Episode 90 of the Public Key podcast is starting the New Year with a Bang. In this episode, media personality and crypto thought leader, Henri Arslanian (Co-Founder and Managing Partner, Nine Blocks Capital Management) talks about his new crypto hedge fund and the licensing process in Dubai, while evaluating his infamous 2023 Crypto predictions. 

You can listen or subscribe now on Spotify, Apple, or Audible. Keep reading for a full preview of episode 90.

Public Key Episode 90: The Rise of Dubai as a Global Crypto Hub and Hedge Fund Licensing

Has Dubai’s crypto regulatory licensing process become the most stringent in the world?

In this episode,  Ian Andrews (CMO, Chainalysis) gets the answer from crypto media personality and thought leader, Henri Arslanian (Co-Founder and Managing Partner, Nine Blocks Capital Management)

Henri discusses the recent news of Nine Blocks Capital becoming the first licensed crypto hedge fund in Dubai and stresses the stringent regulatory framework put in place by the Virtual Asset Regulatory Authority (VARA). 

He also shares his insights on the challenges and opportunities faced by crypto asset managers during market downturns and the growing role of stablecoins and DeFi in the industry.

Ian concludes the conversation with grading Henri’s Top 10 crypto predictions for 2023 and his thoughts on the metaverse, crypto gaming and the need to utilize some of TradFi’s best practices. 

Quote of the episode

“I’ve done, I don’t know, over the years, maybe 60, 70 licensing applications and the VARA (Virtual Asset Regulatory Authority) one was by far the most difficult I’ve ever done. And the ongoing supervision is probably by far the most stringent.”  – Henri Arslanian (Co-Founder and Managing Partner, Nine Blocks Capital Management)

Minute-by-minute episode breakdown

• (2:10) – Discussion of NineBlocks Capital’s licensing by VARA (Virtual Asset Regulatory Authority) in Dubai 
• (3:58) – Dubai’s transformation into a crypto hub and the strict regulatory oversight
• (8:40) – NineBlocks’ success in attracting investments and achieving growth in crypto industry during a downturn in the market
• (14:25) – Managing risk and counterparty exposure in trading strategy and broader crypto ecosystem
• (21:27) – Future debate on privacy and transparency in crypto transactions
• (25:50) – Concentration and counterparty risk in the crypto ecosystem
• (29:45) – Hong Kong’s resurgence and its position in Asia’s crypto scene
• (32:02) – Recap of Henri’s 2023 top 10 crypto predictions 
• (33:35) – Predictions on TradFi best practices, CBDCs and stablecoins as safe haven
• (35:44) – Predictions on Ethereum domination, regulatory tsunami and growth of DeFi
• (39:29) – Prediction on lack of crypto gaming surge, global metaverse strategies and self custody make a comeback and NFTs become more mainstream

Related resources

Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.

• Website (Henri – Personal):  Learn about Bitcoin, NFTs, DeFi & the Future of Money
• Website (Nine Blocks Capital): The leading institutional grade crypto asset management firm
• Podcast:  The Future of Money Podcast (with Henri Arslanian)
• Article: Special Issue: My Top 10 Crypto Predictions for 2023
• Newsletter: The Chainalysis 2023 Crypto Crime Report (Available Now)
• Book: The Book of Crypto: The Complete Guide to Understanding Bitcoin, Cryptocurrencies and Digital Assets (Available Now) 
• Event: Chainalysis Links Conference NYC 2024 (Apr. 9-10, 2024) – Early Bird Pricing On Now!
• Blog: Executive Corner: Welcoming Omesh Agam as CISO
• 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) 
• Henri Arslanian (Co-Founder and Managing Partner, Nine Blocks Capital Management)

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Transcript

Ian:

All right. Hey everyone. Welcome back to another episode of Public Key. This is your host, Ian Andrews. Today I have an amazing guest, Henri Arslanian, who is the co-founder managing partner at NineBlocks Capital, also a prolific podcaster, content creator. You can find him everywhere on every platform. Henri, welcome to the program.

Henri:

Thanks for having me, and thank you for all the great work you guys are doing with Chainalysis. A big fan of the contribution you guys are bringing to the crypto and broader Web3 community.

Ian:

Mutual admiration. I’m a big fan of all your content. It’s taught me a lot as I’ve been running this podcast the last year and a half tips and tactics. Hugely appreciated. Hey, I want to start the conversation off with some big news that just broke this week as we’re recording the virtual asset regulator in Dubai that we call VARA. Granted your firm NineBlocks, I think you’re the first licensed crypto asset manager in the region. Talk about what that’s all about.

Henri:

Yeah, we just became this week at a time of recording the first crypto hedge fund to get a license by VARA. Like you said, it’s the virtual asset regulatory authority in Dubai. What’s interesting, Ian, is that Dubai two years ago made a big decision of having the world’s first crypto specific regulator. And as many of your listeners know, the crypto industry, unlike what many people may think, wants to be regulated. They want to actually set up rules that everybody can abide with and operate on a level playing field. And what’s really amazing here in Dubai, they created that framework and we are the first crypto hedge fund to go through. And it’s been obviously very important because for us at NineBlocks we believe in having an institutional setup. We believe in being regulated, we believe in best practices, we believe in governance, transparency, and everything that you would expect that institutional investors want.

And it’s been actually quite an interesting journey and getting the license. And there’s a number of other firms, I think, who are trying now to do the same. It’s a very difficult license. It took us some time to get it and not only getting it is one thing, but the ongoing supervision is very, very stringent. My background, I’m a hedge fund lawyer when I started my career. And I’ve done, I don’t know over the years, maybe 60, 70 licensing applications. And the VARA one was by far the most difficult I’ve ever done. And the ongoing supervision is probably by far the most stringent. I mean, just to put things in perspective, we have as a crypto hedge fund, weekly reporting to the regulators, wallet addresses, confirming there’s no PEP or high risk transactions. There’s monthly reporting of our financials to the regulator along with a suite of other reporting assets from our assets to reserves, counterparties and all the kind of different things.

