Episode 116 of the Public Key podcast is here !! Capital controls and Government bans have always made launching a crypto exchange in Africa challenging, but today we speak with Farzam Ehsani, who is the Co-founder and CEO of VALR, which is the largest crypto exchange in South Africa, who explains the local and global regulatory challenges, the challenges with listing tokens and untapped potential for Bitcoin and blockchain for traditional institutions and users around the world.
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Public Key Episode 116: Overcoming Regulatory Hurdles: How VALR Navigated South Africa’s Crypto Landscape
“You might think it’s risky now to enter crypto. But I can promise you that time is going to flip very quickly where it’s going to be risky not to enter crypto” – Farzam Ehsani
Capital controls and Government bans have always made launching a crypto exchange in Africa challenging and in this episode, Ian Andrews (CMO, Chainalysis) sits down with Farzam Ehsani (Co-founder and CEO, VALR), who discusses the journey of South Africa’s largest cryptocurrency exchange,from the company’s inception in 2018 to securing multiple global licenses.
Farzam shares insights on financial sovereignty, regulatory challenges, and the evolving crypto landscape, while reflecting on transitioning from banking to crypto and underscores the importance of integrity and choice in finance.
He announces The VALR Grand Slam trading competition, where there is a $60 Million USDT prize pool and looks forward to expanding VALR’s global footprint and making cryptocurrencies more accessible through innovative financial solutions.
Quote of the episode
“The beautiful thing about Bitcoin is that it actually helps people understand the traditional financial system. Before understanding Bitcoin itself, you have to ask all these questions about what the basic building blocks of how finance works. And that’s tremendously illuminating” – Farzam Ehsani (Co-founder and CEO, VALR)
Minute-by-minute episode breakdown
2 | Farzam’s introduction to Bitcoin and how it helped him understand the traditional finance ecosystem
4 | The balance of self sovereignty and acting as a custodial crypto exchange
7 | How traditional banks decided to move into crypto and the launch of VALR crypto exchange
15 | The rigorous process of obtaining licenses in multiple jurisdictions and adhering to international regulatory requirements and capital controls
25 | Understanding whether VALR is appealing to retail or institutional clients or both
30 | Is VALR launching its own exchange token or security token?
33 | The challenges with listing tokens and keeping up with customer demand on memecoins
36 | VALR raises $50 million in Africa’s largest ever crypto raise and even turned away investors
38 | VALR announces $60 Million Grand Slam of Trading Competitions
Related resources
Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.
- Website: VALR: Trade spot, margin, futures & OTC on the best crypto trading platform
- Video: Adopting Bitcoin Cape Town Conference (Farzam Ehsani “Truth” Talk)
- Programme: VALR $60 Million Grand Slam of Trading Competitions
- Blog: Cryptocurrency Penetrates Key Markets in Sub-Saharan Africa as an Inflation Mitigation and Trading Vehicle
- YouTube: Chainalysis YouTube page
- Twitter: Chainalysis Twitter: Building trust in blockchain
- Tik Tok: Building trust in #blockchains among people, businesses, and governments.
- Telegram: Chainalysis on Telegram
Speakers on today’s episode
- Ian Andrews * Host * (Chief Marketing Officer, Chainalysis)
- Farzam Ehsani (Co-founder and CEO, VALR)
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Transcript
Ian:
Hi everyone, back with another episode of Public Key. Today I’m joined by Farzam Ehsani, who is co-founder and CEO at VALR. Welcome to the program.
Farzam:
Thank you so much. Great to be here. Thanks for having me.
Ian:
For people that don’t know VALR, you and I are sitting in the United States right now. I won’t fully disclose your location, but you’ve got a beautiful background behind you. Tell the audience here about the company, what you’re focused on, maybe as a starting point, and then we’ll dig deeper from there.
Farzam:
Sure. So VALR itself is a global cryptocurrency exchange. We offer spot market trading, spot margin trading, perpetual futures trading. We started in 2018. We’re the largest crypto exchange in Africa at the moment and growing globally. Yeah, I think that’s the quick synopsis of what we do. We’re excited, but I think the main thing that we’re trying to do is just try to make the world that a little of a better place, upgrade the financial system to something that actually recognizes the unity of the human race, and there’s a lot to be done.
Ian:
Not a small mission there at all.
Farzam:
Not at all, no.
Ian:
It is an exciting challenge. Now, your background, you’ve worked in banking, you’ve worked in consulting. When did you first discover cryptocurrency and start to get interested in the segment?
Farzam:
Yeah, I think I first heard about Bitcoin in about 2012 that it was being accepted in New York at a restaurant or a cafe or something like that. I didn’t know what it was. I initially thought it was a scam. I thought when the price went up all the way to $2,000 and then crashed down to 150, $200, whatever it was, that was in 2013, 2014, I felt vindicated that it was a scam. And then long story short, I had a friend, excuse me, with a start-up in the crypto space and a friend of mine that I highly respect, and I asked him, “What are you doing in this space? This is beneath you.” And he basically said, “I think I’ve got a couple of things to explain to you.” So he did that I think in 2014, 2015. And the rest is history, so to speak.
