Ep. 33 The Long-Short | Discussing the ABCs of crypto with Henri Arslanian

Published: 29 June 2022

The Long-Short is a podcast by the Alternative Investment Management Association, focusing on the very latest insights on the alternative investment industry.

Each episode will examine topical areas of interest from across the alternative investment universe with news, views and analysis delivered by AIMA’s global team, as well as a host of industry experts.

Amidst a tumultuous series of events impacting crypto markets, The Long-Short caught up with fintech and digital assets thought leader Henri Arslanian, to guide us through the ABCs of cryptocurrencies and get to the bottom of what’s been really going on in crypto markets.

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Hosts: Tom Kehoe, AIMA; Drew Nicol, AIMA,

Guest: Henri Arslanian, Senior Advisor at PwC and author of The Book of Crypto: The Complete Guide to Understanding Bitcoin, Cryptocurrencies and Digital Assets

Interlude: Lorna Barnard, AIMA


Tom Kehoe, AIMA  00:05

Hello and welcome to The Long-Short, a new podcast brought to you by AIMA, the Alternative Investment Management Association, focusing on the very latest insights on hedge funds and private credit. My name is Tom Kehoe. AIMA is the global representative of the Alternative Investment Industry with around 2,000 corporate members spread across 60 countries. Of these are fund manager members account for approximately two and a half trillion dollars in hedge fund and private credit assets. Each weekly episode of The Long-Short will examine topical areas of interest from across the alternative investment universe. News, views and analysis delivered by AIMA’s global team, as well as a host of industry experts. So, whether you're a hedge fund or private credit industry veteran, a student of the industry, or just someone interested in learning more about hedge funds and private credit, this podcast will be your ideal companion to help navigate you through the long and short of this fascinating industry.

Tom Kehoe, AIMA  01:02

Hello and welcome to another episode of The Long-Short. After weeks of turmoil in the crypto markets, we decided to revisit this topic to cut through the noise and speculation and get to the bottom of what's been really going on. At the center of the recent turmoil is Bitcoin the most established cryptocurrency, which has been declining from a peak of around US$67,000 last November, to fighting to stay above US$20,000 and other cryptocurrencies like Ethereum and Solana have suffered a similar fate.

Drew Nicol, AIMA  01:27

The steady drop off has been punctuated by several sharp crashes brought on by a series of market events, including the collapse of Terra USD; algorithmic stablecoin, and events which cause Celsius network to temporarily freeze withdrawals. Bitcoin appears to have found a flaw, but concerns remain about how correlated the crypto market is to move in equities and further expected interest rate hikes. Many market commentators are warning that this is just a temporary reprieve for the embattled crypto asset sector. Whilst those in the space argue that the current volatility may serve the positive purpose of trimming the fat from the market, which will emerge humbler and with a greater emphasis on risk management and operational best practice.

Tom Kehoe, AIMA  02:09

To make sense of it all. We checked in with a The Long-Short favorite Henri Arslanian. And regular students of The Long-Short will recognise Henry from Episode 11 and, crypto and digital asset aficionados will also recognize Henri from his many appearances on the likes of CNBC, Bloomberg, as well as his very popular future of money series.

Drew Nicol, AIMA  02:28

Henri is also the author of the book of crypto, a newly published guide to cryptocurrencies and the digital asset universe. So, if you don't know your NFT's from your blockchain, this is the book for you. As well as that Henri recently became the managing partner of a crypto hedge fund Nine Blocks Capital Management.

Tom Kehoe, AIMA  02:46

So, the first part of the podcast includes a lightning round with Henri to help better explain what cryptocurrencies are.

Drew Nicol, AIMA  02:53

While in part two, we get to the hard questions as to why cryptocurrencies have fallen so hard in value lately. And where do they go from here.

Tom Kehoe, AIMA  03:01

We hope you enjoyed the episode. If you do, please do give it a rating, and share the word.

Drew Nicol, AIMA  03:10

A very warm welcome back to a Long-Short short favorite, Henri Arslanian.

Henri Arslanian, PwC Senior Advisor 03:14

Thanks for having me, Drew. And Tom, great to be back on the on The Long-Short, very excited to be here.

Tom Kehoe, AIMA  03:19

So, Henri has been quite a period for crypto markets globally. And later in the episode, we will ask you to offer your perspective as to what is happening across crypto markets. But first following your appearance in Episode 11, we received several requests asking us to do an ABC of crypto. And of course, you've just published a book on all of this right?

Henri Arslanian, PwC Senior Advisor 03:37

Absolutely. My thanks for bringing it up. My last book, The Book of Crypto just came out a couple of weeks ago, I'd have to say I've been very touched by the welcome. It's became the number one global release in financial services. It became already automatically a top 10 Best Seller as well. So very, very happy for the book of crypto that came out. Actually, the reason of the book was to answer the question you just raised Tom, is many people, not only the hedge fund industry, but our brother financial services often asked me, “Henri, we're looking for one book like a primer that we can read this and unpack all the fundamentals of crypto”. And that was the rationale behind the book of crypto, we're literally at about 400 pages, I cover all the essential that somebody would need to know about crypto from cryptocurrencies, crypto mining, stablecoins, the DeFi, NFT’s, web3, CBDCs. And really try to give the foundations to everything. So hopefully it can be useful to many of your listeners and to the community more broadly.

