Summary of “Post-FTX: Road To Transparency and The Need for Self-regulating CeDeFi” session at Blockchain Thailand Genesis 2022 -

Blockchain Thailand Genesis 2022

“Post-FTX: Road To Transparency and The Need for Self-regulating CeDeFi” presented by

Art Kavin Phongpandecha, Chief Executive Officer and Co-Founder of Bitazza with Sanjay Popli, CEO Cryptomind Advisory

Sanjay (Cryptomind Advisory)
FTX, the world’s second largest digital asset exchange crisis was one of the biggest incidents that occured in the crypto industry. Prior to this event, we have already faced Luna, Celsius and Three Arrows crisis. Therefore, post-FTX crisis, how should we prevent all these crises and how do we ensure user asset security as service providers?

Art (Bitazza)
We started our business on shore, especially in Thailand, which is regulated by Thai SEC. We are to report the company’s net capital values, the disclosure of total customer deposits relative to the assets and Proof of reserves on a daily basis to the SEC.

Sanjay (Cryptomind Advisory)
In other countries, it might differ in regulating digital asset exchanges, but in Thailand, there is obvious regulation that we cannot invest customer assets anywhere, and it needs to be stored in both Hot and Cold Wallets. So how do we manage these assets?

Art (Bitazza)
It is divided into 2 parts

1.Assets at Bitazza are divided and stored in 2 types of wallets as follows:

90% of digital assets are secured in cold wallets with proper rules and internal control processes.

10% of digital assets are secured in hot wallets with control systems for increased security.

2.100% of Thai baht is kept in designated bank accounts that were specifically opened to hold customer assets in accordance with all rules and regulations.

Sanjay (Cryptomind Advisory)
As a Centralized Exchange (CEX), how is it possible to create proof of reserves on chain and how to do it?

Art (Bitazza)
Proof of reserves should be separated into 2 topics:

1.Proof of assets, which is easier to do because the company can show that they have a policy to store assets in this wallet, and you can have a look at the assets and transactions history on chain, as well as checking if the service provider adds leverage or not, such as staking on smart contracts to earn yield or any other wrong things. This can show transparency.

2.Proof of liability, as it is a harder thing to do because normally, when you run a business, you need to have assets and liabilities. A company going bankrupt occurs from all liabilities not covered by all assets, including some liability not on chain such as debt signed contracts. Therefore, it is quite difficult to prove liability that is not on the blockchain.

Sanjay (Cryptomind Advisory)
As a user, what are the main points that we are going to focus on from this perspective?

Art (Bitazza)
Moving back to regulated standards in Thailand, we are audited in the technology aspect and our IT system is well-managed, customer assets are safe, as well as with checks and balances.

In addition to the above, we are also audited in the accounts of an auditing service company on whether our liability is covered by assets. We must combine both of these together and investors will need to consider that this company has a proper audit standard. How do they self – regulate and track records, or the lindy effect of a company, meaning that the older company is, the longer it’s likely to be around in the future. In Thailand, there are 6 types of licenses which include Exchange, Broker, Dealer, ICO portal, Advisory Service and Fund Manangement, as well as an upcoming Custodian. Moreover, there is a rule that service providers with the exchange license cannot get dealer licenses in the same company due to conflicts of interests. Let’s draw an analogy: FTX represents an exchange, while Alameda Research represents a dealer. Both companies are working and sharing assets together, causing the crisis that happened. This is illegal in Thailand.

Sanjay (Cryptomind Advisory)

Actually if we see from outside, both FTX and Alameda Research are totally separated, but from inside, it’s not that separate in terms of policy and transactions. For example, Alameda Research was a market maker on the FTX platform and there was a front-running situation which was the global issue.

Art (Bitazza)
Front-running situations are illegal and it’s not an appropriate thing to do. Due to no proper regulations, they have a user database, so it’s easy to take advantage of the customer. Therefore, both companies should not work together.

Sanjay (Cryptomind Advisory)
In your opinion, what will happen in the crypto world? How is it going to be? Are we going to work harder or not? Where will the balance point be from post FTX era?