Once you really see the light and you kind of understand what Bitcoin is, and more importantly, when you understand what the traditional financial system is and how it works, then that’s when you start to really understand things. And I think the beautiful thing about Bitcoin is that it actually helps people understand the traditional financial system. Before understanding Bitcoin itself, you have to ask all these questions about what the basic building blocks of how finance works, and that’s tremendously illuminating.
Ian:
Take us back to that conversation with your friend who took you from skeptic to now obviously fully in the space, a true believer. What were the points they made that converted you?
Farzam:
I think the biggest thing is probably this concept of double spending. People don’t fully understand it. And I even find now when I speak to executives or regulators that they’ve been in the blockchain space or looking at the blockchain space for quite a long time, but they don’t know what double spending is. And so for the listeners, it’s really the fact that we have telephones and we have computers. These are physical devices that deal with digital media. And 95% of money in the digital space, in the traditional financial space, is digital. And it’s not backed by anything physical. So that begs the question, okay, well, if 95% of money is digital and I have a folder on my computer, on my phone for my music, for my files, for my videos, well, why don’t I have a folder for my own money and why do I need to depend on a bank or another financial institution?
And then this idea of double spending comes about, which is anything that’s digital can be copied and pasted infinitely at zero cost effectively. That’s great for communication. But what’s tremendously important about value transfer is that when I give you 100 bucks, I no longer have the 100 bucks. And so our traditional systems, HTTPS, FTP, SMTP, email protocols, internet protocols, etc, they’re great for transferring information but keeping records of that information on either end. But they’ve been horrible for transferring value and making sure that there’s a credit and a debit at the same time. So obviously within traditional finance, we have banks that do that, and we don’t really trust the banks necessarily. So we have regulators that oversee the banks, but blockchain solves that in a beautiful, beautiful way, and I think that’s one of the key points. To me that was tremendously insightful, and I think that still requires a lot of education for the public today.
Ian:
It’s interesting because you obviously had worked in banking in South Africa. Did you feel like this double spend problem, or maybe even more broadly, like lack of effective accounting for wherever everyone’s money is, was that a concern that you had felt before this conversation with your friend in 2015?
Farzam:
It wasn’t such a concern, and it’s not too much even of a concern right now from the perspective of, I think for the most part, banks are doing their jobs well, from the perspective of kind of just debiting, crediting payments. Obviously the banks are fractional reserves, so they’re creating money. Even a lot of people that haven’t studied economics don’t understand that actually banks create new money in our economy, and that’s kind of part of the system. And we can debate the pros and the cons of that. But I think the thing that for me, this affected me actually in the last few days, for about 48 hours in the last few days, I didn’t have access to my bank account and I couldn’t make a payment at all. And so I contacted the bank, I said, “Hey guys, what’s going on?: And they said, “Oh, well, we need your proof of address.”
And I said, “Okay, well just ask for it, but don’t lock someone out of their account and then tell them that you need a proof of address. No problem.” I gave it to them and then it was unblocked after 48 hours. But that is a really uncomfortable feeling when you do not have any control and there’s someone somewhere in a bank that’s clicking a red button on your account and saying, “Oh, we don’t have a piece of paper showing where this guy lives, so we’re going to cut him out of the financial system.” And the beautiful thing about Bitcoin and crypto is obviously it puts the sovereignty back into the individual’s hand, their financial sovereignty. And that aspect, forget about the hard money aspect, the fact that I think that is going to still head towards 700, 800, 900,000 US dollars per coin. Those are separate things, but just the ability to have control over your own money if you want it as a choice, that is tremendously powerful.
Ian:
I think that has been at the core of the crypto movement from the very beginning, was kind of the distrust out of the global financial crisis in ’08 led to the moment where I think people were really primed and excited for an alternative financial system because they really had lost complete faith in the banks who all seemed to participate in the housing bubble that led to the credit crisis. I’m curious though, because you run a centralized exchange, how do you reconcile the business that you’re in with that ethos of self sovereignty and decentralization? Because on the surface it seems like two very different ideas.
Farzam:
Great question. So our view and our perspective is very much that what I’ve just complained about, we are an institution that can do that, VALR. We are subject to the law, and if we get subpoenas or if we get anything that’s legally valid, by the way we push back on anything that isn’t actually by the law. But if there’s anything that’s compelling us by law to take action against a particular account or a particular transaction, then we have to abide by that law. So the paradox there is that I don’t believe that every individual will want to have the self sovereignty of their own financial affairs. I think there’s going to be a huge proportion of humanity that, A, doesn’t really know how to secure their own funds, and B, that wants to be able to reset their password if they lose it.
