Crypto outlook 2020: Interview with Pam and Shane of Bitvo.com
I’ve got Pam Draper and Shane Thomson of Bitvo back for their thoughts on crypto for 2020.
In this interview, we’re going to talk about how crypto is shaping up into the new year. We’ll talk regulation and Quadriga, and what you need to do to protect yourself. Then we’ll explore the impacts of Libra, crypto futures, and margin trading in the upcoming year.
Did you know Canada has a stable coin coming? Well, you can hear a bit about that and why it’s important.
If you aren’t already familiar with Pam and Shane, here are their bios.
Pam Draper is the President and CEO of Bitvo. Her background includes 14 years of Corporate and Investment Banking at BMO and CIBC. She is a graduate of the Richard Ivey School of Business at Western.
Shane Thomson is the Head of Cryptocurrency Trading at Bitvo. Shane was a Corporate Foreign Exchange Trader at Cambridge Global Payments, an Energy Trader for Capital Power Corp and an equity research associate at TD Securities. He is a graduate of the Haskayne School of Business at the University of Calgary and is a CFA charter holder.
Bitvo is a cryptocurrency exchange founded by experienced Canadian financial entrepreneurs. Launched in 2018, Bitvo offers a state of the art trading platform, proprietary air-gapped cold storage security, the Bitvo Cash Card and the Bitvo Same Day Guarantee.
Tristram: What are the trends that have developed in the crypto space that you anticipate to continue into 2020?
Pam: 2019 will be looked back as the year when crypto became much more mainstream. It’s becoming a dinner table topic thanks to things like Libra. We expect this trend to continue. There have also been several institutional friendly announcements around custody, futures, options, Bitcoin type funds, and we are for looking for this to continue into 2020.
Shane: On the trading side, trading is becoming more constructive. It’s still very volatile, but Bitcoin seems to be finding higher support levels suggesting strong buying interest under the surface. We’ve also seen more unique wallets. While the whales still hold a significant amount of float, overall ownership appears to be broadening.
There’s a variety of factors behind that, one of which is the increase in opportunities to use Bitcoin to make purchases. One of the trends behind this is an increasing interest by various kinds of businesses looking to diversify their payment options, like accepting Bitcoin. The big challenge here is getting over the hurdle of integrating crypto into their system.
Can you elaborate?
Shane: Sure. Part of it is bank charges for payments to international suppliers and payments from international customers. Bitcoin is faster and easier to track. And if you’ve ever had trouble with an international wire transfer, you know how this can take days to sort out. Nobody wants the hassle if they don’t have to.
We are regularly sitting down with companies to help them with integration giving their business more seamless access to crypto in terms of receiving, sending and conversion to fiat.
What kind of regulatory developments are you looking for into 2020?
Pam: 2020 is shaping up to be a big year for regulatory developments where 2019 has laid some necessary groundwork.
In Canada, all virtual currency exchanges now must register as Money Service Businesses and report to Fintrac by June 2020. The CSA and IIROC are also mulling over responses to their joint request for input for crypto regulation earlier this year. We are looking for some major announcements following their evaluations in 2020.
What were the impacts of the Quadriga and Einstein failures, and how will they affect the crypto business going forward?
Pam: High profile failures in any industry increase awareness and they encourage today’s crypto participants to be more aware of whom they deal with. So we expect clients of any crypto-related business to be asking a lot more questions about who the founders are. They should be asking how they operate and what standards do they hold themselves too. Regulation helps to address a number of these questions, but until regulation is more widely adopted, clients should be vigilant.
We are also seeing that regulators are more proactive about shutting down problem businesses, as in the case of Einstein. While Quadriga shut themselves down, we don’t see regulators waiting around when clients are having trouble with withdrawals going forward, for example.
The effect of this will be further weeding out of weak business models and consolidation around companies with industry-leading standards. This is a natural process in any developing industry or asset class. Enforcement and elimination of rogue business practices strengthen the crypto industry and legitimizes wider adoption.
Shane: I can’t speak for any other crypto operations, but our clients didn’t seem all that concerned with respect to Bitvo and their accounts with us. Our approach has been from day one to build the business expecting regulation. We use existing financial industry guidelines to govern how we conduct business in terms of security and custody of our customer’s assets. We hold ourselves to the highest standards in the industry and our clients are aware of that. We’ve always maintained strict regulatory standards, even though it’s not currently mandated by regulators to do so.
Are there some simple steps crypto participants and those wanting to get involved can do to avoid Quadriga type businesses?
Pam: Quadriga shows quite clearly that founders and management teams matter. So you might want to look at prior career paths along with any regulatory or legal issues in their backgrounds. You might want to consider whether they have experience either managing money or acting as a fiduciary in some way for other people’s money. You might want to know if they have some financial experience or have taken steps to acquire talent with this experience.
Understanding financial regulations isn’t a nice to have anymore. It’s a necessity.
And what we are seeing is that many, if not all of the high profile failures in the crypto space have deficiencies in most or all of these areas. We expect additional regulation to accelerate this vetting process for the benefit of crypto participants.
We’ve talked about custodial services and insurance before. What are you expecting coming into 2020?
Pam: Some significant strides were made in 2019 with respect to insurance, particularly Lloyds of London, institutional-grade custody with Fidelity recently acquiring a license and the launch of products that don’t require traders to hold physical coins such as Bakkt’s suite of products, for example. These high profile developments both encourage others to get into the space and provide institutions with a green light to get involved.
There remains much more demand for insurance and custody products than there is supply, currently.