Art (Bitazza)
Currently, the world is divided into 2 sides which are both CeFi and DeFi. The crisis that we faced came from leverage on systems that CeFi did corruptibly, making most people lose faith in CeFi, otherwise people do not know DeFi is still working from what it is designed as usual.

Throwback to the bull market, we might have heard people talk about lending and over-collateralized loans, or under-collateralized loans. In DeFi, it can do over-collateralized loans, but not under-collateralized loans, meaning that if you have 10 THB, but you need to make a loan for 100 THB. You cannot do it. On the other hand, in CeFi, it can do under-collateralized loans by signing contracts and providing yield, including leverage and pretending to be an unregulated bank to provide a lending service. However, DeFi must do over-collateralized loans. For instance, if you have 100 THB, you can only make a loan for 70 THB. Therefore, the problem in the DeFi world doesn’t happen as contagion where someone collapses, others will not go down as well. I think that post-FTX era, people will focus on transparent, well-designed products and what they happen for.

No matter what crisis happens, DeFi functions as usual. But the thing that I’m concerned about is over-regulation from government authorities which consider all entities under the same standard. If you are a crypto player who is regulated in the same way, restricting new things happen. Actually, it needs to exactly differentiate who is a good or bad player, and solve the right problems.

Sanjay (Cryptomind Advisory)
In terms of over-regulation, industry and entrepreneurs innovate things hardly. Also, if we are regulated by the same rules, but we are all different types of licenses. It might rule with the wrong purpose because each type of business operates differently.

Art (Bitazza)
Further than that, we are not even close to reaching the maximum potential of smart contracts. There are plenty of benefits, and real-world usage we can adapt to our daily lives. Just to think that we will regulate DeFi is like using old-world methods on new-world finance which may limit the creativity of new innovations.

Sanjay (Cryptomind Advisory)
In the DeFi world, I think regulation is very challenging even for the SEC. Even US SEC also needs to adapt to regulate. Cryptocurrency is still considered a very new market for all parties, which takes those businesses to another level.

Art (Bitazza)
I see it as both pros and cons. 90% of startups failed, and only 10% survive. Normally, those who invest in startups usually are financial institutions or experienced investors who have insights from their network. Contrary to the crypto market that’s open for everyone. And of course, it comes with risks. But the fact that we regulate only when we lose profit means that we are pushing our own responsibility to others. It is hard for regulators as well to be in this position. I think we have to find a sweet spot between exchanges, traders, and regulators. However, the loss of profits and malpractice must be clearly separated. I think we should brainstorm our next move on how to prevent these incidents, and use the FTX crisis as a lesson moving forward.

Sanjay (Cryptomind Advisory)
Agreed, we need to have sharp eyes, for example, the root cause of FTX collapsing is not a normal business bankruptcy, but because they invest using customers’ money, which really shouldn’t even happen. Lastly, May I have Art share his thought on the 2023 crypto market trend? How should we plan our own investments?

Art (Bitazza)
I think the key is risk management. Especially in 2022 which could have been the first crisis for newcomers. If we look back to 2017-2018, the ICO Crisis affected prices drastically but many exchanges around the world still survive. But this time, the exchanges are affected and collapsed. Therefore, we should secure our assets in many places where they are credible and well-organized. Experienced traders, should keep their assets in a cold wallet, like the classic crypto phrase “Not Your Keys, Not Your Coins”. For newbies, you need to explore and learn all the crypto foundations, and keep it with someone who has good management procedures.

Sanjay (Cryptomind Advisory)
I think the exciting things that we can look forward to after the FTX situation is that we all have learned a valuable lesson. There might be a big change in our industry, and I believe that anyone can survive this crisis. As the sun always shines after the storm, I believe we will see better innovations develop from this.

See more of interview from Thairath news here starting from 2.10 mins

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See more of the event atmosphere here https://bit.ly/3HpdWQo
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*The person in this picture is the person of Bitazza Ltd and Cryptomind Advisory Ltd. This event is held by Bitazza Ltd as marketing partner of Freedomverse Ltd
Disclaimer: Cryptocurrency and digital tokens involve high risks; investors may lose all their investment money and should study all the information carefully and make investments according to their own risk profile.