Drew Nicol, AIMA  04:29

And we'll be very happy to add that book to The Long-Short book club which we are slowly starting up. But to commemorate the very publication of this book and the launch of Nine Blocks Capital Management, and to help our listeners understand a little bit more about the world of crypto, we just wanted to start by throwing some questions your way too that we'd like to have your address and what we're calling something of a crypto lightning round.

Henri Arslanian, PwC Senior Advisor 04:56

Let's do it.

Tom Kehoe, AIMA  04:57

Yeah, so Drew and I, drafted 10 questions for you to explain what a crypto asset is, what's Bitcoin? How does one get a crypto asset? What are its advantages? Disadvantages? Who invests in crypto? So, your game to answer a few questions, so to borrow from your catchphrase, let's go!

Henri Arslanian, PwC Senior Advisor 05:12

Let's do it, always ready.

Drew Nicol, AIMA  05:14

Okay, so let's start with a nice and easy one. What is a cryptocurrency?

Henri Arslanian, PwC Senior Advisor 05:21

A cryptocurrency, let's give an example of Bitcoin, is for the first time, an asset that we’re able to store value that we’re able to send from one person to another without any intermediaries. And this was really the innovation that we got in 2008. On October 30, 2008, from Satoshi Nakamoto, were we able to send kind of a value from one person to another without using any kind of intermediary, whether it's a payment company, a bank or any other kind of financial intermediary. So that is a short answer of what is a cryptocurrency.

Drew Nicol, AIMA  05:52

And it does get a little bit more complicated than that. So, could you give us some examples of the types of cryptocurrencies that are out there now?

Henri Arslanian, PwC Senior Advisor 05:59

Yeah, that's a big one, there's obviously a lot of different types of what are called crypto assets in the market of cryptocurrencies, which is the first category we just mentioned, a Bitcoin is the biggest example. It's by far the biggest market cap and usage, then you have the second category, which are stablecoins, which are digital assets that are backed one-to-one by fiat money. So, for example, if I send you through a Bitcoin, you'll be very happy. But you don't know what the price of Bitcoin will be a week, a month, a year from now. Whereas a stablecoin, it's worth U$1, today, US$1 next week and US$1 next month, unless it's one of the algorithmic stablecoins, like Luna and we can talk about that later as well. So, you have cryptocurrency, stablecoins, and then you have utility tokens, which are examples like Ethereum, Solana, Tezos, and many, many others, which are basically kind of a token that allows you to access the ecosystem.

The best analogy of that is: imagine you have an amusement park, and I sell tickets, you're able to actually use those tickets to go on the roller coaster. It doesn't give you any economic rights, doesn't give you any voting rights, but allows you to use that crypto at that ecosystem. The analogy of an amusement park, a roller coaster, and the crypto world obviously doesn't exist, but it actually allows you to use that blockchain, Ethereum is a good example. And there's others as well. For example, there's security tokens, which are really kind of digital assets that are tokenizing certain other either digital assets, or real-world assets. We have NFT's which are non fungible tokens, which allows us to, for the first time, to mathematically prove that a certain asset is unique. We have central bank digital currencies, that are digital currencies issued by the central bank, and the list goes on and on.

So, there's really a wide number of categories. By far the biggest right now is the first one, cryptocurrencies, and the second and third one stablecoins as well as utility tokens have a big chunk of not only total market cap, but also usage as well.

Tom Kehoe, AIMA  07:50

Wow, so much jargon in there, I think we'll have to get you back in for another episode.

Henri Arslanian, PwC Senior Advisor, 07:55

But that's like 100 pages of my book.

Tom Kehoe, AIMA  07:59

So, what do we mean then by mining for a currency?

Henri Arslanian, PwC Senior Advisor 08:05

Yeah, so the way we achieve consensus in a traditional world, if I send you Tom US$100, the bank or the payment processor will literally kind of do the debits and the credits, they will kind of, you know, take away US$100 on my account and put it on your account.

This obviously, where you're talking about Bitcoin, for example, where there are no intermediaries, the way we're able to achieve what we'll call the consensus mechanism, is really by something we call Bitcoin mining, which is actually probably not the right term, it should more be like Bitcoin accounting, or Bitcoin bookkeeping, if you want. And basically, it is a process that actually verifies puts all transactions together every 10 minutes, and actually then verifies which block is going to go on the blockchain. And actually, that becomes kind of if you want the equivalent of an audited account that the rest of the world can see it. Instead of having the Big Four, you have Bitcoin miners who are doing the same role. Instead of having audited financials, you have literally blocks that are there, that everybody can see. And this process takes place in the case of the Bitcoin network every 10 minutes. And it's kind of that's what we refer to as Bitcoin mining, which is how the system is run.