So if you take self sovereignty, there’s a huge responsibility there where if you lose your keys, you lose your money. You lose your physical wallet, you’ve lost all the cash in your wallet. There’s no bank that’s going to help you with that loss. So what I’m very pro is people having the choice of what they want. We actually encourage people, if you know what you’re doing, take your assets off VALR, keep it yourself. If you don’t know what you’re doing, we obviously have a dedicated cyber security team. We use external security consultants, security teams. We invest a heck of a lot into our security infrastructure. So the point is that I really believe that people should be able to choose. So we create the infrastructure to bridge the worlds of traditional finance into crypto. We provide the custody of those assets if you want, but we don’t encourage it. We don’t actually make any money from people holding their assets on VALR. It’s actually more of a cost to us.
So we encourage people, if you want to take off your assets, by all means do that. So that’s where it’s not a seeming paradox I suppose, but for me, it’s very much consistent with the promotion of choice in the world. And if our customers want to take it off themselves, wonderful. If they don’t, we’re happy to serve.
Ian:
Yeah, I love that approach and perspective. Personally, I’m terrified every time I execute a transaction in MetaMask that I’m sending something to the wrong place, never to be seen again. So I tend towards the, I want to work with service providers that are technically competent and spend a lot more time thinking about the mechanics of storing digital assets or transacting or protecting me from all those cyber threats that are out there. So I’m glad you’re there. Rewind back in time a little bit, you were at Rand Bank and became the blockchain lead there before taking on the role at VALR. What was that like? 2016 to 2018 timeframe, if LinkedIn has given me accurate information here, kind of a boom time in crypto, if I’m recalling correctly. Tell us what Rand was exploring and why they put you in a role. What were they doing with blockchain?
Farzam:
Sure. So 2015-ish after I talked to my friend, the one that I mentioned earlier, I started writing to some of the leadership at RMB, Rand Merchant Bank, which is where I was, but also First Rand, which is the mother group, and also FNB, which is the retail arm of the investment bank that I was in. And I was just saying, “What are we doing about blockchain and crypto?” And invariably the response that came back is, “Crypto? Please don’t even mention that word. Don’t use the C word over here.” And blockchain, interesting. Let’s take a look at it. That was post, I think it was October 2015 when The Economist front page article about the trust machine came out. And that did a lot to bring this topic to the fore.
Initially people said, “Okay, well, interesting. Let’s see what to do there.” And then Singularity University came and did a show or an event for Rand Merchant Bank, and they talked a lot about blockchain technology and crypto. And then post that, I got a call that said, “Are you interested in helping us set up this FinTech unit at the bank?” Myself and two colleagues. And I said, “Let’s do it.” So that was when we started in January 2016. What we were doing is really just, it was first and foremost just a research hub at the beginning to see what we could do to create products and services to keep the bank at the forefront of its game. So we did a few things. Number one is we just set up the South African Financial Blockchain Consortium. So that was a really wonderful initiative where we brought together basically 95% or institutions that represented 95% of the transactional volume in South Africa.
We brought together the regulators as well. And it was once a month, I think it was, that we came together and we just discussed. We had a couple of hours where we would discuss the topics, share presentations on whatever different idea there was, but it was really basic stuff. And then also I told the bank, I said, “Listen, let’s look at a crypto exchange. I think that’s where the future is going to be.” And I remember that when I first did the presentation, the Bitcoin market cap was about $12 billion, if I’m not mistaken. So fast-forward, we’re well over $1 trillion US right now. And so they said, “Go for it.” But then we built it, and then when we wanted to launch, it was just at the time that the price started coming down post 2017 at the beginning of 2018. So there was a little bit of reticence and a little bit of some risk aversion, which I completely understand.
As a big bank, you’ve got a lot of factors to think about from a risk perspective, but then they weren’t comfortable launching. And so myself and my co-founders basically said, “Listen, it’s been a great journey, but with due respect, we’re going to head off and start VALR.” Obviously the IP that was built belonged to the bank. We didn’t touch a code of that or a letter of that. That code remained with the bank. But obviously running an exchange and building an exchange conceptually is quite an easy thing. But it’s the detail that’s very, very difficult to get right. All the security that’s required, the performance of an exchange, making sure that there isn’t any latency or as low latency as possible. So all of that kind of stuff is where the complexity comes in. So there wasn’t that much IP, so to speak, in any case, but that’s where our journey started in 2018.
Ian:
It’s kind of amazing that had maybe the price of Bitcoin held a little bit longer you might’ve launched at Rand. Was the plan that that would have been a retail crypto exchange or was it more focused on a different market segment?
