How Fed-led inflation of USD could be good for bitcoin and digital assets

The U.S. Federal Reserve’s unprecedented levels of stimulus for the American economy amid the continuing Covid-19 crisis may be spurring more institutional interest in cryptocurrencies.

“Monetary policy now is really starting to make people think ‘how am I hedging my portfolio against inflation?'” said Richard Byworth, CEO of Diginex, a Hong Kong-based digital financial services and blockchain solutions company.

In an interview with Forkast.News on the day of Diginex announced its launch of EQUOS.io, the first U.S.-listed digital asset exchange, Byworth said that more and more investors are looking at bitcoin as a hedge against inflation caused by central banks’ money-printing. Byworth is also CEO of EQUOS.io.

One such investor is CEO of Tudor Investment Corp., Paul Tudor Jones, who has said in a market outlook note that the best profit-maximizing strategy is to own the fastest horse. “If I am forced to forecast, my bet is it will be Bitcoin.”

Politics and the Covid economy may make it difficult for the Fed, in the near future, to reverse course on the quantitative easing and flooding the economy with more money.

“Obviously Trump wants to get re-elected. He’s not about to let the Federal Reserve stop easing or printing money,” Byworth said. “So when you look at bitcoin as a scarce digital asset, that’s something that’s really starting to create awareness around investors looking to hedge their portfolio with institutional and retail.” 

Highlights

• Why digital assets are gaining ground during this pandemic: “Monetary policy now is really starting to make people think ‘how am I hedging my portfolio against inflation?’ I think one of the key macro portfolio managers in the world, Paul Tudor Jones came out and stated that in this particular situation he sees bitcoin as being the fastest horses as his hedge for inflation.”

• Could bitcoin reach $250,000? “The route to getting to a $250,000 price in bitcoin means that you’ve seen a significant devaluation of the dollar price. And so I think it can get there if the Fed were to continue down a road of loss of control of the printing press.”

• Crypto derivatives, like bitcoin futures, are growing: “Probably the biggest change that we’ve seen over the last year has been the introduction of futures products across broad exchanges and that’s really seen the growth of the derivatives market scale from being very very limited to where we are today.”

• On the Office of the Comptroller of Currency allowing banks to serve as crypto custodians: “It really highlights the issue in the industry, that all these banks now suddenly need to think, ‘OK what is going to be my solution around digital security custodianship.'”

• The future of securities: “Blockchain networks and blockchain solutions are going to drive the way that we issue securities in the future. There’s no doubt about it”

Watch Forkast.News Editor-in-Chief Angie Lau’s interview with Byworth to learn more about how bitcoin and other digital assets are benefitting from the Covid crisis, how institutional investors are eyeing crypto’s maturity, and how regulations in the U.S. and Asia are shaping the industry’s developments into the future.

Full Transcript

Angie Lau: Welcome to Word on the Block, the series that takes a deeper dive into blockchain, crypto and emerging technology that shapes this world at the intersection of business, politics and the economy. It’s what we cover right here on Forkast.News. I’m Editor-in-Chief Angie Lau and it is my pleasure to introduce to you right now our next guest on the show, he’s CEO of Diginex, Richard Byworth.

Hong Kong-based Diginex is going global. Richard, you’re expanding beyond the regulatory framework of the city. In fact you’re about to launch EQUOS.io. This is your institutional grade crypto exchange operating under the regulatory framework in Singapore. So the question for you Richard is; you’re based in Hong Kong, why Singapore?

Richard Byworth: Great to be here. Thanks for having me on the show. We’re in Singapore around the exchange because the exchange framework in Singapore is just that little bit more flexible in terms of what we’re trying to do. So the big focus for Diginex and particularly EQUOS.io is really expanding the derivative marketplace and providing infrastructure to institutional investors to allow for that propagation and growth of the derivatives markets more broadly.

