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Growth of digital assets markets and exchanges

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This is part of our December 2020 report into:

The Unstoppable Rise of Digital Assets

Interview with Thor Chan, CEO of AAX

Forkast.News: The value of digital assets has exploded during the last year, and we are now at levels well above previous forecasts. What are you seeing in the market right now?

Thor Chan: We think that the global crypto market is growing. More money is flowing in, and that’s not just because of the Covid-19 pandemic. We are also seeing more innovation, such as the growth of the stablecoin market and an increase in the quantity of stablecoin that is being issued. The market cap is growing.

Stablecoins are tokens pegged to a fiat currency

This is a very good sign because when people use stablecoins, they typically use it as an entry point for buying and selling different types of digital assets. So, the growth of stablecoin is a good indicator that the market is growing. 

We have also recently seen that there are a lot of decentralized finance assets. These tokens are currently booming—growing at a rate of ten times or twenty times.

Thor Chan
Thor Chan, CEO of AAX

FN: What trends are you monitoring right now at AAX? What are people really excited about that you’re seeing in terms of liquidity and volumes on your exchange?

TC: We continue to look at the major digital assets: Bitcoin and Ethereum. What we see is that those who were primarily focused on traditional finance and who may have had a little interested in crypto previously only invested in the stock market or in gold or forex.

Now they are getting more and more interested in crypto. As a result, we’re monitoring the “on-ramp” and “off-ramp”, as well as how many people are willing to buy their first Bitcoin using their local currency. In Hong Kong, for example, an increasing number of people are asking us questions like: “I want to buy my first Bitcoin. Where should I go? What is Tether? Can you tell me a more about it?”

Tether (or USDT) is a popular stablecoin tied to the USD

AAX focuses on how to capture the retail market or retail users, and how those people get their first Bitcoin. This is still a major indicator for us in terms of how we grow the platform.

Right now, even decentralized finance and those kinds of assets are very hot, but for the majority in the finance industry or the average investor, this is still an extremely complex process. They are still asking basic questions like “how can I get my first Bitcoin?” 

Our aim is to educate them about DeFi, but at the same time, we don’t want to scare them off. Although it is very complex, they just want to try Bitcoin. Once they get their first Bitcoin, get their USDT, they can start trading it. [And once introduced to the ecosystem] we could begin to tell them more about DeFi assets. 

Some of my friends who trade stocks, when they trade DeFi assets, say: “Oh, the liquidity is too thin. I just want to buy maybe 500,000 Hong Kong dollars. But the slippage if I buy this very famous DeFi asset is too high.” They don’t feel comfortable with it, so they often choose to just trade Ethereum instead.

FN: You say that slippage is something that traditional markets and traditional exchanges are really disciplined about, but this is not necessarily something that we see with crypto or digital asset exchanges. Can you talk about the slippage you see in trading?

TC: So, first, this is an institutional-grade technology. Therefore, when we built this matching engine and  trading infrastructure with off-the-shelf technology (AAX uses LSEG’s engine, but also as its own code in the stack as well), we wanted to make it institutional-grade. 

It’s all about market infrastructure. We have created a very capable matching engine. We offer pre- and post-trade transparency, market surveillance, and proper AML (anti-money laundering). So really, all of this institutional-grade technology is about our attitude and commitment to market integrity, and these are the conditions required to make our trading value more suitable for institutional investors. 

When there are increasing numbers of institutional investors or similar professional traders coming into the space, they create more liquidity on our platform. And that’s why we tried to develop more of a market-maker program. We can give them excellent technology and infrastructure, and they can place orders here as we provide very good liquidity. 

FN: What are you seeing within the Hong Kong microcosm of investors in terms of what interests them? First, they buy Bitcoin, and then stablecoin, and then what?

TC: Hong Kong is a fairly mature financial market. Like me, a lot of people in my age group started trading stocks while in university, so investing is something that we are very familiar and comfortable with. 