Farzam:
Yeah, it’s a great question again. So we spent a lot of time thinking about this, and the plan was to start retail for a very simple reason. I gave a presentation to a bunch of asset managers when I went to Cape Town one time telling them about what we were doing, and these are probably people in their, at the time, 40s and up, guys driving their Porsches and all that kind of stuff. And then I asked them, I said, “How many of you own crypto?” And they were probably about 20 people in the room at that point. None of them put up their hand except for an intern who was like 27 years old. And she kind of raised hand sheepishly and everybody looked at this person.
And basically the feedback was that for institutions like themselves to be able to buy crypto, their mandates need to change. And so the governance committees need to basically unanimously decide that we’re going to be buying crypto. So if you have one person that’s kind of against this for whatever reason, that mandate’s not going to change. So we started with retail because you just need to change one person’s mind, and then it’s going to get into the institutional space. And now we are getting into the institutional space with all these ETFs that have been approved, but that’s now seven, eight years.
Ian:
Yeah, exactly. Well, and it seems like the high net worth asset managers also, they’ve turned in just the last few years, but I’m assuming that, I mean, this is the group you’re talking about. They didn’t even know what crypto was at the time, but now they’ve got all their clients demanding it.
Farzam:
And they had no incentive to really learn about it or understand it. They were doing very well in the traditional financial system. It was treating them very well. They were getting paid very big salaries. “What is all this talk about financial sovereignty? I’ve got plenty of financial sovereignty. Look at me, look at my car, look at my house.” There was no incentive. So the things are changing, and I always used to say, and I used to tell the bank, I said, “You might think it’s risky now to enter crypto, but I can promise you that time is going to flip very quickly where it’s going to be risky not to enter crypto.” And I think that’s where we are now. VALR just got licensed in South Africa with the Financial Sector Conduct Authority in the last couple of weeks, and now we’ve got a lot of the same traditional financial institutions that we were talking to, talking to us to figure out how to get into the gap.
Ian:
Yeah, that’s really interesting.
Farzam:
It’s very interesting.
Ian:
I was going to ask what your relationship with the banking sector is now, because from that skepticism in 2018, I would’ve imagine things have probably changed and evolved over the last seven years.
Farzam:
They have. I think another kind of theme about the way I operate and the way VALR operates is that we really believe strongly in unity and not to have these false dichotomies. And there’s often false dichotomous discourses within the crypto space like, “Oh, it’s us versus the banks or us versus the government, or us versus whoever.” And I find those not to be very helpful. Having been in a bank, there are a lot of very good intentioned people in banking trying to help the world. And having been in crypto, there are plenty of bad intentioned people in crypto. So it’s not about us and them first from a perspective of what industry you’re in. So we’ve always maintained very good relationships with the banks. With my previous bank, I’ve still got very good relationship with them. And our ethos is basically, we want to serve the world.
We want to serve humanity, we want to advance civilization. Do you want to work with us to do that? If so, we’ll help you. And that goes for regulators, bankers, anybody in the broader industry. So relationships always, I think we prize our relationships and prize having good relationships. The only time that I think a relationship would suffer is when it gets in the way of justice. So we always put justice at the forefront and we will stand up for justice. So we’ve got a lot of love for everybody. We’ve got a lot of love for everybody, but I will speak up very vociferously when it comes to justice.
Ian:
I love that rank order prioritization there of bring everybody together, but justice first. Talk about the experience getting licensed, because I think VALR is the first crypto business to be licensed in South Africa, if I’m not mistaken. So this is a pretty monumental achievement. What was that process like and what does this mean for the business going forward?
Farzam:
Sure. So just to be fair, we were one of the first. So we were in the first batch to be licensed. We would love to claim we’re the first, et cetera, but we were one of the first. The process has been very intense. So I was talking to the regulators from 2016 when I was at the bank, and we’ve been kind of sharing our knowledge, telling them what the challenges are in crypto, where we think there’s value to be had from a regulatory standpoint. So those conversations with many others in the industry, obviously that have been had with the regulators, kind of culminated with last June when the application process was first opened to the public. There was a window of opportunity from the 1st of June till the end of November in 2023 where anybody that was providing crypto asset services in South Africa had to make an application to the Financial Sector Conduct Authority.
And that’s a hectic application, as it should be, because there’ve been a lot of players in our space that quite frankly, don’t deserve to be serving the public. They’re people of questionable kind of integrity and some of them just plain frauds. So there was a lot that went into that, a lot of back and forth, a lot of paperwork to kind of show what our processes are. There were several days of on-site discussions and visits to our premises. So it’s a very intense process, but it’s worth it, right? Because hopefully, and I say hopefully because we know that regulation isn’t perfect, licensing isn’t perfect, but hopefully we get rid of a lot of the riff-raff and the people that are licensed are the ones that serve the public well. Of course, we know from other industries that just because someone’s licensed or they’re official or whatever it is, it doesn’t mean that the industry or those players are immune to wrongdoing, but it’s a step in the right direction.