I mean we do operate in Hong Kong, and the majority of our business is in our asset management business and our capital markets business. But at this point in time, Singapore is the right regulatory framework for us around the exchange. [Editor’s note: EQUOS.io offers spot trading from Singapore via a temporary exemption from licensing under the Payment Services Act (PSA). Crypto derivatives are not regulated under the PSA.]

Lau: All right, this is often what they call a regulatory race. Hong Kong’s SFC (Securities Futures Commission) has created what is still a sandbox environment. Singapore certainly has expanded a lot of language for its regulatory framework for crypto, for blockchain projects and for exchanges. And so when you say you go after the derivatives market for institutional grade investors, the flexibility that Singapore gives you, what exactly will those investors get? What can they expect that’s a little bit different anywhere else?

Byworth: Sure, I think a good example is in the U.S., the way that the CFTC (Commodity Futures Trading Commission) have operated the framework for derivatives has really been around providing platforms that can only be accessed by broker dealers. And I think the key thing here is that we’re operating under a construct that allows both retail and institutions to operate on that platform.

I think that’s really, really important when you’re looking at key infrastructure like portfolio margins as well as the perpetual and futures products that are driven by retail pricing but then institutions coming in providing the liquidity and making the market more efficient. So I think by adding the two together it really adds a differentiation.

Lau: It’s really notable how much institutional interest is getting into this space. We note that bitcoin has hit above $10,000. It’s showing a level of stability compared to the equity markets at the moment. What do you make of this increased interest, especially in a global pandemic [situation] where equity markets are so very volatile. What are you experiencing in terms of the hunger for alternative assets or alternative investment vehicles that institutional investors are looking for?

Byworth: It comes down to monetary policy. I think monetary policy now is really starting to make people think, “how am I hedging my portfolio against inflation?” I think one of the key macro portfolio managers in the world, Paul Tudor Jones came out and stated that in this particular situation he sees bitcoin as being the fastest horses as his hedge for inflation.

I think that we’ve got to a point with central banks where there’s no reversing it. Obviously Trump wants to get re-elected. He’s not about to let the Federal Reserve stop easing or printing money. And so when you look at bitcoin as a scarce digital asset, that’s something that’s really starting to create awareness around investors looking to hedge their portfolio with institutional and retail. 

Lau: Another thought leader in the space, Tim Draper and a guest on this show here at Forkast.News, we spoke recently, and he talked about his forecast for bitcoin. We talked about this environment in which we’re all living under the weight of, on one hand what is a pandemic-fueled almost depression or definitely recession. And then on the other hand, a desperate stimulus, and then this kind of middle lane that we’re talking about here with bitcoin, which he foresees by 2023 could reach $250,000 in his view. Do you think we’re gonna get there?

Byworth: Tim is very bullish obviously. I think that the route to getting to a $250,000 price in bitcoin means that you’ve seen a significant devaluation of the dollar price. And so I think it can get there if the Fed were to continue down a road of loss of control of the printing press. I think the Fed is a group that is extremely thoughtful in the way that they go around this process and I think they have a very good balance in the way that they’re thinking about these things. But I think broadly it’s very possible. From my own perspective I see a lot higher price from where we are today even the next six months.

Lau: Grayscale investment was one of the largest crypto hedge funds. It is incredible that they reached a five-billion dollar valuation this week after adding half a billion in assets under management in just a week alone. It just shows this kind of appetite is increasing amongst institutional investors. And increasingly, we are seeing this and monitoring it at Forkast.News as well.

EQUOS.io is, while among the first, not amongst the few. There increasingly are a lot more competitors in the exchange space like AAX, like Binance, like all of these other exchanges that are also looking towards that specific rate of investor. How do you think the story has shifted even as you were building out EQUOS.io just over the past year? There’s just kind of this migration of institutional interest increasingly in this space.

Byworth: Yeah, I think probably the biggest change that we’ve seen over the last year has been the introduction of futures products across broad exchanges and that’s really seen the growth of the derivatives market scale from being very, very limited to where we are today. We’re two to three times the spot market, and number well into the billions of dollars for daily volume.