Tom Kehoe, AIMA  09:17

So then, how energy intensive is crypto mining? And what does all this mean then for crypto in a market that is looking to embrace ESG?

Henri Arslanian, PwC Senior Advisor 09:27

Excellent question. Again, there are maybe 50/60 pages about it in my book as well, but I’ll try to explain that in 10 seconds. What you'll see is that there are some certain consensus mechanisms like the one for Bitcoin, which is what we call proof of work, that consumes a lot of electricity. This is very different from other consensus mechanisms we have, one of them the very popular called proof of stake, which is used by other various cryptocurrencies, Ethereum, like Solana, and many others use variants of proof of stake, proof of work, which is what Bitcoin uses, yes consumes electricity. However, of course, we will look at it from an ESG perspective, which is very important today, when you look at it is that increasingly, Bitcoin mining is using renewable sources. Depending on the data source you look at, you know, some of the latest official data that we have is around 68% really depends on what source you're looking at. But basically, the main reason for that is actually, when you're mining Bitcoin, you want to have the cheapest source of electricity, in many cases, that is renewable hydro being a good example. And that's what actually a lot of the Bitcoin mining is migrating towards renewables, and also indirectly using cheaper electricity, but also renewable sources. And there's a lot of research on this as well.

Back in the day, when a lot of the Bitcoin mining was happening in China. In the wet season, it was happening in Sichuan Province, where there's a lot of hydro, there's actually surplus of hydro and the dry season, it would move to what we call the northeastern part, Dongbei, or you know, Xinjiang and other parts like that, where they're using coal. And the good news now is the majority of Bitcoin mining today happens in the United States. As we all know, there was a ban of Bitcoin mining in China last summer in July of 2021. And since then, a lot of what we call the hash rate, which is the kind of the percentage of Bitcoin miners around the world, has moved to the US, by the way, a large part to the state of Georgia and Texas. So interesting data pointer, where a lot of it is actually being used by renewables.

Drew Nicol, AIMA  11:29

And this is a tricky one a given all various types of cryptocurrencies that you mentioned earlier. But broadly, what are the advantages of a cryptocurrency over traditional money created by banks, i.e., fiat money?

Henri Arslanian, PwC Senior Advisor 11:42

Well, it really depends on what assets you're looking at, you know, for example, a good example is Bitcoin. In the case of Bitcoin, the monetary policy is very clearly defined, every 10 minutes, we have six point 25 Bitcoins that are created, there will only be 21 million Bitcoin ever. That's it. There is no quantitative easing, there is no central bank involvement in when it comes to Bitcoin. So really, that's kind of one of the attributes, people love, very similar by the way to how people look at gold, for example, other crypto assets have other benefits. A good example of that are stablecoins. So stablecoins, again, are digital assets that are backed one-to-one by fiat money. One of the big benefits there is it allows you to send money around the world 24/7, pretty much instantaneously, pretty much for free.

Today, if you want to wire money, let's say from London to Hong Kong over a weekend. First of all, good luck, it doesn't work on weekends, or maybe your bank goes to church, I've never figured out why. But also, then the thing is, there's also a lot of hidden fees, explicit fees, FX fees, and also then you're subject to intermediaries, whereas I could send you through a US dollar, USD stablecoin, on a Sunday night at 2am, from anywhere in the world to wherever you are in the world. And it will reach you in about literally a matter of less than a minute. So, that's one of the benefits of stablecoins. And then I can go on and on about how every kind of digital assets has its own pros and cons. But I'll stop there for now.

Tom Kehoe, AIMA  13:03

So, are there any disadvantages and holding cryptocurrencies Henri?

Henri Arslanian, PwC Senior Advisor 13:08

Oh, yeah, of course, there are, for example, if you're holding Bitcoin there, it's a very volatile asset at the moment, as we saw the last couple of weeks. So that's one of the one of the downsides is for certain crypto currencies, volatility is definitely a problem. And you need to be comfortable with that volatility. Second, is actually the, what I call, the user friendliness. You know, if today you want to go use a payment app, or you know, to a certain extent, your bank, although I would argue the user experience is terrible, but at least people know how to use payment apps right now. Whereas actually with crypto assets, yes, you can use some of the centralised players where the user experience is very similar to traditional financial institutions. But if you want to hold your own crypto, it's actually not that easy.

So, you need a bit of awareness, it takes some time to get used to it. By the way, not too dissimilar to the early days of the Internet, when people were trying to get acquainted with the internet, or other new technologies, using cryptocurrencies will just become easier and easier, not because of the assets per se, but because of the tools around that people will use crypto without even knowing they're using crypto. So there are some downsides on the asset side value side volatility side, but also, frankly, day to day usability as well. We're a bit in crypto now, maybe late 1990s, early 2000s, of where the internet was still a bit clunky, not ideal. There's a bit of a you know, people are still afraid of it. But it's definitely here to stay.

Drew Nicol, AIMA  14:26

And obviously this question will vary based on jurisdiction. But, for someone who maybe knows nothing about this, what are the main regulations and requirements that govern crypto assets?