So there’s an image people have that Dubai is light touch the Middle East. I would challenge any of the regulators listening today on the show, fortunately or unfortunately, I think what happens now with VARA is probably the most stringent regime in the world right now. Unfortunately, not many people know about it. I think VARA should do a better job probably on the marketing side. They do a very good job. And I think in life what you do is very important and what people think you do is also equally important. I think on the second part, like any regulator, they may not be as good as they should, but I’m sure that’s something they can work on over the next couple of months and years.

Ian:

Yeah. It really is amazing what’s happened in Dubai where they went from really zero crypto presence in the ecosystem and have completely transformed that. It seems if we kind of follow the trend out, that they’ve become, if not the financial capital of the crypto ecosystem, one of a few. You’ve recently moved there as well, right?

Henri:

Absolutely. I spent the last, I would say 15 years of my career, in Hong Kong. I’m originally from Montreal, Armenian background, born and raised in Montreal in Canada, then went to China and then Hong Kong. And where I was very active in Hong Kong and the growth, of the birth and the growth, of the crypto ecosystem there. And about two years ago, I was very instrumental also in the early days of the birth of the crypto community here. And I remember very well meeting with a government official here who was telling me, “Henri, we’re not in the top 20 and we want to be number one.” And I was like, “Yeah, famous last words. I’ve heard this” … Before this, I used to be the global crypto leader at PWC and a partner there. So I worked with many regulators over the years, many governments, many central banks. And then many of them speak big words, but actually the execution that obviously it doesn’t follow through, and here I have to say they’ve really done it.

It’s really impressive what’s happening in Dubai with VARA, with DIFC and the DFSA, what’s happening in Abu Dhabi with ADGM and also some of the smaller Emirates as well across the UAE like Ras Al Khaima for example, that is coming up right now with regulations on DAOs, on Decentralized Autonomous Organizations. But to put things in perspective as a crypto hedge fund, I’m in VARA, it’s an area called One Central. It’s a free zone here. Literally pretty much all my counterparties, Ian, are one minute walk away from me.

Ian:

That’s incredible.

Henri:

And when you think about building an ecosystem, the fact that I can have all my counterparties one-minute walk away from me, I see them down downstairs when I’m buying lunch, when I’m getting coffee, it really creates it. And they built this in less than two years. And I think there’s no doubt in my mind right now as you said, that the UAE has become now the global crypto hub for crypto native firms, VARA Dubai is doing a great job for, let’s say, traditional funds or asset managers who are getting into crypto. The IFCDFSA is a great job, ADGM when it comes to many things, including they just released a new law on DLT foundations. Abu Dhabi is playing a big role. So I think there’s a lot of activity.

I mean, what I just heard, that VARA alone has over 800 applications, forget 50% of those. If 10% of those go through, it becomes one of the biggest hub in the world by a multiple of three or four. So I think there’s a lot of activity going on. For sure what’s happening right now here in the UAE will be a business school case study and people will analyze this for the years to come, not only the vision, but also most importantly the execution. And I think that’s something that crypto community has appreciated and this is why you’re seeing an influx of not only crypto folks moving here, but crypto companies, including some of the large ones, moving their headquarters here, which is very telling.

Ian:

It is surprising that that is happening given the regulatory scrutiny that you described your companies going through, because I think what we’ve seen historically drive some of these migrations of crypto companies has been friendliness where friendliness meant low oversight. But you’re actually saying no, it’s incredibly high oversight. So what do you think? How has that changed?

Henri:

It’s a very good point because the impression I got, many people that are not in our crypto circles think, “Ah, these guys want to go where it’s low-touch offshore.” And I cannot emphasize this enough, if anybody tells you that getting licensed in Dubai is easy, you should hang up the phone on them. I can tell you firsthand how complicated it was. And I think it showcases actually the genuine interest from the crypto community of being above board, especially after what happened a year ago with FTX where these players want to provide their wallet to dresses. They want to provide the proof of reserves, they want to show their financials, they really want to open up and show what’s under the hood because we know that as a community, we are as strong as the weakest member of the group. And I think this is what’s driving a lot of the activity.

It’s been interesting because people often will confuse friendliness with being relaxed, and I think that’s very wrong. For example, I just came back from Abu Dhabi where Abu Dhabi is very pro crypto, but if you want to get licensed, it’s very strict and I can tell you that’s not a place where you want to do something wrong because it’s obviously very harsh enforcement as well. So actually when you’re where somewhere you feel welcome, where the rules are clear, and the rules are made in a way that they can adapt and innovate as the industry grows, but you know that if you don’t abide by the rules there’s actually very strong supervision. I think that’s a great place in the crypto community will grow. And this is why I remain very bullish on the future of the UAE as a regulated global crypto hub.

Ian:

Yeah. It’s very attractive to anybody who’s running a legitimate business, right? Here are the rules. Here’s how you can, you have to operate your business in this way. If you do this, everything’s going to be good. The ambiguity that we have in the US right now I think is driving some people nuts. It’s very difficult.

Henri:

As somebody who’s been in crypto for a long time as a lawyer, I genuinely believe in giving people a choice. I think whether … And what’s beautiful right now in the crypto world, people have the choice and you have the choice of moving your business where you want to move it. These rules are nobody’s forcing you to comply with, these firms are coming here getting licensed are doing so because they want to comply with. Did Dubai benefit from, you mentioned what’s happening in the US, by some of the ambiguity or, let’s say, confusion that’s been shared by other regulators? I think absolutely right.

Ian:

Yeah.

Henri:

And I think that’s what makes the world a beautiful place is that when somebody’s not doing a good job and other player can come in and really be a dominant player. So I think kudos to the authorities here. They’ve done something that I think many people believed was possible only two, three years ago.

Ian:

Yeah, it’s incredible. Shifting gears a little bit, I’m fascinated by people who are starting businesses in crypto and if I’ve got the timing right on NineBlocks, you raised your first fund sort of at the tail end of the bull run just about two years ago. And so talk about what it’s like to operate through the turbulence of 2022 and then kind of the doldrums that we’ve seen here in 2023. What has that meant for your business? And I imagine this has to be tough, but I’m also not an asset manager, so maybe it’s been terrific.

