In this edition of Star investing podcast, we spoke with Adrian Pshalozny to talk about how Australian investors should view cryptocurrency, who is a typical “investor” and his personal views on how to conduct cryptocurrency research and what to look out for.
We talk about how cryptocurrency exchanges work and what functions they perform in the broad market, why the Independent Reserve uses physical repositories to store cryptocurrencies like the typical bank and transaction currency Facebook Libra.
We are also discussing the company’s growth plans and what needs to be done from a regulatory perspective in the Australian crypto sector.
Today in the podcast we have Independent Reserve CEO Adrian Przelozny. Tell me: cryptocurrency exchange, how did you create something like this?
Adrian: So we had the idea to establish the Independent Reserve back in 2013. We really saw the need for an exchange in Australia. Then there was only one exchange in the world called Mt gox. It was obvious that it was not very good. I think it took about 2 or 3 weeks to open the account. I think that during the verification of my account the exchange broke down and did not work for a week, and then rose again … it was a very amateurish operation. It was not designed to handle the number of users they had.
My experience was in IT, I managed IT consulting to the Independent Reserve. We felt we had our own experience to create a secure reliable exchange that works the way people expect. People are used to using platforms like CommSec and e-Trade and they just expect everything to work.
We felt we could really take this whole industry to the next level. We therefore incorporated the Independent Reserve in mid-2013 and developed the platform for 18 months. We launched in November 2014, and the first couple of years the markets were pretty quiet, and then, I guess, things turned around about 18 months ago. We really found ourselves on the hockey stick curve. There was a huge interest in cryptocurrency. Everyone wanted to participate.
There was a small bubble, and I guess it’s a little smarter now than it was then. The whole industry is ripe, we have seen that industry regulators are involved. The growth of the industry has been tremendous.
We now have about 120,000 customers on our platform, about 8,000 of them – SMSF, which is very encouraging. The average investor has evolved from a first-time technology user to a promising investor. People who want to diversify their investments view cryptocurrencies as an asset that does not relate to other things. So this has really become what you have in a balanced portfolio.
So usually in a balanced portfolio you will have some property, some stocks of resources, some cash, some bonds. Now do you think people want a small piece of digital currency?
Adrian: This is a joker in a pack. Inconsistent with many other things you may have in your super. It is also now easier to get into space. Now that regulators are involved, it’s much safer. Now there are insurers, for example, the Independent Reserve started offering insured accounts about 3-4 months ago. This allows you to keep the cryptocurrency in the Independent Reserve on an insured account, which means that if anything happens to us, there is an insurance underwriter who basically has to make sure your cryptocurrency is safe and you are protected.
What do you think is the common understanding in Australia of what a cryptocurrency is?
Adrian: It’s still a very niche, but I think most people’s understanding is improving. We now have 120,000 customers on our platform. Three years ago we had about 10,000 or less.
Where are they based? Are they mostly based in Australia or worldwide?
Adrian: Most of our customers are in Australia (about 90%). The rest are mostly based in New Zealand. I think we are the largest cryptocurrency exchange in New Zealand and we have a small number of clients from Europe and Asia.
Could you give us a profile of some customers who use your platform. Is it anything from trading to typical retail investors and to perfect investors? Are you really getting a real mix?
Adrian: There really is quite a mix. It really started with the first technology enthusiasts and libertarians who came into this space. Now we see that the average age of our customers is increasing, so when we started, the average customer was about 25 years old. Now they are about 35 years old. They are still mostly men, but we see more and more women joining. As it becomes a more acceptable and massive investment, you will find that more average moms and dads get into this space.
Would you describe the existence of a digital currency as a risky investment?
Adrian: Obviously, these are very volatile investments, and by definition this makes them risky, so everyone should always check out all the investments they make. Cryptocurrency is no different. There’s a lot of information as well as a lot of misinformation, so do some research before you invest.
You invest at your own risk, so you need to know: what currency are you investing in, which team is behind it? What problem is he trying to solve? What is market capitalization? What is the liquidity? All the questions you ask yourself when investing in stocks also apply to cryptocurrencies.
Can you explain how the exchange works?
Adrian: Уthe dependent reserve is an exchange of orders. This means that we are a platform that allows customers to trade with each other. We don’t actually trade on the platform ourselves, we just provide a marketplace where people can place orders in our order book, and if two people want to trade with each other … then they trade in our order book.