Henri Arslanian, PwC Senior Advisor 14:39

That’s another big one as well. I have another 40/50 pages on this in the book as well. But really, I mean, putting my lawyer hat on. There's a lot of regulatory clarity now in crypto or like what people may want to believe. You know, for the last couple of years there’s been actually quite a lot of improvements happening globally when it comes to digital assets regulatory clarity. Today, for example, in most large financial centers, if you're launching crypto exchange, you're launching a crypto fund, there is actually reasonably well defined crypto regulatory framework. Is it perfect? No. Does it answer all the questions? No. But is there something you could use as a basis? It's there.

I would say there's this couple of jurisdictions, a lot of crypto companies are using in, let's say, the Americas. It's mainly the US, the US is probably the ironically, one of the jurisdictions that has the most regulatory clarity today. It's a bit of a mess. There's a lot of different conflicting regulations. But there is actually, to a certain extent, regulatory presence that you can use other smart countries in the Americas. Bahamas is a very good example. Bermuda is another one, there's actually pretty good regulatory clarity today, if you move to Europe, EMEA, actually, where a lot of people are going right now, there's, you know, places like Dubai in the UAE, where actually they set up a new regulator specialised on crypto, which is a first globally where there's now a new regulator 100% focused on crypto called the VARA. And then obviously, there's all the ones in Asia with Singapore and Hong Kong to a certain extent. But as you can see, a lot of the big financial centers, if you look at it, have some kind of regulatory framework for crypto, and for sure, this is going to improve over the next couple of months and years. So, I would say that if anybody personally or as your organisation, you have cold feet, and are afraid of entering crypto because of regulatory reasons. I think that's wrong. You may not want to enter for other reasons. But I think not wanting to enter it because of regulatory concerns is probably not a concern anymore. It was two, three years ago, I would argue not anymore in 2022.

Tom Kehoe, AIMA  16:39

So, this is really good stuff, Henri, and we're getting to the end of our lightning round here. Just a couple of questions left. So, in terms of who is buying crypto currency cryptocurrency? Who are the typical investors now?

Henri Arslanian, PwC Senior Advisor 16:54

Good question. It really depends on where you look at it. And there's a lot of data on this, that I've you know, I've covered in many of my newsletters in the past and other places. And if you look at that, say, retail users, I mean, to put things in perspective, only five years ago, there was only 5 million users of crypto exchanges globally, 5 million that's at five years old. And now, we're over 300 million, to give you a size of how much things have changed on the retail side. Second, there's obviously a lot of stuff when you look at it on the institutional side as well. Actually, the latest PwC, Elwood and AIMA crypto hedge fund report that we published is a very good indication that says actually 67% of traditional hedge funds are looking at increasing the crypto allocations this year, of the hedge funds survey, which are presented over 400 billion of assets. So, there's actually a lot of institutional players are buying in. However, I would say if you look at crypto funds, for example, to make it relevant to the AIMA audience. The vast majority of investors in crypto hedge funds are first, high net worth individuals, not surprisingly, and second, family offices. We are seeing some of the large institutional players enter the market. I just came back from Consensus in Texas, where you know, we had the 17,000 attendees, there, you have not only all the big some of the big pensions around the world for the Canadian ones like OTPP, some of the US state pensions like Texas and ERS and others, but also some of the sovereign ones as well, like Adea was there, Temasek was there, so you're seeing some of these big sovereign players one as well, carefully, looking at the space as well, and making some kind of allocations and bets on the future of crypto.

Drew Nicol, AIMA  18:33

You've anticipated our last question a little bit, but because this is a The Long-Short, I do have to ask you directly about hedge funds involvement in this space. So, you've already mentioned the report, which AIMA was very happy to contribute to, but just maybe referencing that, to what extent are hedge funds interested in crypto assets?

Henri Arslanian, PwC Senior Advisor 18:55

Yeah, it's an interesting question. As somebody who spent many years in the hedge fund world, first as a hedge fund lawyer than in prime brokerage for many years, is, obviously there's a sector that I'm very fond of, and I really want to see more hedge fund involvement in crypto. And what's been interesting is actually when you look at the data, we are seeing increased levels, numbers of crypto, sort of traditional hedge funds entering the space. I mean, just to put things in perspective, Drew, if you look at it, according to the latest data, the 67% of hedge funds I mentioned, they want to increase their allocation.

Even all this these hedge funds, the majority of them are looking at allocating less than 1% of their AuM. But even 1% of the hedge fund surveyed represents over US$4 billion in assets that will enter the crypto space. And you may say yeah, that's still a very small amount, right. But let's not forget that the total size of the crypto hedge fund industry is around US$4 billion only, by the way this excludes VC funds, long only funds, passive funds, or real hedge funds, or absolute return funds we think about it, this is less than US$4 billion. So literally, what if the data is accurate this year, the capital that will come in from traditional hedge funds into the crypto space will be equivalent to the entire size of the crypto hedge fund industry, which I would say shows how much there is for growth to be done in this space.