Ian:
Yeah. It raises the bar. It makes it a little bit harder for someone to run a scam or an operation. Now, VALR’s obviously a global entity now. You’re the largest exchange on the African continent, but I would imagine you’re going through these licensing and regulatory discussions all around the world, and there’s been a lot of movement from Mica in Europe to the Vara being stood up in Dubai. Singapore has, I think, opened things up a little bit. Hong Kong came from an outright ban to now an open market. Where are you spending your time and focus as you grow the business, and what are the differences in the regulatory climate between what you’re seeing in South Africa and other places?
Farzam:
Yeah, so apart from South Africa, also we’ve got approval from the Polish Ministry of Finance to serve the European Union. We also have initial approval from Vara, the Virtual Asset Regulatory Authority in Dubai, as you mentioned. We’re hopefully in the final stages there to get our final approval there. We are also in process with Mauritius. Those are the main jurisdictions that right now we’ve got very active applications, and we’re hopefully nearing the finish line with these. We are also registered with the Financial Intelligence Unit in India, but India is a very difficult market. So we actually paused our operations in India there. Same thing with Nigeria. Nigeria, there was a ban instituted by the central bank that was then lifted, but then a couple of months later, the communication commission basically banned people from accessing crypto websites and things of that nature. And as you’ve probably been following with the Binance executives that have had some trouble there.
So we need a little bit more clarity from places like Nigeria and also places like India. But our approach, again, is very transparent. We tell our bankers, we tell our regulators exactly what we do. If we are welcome, we proceed. If we’re not welcome, we don’t. It’s as simple as that. So we don’t agree with all the laws and regulations that exist, but wherever we operate, we must abide by those laws even if we don’t agree with them. So I’m also in South Africa, there are certain laws that I disagree with. I’m very vociferous about my views with the regulators about that. But so long as that they’re the law, they’re the law. So we have to abide by them, which we do. So I think there’s a lot of power when you speak the truth and you share very openly what your views are with the intention of really making the world a better place.
I’ll give you one example. With the South African regulators, basically, they want to put a clause in the regulations that would give an advantage to the exchanges like ours to effectively have the ability to get liquidity from offshore at the expense of other people in the market because there are capital controls in South Africa. That would be great for us. We would make a lot of money by doing that. But I was very clear with them and I said, “Listen, if I were in your shoes, I wouldn’t do that because that gives us a great advantage. We’ll make a lot of money, but it’s not fair to the rest of the market. So I would change that,” even though it wasn’t in our interest.
So I think another thing just to share about VALR and who we are is it’s really important to try to do what’s best for society. I think even this lobbying and doing what’s best for you and only you, I think it undercuts one’s integrity to just kind of be a mouthpiece of truth, to just share your truth. Say if I’m on this side of the table or that side of the table, my view would be exactly the same, something that’s fair.
Ian:
Well, I think you’re a standout in that regard. Not everyone would approach it the same way. I am curious on that point of currency controls and being able to source offshore liquidity, where did they end up with the regulation? Did it stay in or did they take your advice and remove it?
Farzam:
So we’re still waiting for final regulation on that point. So the financial sector conduct authority is the entity that regulates the conduct of crypto exchanges and other financial services providers. It’s the South African Reserve Bank that’s responsible, specifically the financial services, the financial surveillance division that’s responsible for that. So they’re still to come out with all their laws and regulations. As it stands right now, capital controls remain in place. People can use what’s called a single discretionary allowance, which means you’re allowed X amount of allowance to be able to take out of the country at your own will. And a lot of people do do that through the banking system. There’s a lot of arbitrage that’s totally above board and totally legal to do that. So we’re still waiting for the final regulations that will hopefully come soon.
Ian:
Yeah, I’ve had previous guests on the show who operate one of the larger exchanges in Nigeria, and they actually talked a lot about currency controls in that country and efforts by the central bank to create a digital currency, the e-Naira and how that had largely failed from a public retail adoption standpoint. Nobody wanted to touch the currency, and their view was a big draw for crypto was not financial speculation or buying art or collectibles like NFTs, but it was very much getting around currency controls because they had businesses where they needed to buy goods abroad or they wanted to sell abroad, or they just had people that they were transacting with outside the country and the banking system, it was unreliable in terms of being able to take money out even when you had the capital available to be able to convert it into a foreign currency and send it abroad.
I’m curious, one, if you’ve seen a similar draw for crypto in the South African market and how you think about that, because obviously in Nigeria, the government’s position now is, “Well, all that activity has destabilized the currency further and caused a bunch of economic harm to the country.” Any thoughts on that?
Farzam:
Yeah, sure. Several thoughts, actually. Number one is I think the South African banking system works quite well. We don’t really have this issue or this shortage. You hear oftentimes there’s a shortage of dollars in Nigeria or Ghana, and there’s been a complete DPEG of the currency, or not a DPEG, but a jump risk. There’s a devaluation of the currency. Yes, the currency is devalued a lot in South Africa, but it’s a free-floating currency. And if you actually go onto Google and you’ll look at, let’s say the Kenyan shilling against the dollar or the South African Rand against the dollar or the Nigerian Naira against the dollar, you’ll see the South African Rand is all over the place. You’ll see a lot of these other currencies are kind of devaluing slowly. Then they’ll see a sudden devaluation and then devalues slowly, then a sudden devaluation. So that’s all much more controlled in those economies than it is in South Africa.