Henri:

No, absolutely. I think to better explain how the difficulties is better, it’s good to understand the background. NineBlocks was created because we really believed that with the vision of becoming the leading crypto asset management firm in the world where you can have basically all the governance, the regulation, the transparency, the compliance that you have in a Tier I traditional hedge fund, but have it in crypto. And as I mentioned before, I was not only hedge fund lawyer before I was in prime brokerage where my specialty was setting up hedge funds for clients. My first book was how to launch a hedge fund. So I’ve done this over and over many times. I have to say that launching, it’s an institutional-grade crypto hedge fund, took us two to three times more time than we thought and two to three times more money than we expected because it’s obviously if you want to comply with the highest standards, anything from independent directors to governance, to insurance to security.

And we decided that … We launched the business in 2021, so over two years ago. And then off a couple months later, FTX happened and it was very interesting, really the last 12 months, anybody in crypto tells you that it was easy is absolutely lying. It was very difficult. Probably the audience who listened to this podcast, they believe in crypto and they’ve been following it since. Where I found it was the most difficult was when you’re dealing with, let’s say, institutional allocators, the sovereign wealth funds of pensions, foundations, endowments, and the likes, and maybe I would say also some traditional family offices has been very difficult to get the message through, to getting this perception that people had of the industry. Despite that, we believe that actually our view as a firm was that this is the moment that you provide transparency and the players that will survive this will come out stronger.

And now we just crossed a hundred million dollar UM mark. We have over two years of track record now. We’re the first crypto hedge fund to get licensed. As we’re recording this, we just had the six months of consecutive inflows.

Ian:

Amazing.

Henri:

So it shows you that despite the hard times, it’s been very difficult to be fair, but I think this is why I really believe that as we’re turning corner and we know we’re getting through, the players who survive this will come out stronger. I think the big difficulty as well was the question of perception. I think there was two big things that people wanted to see, saw before they started looking at the space again. One was FTX. Of course now SBF is hopefully going to jail, but also I think the trials done and also the claims have been trading at pretty high. As we’re recording this, the FTX claims are selling at over 60 cents on a dollar.

So I think there’s been a lot of more positive momentum on the recovery rate of this insolvency, of this bankruptcy. And second, I would say is what was going to happen to Binance. So I think when I was talking to a lot of institutional allocators, they would often tell me, “Hey Henri, we want to see first what’s going to happen to Binance. How is that domino going to fall?” And there was a lot of actually interest in seeing how is that going to evolve and now that there’s matching settlement, yes, there’s one regulator, SEC that it’s still outstanding. But overall I think we can say that it’s been settled. There’s been definitely a lot of interest now, not a lot, but definitely we felt the change of the wind direction since the settlement has been announced. I think that’s very positive for the industry, especially as we go through the holiday, and we go through the ETF news and other elements that may act as catalysts over the coming weeks and months.

Ian:

I’m curious, as an asset manager, how do you set strategy in a downturn? You’ve been talking about, I think, the investors bringing funds in, but obviously your job is to make them all money. How do you approach the rocky market that we’ve had? I would imagine those are very different tactics than what maybe you initially planned to employ during bull run times when you were first getting started.

Henri:

Well, yes and no in the sense that obviously when we set up the fund, we have very clear indication of what our strategy is going to be. And I would argue that actually even despite the market downturn, we have to stick with our strategy. Of course, we always innovate and come up with new ways of generating alpha within that strategy. But it was very important that there’s no style drift as we call it. Our strategy and our fund, when we launched it, the first fund that we launched was a market neutral fund. What that means is that actually we don’t take any directional view on any type of crypto assets, but our goal is that regardless of whether you believe in Bitcoin, you don’t believe in it, whether Bitcoin goes up or other cryptocurrencies go up or down, we generate pure alpha based on the inefficiencies of the market.

For example, we do a lot of funding arbitrage between perpetual swaps and spot. We do base arbitrage, some other [inaudible 00:14:46] reversion and other strategies, but there’s always a real market neutral component to it. So it’s really taking advantage of the arbitrage opportunities, but again, with no directional risk. And I think that’s in the what really markets where our strategy really outperforms is really when there is a lot of liquidity, a lot of volumes, people are trading, that’s where it becomes obviously interesting. But even in down markets, as long as liquidity and people are trading, whether their assets are going up or down, we should be able to generate some interesting genuine alpha, real alpha. So I think that’s what we’ve been trying to do and I think we stuck by our strategy from day one and I think that’s what I would say investors like as well, the fact that you’ve been consistent and there’s been no style drift and you’ve been very transparent as well. I think that’s something that hopefully we believe the market will reward the transparency despite the difficult year that the crypto industry has had.

Ian:

Do you make bets on certain ecosystems? If you’re looking for liquidity, I would assume that Ethereum is probably the most interesting just because of the transaction volume in that space and the different number of services and platforms presents greater arbitrage opportunity. But there’s so many new chains coming online. How do you make a call? Solana as an example, looked like it might be dead following the FTX collapse, and yet I’m seeing the asset prices on the native token, so is now actually maybe trading higher than it was in November of last year pre FTX collapse. So how do you think about the different ecosystems?

Henri:

Yeah. So as any institutional grade manager, we have very strict guidelines. First of all, I think there’s different ways we look at the world when it comes to, for example, assets we trade on. There needs to be liquidity, there needs to be depth of markets. This is why the majority of crypto that we trade in a market neutral strategy, it’s the same for pretty much all market neutral managers. It’s Bitcoin E3M or definitely top five or 10 coins where there is a lot of liquidity. However, risk management is critical. Before making money, you have to make sure you don’t lose it and you actually manage your risk properly. And we look at this different kinds of risks that we are generally you need to be obsessed with, but there’s obviously market risk, what’s happening. There’s also what we call the counterpart risk. For example, we have very strict counterpart exposure met meters.