Shane: Insurance isn’t advancing as quickly due to a lack of understanding of crypto by the insurance industry. This information deficit makes it difficult for them to price risk accurately. So they are either doing it at prohibitively expensive premiums and deductibles or not at all. This will come along; it’s just not advancing as quickly as we would like.
Leverage in the crypto space has started to blossom in 2019, what role will it play going into 2020?
Pam: Yes, we’re starting to see a variety of international platforms offering leverage, like margin trading. Not so much in Canada yet. The levels of margin offered are, in some cases, significant, and for the average crypto participant, potentially problematic. Margin trading is a perfect example of where KYC rules can help, and those are not being applied in many cases.
So we anticipate that more platforms will start to offer leverage, and we will see regulation around the levels and qualifications for the use of that leverage as well. This is an area we will be exploring as the rules and guidelines are established in Canada.
Shane: Clients like being able to use leverage, but they don’t always know how to use it properly. Equity, futures, and options markets have strict rules around trading with margin and margin maintenance. The 100x leverage you can get in some crypto situations seems excessive considering. So this is begging for regulation. As Pam said, any business following KYC will be likely be looking at this already.
What role do you anticipate arbitrage and derivatives advancements will play in crypto volatility and infrastructure development over the coming year?
Pam: Arbitrage is an important part of a more uniform global price across an international market like in crypto. This process is a fundamental part of price discovery for traders, and others getting the best price for their execution. Price disparities remain, but increasingly active arbitrage is helping to address these price gaps.
On the derivatives side, the expansion of these crypto-specific products is helping to reduce some of the volatility in the asset class. Derivatives will help reduce structural volatility as these markets keep growing through next year and beyond. This has been the case across other markets historically. A reduction of volatility will increase the adoption and use of crypto as a payment vehicle.
However, like leverage, derivatives should not be used by everyone. The UK FCA is looking at banning the offering of derivatives to retail investors. We anticipate the derivatives market to continue to expand and become more sophisticated over the coming year.
Shane: And to add to that, the demand for hedging is there from institutional clients like miners, who are looking to lock in prices and protect their downside. Meaning the demand for derivatives is growing. These products are a necessary part of a fully functioning financial system, so we expect these to continue to grow along with demand. But, they are still at relatively early stages, and while volumes are increasing, they remain relatively light.
How do you see the global digital currency playing field evolving with the announcements from Facebook, Carney, the Chinese government, and the Bank of Canada, amongst others?
Pam: Governments don’t want to be left behind, so we are looking for more announcements around government-backed coins in 2020. Maybe even a launch.
As for corporations, especially multinationals, the Libra announcement and resulting pushback have exposed some real business risks to corporate enterprise crypto ambitions. So corporations will likely proceed with caution, while governments will be speeding up in terms of digital offerings.
I’ve been encouraged by Canada’s approach. Regulators have been consultative with the industry stakeholders, I’d say. Canada is middle of the pack on approach to crypto regs. We aren’t leading, but we aren’t laggards either. 2020 will give everyone a clearer picture of where we stand.
Shane: Libra was the big wake up call for the regulators specifically, and governments generally last year. The resulting pushback by government was a sign that things are moving quickly, and they need to get moving on guidelines and a dedicated set of rules. Government is discovering that this isn’t something that they can just “put back in the bottle.”
Overall, this development is bullish for the entire crypto sector.
And one other thing is that Canada is one of the fastest adopters of cryptocurrency, on a per capita basis. Especially the 20 to 40-year-olds. It’s kind of amazing how eager Canadians have been to adopt cryptocurrency, compared to some other countries.
What do you see on the trading side?
Pam: We’re still seeing the bulk of trading come from crypto institutional type players like crypto brokers, miners, and high net worth individuals. Retail remains a price chaser. And I’d say another trend is that volume is still really heavily skewed to Bitcoin. So 90% plus probably of our volume is still dominated in Bitcoin versus other coins.
One interesting development that Shane mentioned at the beginning is the increasing demand from new corporate accounts looking for a way to diversify their payment options. In this case, businesses are trading or managing crypto exposure because they are or want to accept crypto as a form of payment – this is a significant development in our view.
Lots of stablecoins are either in operation or in development. What role will stablecoins have in the coming year?
Pam: The demand for stablecoins is based on ease of transaction and less volatility. For institutions, the demand for stable coins reflects a desire to have a bridge to facilitate transactions more seamlessly. It’s easier to use without the constant conversion in and out of the banking system.
Shane: The average retail crypto holder wants an easy way to send money without the volatility rather than speculating. They want speed, traceability, and transparency without the hassle of volatility. Stablecoins can also help achieve that.
Pam: A Canadian dollar stable coin is close to launching, and Bitvo is in discussions to offer it on our platform. It’ll be the first of its kind in Canada. We’re looking forward to using it to manage volatility in our business and offering it to our growing roster of institutional clients.
Are there any other changes in the space that you’re focusing on for 2020?
Pam: As a business, we have a few developments we are looking forward to. One is the rollout of our redesigned iOS app in the next few weeks after testing is completed. We are also looking forward to announcing that our first Android app will be released in 2020. These are part of our ongoing commitment to enhancing user experience, maintaining a high level of customer service and security.
These are in addition to adding a CAD stablecoin for our clients. Stay tuned!
On the regulatory side, we are working closely with the CSA and IIROC on upcoming regs in Canada. We will also be registering as a money services business early in the new year in advance of the June 2020 deadline.
So in our view, 2020 is looking like a big year for the crypto space.
Great to get your thoughts on the upcoming year. If someone wants to get in touch, where can they do that?
Pam: Great question. All our contact information is available in our meet the team section of our website, Bitvo.com.
Thanks for taking the time.
Pam: Thank you.