So I’ve never heard in my time in South Africa, “Oh, there’s a shortage of dollars.” If you want to buy dollars, you can buy dollars. It’s not a problem. So we don’t face similar issues in South Africa as the Nigerians or in some other African nations face as far as dollar shortage. And also there’s generally the rule of law, I think in South Africa is much more robust than it is in other African nations. Doesn’t mean that it is completely robust. There are issues in South Africa as well. There are issues in the United States and everywhere else.
Ian:
I was going to say, the US has its share of rule of law problems.
Farzam:
Exactly, exactly. So I think those concerns don’t really relate too much to South Africa at the moment. I can certainly understand them in Nigeria. And also maybe something to say, it needs to again be called out because when a government says that the depreciation of their currency is caused by a crypto exchange, that’s kind of like saying that my son has now a temperature because I gave him a thermometer and the thermometer gave him a temperature. No, the thermometer tells the temperature. Don’t get the causation mixed up here. And so crypto exchanges don’t set prices. Crypto exchanges bring together willing buyers and sellers to determine what the value is. And so I don’t really have much patience for that type of a discourse that it says, “Oh, crypto is responsible for the declining of our currency.” No, there are much more deeper seated issues at play than a crypto exchange.
Ian:
Yeah, I think that’s a fantastic point about causation and the direction of indication there. I’m curious, I was looking at the VALR website earlier today, and it seems like you cater to a wide range of users, from your casual retail buyer who might just be looking to acquire something like a little Bitcoin or Eth to institutional traders. There’s all sorts of information about your API and the performance of that API. I’m curious how you think about the various markets and where the attention of the business is today. So compared to where you were in 2018 when you were first launching?
Farzam:
Yeah, so it’s been a very interesting journey. We raised our series B round of funding in 2022, just at the beginning of 2022. And basically the story there was really an African growth strategy, and we did that. We wanted to go into Nigeria, we were about to get into Nigeria. We actually went into Zambia, but then we kind of came back out of Zambia because we had troubles with securing robust stable banking facilities there. And so what we’ve done right now is we’ve said, “Listen, we’ve tried to kind of go into the different countries, integrate into the banks,” which has been a very difficult journey, particularly when there’s lack of clarity on the regulatory front from all of these nations. So now what we’ve done is we’ve said, “Okay, well, we’ve got a fantastic API, an API that rivals the best in the industry globally, or the top exchanges in the world.”
Locally and regionally, we’ve been told that our API is by far the best. There’s no question about that, and that it’s on par with the largest global crypto players in the world. So we said, “Well, we’ve got the ZAR on and off ramps. We’ve got dollar on and off ramps. We’re going to have the ability to actually have GDP on and off ramps, Euro on and off ramps.” Very shortly, we’re integrating with a payment services provider as well. So our idea is to say, let’s take on a lot of customers from the jurisdictions where we can, where it’s legal. We don’t take on American customers, we don’t take on any sanctioned countries, et cetera, but where we can, we take on those customers and then we’ll onboard via the reserve currency, the US dollar right now, and South African Rand, wherever people want to, and then people will trade with stable coins and with crypto to crypto, et cetera.
And so our goal right now is to actually go global in one shot versus going piecemeal. And to that effect, we’ve made an announcement, actually an email went out to our users today that we’ve actually announced the largest crypto price pool of any trading competition to ever exist, up to $60 million over the next year, and up to $5 million US per month, which is basically an incentive to get people to come onto VALR. And as we get revenue from our perpetual futures, we pump that revenue back into the price pool. So it’s a sustainable model and it’s obviously tier based, but it’s something that’s worked well for us in the past where we have shared value. As we earn, we pass it back to our users. And we’re hoping, because there’s no guarantees that we’ll be able to compete with the likes of the Binance’s and the Bybit’s and the OKX’s of the world, the Coinbase’s, the Kraken’s. So that’s our aspiration right now. Whether we achieve or not is to be seen, but that’s what our aspiration is.
Ian:
That’s exciting. Now, I don’t think VALR has an exchange token. Is that correct?
Farzam:
We don’t. We’ve thought a lot about it. We’re still thinking about it. We have a lot of conversations about it, but if we do do that, it’s really important that it’s done well. We’re not interested in pumping and dumping.
Ian:
Yeah. Well, and that was going to be my question. The scheme of returning value back to the users has been tried before, and in the last cycle it was very much wrapped in these exchange tokens, like Celsius token from that platform or the FTT token from FTX, which kind of notoriously closely held and then surreptitiously traded. Right?