We tier exchanges, we have Tier I, Tier II exchanges. We monitor the counterpart risk on an ongoing basis to make sure that we are aware of anything that may happen at these exchanges and we monitor it dynamically as well. So I think some of these elements, there’s various elements that come into play when you are looking at managing a market neutral book, especially that unlike let’s say if you’re doing a buy and hold strategy where you buy the asset on exchange, you move to your custodian and you put it in cold storage for example. When you’re trading any market neutral, any trading strategy, you have counterparty risk to exchanges because that’s where your assets are sitting at all times and that’s where there’s always an exchange risk when you’re trading there. So I think counterparty risk becomes fundamental.

And I have to say that’s an area I’m very impressed by the crypto industry, I have to say. This is something I think we don’t talk a lot about it enough. I was fortunate or unfortunate that in 2008, I was a hedge fund lawyer and at the time I was helping hedge funds ironically against their claims against Lehman and the prime brokers and then I was UBS in prime brokerage helping set up these bankruptcy remote structures to help protect investor capital. And during the last year, I’ve seen really a complete 180 from some of the biggest counterparties when it comes to the access they’re giving, the transparency they’re giving, and really from a due diligence perspective, the openness that they have, which was not the case before. I have to say that I saw in the crypto industry really in three to six months, what in 2008 I saw from a traditional banking role in two to three years.

And I think this is something that, as a crypto industry, we don’t market ourselves as good as we should because I think there’s a lot of work that a lot of the big exchanges have done, which frankly I think we should be grateful for when it comes to transparency, governance, and the comfort that they provided to the ecosystem. I think an incident like FTX, I think it’s unlikely we’ll have the same type of fraud that would happen to FTX will happen again. There’ll be another incident in a couple of years. I don’t know what it’ll be, there’ll be something else, but I think this kind of fraud that we saw with FTX, I think, hopefully should not happen again. And I think the large platforms have done a pretty good job actually on the centralized side in trying to provide a better transparency to the investors and investing counterparties they trade with.

Ian:

That’s great to hear because I think in the wake of the FTX collapse, everybody was running around talking about public proof of reserve statements and then you got into this like, “Well, is it good enough to know you have the reserves if I can’t see the liabilities and how are we actually representing your operating budget of your exchange on chain in a way that’s cryptographically verifiable?” And then the whole thing, I think in at least the retail context kind of fizzled out. You don’t really see many people talking about this. There’s a couple exchanges, I had a guest on recently where they’re actively publishing both reserves and liabilities and there’s an audit function behind it. So it’s happening in a couple of places, but you’re saying as a business to business relationship, you’ve seen a meaningful increase in the transparency.

Henri:

I think the transparency and the openness that these large exchanges that have provided from pre and post FTX, it’s complete day and night. And I think this is something that is quite impressive. I think there’s also what is the right mechanism of transparency, whether there’s proof of reserves, like you said, there’s pros and cons to each approach. I don’t think time will tell. Different exchanges have taken different approaches to that, but I also think we need to be a bit humble sometime in the crypto community. I know many of us, we don’t like what Tradify does, what the banks do for example, but the reality is the banking, traditional banking sector, has gone through its load of crisis over the years and is actually pretty good processes that have been in place over the years to try to address a range of issues. For example, I’m a big fan of SOC 1, SOC 2 review mechanisms.

Even you can argue to certain extent financial audits. There’s a lot of agreed upon procedures that actually a lot of firms can use where a lot of the big consulting firms that big four will do. So I think there are a lot of these best practices. IASC is one of them. There’s these best practices that have been in place in Tradify for many years that I think the crypto, especially the centralized crypto ecosystem, where these big centralized players could benefit. And actually I’ve been quite pleasantly surprised to see over the last couple of months, many of the large players go through these certifications that are offered by these large consulting firms. Are these perfect? No. Are there a step in the right direction? Absolutely. I think this is something that actually we should also celebrate and welcome, not only by the way as a crypto ecosystem, but also for the regulators and the broader society as a whole.

Ian:

Yeah. I mean something like SOC 1, SOC 2, it’s an IT certification, but if we think about at the core of cryptocurrency at the technology layer, you’re managing private keys, right? It’s an IT level system and if you’re not doing the work to maintain the hygiene on your technology systems that underpin this, it just leaves open a hugely vulnerable asset, right? Digital money, you’ve got to be really good at your technology operations process.

Henri:

Absolutely.

Ian:

I’m curious-

Henri:

And transparency as well, by the way, what you guys got chain houses for example is a good idea. When I teach, I train a lot of regulators and I still do, and I do the same with central bankers and other financial services professionals and I think there’s a big … When I tell everybody, all my audiences, if you’re a criminal and you’re using Bitcoin, you’re an idiot. It’s the probably worst thing to use if you’re a criminal. I mean good old cash is still the best way if you want to hide your traces, especially smaller sizes. And I think that often people underestimate how powerful tools like what you guys have at Chainalysis, and others by the way, to be fair, have become. And in many ways you’re probably better off using the traditional banking system with trust and lawyers and lawyer attorney privilege and different jurisdictions to hide your assets.

As many of the law enforcement listen in your audience knows, you don’t want to do an investigation that’s going to take 10 years. You want the one that’s going to take a couple months or one year that you can show it. It’s public, you get a promotion. That’s why I think crypto is a pretty good fast way to solve some of these cases, which I mean if you’re going to start doing requests to different law enforcement agencies around the world, they will take you months and years and you probably will not be there. So I think it’s very interesting how the public perception of crypto, especially when it comes to illegal activity or nefarious activity versus the reality, it’s often day and night.

Ian:

Yeah, yeah. It’s such an interesting mechanism. We’ve been able to map ransomware organizational structure by looking at how they distribute payments after a ransomware attack, right? Because they pay everybody in crypto and then they buy all the services that run the ransomware infrastructure and it’s led to some meaningful take-downs of some of these more bad actors. You couldn’t do that if people are handing off bags of cash, the records just aren’t there.

