fantastic. Well, we're recording this here in Hong Kong, which is the only city in China that allows the trading of Bitcoin and other utility tokens across the border in Shenzhen and to the North. We have a national development goal of blockchain, a new NFT system, and really some of the world's fastest progress on Central Bank Digital Currency. What are we? A test bed for China? Why do we have one country in two systems when it comes to digital assets?
Angelina Kwan: I won't call us a test bed, but I will call us one country, two systems and the testament that virtual assets is allowed in Hong Kong and is a regulatory regime that allows it to be operative in next to securities and derivatives is a good thing and testament to the one country, two systems. So I think it is a test bed and it is in some way. I don't like the word test bed, but it's a way that China can also see developments. And it's also a way for Hong Kong to be an international financial center.
And Hong Kong has and is a leading financial market in terms of equity issuances. We've been a leader for many, many decades and we will continue to be in virtual assets now. We were the first market to actually have our first ETFs, which were Digital Asset ETFs. So I think that's testament to one country, two systems and allowing Hong Kong to move towards being a virtual asset hub.
Walter Jennings: Yeah, no, and I loved one of the quotes you once said that how different it would be if Lehman Brothers were Lehman Brothers and Sisters, how different life would be if there were more women in decision making positions. What differences would we see?
Angelina Kwan: Maybe there would be a bit more discussion about rules and regulations. Maybe there would be more consideration about, and I'm not saying that all women have the same types of views about regulation and things like that, but maybe there'd be more discussions about protecting investors. And that's why when I use the quote, if there were more women in Lehman Brothers, we might not have had this collapse of Lehman. It's because with diversity comes discussion, because people are coming from different viewpoints.
And if you have women and men working together, you will have a diversity of views and you will have more discussions. And I remember areas where a lot of, some of the firms that I worked with, they just didn't want to put in money laundering controls, for example. And if they did wanna do it, it was very, very late and it was delayed. And I mean, looking back, if we had a different group of people and maybe more diverse people from different backgrounds, there might have been more discussion about whether or not to put in internal controls in place, for example.
Walter Jennings: And, how would you define the Crypto bro's culture? And what's the antithesis to that?
Angelina Kwan: Uh, early on when I first came to Hong Kong, the securities industry was very much, it was already being tamed. But even before I came to Hong Kong, it was very much the Wild West, the crypto bro. And 2016 to 2018 was very much the Wild West of digital assets and crypto. And from that was the ascendance of the crypto bros and a culture where, hey, we can do this, we can do anything and there's no rules to feder us and we really don't want to follow these rules, so we're gonna do it.
And partially that led to the growth of digital assets. Some survived, some did not. But now we've seen the aftermath of going full tilt without controls in place. And my boss at the SFC once said to me "Angelina, if the market was completely clean, there wouldn't be an SFC or an SCC. And that's why we are here and we need to protect investors." And I think you can be a crypto bro, it's fine. But just follow the rules and remember who are your clients and don't take advantage of your clients. And the crypto bro culture is a fun culture. They party, they have a great time, but when it comes back to business, you need to do the right thing by your clients and do the right thing for the entire ecosystem.
Walter Jennings: Angelina, we like to end this with a segment we call Tracks in the Finoverse. And we want a song that would portray your energy and we will use it to play our listeners out. If you could take one song with you into Finoverse, what would that be?
Angelina Kwan: For digital assets, I would choose I'm Coming Out by Diana Ross and digital assets are really coming out and it's gonna be a real asset class. And I've said this since day one on every single podcast that digital assets are here to stay. They've taken a bit of a bump, but now with coming out, it's also developing and becoming a real asset class. And I think that's a very good song for.
Walter Jennings: We will let Diana Ross sing our listeners out and down in the notes you'll find a link to a YouTube video of a dancer that inspired Angelina to choose this song, because of their outrageous style. Much like yours, Angelina. Angelina, it's great to have you on the podcast. Thank you so much.
Angelina Kwan: Thank you very much, Walter. It's so much fun to see you and it's great to be here and keep it up in terms of the podcast. And don't give up on digital assets. It's only going to grow.
Walter Jennings: We are all in a learning journey together.
Angelina Kwan: Yes.
Walter Jennings: Fantastic. Thank you so much.
Angelina Kwan: Cheers.