I think to the point about Grayscale, if you look at Grayscale, it’s a product that you can access. It’s listed. It is bitcoin exposure directly. A big part of what we’re doing is trying to raise the credibility of the industry to offer transparency, and on our road map in September is a listing on Nasdaq.

Now the Diginex group goes to a Nasdaq listing… and we’ve got that coming up in six weeks time. For us it was very important. It’s about bringing that credibility to the industry to allow that growth to really go to the next level, give institutions that assurance that they need to onboard to a platform. 

Lau: Essentially a reverse public listing. You’re taking already a publicly-listed company and injecting Diginex DNA into it. As you go to market, what do you think the investors both on the retail and institutional side as they take a look at Diginex in your public listing, what are they going to be buying into?

Byworth: Well I think the big part is obviously the exchange. We’re going to be the first virtual currency exchange listed on Nasdaq, and I think that’s actually a huge proposition for investors that really struggled to get access in the equity markets to a play like this. So Diginex is a hell of a lot more than just a virtual currency platform.

We have a capital markets business. We have an asset management group. We have a trading technology platform, Diginex Access, and we have a full custodian offering in Digivault as well. So it’s a really diversified play across the virtual currency space and people can, for the first time, get access to the public markets.

Lau: Another competitor also based in Hong Kong, BC Group, also publicly listed at least in Hong Kong, recently raised $36 million. A recent share placement also reports that Fidelity invested some tens of millions, close to 20 into some shares at BC Group. And so these names and these investors, as they buy shares of even your competitors and as you go to market, does this also elevate just what the conversation has matured into even just compared to a year ago? 

Byworth: Yeah, I think that’s absolutely right. Fidelity had been involved in this space for quite some time with Fidelity digital assets that they’ve built themselves, a custodian group. But I think this is really just the beginning of that credibility shift that I talked about before. We’re going to start seeing more and more companies get the fact that that’s the level of transparency that you need for people to trust a platform where there’ve been all sorts of security issues and credibility issues in this industry for so long. You’re actually going to start seeing much more of this, as people realize that is the way or the route towards a much deeper credibility for the industry.

Lau: It’s interesting that you’re now operating under the regulatory framework in Singapore. If you’re going to list publicly on Nasdaq, why not under the U.S. regulatory framework?

Byworth: It’s like I said before, the CFTC is a little bit restrictive at this point in time in terms of who can access futures and derivatives, and this is not something we need at this point in time in terms of the way that we’re trying to drive things forward. We really want to build a complete infrastructure offering around derivatives. That gives that regulatory certainty to people as they start to explore products.

Lau: What’s interesting is that the U.S. space is evolving so much. Hester Peirce, we spoke with her recently as well. She’s talking about the Howey Test and how that might need to evolve. We also heard about the U.S. Office of the Comptroller of Currency in recent news. This is really interesting, where traditional banks now can serve as crypto custodians. So the space is certainly evolving in the U.S. How do you hope to potentially influence, impact and get involved in that regulatory conversation especially after your Nasdaq entrance?

Byworth: I think that is a very very important point. That OCC point, it really highlights the issue in the industry, that all these banks now suddenly need to think, “OK, what is going to be my solution around digital security custodianship?” And when they look at the industry and they look at companies that they’re likely to be able to work with, it’s actually very few. And so this is where I believe the Diginex proposition is extremely differentiated by being able to offer a custody solution that is in the process of being regulated under the FCA (Financial Conduct Authority) in the U.K. for digital assets security.

We’re AMLD5-registered for the new AML (anti-money laundering) and KYC (know your customers) regulations across Europe. There’s very few companies that have achieved this level of regulatory compliance and credibility, and I think we are already becoming, since that announcement, the focus of many banks that are starting to pay attention and look at what Fidelity are doing, looking at what other players today, and saying, ‘we need to catch up fast.’

Lau: Yeah, but the one thing that we still don’t have is insurance. I mean, custodian is one thing, insuring the asset is another. And while in the traditional space, banks are under [FDIC] and all of these other things, that there’s some aspect of insurance there. Why is that still missing in the custodian space here for crypto currencies?

