Crypto Investors Must Rethink Risk After FTX’s Near Collapse

But what it does, especially in the early stages of innovation in a market, is show that companies like FTX have laid the foundation for future innovation. The FTX problem will set us back X time because they were the dominant face of crypto, but that doesn’t change the larger narrative around crypto and Web3. They were a participant of space, they are not space.

Is Zerocap exposed to FTT? [FTX’s token]?

No. In crypto, some participants push to move as fast as possible by taking as much risk as possible, and many people only consider the benefits. They do not mitigate or manage downside risk. So many years ago, we brought in people from the big institutional investment banks who saw the space and went through the different cycles, and they helped put in place sustainable risk management strategies.

As a crypto investment firm, does this change your way of thinking when it comes to managing funds or advising clients?

Yes, 100% it is. But that doesn’t change how we view the market because we were big believers in that space. But it naturally sharpens your risk management, tolerance and strategies. They had already been sharpened after the Three Arrows. It’s just a matter of ensuring that your ear is continually listening to the market and that you are in touch with your counterparties. But it certainly shakes the heart of the industry around counterparty risk.

This year, Zerocap helped launch Australia’s first bank-backed stablecoin, A$DC, with ANZ Bank. What was your role in this whole transaction?

Billionaire Binance founder CZ Zhao (right) has withdrawn an offer to buy FTX from Sam Bankman-Fried as FTX teeters on the brink of collapse.Credit:Bloomberg

We advised them on the token, we provided them with custody, a market maker and a liquidity venue service. When trading with Ethereum, which is not a regulated product, banks cannot hold spot exposure. They therefore need a counterpart capable of taking care of it.

A$DC was largely a proof of concept, but could a stablecoin like this have broader uses for Australian businesses?

When you have a bank-backed stablecoin – which is one-to-one validated, can be verified, and is from a top financial jurisdiction such as Australia – it opens up trading opportunities and liquidity in the local market. So I think it’s a natural evolution when other companies look at Web3 and native payment systems within Web3.

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Can something like A$DC co-exist with a central bank digital currency (CBDC) like the Reserve Bank is testing right now?

Theoretically, they can both exist. It can be a hybrid model, where you as an Australian resident have an account with both the RBA and the bank. So they can work together, and the RBA can even model its CBDC after a stablecoin. If there’s one on the market that works and already has proven use cases, then why not?

What other areas of the Web3 space are Zerocap interested in?

We are involved in projects to tokenize real-world assets such as stocks, bonds, and investment vehicles, as well as physical objects such as artwork, cars, land, and real estate .

On these token and NFT projects, we provide a range of services including insured custody, cash management, OTC and market making. Token projects tend to have foundations, treasuries, and DAOs looking for an institutional solution to work with. Instead of having idle funds or having to sell assets to cover expenses, we can provide structured products to carefully and sustainably monetize their cash.

I don’t think large institutions will be able to keep up with Web3, especially if they’re public companies, because it’s a complete paradigm shift. How can you allocate value to the community when your value is locked up in your shareholders?

Another stakes and becomes a network validator. Decentralization is a key philosophy of crypto, and one way to protect it is to participate as a validator. We are becoming a validator for key and upcoming blockchains to reinforce our position on the importance of decentralization at the protocol level. We are also building the infrastructure to offer this to our clients so that they too can have a positive impact on the blockchains they invest in.

How long do you think it will be until we see institutional adoption of Web3?

I wouldn’t be able to set a timeline because different institutions and different companies move at different speeds and are at different stages of the journey. Obviously for public companies it becomes much more difficult due to all the approvals that need to be obtained.

Even in large institutions, there have been a number of different use cases and proofs of concepts built over the years, but they rarely see the light of day because you have to get buy-in from stakeholders at the superior. And that’s why I don’t think big institutions will be able to keep up with Web3, especially if they’re public companies, because it’s a complete paradigm shift. How can you allocate value to the community when your value is locked up in your shareholders?

So that’s a very difficult question to answer, but I think with the speed at which the world is moving on things like CDBCs and the A$DC show, we’re headed in the right direction.

A key to widespread adoption is that the benefits of tokenization – more accessibility and liquidity in assets, the ability to fractionate ownership – are demonstrated. Then, it will also allow the blockchain and the tokens on which these assets are issued to become the underlying necessary market infrastructure.

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