Henri:

I would argue even this right now, this is going to be I think one of the big debates we’ll have as a crypto community over the years. Right now that plays, in my opinion in crypto’s favor because it makes regulators more comfortable, governments more comfortable to a certain extent that there’s a bit of transparency. We can keep the bad actors away. However, I think in a couple of years as Stablecoins are getting more adopted, as cryptocurrencies are becoming mainstream, that’s going to be a flaw cryptocurrencies. Ironically, today, a SWIFT bank transfer is probably in many ways more private and confidential than a crypto transaction. If I pay you right now in Bitcoin or I give you Stablecoin, obviously my wallet, there’s ways you can reverse engineer. If I’m a business that runs on crypto, you can in theory reverse engineer my cashflow statement and that obviously brings up a whole different suite of issues from security to confidential information.

And I think this is why we’re going to need to have at one point a debate on the need of privacy and payments. Right now, many people will say that’s what we need more narrow. That’s what we need certain features of other coins like Zcash and others. But I think, that’s why I have to say as a university professor, I’ve been teaching crypto since 2015 at university, from an academic perspective, I’m very excited to see some of the recent research that has been taking place. There was some with Vitalik recently with what’s happening on ZK, call it Zero Knowledge proof ecosystem if you want. I’m very excited that some of the innovation that is going in that space. But for right now in 2023, 2024, I think it’s still a positive. It is great as firms like yours that are doing this job. At one point over the next decade, this will become an issue. We’re going to need to find ways to providing the comfort but without actually hampering our right to privacy. I think that’s going to be very, very interesting debate to see over the next couple years.

Ian:

It really is. We talk a lot about it on this show, which is this tension between transparency and privacy. And I think because of the original design of blockchain, we substituted anonymity for privacy. We said, well, you don’t know who’s behind this wallet address, so it doesn’t matter. Everything’s private by default, but obviously that wasn’t really true because it becomes, as you said, pretty easy to reconstruct past transactions if you’re collecting the data and then you can sort of follow everybody’s activity all around. And I would have to imagine in your business running a trading fund, you don’t want everyone seeing your trades, you don’t want people front running you, you don’t want … You need a level of privacy to that transactional history and future activity, right?

Henri:

I mean for a lot of market neutral hedge funds, we traded only with centralized exchanges and there’s obviously a lot of security elements behind. But I think you’re absolutely right. I think this element of the privacy and payments, especially when it comes to digital assets, will be a big debate. And by the way, I think this is not only when it comes to cryptocurrencies, I think it’s going to be one of the things we’re going to debate as a society. What you mentioned before, there’s anonymity and privacy. It works if there’s no off-ramp exchanges, we’re all operating in a Bitcoin world and there’s never need of KYC. Yeah, that’s true. You’ll never find out who it is, but the reality is there’s this fiat world that needs to interact with the crypto world, and that’s where I think it’s going to happen. I think what’s interesting now is the reason criminals are still able to use digital assets is ironically because of the slowness of the traditional world.

So for example, if there’s a love scam going on or pig butchering or whatever these things that somebody sends crypto by the time the person finds out that it was a scam, by the time I go to my law enforcement, by the time there’s a request for the exchange, by the time they go freeze that asset, that money is easily already gone and I know the speed is helping a lot of these frauds, for example. But I also believe this is going to be big debate when it comes to the CBDC area. I generally believe, maybe not this presidential election that we’re coming up in the US, but two or three presidential elections from now or prime minister, other elections in many countries, privacy and payments, especially when it comes to CBDCs will be critical topic of election. I think some parts of the world, parts of Asia, countries like China, even parts of the Middle East will go ahead.

We’ll have CBDCs that are mainstream. Other parts of the world, say Europe or the US, I think will be very difficult to have a CBDC that is actually a retail CBDC that is being used on a day-to-day basis because of the fears around privacy and government interference. So I think it’s going to be very interesting. We may have a bipolar world of those are using CBDC and where we’re sacrificing personal privacy for the collective interior, a lack of crime, lack of lower money laundering and better society versus the one where we don’t want to provide, we’re afraid that the interference that governments and access can have through our own personal privacy. I think that’s going to be a very, very interesting debate over the next couple of years.

Ian:

Yeah. There’s people who are fired up on both sides of that topic, I think. One thing I’m curious about, you mentioned counterparty risk a few minutes ago, and it seemed like during 2022, there was not only counterparty risk but concentration risk where we had a number of crypto lending firms offering these incredible retail rates. But on the backend in order to support that, they were all lending to what turned out to be a very small number of institutions, right? Three Arrows Capital being maybe the most well-known, and then Three Arrows in order to generate return was making some kind of outlandish bets as it turns out that went badly for them. And that led to a lot of the collapse that probably undermined at least some of FTX beyond the fraud they were committing obviously. I’m curious how you think about the ecosystem now. Is there less concentration risk or is there maybe more awareness and you’re able to manage around this concentration risk? How do you think about that?

Henri:

Yeah, it’s a good question. It’s something that we spend a lot of time thinking about. I think you’re right. There is still some players are very big in the crypto ecosystem, not to name names. But I think the problem when it comes to this concentration risk, and I think I have to say that the industry has, the ecosystem, has grown a lot in the last, not only the last couple of years, but in particular the last 12 months. For example today, if anything would’ve happened to Binance, there’s a number of players that would’ve easily been able to capture, if you want, that flow subsequently. So I think the industry is definitely more mature than it was a couple, not a long, a couple months ago, but definitely a couple years ago as well. I think what’s interesting now is the counterparty risk mitigation mechanisms have dramatically improved.

So today, for example, with most of the exchanges we trade with, there’s different mechanism with certain custodians were we able to actually mitigate the counterparty risk. For example, you leave your assets at a certain custodian and you’re able to actually trade on a separate exchange using the assets that you have in this particular custodian. And even one of the biggest, it’s public, we can mention Binance announced that they also are looking at doing something similar in having a known regulated custodian where people can leave their assets and trade on exchange, or this could be done by a bank, for example, and other third parties. Of course, then you have counterparty risk towards that custodian or that bank, but at least it mitigates some of the risks that people have, the perceived risks in particular, against some of these crypto exchanges. So I remain, I’m very pleasantly surprised again of the fast-moving innovation and offerings that have taken place, especially from the custody world.