A lot of people here already know how it works, but when they return to it, they have to be very careful because the market has changed over the years. At the same time, they’re very curious about Bitcoin, because more people are exploring cryptocurrencies and there is a lot of media coverage about Bitcoin here in Hong Kong. Additionally, we have recently had an influx of Bitcoin-related advertisements on our trams, in the tram stations, and on the front pages of our newspapers. So, over the past two years, attitudes toward Bitcoin in Hong Kong has improved quite a lot.1

FN: As one of the many digital asset exchanges active in cryptocurrency and DeFi, what do you and other exchanges need to do in terms of best practice to attract more of these new crypto digital assets enthusiasts into the market? What are the key best practices that should be applied?

TC: Education is a really important part of crypto culture today. Universities teach their students about it in terms of exposure. Mainstream media and articles are quite good and they are covering Bitcoin, but they’re not yet delving into altcoins. So, education is crucial for the crypto market. Crypto operators must educate their users and keep all communication very transparent. This is very important. 

Financial platforms have become very used to a lot of their payments, a lot of online banking, and also stock trading. The platforms are very simple and easy to use. When it comes to crypto, sometimes users want to try it out. But when they see confusing terms or very technical words that they don’t fully understand, their view is: “Oh, I don’t have the confidence to do this. I don’t want to try anymore.” So, this is something that we need to need to improve.

FN: How do you assess the current state of regulation in the digital asset market space? Is it harder for exchanges like yours to navigate?

TC: For us, as a global platform, we have users from different jurisdictions and different countries, so it’s actually very costly for us to look into different regulations. 

But at the same time, we can see that the market is expanding. It’s reached a scale that the regulators can no longer ignore. They have to implement strict regulations to protect investors’ interests. And as this is a very hot topic, people will continue to talk about it. Retail users will want to buy more digital assets and some people will just take advantage of that. Those people will issue some (so-called) “shitcoins” or undertake projects similar to Ponzi schemes, that kind of thing. So, the regulators, they have to pay attention and keep investors safe. 

For us, we actually look at the regulations and try to work very closely with the regulators, especially in our target markets. In many jurisdictions, we have noticed they are now taking a more hands-off approach because they want to keep the door open for innovation.

FN: The regulators are starting to pay attention, but different jurisdictions have different rules. How are you dealing with that? And how are you trying to reach crypto investors in different jurisdictions?

TC: It’s actually a very challenging task for exchanges to enforce these regulation and compliance practices across various jurisdictions. Because we have users from all around the world, from different jurisdictions, they all have different compliance processes. So, we simply try to be very self-organized and self-regulated.

We also look very closely at the regulations and the compliance guidelines in our target markets. Right now, for example, it’s clear that the regulators are very eager to implement strict regulations because they want to protect retail investors. At the same time, there are some jurisdictions that take a more hands-off approach, like Hong Kong, as they don’t want to limit innovation or progress.

FN: Where do you project this industry going in a year, in two years, in five years?

TC: We are predicting that more and more institutions and retail customers will introduce Bitcoin as part of their portfolio diversification.

And because of the regulations that are in place, these institutions will have a green light to invest more money and allocate more capital to digital assets. But from what I have seen, institutions will probably only invest in more established assets, like Bitcoin or Ethereum in the next few years, not in altcoins. 

In Hong Kong recently, an exchange got a license to operate exclusively for institutional clients or professional investors. That’s a very good sign for the industry because some licensed entities in Hong Kong will be able to invest in Bitcoin through this channel. More and more institutions are adopting and embracing Bitcoin, but they are not really moving to altcoins just yet.

I predict that they will focus primarily on Bitcoin and Ethereum, and we will likely hear more and more news about institutions buying Bitcoin and publicly announcing it. This is what I predict for institutions in the near future. 

For the retail market, there will be a lot of gamification happening in this space because the crypto generation, who are mostly millennials, are gamers. There will be a lot of innovation and a lot of new and innovative ways of buying, owning or staking crypto. And these are the retail users that the industry loves to chase. Newbies will probably start with Bitcoin and Ethereum before they jump into different methods of staking more, saving or acquiring more digital assets.


1. In early November, Hong Kong Securities and Futures Commission executive Ashley Alder announced that the SFC has planed extensive regulations targeting cryptocurrency exchanges that operate in the city or target its residents. These regulations seek to apply securities laws to more token products, seemingly the opposite of the regulatory direction taken by US authorities.