I mean, to put things are perspective, if we believe that the crypto hedge fund industry will be 10% of the total hedge fund industry today, right, which is US$4 trillion. It grew, let's say that’s US$400 billion. That means we still have 100x of the increase of the crypto hedge fund industry. I mean, this is a very, you know, I think your data speaks of itself of how much growth there is potentially to have in the crypto hedge fund sector.

Drew Nicol, AIMA  20:43

That was absolutely excellent. Congratulations for completing the lightning round. The bad news is that is where the easy questions end. Because it's excellent to understand all of that, but we really want to get to the meat of the topic and put it in its current context, the past month has been very challenging. And I remember last time you came on, you said you don't necessarily check the prices day-to-day, but it may sort of come across your radar, the recent volatility, and there has not been, by any way, limited to digital assets. You know, all markets are down pretty much. But crypto has definitely captured the headlines with notable coins such as Bitcoin and others down as much as 60-70% since the start of the year. So, the billion dollar question then is, what's going on here and why has there been such a sharp fall?

Henri Arslanian, PwC Senior Advisor 21:45

Yeah, it's a good question and one that I think many people in the crypto ecosystem have been discussing in recent weeks. I think first of all, anybody that puts allocates the crypto needs to understand that it's obviously a volatile asset. There's no doubt about that. Right? And while many of the crypto ecosystem kind of believed that Bitcoin could be as a hedge against inflation, for example, what we realise in practice is actually goes more in line with, let's say, tech stocks or other risk on assets. And that's something that we've been seeing in the last couple of years as well.

What I mean, obviously, the market crash has been quite significant. Depending on what perspective you look at. One thing that's been interesting is that if you speak to many people in the crypto ecosystem, many people see this mark, this bear market, in crypto potential as a good thing for a couple of reasons, one of them, it clears a lot of let's say the some of the players in the ecosystem. So, it kind of does a cleanup of some of the other smaller players, or the firm's, frankly, who are not operating at the institutional level grade.

I mean, it's not a surprise that when you look at the crypto hedge fund ecosystem, my personal view is that we're going to have a significant percentage, it's tough to put the number, but I would not be surprised that it hits up to 25 to 30% of crypto hedge funds may have either serious redemptions, or literally shut down in the next year. Because the data that we have, if you look at some of the data that was released in the latest crypto hedge fund report showed you that literally a significant percentage had exposure to USD for example, you know, the stablecoin that collapsed, I mean, to put things in perspective, there was almost 50% of crypto hedge fund had exposure to Luna. And around 30% of them had exposure to USD, which is Terra, which is basically one of these algorithmic stablecoins.

As many of you in industry know, whenever there's a such a big downfall or winning many, many allocators find out that the managers were actually deploying capital to some of these protocols, where, frankly, all of these things were predictable, and people knew they were going to happen. I expect to see a lot of redemptions. And you know, as we have quarterly redemptions, end of June is important, it’s an interesting date. But I think I'm watching the end of Q3 as well, to see how many redemptions we'll have in the sector. So, I think it's going to be very interesting to watch. It's not a coincidence that we've had somebody with the large players, the likes of Celsius, for example, that will point manage over US$20 billion, having crypto hedge funds, I mean, they're more of a family office, but like Three Arrows capital are based in Singapore, that according to some media reports, they we're managing over 10 yards, over US$10 billion.

And now, you know, arguably, potentially, you know, they will need to shut down as well. So, I think there was a lot of issues with risk management, and some of the things that we take for granted in a traditional hedge fund world, you know, counterparty risk, due diligence, operational due diligence, you know, day-to-day risk management are things that let's say the crypto industry sometimes didn't pay as much attention to as it should have. And I think that's one of the effects we're seeing right now. But by the way, this is not too dissimilar, I think many of us were in the industry in 2008, when the Lehman [Brothers] collapsed, we saw some of the effects as well. I think some of the older guys remember, remember the LTCM days and the likes. So, I think these are kind of events that are, I think, in the long term will be beneficial for the crypto industry. In the short term, obviously will cause quite a lot of pain.

[Interlude] Lorna Barnard, AIMA 25:06

AIMA Putting ESG Into Practice is returning this September in person, in London, for the first time. The full day programme will address the basics of ESG integration, the latest developments in investor demands, new trends and themes and the regulatory developments that firms need to know about. Throughout the day, speakers will offer unparalleled insights into how to approach the integration of responsible investment techniques across a range of strategies, while offering an in-depth perspective on the evolution of industry approaches in the months and years to come.

Join us at Convene, 22 Bishopsgate [London] to share in the discussion and network with peers, both old and new, as we look towards the future of sustainable investment.

Tom Kehoe, AIMA  25:49

If so, Henri, you've just preempted the next question then in that, as you rightly say, comparisons have been drawn to previous financial crashes, financial market crashes. Over the last week alone, we had commentators compared the recent downdraft to the.com crash of the early 2000s. And ultimately, the fascination for all things internet and the influence of the Internet has proved to be correct. Not before we saw a huge reckoning across markets as the investment bubble there was unsustainable.