Farzam:
Exactly.
Ian:
So I was curious your feeling about that. I think it also complicates the regulatory perspective in certain markets as well, if you’re both an issuer and an exchange, so yeah.
Farzam:
Yeah. So we have very vociferous debates and discussions within VALR about this topic. I think from a marketing perspective, you can’t find anything better because people on our users ask for it all the time. Like, “When are you launching your token? We want to get your token,” et cetera. But getting the tokenomics right and also getting the regulatory framing, which is to make sure that if it’s a security, first of all, then register as a security. If it’s not, then make sure it’s not a security. Those are some of the things that quite frankly, we’ve been challenged by. And I think that the discourse is still open and we haven’t made a firm decision there. So there’s a lot of pros to doing that, to passing on value.
What I would love to do is actually just create a VALR token that’s a security that represents ownership of VALR that we give to our customers, and that as we do well, they can get dividends in the future or participate in the appreciation of the value of the exchange if it appreciates, because you never know. But it’s something that one has to be extremely careful with. If there’s anything that we want VALR to be known for and to stand out for is our integrity and our trust. And in order for that to manifest itself, you need to be very careful with decisions like tokens.
Ian:
I completely agree. I love the idea though of, “Hey, this is a security. It’s a profit sharing scheme. It represents a commitment on future earnings of the enterprise.”
Farzam:
Yeah, I would love that.
Ian:
That, to me is where previous attempts have gotten into trouble because there was this talk track, “Well, it is a utility token to unlock features on the platform,” but the reality was everyone who was buying it had expectations of returns on future income. We don’t talk about that part out loud. And I think as soon as you’re burying that intent to avoid some regulatory scrutiny, you’re on a dark path.
Farzam:
Yeah, absolutely.
Ian:
What is the climate in South Africa for something like that right now? If you wanted to list as a security, is there any precedent for that? Has anyone been able to list a token and achieve kind of-
Farzam:
Not to my knowledge, not to my knowledge. We have looked into a little bit. It’s complicated, it’s complex. It’s also, it tests the regulatory frameworks, and particularly with a regulatory framework where there are also capital controls, like, “Okay, what does this mean? Where is the token?” I think one of the things I like to talk about is these red flag laws. I don’t know, Ian, if you’ve heard about those red flag laws.
Ian:
Maybe explain it for the listeners. What are red flag laws?
Farzam:
Yeah, very briefly. This is 150 years ago or so where we first got the internal combustion engine and vehicles that they were called, I think horseless carriages is what they were called initially. And the idea at the beginning is like, “Oh, well gosh, this is dangerous for society. So what we’re going to do is get a guy.” The laws that actually passed, the red flag laws was that somebody that was in this car actually had to get out of the car, walk in front of the car with a red flag to warn people that are in the way that there’s a car coming behind me. Obviously in retrospect like, oh my goodness, if you see a car.
But that was the initial regulation. And so I think we’re going to be seeing, and we have seen a lot of regulation around the world that’s kind of in line with that, which is like, “Whoa, whoa, whoa, whoa, whoa. No, let’s shut this down. We don’t know what it is.” I think soon enough, society will start waking up and saying, “Oh, this is a tremendously powerful technology. We need to update our regulatory infrastructure, our regulatory parameters, protocols, rules, laws.” But we’re in the very early stages, so it is difficult. It’s still difficult at the moment.
Ian:
This is why I love having people with different global perspective on the podcast, is being able to compare and contrast the context for people who are listening between their local market and what’s happening everywhere else around the world. Last year we had a gentleman from one of the larger exchanges in Malaysia on, and they have some very interesting regulations in this regard related to token listing, not issuing their own token, but exchanges actually have to go through a securities listing process just to list the token for trading on the platform, which I thought was, I mean, obviously that slows down your ability to jump on the latest meme coin, but depending on your point of view on that market, that could be a very good thing.
Farzam:
That’s true, that’s very true.
Ian:
And it seemed to put some further burden on the exchanges themselves to have some confidence in the instruments that they’re ultimately offering to their customers that this isn’t a rug pull scam or some other tactic or trick.
Farzam:
It’s a good topic of discussion because we’ve always said that we are never going to list something that’s an outright scam, an outright rug pull. And that’s pretty clear. If you know that something’s a scam, it’s kind of obvious that you’re not going to list that. Maybe some exchanges would list that. But I mean, if you can tell that something’s a scam, you’re not going to list it. However, the nuance comes in, it’s just to say, “Well, is a meme coin? What is a meme coin? What is it based on? Why is it pumping? Why is it going up? Why is it going down?” And meme coins right now are the things that are being traded the most. So our view has always been we don’t know where this world is going, this crypto asset space is going, and while we need to guard our users from explicit things that are just going to collapse, which is by the way, not always easy to tell, is it our role to be the arbiters of what will have value or what does have value as an exchange.
