This is an excerpt. To hear the full interview, please click the Soundcloud or Youtube links.
As fast as the regulatory landscape in the cryptosphere has changed over the past year, many of the world’s most powerful governments leave much to be desired in terms of proper legislation. Markets are either entirely unregulated (leaving participants open to accidental violations) or improperly over-regulated, leading to a cumbersome, expensive legal process that bogs down innovation.
Finance Magnates spoke with Bharath Rao, founder and CEO of Leverj.io. Bharath spoke about how he believes that institutional investors will make their way into the crypto space, and how the regulatory landscape is shaping the blockchain industry.
Bharath’s colleague, Leverj.io CSO Shashank Tiwary, will present alongside other top-tier industry speakers in a panel entitled “Cryptocurrency Trading: Breaking Down Retail and Institutional Models” at the upcoming Finance Magnates London Summit.
The summit is a leading crypto and forex event that will take place at Old Billingsgate from November 13th to 14th. Finance Magnates is working incredibly hard to make this event the best that it can be, and we look forward to seeing you there. For more information, please click here.
Starting in a Smaller, Less-Regulated Market is “A Lot Cheaper Than Starting in the Established Markets”
“Coming from a Wall Street background, we are very conscious and familiar with what the law requires of us,” Bharath explained. “[To offer] our derivatives products in the United States, for example, you would have to register with the CFTC. If you are accepting orders directly from the public, you’d have to register as an FCM.”
“These are not fast steps,” he said. “These are time-consuming and expensive processes.”
“One option we have has is that we start at a jurisdiction where the process to get regulated is simpler and faster. We have no finalized plans to go to this location, but just as an example, Bermuda is very open to blockchain-based trading as long as there is some sort of provable auditing and transparency, which we have.”
— LEVERJ.IO (@Leverj_io) July 10, 2018
Bharath also mentioned Malta and Switzerland. “It’s a lot cheaper than starting in the established markets,” he added.
”The Competitor Who Goes Toward the Unregulated Market Will Make More Profit”
He went onto say that “every part of the financial landscape has its own regulations.” Cryptocurrency is regulated by FinCen, for example; security tokens are regulated by the SEC. “So, the easiest way is to go where it is simple and fast to get regulatory approval, and then to use the history of running [the company] successfully as a way to enter the established markets.”
Bharath added that for most crypto startups, attempting to incorporate and establish a presence in a large country like the US is “the wrong way to go about it.”
“Crypto is a global market,” he explained. “You’re not going to be able to comply with 200 countries and god knows how many provinces–it’s just not very feasible.”
Bharath explained that as a company that is trying to offer cryptocurrency products, the fact that cryptocurrency is “already global” means that Leverj has to choose between “going through the slow regulatory process of one country, and capturing the market of one country,” and “going unregulated capturing the market of, say, 40 different countries.”
Separating Yourself From the Pack in a Mature FX IndustryGo to article >>
“The competitor who goes toward the unregulated market will make more profit,” he said, “and be able to capture what is currently feasible. The person who goes through the regulated market–two years later, when he gets approval, his product will be obsolete,” Bharath explained.
— LEVERJ.IO (@Leverj_io) October 24, 2017
“This is the real barrier, that it’s just not worth trying to get regulatory approval because it just takes so long.”
Complying with the “Spirit of the Law” Verses the “Letter of the Law”
“On the other hand, I think we actually have a happy middle ground in blockchain technology where you can comply with the spirit of the regulations in [essentially] all jurisdictions, even if you’re not complying with the letter [of the law.]”
“If you look at all the case laws in the US, in Europe, and in the UK, it doesn’t matter if you are complying with the letter of the law if you break the spirit of the law. However, if you comply with the spirit of the law, but not the letter of the law, you just get a letter telling you to fix it in most cases.”
Institutional Investors Will Stabilize Crypto Markets, Welcome More Retail Investors
In its whitepaper, Leverj has outlined plans to act as a gateway for large, institutional investors to make their way into the cryptocurrency space. Bharath believes that the influx of institutional money into the crypto space will have the same kind of effect that institutional money has had on “other markets.”
“What happens initially when large players enter the market, the first thing that it does is to give a sense of credibility and stability. This enables [smaller players] to enter–not just retail [investors], but also crypto hedge funds and investor clubs–they will also feel more comfortable entering the markets.”
“The second thing is that when most of the amount of capital is being traded among large players, the price fluctuations for the most part also stabilize. The presence of derivatives markets is also stabilizing the price.”
Bharath explained that essentially, his prediction is that “the price will stabilize once you have large players trading in [this market] over a period of time.”
An Influx of Institutional Money Will Enable Producers to Offload Risks to Speculators
He compared the effect that institutional traders might have on the cryptocurrency markets to the prices of food in Western markets, particularly the United States. “The prices of food are very stable–wheat, corn, all of these are very stable. That’s because we have commodities markets for these goods.”
— LEVERJ.IO (@Leverj_io) September 13, 2017
“In countries which don’t have this, prices will vary and swivel. If there’s a big crop, the prices crash. If the crop is poor, due to [a lack of] rain or something like that, prices will skyrocket and people have to sort of choose what they’ll eat this year. A commodities market enables the producers of these commodities to offload risks to speculators, and that enables stable prices.”
“I think that’s what you’ll see when large players enter the [cryptocurrency] market and distribute the currencies,” he continued.
“When a currency and large institutions are trading it, it will become stable; when a stock goes from a penny stock to a bigger stock after a while, when its market cap increases and it starts stabilizing–it’s simply because it’s much easier for a large amount of money to cause a price shock when the market cap is small vs. when the market cap is huge. It’s very difficult to see a price shock [then].”