And we've also heard from the CEO of a top crypto investment firm draw parallels between what's happening in crypto with the collapse of Terra, Luna and stablecoin, and the lending platform Celsius, you know, having its challenges, as well as being the industry's Long Term Capital Management, when you know, back in 1998, we saw a highly leveraged investment fund, nearly invoke a massive global financial crash. So, if you say those comparisons have been drawn there, and we've also had the comparison to what's happened in recent weeks to the Lehman Brothers. So, I'll put it to you, I think you had so much to say is that you see this as a moment that will pass. But if you are to make that comparison, and maybe you don't, but is this what we're seeing now, a Lehman Brothers moment? Or is it an LTCM moment for the crypto market?

Henri Arslanian, PwC Senior Advisor 27:14

That’s an excellent question, and it's a question that I've been discussing with many in the industry in recent weeks. Personally, I believe it's more of a Lehman moment than it LTCM moment, I think it's an LTCM moment for some of the players, I think three arrows capital, with some of the bets going wrong at the same time. It's probably a good analogy. But I think overall for the industry, this is clearly a Lehman Brothers moment. And I think many of us who are in crypto, but who come from traditional finance, who come from a traditional hedge fund industry have been advocating on the importance of operational due diligence, counterparty risk, risk management. And I have to say, even somebody, as you mentioned at the start, you know, we're launching a new crypto hedge fund, where operation due diligence excellence is such a big priority.

And I have to say, I've been often surprised that investors or potential allocators are not asking that question even more, right, they should inquire us about our independent directors, they should inquire us about how our gates are working, they should inquire us about how risk management is taking place. They should inquire manager crypto hedge fund managers on how due diligence is performed on various counterparties. And I'm really hoping this event is actually going to turn the spotlight and actually bring attention to this topic. You know, in many cases, we think about what happened with Lehman, at a time I actually believe it I was a hedge fund lawyer back in the days that was dealing with this Lehman bankruptcy.

Following that, you know, we saw the emergence of a lot of prime brokers having you know, bankruptcy removed vehicles, we saw the rise of segregated custodians. We saw traditional hedge funds, think about what happens in the event of insolvency or bankruptcy of my prime brokers, for example, that in the crypto world, I really hope is going to happen over the next couple of months. For example, you know, in an event of insolvency, whatever your crypto exchanges, how do you reach out, where they're based, how you know how the process works, you have a process of exactly getting your assets out of that exchange quickly, and moving them out, not only by the way to other custodians, but potentially even moving them to cash in the event of a black swan scenario, and on a risk that downside mitigation factor.

So, these are the elements that I think we're going to see some of the big things I expect to see now following the Celsius event is obviously focused on counterparty risk. And by the way, this is not the first time it's happening. You know, last year, we had one of the big crypto exchanges, where one of the individuals who had the keys was arrested in China, who actually was, let's say, put up particularly for interrogation, so, crypto funds who were not able to access their assets. We've had in the past hacks that happened with some of the big exchanges. So, I think the issue of counterparty risk is something I expect to see, but at the same time, I expect to see a lot of regulatory developments. For regulators, this is a perfect moment. For example, on lending platforms like Celsius, there are many others out there, there's BlockFi, there are many others who are doing similar services not only in the US, by the way, but globally there are many others. This is going to give regulators the opportunity to try to regulate the space.

Many platforms, Celsius is a very good example, have already had subpoenas, or were already in discussions with some of the state regulators, this is all public, there’s a lot of media reports around it. And I think this is going to really give regulators ammunition against some of these lending platforms. And at the same time, by the way, I think the USD collapse on the stablecoin side, again, stablecoin is the wrong term. But let's say it was an algorithmic, stablecoin they had, which is very different, by the way from other stablecoins that we have, like USDC, and others. Unfortunately, the [Terra] USD collapse is going to have two direct consequences. One of them, it's going to give a bad name to the brother stablecoin ecosystem, whereas you have many players who have who are regulated, operating by the book and doing things properly. But second, as well, I think this gives very big ammunition now to central banks to try to come into the space. And this is a topic I talked about in my book, I talked about it in my newsletters a lot. This is an area where central banks are very worried because today, to put things in perspective, Tom, on January 1, 2020, we had less than US$5 billion in stablecoins, January 1, 2020. Today, we have over US$180 billion. And you know, in many countries, now people are using stablecoins, I can tell even I have to confess myself today, when I have to pay people it's in Latin America, and in Asia. I have to transfer money. I'm not using the banking system; I'm using stablecoins. And the reason is because it's so much easier in many emerging countries right now, where there's a risk of inflation, people want to use as a hedge against the local currency, they're switching to stablecoins. Argentina is a very good example. Turkey is a very good example. Turkey, right now, it's one of the fastest growing markets for crypto because people are using it. Ukraine today, because of the war, a lot of people in Ukraine are using stablecoins to do their day-to-day activities. And if you're a central bank today, Turkey for example, you're not very happy to see your population using US dollar based stablecoins, obviously, because then you lose power from monetary policy perspective. Obviously, you lose control. And there's a risk of dollarisation, but not because of traditional dollarisation. But dollarisation risk because of stablecoins, which can happen faster and quicker, and kind of went out the control of central banks.