I think one thing that doesn’t get enough credit is I think the custodians in the crypto space have done a tremendous job in the last 12 months in improving their offering and making it very practical. I would even argue that today there’s more custodians than there’s actually demand for it, ask managers for it. So I think the infrastructure now is very solid, whereas I remember 2018, ’17, we were talking about we need custody, we were not there yet. Whereas right now, I would argue that from a custody perspective, especially the industry is very, very well served, so I think there’s a lot of positive things. Are there some big players? Yes, but I would argue to a certain extent it’s also the case of Tradify. I mean you have a couple of players dominate the market, liquidity brings liquidity and so on and so forth for the same exact reasons that are also applicable in Tradify.

Ian:

Totally agree. We haven’t published it yet, but we actually had one of the co-founders of Anchorage Digital on the podcast, and so we talked all about the emergence of the custody ecosystem. They’re a federally chartered bank, which really starts to set them apart from the historical custody providers, much higher standard of scrutiny I think on their operations in order to have that authorization here in the US market, and I see that maturity happening across a lot of the other custodial providers in the ecosystem, which is great.

Henri:

And to be honest, I think many of them did it at their own accord, right? I mean a lot of them went and not only you mentioned obviously I encourage with his bank charter, but a lot actually a lot of these firms did it for also regulatory purposes. For example, to bring it back to Dubai for example, if VARA, for me, if a custodian is regulated by VARA, I know exactly what kind of reporting they’re giving, what kind of addresses they’re giving to the regulators. I mean it’s very Toro, it’d be difficult for them to do something that is not fraudulent frankly, at least with what they’re providing. But also I would say a lot of them made it out of best practices. I think the level of governance, processes, procedures that a lot of these custodians have worked on over the last 12 months has been very impressive. And again, as an ecosystem, I think we should do, not that we should tank them, but I think there’s obviously a whole world of crypto that defied decentralization that will take place.

I’m a big believer in that and I believe people should have a choice and the option to go on decentralized networks from trading to other activities, but also believe that actually the DeFi world will cohabitate for foreseeable future with a CeFi world and for that CeFi world, if you want traditional financial institutions to come in, a lot of the big institutional capital, you need to have decentralized players that are actually really operating at the international standards. And I’m happy to say that actually today I would believe that especially from a custody perspective, the industry has come a very long way.

Ian:

Yeah, it’s incredible to watch. I’m curious, we’ve talked quite a bit about the situation in Dubai, but you lived for a long time in Hong Kong. And they’ve gone through an interesting, at first were an early point of genesis I think for the crypto ecosystem, and then more recently it seemed like crypto sort of banned and we saw departure, I think of a large number of firms who then relocated maybe to Dubai or Singapore. But then in the last few months, that’s reversed course and Hong Kong’s open again. What’s your take on the situation there? Should we expect to talk to you again in the future? You’ll be maybe back in Hong Kong. What do you think?

Henri:

Often people don’t realize really the role that Hong Kong has played in the birth and the growth of the crypto ecosystem. There’s actually a cover here, a book, I can show it to you guys, but there’s a book that was written about us, it was Block Kong, about the 21 people who created the crypto ecosystem in Hong Kong. And really if you think about many of the companies that we have today, were really created there. Think about Binance, FTX, Sam launched it there. Tether was created in Hong Kong, actually still the legal entity that holds a tether is a Hong Kong entity, crypto.com was on Wyndham Street in Hong Kong, block.one bullish all created there and the list goes on and on and on of Hex Trust and many others that came out over the years, again, Sandbox, not Sandbox, and IMOCO. So there’s many players that really created Hong Kong and it was a mix at a time of I think this entrepreneurship vibe that was there with it being a hub and many elements that came at the same time that made Hong Kong a big powerhouse in crypto.

And if you were in crypto 2016, ’17 … I’ve been in crypto since 2013 and I organized my first crypto event in January 2014 at the Canadian Chamber of Commerce of Hong Kong. And really from that period ’til about to two, three years ago, Hong Kong was the place to be. There was obviously some challenges afterwards, especially COVID that made it very difficult. I’m very happy to see Hong Kong get a resurgence now when it comes to digital assets. For full transparency, for full disclosure, I served for about, I believe five years or six years on the advisory committee of the regulator Hong Kong. So I’ve seen this ups and downs and the changes happen there. I think the rules are very strict right now, which is I think very good. And I think there are certain players for which Hong Kong is a great hub. There’s certain players for which Singapore is a great hub. There’s certain players for which Dubai is a great hub, but I think definitely anybody who’s in crypto knows the outsize role that Asia plays in crypto and I think that’s not going to go away anytime soon.

Ian:

Yeah, yeah, it’s exciting. Hey, as we’re wrapping up, I wanted to play a rapid fire game and I know this is one of your special tricks. I don’t have a bell, there’s no bell involved here, but I found a post that you published in January of this year, so it’s almost 12 months old as we’re recording this, your top 10 predictions for 2023, I’d love to go through quickly and just score how you did. You know so much about the industry, you’ve been around so long. Let’s test your power as a future prediction by going back.

Henri:

So that point, that prediction has been going on since 2015. So since 2015, I’ve been writing every year my top 10 predictions of crypto for the year ahead. So I would love to see the trend. It’s funny you mentioned this today. I was speaking to my agent and he said, “Hey Henri, you got to write your 2024 one,” and I was like, “Oh shit, I forgot doing it.” It’s my weekend activity coming up this weekend or next to get that together.

Ian:

I’m impressed. You still write it and it’s not an LLM behind the scenes, right?

Henri:

I wish you could use LLMs, but the reality is for insights that are there point of view, fortunately or unfortunately, the LLMs are not there yet.

Ian:

I totally agree. So number one, best practices from Tradify to enter crypto industry, ironically. How do you think we did on that one?

Henri:

I think I was right. By the way, every year I get some predictions right or wrong. I think this is one I was right. I think a lot of best practices from SOC 1, SOC 2, type one, type two IAC, and many others have been now adopted by the crypto industry in the last 12 months. So I think that’s prediction that I’m very happy to see came through.