Because we’re in a marketplace, we bring together buyers and sellers, and so we’re probably more on the more conservative side, but we’ve been asking ourselves the question about are we doing ourselves and our customers a service by that or a disservice by that? We didn’t list any of the big things that imploded like Luna and UST and things of that nature, but not necessarily by design at the time because those are the things that were actually trading at the time. So I would love to say, “Oh, look at us. We’re so responsible.” Actually, that wasn’t the case. We just didn’t get to that and we weren’t listing those things at the time.
Ian:
Happy coincidence.
Farzam:
Yeah, it was a good coincidence. But we can’t tell what the future is going to be. And my personal belief, and again, it’s going to sound strange, but I think we have this Cambrian explosion of all sorts of assets and experimentation. I think a lot of those experiments are going to fail, and I think a lot of the tokens around the world are going to go to zero, but I don’t know which ones those are going to be, just like we didn’t know which of the internet stocks were going to succeed and which ones didn’t. And the vast majority of the internet stocks went bust, but the most valuable assets and companies today are the ones that were born out of that time. And I think it’s the same thing in the cryptocurrency space.
So I personally feel it’s not my role. My role is to provide an infrastructure as VALR. The best performing exchange, make sure that there’s no completely obvious scam there, but to provide assets that people want to trade, go long, go short, provide disclosures to say it’s very risky. And we do provide a whole bunch of disclosures on the website to say, “Crypto asset trading is risky. You could lose all of your funds.” But ultimately adults are adults, and I think that they should be able to have some ability to decide, at least some ability to decide what they’re buying and selling. So it’s always a difficult kind of debate to have, but we are in the early stages of a very powerful experiment in the crypto space, and nobody knows what is going to be the result and the fruit of all this.
Ian:
That is for certain. No one can tell you where it’s going in the future. I am curious, you mentioned successful series B. What was it like as a non-US company raising venture capital at scale? I’m curious the kind of challenges and opportunities. I think Pantera led that round. So a crypto-focused fund for sure, but we have a lot of founders who listen to the program. So I had love to get your perspective on that fundraising and maybe what you’re seeing in the market now if you’ve still got a pulse on the fundraising opportunities that are out there.
Farzam:
So fundraising is always a challenge, particularly if you’re not in Silicon Valley itself and where a lot of the capital is, although the capital is now getting diversified. There’s lots of pools of capital around the world now. And also the world is kind of flush, still flush with money. The central bank printing over the past few years and asset prices going up. There’s a lot of value and money out there in the world right now. We obviously had a lot of rejections. We were oversubscribed as well. We raised $50 million, but I think there was subscriptions for about $120 million or between 110 to $120 million at the time. So we didn’t take everybody’s money and we had to say no to a lot of people, which we were very, I think, privileged to be able to do. But not being in the US and being in Africa specifically, I remember speaking to an investor that said, “Okay, cool, that’s kind of the valuation you’re looking for, but how about the African discount?”
And I said, “What African discount? There’s nothing discountable about me or my team. We’re some of the best that you’ll find anywhere in the world. So if you’re not convinced of that, go find another investment. But there’s no discounts every here.” So I think we did service to the South African climate as well, because I think we still are the largest crypto raise on the African continent still a couple of years later. I think we were one of the largest raises period in South Africa.
Ian:
Amazing.
Farzam:
So that I think did well and opened the doors. And again, about 99% of that capital came from outside of South African borders. So a lot of it came from the United States, some of it came from Europe, et cetera. So I think my piece of advice to people is have confidence in what you’re building. You have to obviously know what climate you’re in. We were very lucky. We raised at a very good time. And be prepared for tons of infections.
Ian:
Perfect. Well, my customary closing question is always to get perspective on the road ahead. So what’s got you excited as you look out to the remainder of 2024?
Farzam:
Very excited for this trading competition that we’re about to launch on May 1st. I think this is going to be a really pivotal year for VALR. We’re trying to really get our name out there, let people know what a fantastic platform, what a performing platform we are. When we were about to launch in 2018, my dad would call me up. And a few weeks, months before launch, he would say, “How are you guys doing?” And I said, “Well, I don’t know yet. When we launch, we’ll be able to see what the liquidity is like and whether we’re in business or not, and whether we have to shut down the startup or continue going.”
And we’re well past that now, but I think that question about how are we going to be doing the next few months in 2024 is just as pivotal. Are we going to be able to make it this year into the top 10 exchange, which is our aspiration? I hope so. It’s not guaranteed, but we’ve got all the key elements to be a global exchange that serves a global population as good as any, so we’re hopeful that that reality will manifest.
Ian:
Exciting. We’ll be keeping an eye on you, and see if you can crack into that top 10 in trading value. Farzam, this was awesome. Really enjoyed the conversation and the opportunity to learn about you.
Farzam:
Thank you so much. Take care. Bye-bye.