Is this a purchase by appointment?
Adrian: I guess you can think of it as eBay, but for cryptocurrencies.
So will your business model be that you charge a small fee?
Adrian: We charge a very low fee for each transaction, the lowest in Australia. Our fees start at half a percent, and depending on how much you trade, they can be up to 0.1% of the trade.
In terms of Quantum what people hold, talk to us about it … what trades go through the platform?
Adrian: I believe that as we grow we find that we hold more and more assets of our users. Thus, according to the latest estimates, we held user assets worth about $ 300 million. It is a mixture of AUD, bitcoin, etherium and other cryptocurrencies. Our volume over the last 12 months has been about two and a half billion dollars, so it has really grown into a pretty big business.
You don’t sleep at night thinking I have “hundreds of millions of dollars on our platform” – what would normally be if you were in a bank, under layers of concrete where yours are, there would be big blocked bugs, so we’re in the cloud?
Adrian: I wonder what you will say that we do use a lot of storage! We store most of our cryptocurrency offline. This means that it is in no way connected to the Internet. That’s the way it is, I guess it can’t be hacked. We use more than 1 repository, we have procedures in which no one can access the repository … just like you said. So it stays in volts over the concrete to ensure no one can access, so it’s really little different from a bank. So I sleep very well at night, which is very good.
Facebook recently started dealing with cryptocurrency with Libra. What do you think of these events?
Adrian: I think this is a very exciting move. They have a user base of about 3 billion people worldwide, so they have incredible reach, so this is something that could potentially bring cryptocurrency into the mainstream.
Libra is a transaction currency – it is not designed as an investment … but it is designed, I believe, by a cryptocurrency that people can use to make transactions with each other very easily. It will be really interesting to see what happens to Libra, it has caught the eye of many regulators around the world. Many regulators are asking a lot of questions about how Libra will be regulated, how it will be controlled, and what about privacy – there are many questions that need to be answered. But I think Libra has more potential than anything else to really introduce cryptocurrency into the mainstream
Take a look at your crystal ball, show me about how the crypto can be used in transactional forms in retail and restaurants?
Adrian: I see that cryptocurrency is being used more and more online. There is a problem that many internet sellers face, it is online fraud. There are a lot of scams going on online, and usually sellers are responsible for this scam. Few people know about it: for example, if someone uses your credit card and then you tell the bank that it wasn’t you, then usually the seller is required to return those funds to the bank.
Thus, cryptocurrency circumvents this problem when traders are not responsible for the fraud that occurs. So I see a lot of options for using cryptocurrencies online.
Earlier you mentioned the growth of the hockey stick in a business that did not support bitcoin. We’ve seen how many ICOs have flooded the market. Many have dried up and will be cut down. You mentioned regulators – is there anything they can do more to improve the market? Are you happy with the way things are going?
Adrian: I think we are on the right track. The first regulator to regulate was AUSTRAC, after about two years of engagement with the industry. I personally spent a lot of time at AUSTRAC teaching AUSTRAC people what cryptocurrency is, what cryptocurrency exchanges are, which parts can be regulated, which parts cannot, which parts should, and how we can apply regulation so that protects but does not put too much strain on an industry that is quite small compared to other industries.
So AUSTRAC started regulating this space last April. The Independent Reserve was the first to be regulated by AUSTRAC. We have a wonderful relationship with them and I think this area works very well. I think the next regulator out there will be the ASIC, which needs to look at what’s happening with the ICO, and they’re already looking at it very closely. Yes, last year there were a lot of ICOs, and there were quite a few people who lost a lot of money because, I guess, there was over-enthusiasm and people didn’t exercise due diligence. The level of research they conducted in their investments was probably not at the level it should have been. Some people have taken advantage of this, but we see that the ASIC and RBA are also starting to look at this area more and more, and I think in the next 12-18 months we will see more regulatory initiatives from these regulators.
What advice would you give to someone who doesn’t currently own digital currency but is thinking about trying it?
Adrian: My main advice is to do research to understand what you are investing in. Then start slow – never invest more than you can lose as this is a risky area to invest. Also choose carefully the exchange you are using because not all exchanges are the same. Tariffs vary, the level of service is not the same on all exchanges, so read reviews online and learn.