Ian:

Yeah. Thumbs up on that one, I agree. Number two, central banks accelerate their CBDC development.

Henri:

I think that as well. It’s interesting. I was looking at data recently, really I think now we have over 90% of central banks that are doing some kind of experimentation on both wholesale and retail CBDC, and I think that’s going to accelerate in 2024 as well. Countries that I’m very impressed with by the way, is UAE India. I think India made tremendous progress the last 12 months. I think that doesn’t get the media attention it deserves. Where I’m a bit, let’s say things have been gone slower on the CBDC side is some parts of Europe and other parts of the world, but fortunately, unfortunately, CBDC will become mainstream in our lives and cash will be of course be banned. And we’re the generation that’s going to see the third form of central bank money CBDC in our lifetime for sure.

Ian:

Interesting. I think I’m up for that one. No more cash. I hate carrying cash around. So digitize everything. Number three, Stablecoins are the new safe haven crypto assets.

Henri:

Absolutely. There’s another one I think and I believe is just the beginning. We have over 140 billion in assets now in Stablecoins and it really depends where your people are. So if you’re in the US and you live in New York and your family, your life is 99% in the US, doesn’t really impact you. Ask anybody in Turkey of your listeners and how the role that Stablecoins are playing, anybody in Latin America, I mean pretty much any business individual that I meet in Latin America across the continent who is doing international trade is using Stablecoins. There’s no question that people that are in Lebanon, people, parts of Africa, there’s genuine usage of Stablecoins right now. And I have to say it’s moving way faster than I anticipated. So yeah, I think that’s another one that I think I’m pleasantly, I’m very happy to see that actually is getting traction.

Ian:

Yeah, we did some analysis on this recently and what my team saw was 50 to 60% of all transactional activity on chain involves Stablecoins. So it’s not just people who are maybe trading out of Bitcoin or Ethereum avoiding some volatility, but they want to hold a digital asset. This is actually being used for transacting, sending value between people and it’s a huge portion of the crypto ecosystem right now.

Henri:

Absolutely. Many countries, a lot of people, Argentina, just basically living off Stable coins especially, you can lend it, you can get a proper yield and fortunately for those who are in countries where they have good central banks, good governance, maybe you don’t need it. But unfortunately there’s a big chunks of the world where people don’t trust their governments and unfortunately they’ve been doing a bad job. The list goes on and on and we can go on for hours naming them and I think at least people have an option. I really believe people should have a choice, an option, and I think that’s amazing the role that Stablecoins are playing.

Ian:

Yeah. So number four, Ethereum continues its dominance.

Henri:

Yeah. This one, I’m not sure I got it right, to be honest. I really believe that post FTX, there’ll be kind of a flight to safety on Layer 1s as well. I’m not sure that really happened. Of course, Ethereum has a great dominance from DeFi to even Stablecoins we just mentioned. But I have to say that I’ve been pleasantly surprised that many of the other Layer 1s that people thought were dead, actually are doing, I’ve seen quite a lot of activity from Solana, Algorand, and many others. They’ve been active in the last couple of months. I’ve been very, very impressed actually, and people, I think it was not only Ethereum, which is good for an ecosystem, there’s more Layer 1s and activity.

Ian:

Yeah. I think if you look at it from a dollars perspective, Bitcoin and Ethereum are about a trillion dollars of market cap in an ecosystem that’s maybe 1-3, 1-4 depending on the day. So certainly dominating that way, but I’m surprised people continue to launch new Layer 1s and Layer 2s, right? It feels like there’s another one coming out every few weeks. So there’s still a lot of dynamism in that layer of the technology stack.

Henri:

And also you think about on that, if you go some of these and there’s very strong communities as well, think about coins like Cardano, think about Chainlink, Polkadot, and the list goes on and on. They’re very, very strong communities that people are very big believers in it. I think that’s great for the ecosystem. It creates a community. I think that’s fantastic. Think about Avalanche, think about what you’re seeing with Savannah, with others. So I think it’s very positive.

Ian:

All right, number five, regulatory tsunami is coming.

Henri:

Oh, I think the tsunami not only was coming, now it came as well. I think you know what I always said, if you’re a US policymaker or a politician and you were not anti crypto in the last year, I mean you’re an idiot. It’s a great thing. It’s bipartisan. Everybody loves … It was easy to bash crypto. I would even argue that some of the CEOs of crypto exchanges like we saw recently are very easy targets. Foreigners, they’re there. Bomb, I think so. I’m not surprised at all that there was a regulatory tsunami. Was that all bad? I think some regulators, without naming them, I think really went completely overboard and frankly from a legal perspective, I think a lot of these decisions will be turned around hopefully by the judiciary, but I think overall the industry will come out stronger after that regulatory tsunami.

Ian:

Yeah. Yeah, good regulations are good. That’s my takeaway there. Number six, DeFi’s rise to be catalyzed.

Henri:

This one, I mean I’m a massive believer in the world of DeFi. I really believe that one thing we often forget after FTX, of course, CeFi and everybody was afraid of another collapse. What’s been interesting is DeFi during the whole FTX saga did perfectly well, continued to operate perfectly well. I really believe there will be more excitement and more capital going to DeFi. It happened by the way, of course, the DeFi ecosystem has grown, although it dropped from its high, but it’s still continuing to grow. I was probably maybe too naive. I believe that it was going to grow faster, but I think this is one that I was not, let’s say, I’m not right, but I’m not wrong, but I was not perfectly right either. I think I’m probably somewhere in between.

Ian:

I think maybe what the rate limit around that ecosystem is right now is the point you were making about some of the operational cleanup that we saw on centralized platforms where they’re adopting some Tradify practices. I think that process is, it hasn’t happened yet in DeFi, and so institutional money is still hesitant to really touch some of these DeFi systems and that’s going to be the big unlock. I think the first player in DeFi that really goes down that path of building an institutional grade system probably has a massive opportunity in front of them. That’s maybe my prediction for ’24.