Drew Nicol, AIMA  32:31

Now, that's really fascinating, because there has been absolutely no shortage of commentary over the past few weeks on people weighing in on what's going wrong and why and whether that is ultimately for the good or not, as you suggest. But what came through in a few different pieces I read was that the concern was coming from the fact that there was a lack of precedent in what was happening to cryptocurrencies. But what you seem to be suggesting is that actually, there are some parallels that can be drawn to crashes in equities, or you know, 2008, or whatnot. And then actually, there are some lessons that can be learned from the traditional finance space in how this might play out for the long term and somewhat of a, you know, a maturation of the industry. But what I find that has been really striking is the difference in reactions to the past few weeks of volatility between those who are, you know, the normies, or those in TradFi, or those in the media, compared to people like yourself, who are actually in the space day-to-day, the point being here that if you're reading a lot of the headlines, you would think it's, you know, the end of days when it comes to digital assets. And this is the reckoning that so many people have predicted, you know, glibly on Twitter for so long, whereas yourself and many others seem much more sanguine about it and much more as a teething problem.

So could you just talk us through about what you've talked about it a bit already. But you know, what is it that you guys know, in the crypto space that we don't?

Henri Arslanian, PwC Senior Advisor 34:04

It's good questions. I'm not sure we know, things that people don't know. But I think probably we're a bit more comfortable, you know, myself, and it's the case of many others who have been in the crypto space for some time. And I've been in crypto now since 2014. So, this is not my first bear market. It's not my first crash. I remember very well, when we don't Mt.Gox collapsed, you know, which at the time, believe it or not, was having between 70% to 90% of Bitcoin volumes globally, at a time there was no other assets, by the way, there was only Bitcoin. So, this is something I think people have been in crypto for some time, have seen already, the ups and downs. And you know, and I personally believe that every bear market, if you think about some of the greatest companies we have in crypto, often were created during bear markets, it’s actually becoming a bit more difficult to raise money. A lot of people that were just there because they were full mowing or they were there for the hype, actually just stepped out of the crypto ecosystem, you know, they don't even want to join. So, the people you end up with in a bear market are actually individuals who are very are committed, they believe this is here to stay, they believe in the future of the asset class. And they really don't focus on building the future of finance or building the future of money. Personally, that's why I actually think this crash is going to have some negative effect for sure.

I think it's going to get cold feet to a lot of retail investors, it's actually probably going to give cold feet to a lot of institutional investors, I think it's going to be more difficult to get allocations through the ICEs to various investment committees, for example. That being said, I think there's going to be, we're going to see continuous growth in many verticals of crypto. I think the service provider ecosystem around you know, the picks and shovels, is going to continue to grow areas like DeFi, on web three, NFT's is going to continue to grow the crypto hedge fund space, even this kind of downturn for market neutral funds is actually not a bad time to be in, right. So, there's a lot of these things you're seeing, there's a lot of opportunities for some kind of funds you're going to still see in this in this environment, but it's really going to overall, it's going to bring, I think it's going to bring a lot more maturity, a bit more humbleness to the crypto space as well, a bit, to certain extent, regulatory oversight, which seems a bit ironic. But I think all these elements will really be beneficial to the crypto industry. Like I've said, in every single bear market, sometimes you got to take a step back to bounce better. And I believe this bounce that we may see afterwards may actually be one of the biggest ones we've seen in a long time.

Tom Kehoe, AIMA  36:30

Henri, the crypto space has been co-opted by institutional players, including hedge funds that you've mentioned. And a major selling pressure, recently, one would assume is partially a reaction to MBs investors having to adjust to everything going down same time. So, we may not know specific names, but what do we know about why people are selling at these lower levels? And I guess the question I would ask is, if the hypothesis for them is still proving to be sound, then, are they not holding up for a bounce? You mean, you suggested that there's going to be the greatest bounce back everm potentially?

Henri Arslanian, PwC Senior Advisor 37:10

Yeah, so it's an interesting point, because what's been happening is a lot of folks will really believe in crypto, if you believe in the thesis of this, of crypto assets. And many would argue this is not a bad time to come in. Actually, you know, I know a lot of people I talk to a lot of people in the traditional hedge fund industry tell me, “Oh, Henri, did we miss it? Are we too late?” Those are question I get asked all the time. But if you if you look at it, now, it's potentially a pretty good time to come in, you know, Bitcoin, just at the time of recording today, it’s just over US$20,000, you know, ETH around US$1,000 as well.