Byworth: In terms of the custody space for digital assets, there is insurance and so you can get insurance, and we do have a line of insurance with our custody solution. There’s two types of insurance around this space. There’s crime insurance which is [against] a specific hack, and then there’s specie insurance that can be much more expensive and covers… custody solutions. So actually, the insurance industry has developed quite rapidly around this and I’m approached regularly by different insurance brokers trying to push their product to us. So yeah, it’s starting to grow, and we’re already starting to see rates for insurance coverage drop quite significantly.

Lau: What’s your hope for EQUOS.io?

Byworth: So really, the hope for EQUOS.io is to deliver an infrastructure that really allows people to operate in the derivative space to the sort of degree that we see in other industries or other financial products. So FX derivatives are hundreds of times the spot market in terms of daily volumes.

In terms of crypto today, we’re really just two to three times the spot market in crypto derivatives. So providing that infrastructure will really allow the industry to take the next level of growth that we expect to see. And so my goal is that in a year’s time we’re sitting down here, Angie, and having a conversation about how we’ve seen 10 to 20 times growth of the derivative market than it currently is today. 

Lau: Cryptocurrency is one thing, but digital assets, that’s a whole new world here. Is there an onramp that starts with crypto but can expand into so much more?

Byworth: Very pertinent question, the industry is travelling in that direction. Blockchain networks and blockchain solutions are going to drive the way that we issue securities in the future. There’s no doubt about it, and everyone is starting to explore security tokens and actually that’s a big focus of the banks and custodians that are talking to us about custody solutions, is how do we deal with security tokens. They don’t always focus necessarily on cryptocurrencies, but they’re thinking about security tokens.

I think you’re absolutely right that the next step comes when you’ve got infrastructure in place when you’ve got regulated exchanges like EQUOS.io, then have that digital security exchange licensing and that feeding into the custodian as well to be able to cover digital securities. Then once you have that infrastructure in place and it’s quite broad, then you’ll start to see a much larger growth of issuance of securities leveraging blockchain networks.

Lau: I got to ask you this question before we wrap up. We are talking in a part of the world in Asia where things are happening pretty quickly. Just north of us is China and they’re working on a CBDC, the DCEP, digital currency / electronic payment which is essentially the central bank-backed digital RMB. And so these initiatives are happening at such a fast pace. You are there in Hong Kong. We’re talking about Singapore. We’re talking about this region here. As you take a look in this space what do you think the other blockchain in crypto hotspots are going to emerge?

Byworth: I think it’s going to be in the security token space or what we refer to as digital securities. We’re starting to see regulators look to adapt their regulation around that. And so securities laws are going to change to accommodate security tokens or digital securities and we’re really very excited about that because obviously all the infrastructure we’ve built caters to that product set too.

Lau: And so then what do you think of all the initiatives that’s happening in China, do you think that stokes just more institutional interest?

Byworth: Yeah, I think central bank digital currencies are definitely going to be a continuing theme for this year. I think Covid has really expedited that process. Now obviously you’ve seen the shambles in the U.S. around getting aid to people. It really just makes the case for, if everyone had a wallet associated with that social security number, that process would have gone to seconds as opposed to weeks. And I think more and more we’re going to start to see this propagate.

We’ve already got 40 central banks across the world that are looking at this that we’re aware of, and I think this is just going to continue. So yeah, it’s a very exciting future. It will continue to push forward the blockchain industry as a whole. And obviously we plan to be front and center in that industry. 

Lau: Well we’re going to be keeping watch. And certainly we will speak again ahead of that public listing planned on the Nasdaq. But for now, Richard, thank you so much for joining us. It was really great to learn just where this space has come from and where it’s going and the contributions that you’re making right there in Hong Kong.

So we appreciate it of course things are really interesting here in Asia, that is for sure. Thanks Richard and thank you everyone for joining us on this latest episode of Word on the Block, I’m Editor-in-Chief of Forkast.News Angie Lau, until the next time.