Henri:

From a trading perspective, some of the innovation in DeFi is absolutely mind-blowing. I’m really, I think from a technical perspective, academic perspective, trading perspective, what we’re seeing in DeFi is mind-blowing right now. But for that to become a bit more mainstream, we don’t need it to mainstream, but let’s say mainstream in the crypto community already. I think it went a bit slower than I expected it, but let’s see, maybe 2024 is the year that will change.

Ian:

There we go. There we go. We got one prediction for your 2024 list. Web3 continues its growth with gaming being the catalyst.

Henri:

Yes, yeah. That’s an interesting one as well. I think this one, I was a bit too bullish on it. I would say I’m a bit wrong. I’m a massive believer in the potential of gaming. I think people often underestimate how big the gaming industry is. It’s obviously bigger than TV and movie industry and sports put together. Industries like eSports, gaming I think have tremendous potential and I think they will be the bridge for the next billion users to come into crypto will be via gaming. I have no doubt about it, which I believe also will happen in the UE and the Middle East by the way. Countries like Saudi Arabia, PIF, the Sovereign Wealth Fund is investing 29 billion in gaming. The UE is doing tremendous investments in gaming and eSports. And this is why I’m even more bullish on the Middle East, by the way, in UAE and countries because of this interaction.

But I think where I was wrong by my prediction is I thought this was going to happen maybe in a bigger way in 2023 and it didn’t happen. I would argue potentially because of the bad press around crypto, I don’t think this really helped the gaming sector. If you’re a gaming company, you’re probably better off the last year staying away from crypto and then being and getting closer.

Ian:

Number eight, every Fortune 500 company announces its metaverse strategy.

Henri:

I think this one, I was probably wrong as well. When this happened, I’m a big believer I would say still of the Metaverse ecosystems. We’ve seen some countries really take big bold move here. I mean, again, not to brag on the UAE, but here in the UAE, many government ministries have to offer their services in the Metaverse. VARA was the first regulator to set up a presence in the metaverse, and I was happy to see countries even set up a presence there and so on, so forth. I think where I was a bit too optimistic, I believe that every country was going to have their own defined metaverse strategy, Web3 strategy. Again, I was wrong there, I think. So this is one that I missed. Where I think also, and I’m not surprised was again, there was a lot of bad connotation with crypto in the past year and you’re probably better off staying away from crypto in the last year. So I think that played a role in it as well. But I was definitely wrong on this one.

Ian:

I think maybe with the launch of the new Apple headset, the Vision Pro, maybe there’s a comeback on this one. But yeah, I would say that we definitely missed the mark for 2023. Number nine, self custody makes a comeback.

Henri:

This is a tricky one. Post FTX, I remember that, I think companies like Ledger were having record sales, and I really believe that for some time, self custody was going to make a comeback. I would say that I’m still a bit wrong on that because while there was a lot of fear in the early days, I think now people are getting more and more comfortable with these centralized players, and I think while self custody is great for people that are, I would say, knowledgeable on crypto and are comfortable with it as well. I always give an example, my mom, my mom would never be able to self custody. So I think where I was wrong, I think self custody will play a role, by the way, it’s called third-party custody. But I think that I probably overestimated or I was too ambitious on the role that was going to play. So I think this is another one I was wrong. I think people still prefer centralized custody in many cases.

Ian:

Yeah. The user experience is still too hard and the risks are too high. You might carry a few digital assets in MetaMask on your phone, but you’re definitely not putting your entire net worth there if you’re smart. Last one, number 10, NFTs become even more mainstream.

Henri:

Wow, I forgot about these. I should revisit them. So NFTs, I think at this point I was wrong as well in the sense that NFTs definitely became more mainstream. We saw with NDA top shots and a lot of the activities that was going on from luxury shops to others, I would say that they probably became very popular because of the wrong reasons. So obviously the hype around them and so on and so forth. Where I was probably wrong, if I remember correctly in the article I talk about how we’re going to be able to see them in day-to-day usage. I still don’t understand why my university diploma is not NFT, my driver’s license is not an NFT, my passport. I think unfortunately we’ve had a lot of NFT activity on artistic side maybe or some more funky stuff, but real proper use cases that are so much needed like some of the stuff I mentioned from land titles to any kind of government document, we’re still very far from having them on NFTs unfortunately. So I was wrong on that one as well.

Ian:

Yeah. So I’m trying to keep score here in the background and I think you actually did pretty well here, right? Predicting the future’s hard. I’m going to give you maybe a six and a half out 10, which is I would consider that to be outstanding, right?

Henri:

Exactly.

Ian:

That’s very well done.

Henri:

What I’d love to do is go back to my prediction from 2015. I should put them all together. I mean one pool for all of them. It shows you how much the ecosystem has grown over the years. That would be a good post actually.

Ian:

I would read that post. I’m there for that.

Henri:

Actually, it’s not a bad one. It’s pretty much nine years of year to year, but I think now you put me on the spot, I need to actually write my 2024 predictions as well as per the tradition. I’ll start it now.

Ian:

We’ll wrap up this conversation so you can get to work on 2024 predictions. Henri, this has been fantastic. Where’s the best place for people to find you online, follow all the content that you’re producing?

Henri:

Yeah. The best way, I’m pretty much on across all channels from LinkedIn to my YouTube page to Twitter, it’s Henri, H-E-N-R-I, the good old French Canadian Way, Arslanian, A-R-S-L-A-N-I-A-N, good old Armenian name. But I think the best way is via LinkedIn, Twitter, YouTube. I post a lot of educational content on YouTube. I have my own podcast called The Future of Money with Henri Arslanian, and I have obviously a lot of other content across other channels, so great to connect with anybody, happy can reach out to me on any of these platforms.

Ian:

Fantastic. We’ll link to all of that in the show notes so people can find you and definitely sign up for the podcast. It’s a fantastic list and you get some great guests on there.

Henri:

Awesome.

Ian:

Thank you.

Henri:

Thanks for having me, and thank you everybody for at the Chainalysis family for all the good work you guys have done for the growth of the ecosystem.