And those are actually pretty interesting prices compared to only six, seven months ago. So, I think if you have a long-term perspective, this is not a bad time to get to know to get into the market, I can tell you myself, with the crash that happened last week, I was even buying more crypto, and I've been buying since 2014. So again, shows you how I think for and I'm not the only one, a lot of people in crypto have been doing the same thing have been actually loading up on some, you know, Bitcoin, Ethereum and other layer one assets that they quite like. What's going to be when is the bounce going to happen? Again? No, we don't know, I guess, very difficult question to say, you know, many would believe that this bear market can last for a while. And actually something that I think a lot of the people in crypto are realizing more and more that is that crypto markets are probably more sensitive to a fair central bank actions that many believed, you know, and I think so while I think people will continue to build, at the same time, I think we're going to see a lot of firms enter the crypto space taking advantage of the markets right now. And especially those who have a more long-term perspective, firms like family offices, high net worth individuals, and actually a lot of the hedge funds as well, where there's a bit more, let's say, comfort with risk management, there's a bit more experience and expertise, I expect a lot of these firms as well to potentially look at the space spite of the market conditions in crypto.

Drew Nicol, AIMA  39:00

And I think there is ultimately whether you come out of this as a bull or a bear for crypto, there are definitely lessons to be learned and the market continues to mature. And at the heart of all of this does seem to be the ongoing educational process of the digital asset space, you know, not just for those of us that are very much the beginning of that journey like myself, but I guess even for the people that have been in the space for a long time, as digital assets react for the first time in different market conditions. We're all on this journey together in some form or other and, resources like your new book and the prolific social media content that you put out there, the videos, the updates, the blogs that you and people like you're putting out are really an invaluable resource to those of us as we progress. So, thank you so much for doing that. And please continue to do so.

Henri Arslanian, PwC Senior Advisor 39:54

It just at that point, I think you raise a very important point. It's education. Right. And this was I think the one advice I have to everybody in this space is, you know, you may love Bitcoin, you may hate it, you know, you may believe in decentralised assets or you may not, you know, you may think it's all a bubble I may not. However, I think we all have this intellectual duty to at least understand how it works, you know, understand the asset class, and then you can make an objective judgment call, whether it's worthless, or actually, this is the future of money. So, I think that the biggest the biggest advice I give to people is, you know, it's never been easier to learn about crypto, for example, you don't have I have an online course on Udemy. It's actually the highest ranked course on Udemy, which is a 90-minute course Introduction to crypto for financial services professionals.

I'm actually now working on LinkedIn, I'm going to launch a couple of courses on LinkedIn for crypto as well. But also, the book is a very good example, right? Where people want to read about understand the asset class. And the other thing I say to people, especially as we entering the summer season, you know, if you want to get in give somebody as a wedding gift, or baptism, give a Bar Mitzvah gift or graduation gift or whatever, why don't you give them a bit of crypto, you know, an amount you're happy to lose, it's a very good way to learn, especially with your kids or people in your family, I find that often when people start using it, they actually started realizing the power of it. And the last thing I tell to a lot of fund managers, you know, I've had this conversation with many CIOs, many people at the senior level and financial institutions, they tell me, “I don't understand this”, and I tell them, “ask the youngest member in your family, literally, when you're meeting them for 4th of July, a barbecue or whatever event, go find the youngest member in your family, ask them what they think about crypto, and you will be surprised of their answer”.

I had the privilege, as you mentioned at the start, I've been teaching crypto in university now since 2015 and I deal with students all the time in my various courses. You'll be surprised how comfortable young people are with digital assets. And in many cases are, they don't want to they don't trust the banks, they're very happy to deal with lending platforms online. And also, they're very happy with actually owning NFT's or digital assets. I mean, the best example is gaming. You know, we often forget, we talked about metaverse, but the biggest metaverse right now are our online games. League of Legends, World of Warcraft, you know, and many, many other games people play today. And these people are making an entire living out of these games. For many of my students, when asked them in class, their most valuable assets are their skins or the guns they have in these video games. You know, so I think there's a there's a whole generational issue as well that we need to we need to get comfortable with. So really, if there's one piece of advice is education, that's never been easier, as many free tools out there, many books now a lot of online content. And I think then you can make an educated decision on what your view is on the asset class.

Tom Kehoe, AIMA  42:44

And if you don't give them a bit of crypto, give them the The Book of Crypto: The Complete Guide to Understanding Bitcoin, Cryptocurrencies and Digital Assets by your good self, Henri, and it's available on all good book outlets. And we've only scratched the surface, as you say, I mean, we could come back, and we will get you back on to talk a little bit about NFT's and the DeFi. I mean, I need to go through that jargon alone as well. So certainly, there's another episode or two in the offing there. But many, many thanks for your time today, Henri.

Henri Arslanian, PwC Senior Advisor 43:17

Thank you very much. Thank you, Tom. Thank you Drew. Thanks for having me on The Long-Short, I am a big fan of what AIMA is doing in the space. So, keep up the good work. And thanks for having me today.

Drew Nicol, AIMA  43:25

And good luck with Nine Blocks. The last show was brought to you by AIMA, The Alternative Investment Management Association global representative for the Alternative Investment Industry. As always, you can get the latest episodes by subscribing to The Long-Short on Spotify, Apple podcasts and Google podcasts, or by streaming episodes directly from our website AIMA.org.

Thanks for listening.


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