Crypto custodian Hex Trust says the recent merger of stablecoin TerraUSD (UST) and its sister token Luna will herald greater intervention from regulators, paving the way for more asset managers to join the crypto space.
ong Kong’s Hex Trust had worked closely with Terraform Labs when the Singapore-based firm’s crypto tokens UST and Luna crashed early last month. The crypto custody firm said it had managed to avoid the “bloodbath” by liquidating its collateral positions in the days before the implosion.
Hex Trust had seen the warning signs began to emerge over the weekend of May 7-8, when investors began withdrawing their funds from Anchor Protocol, a crypto lending platform that promised interest payments of almost 20% for UST deposits. Over the next two days, the UST lost its peg to the US dollar, plunging as much as 25%, according to tracker CoinGecko.
Although Terraform Labs was one of the investors in Hex Trust’s $88 million funding round announced in March, the crypto custodian said it had not received any information from Terraform Labs as it progressed. extent of collapse. Terraform Labs, which also developed Anchor, suspended UST’s trading line with other stablecoins in a clear sign that it could no longer defend UST’s value.
“Fortunately, we are very cautious from a risk perspective,” Hex Trust co-founder and CEO Alessio Quaglini said from the company’s Hong Kong headquarters. “We’re still over-collateralized, so we haven’t had to take any loss on the secured lending side.”
Hex Trust is a crypto custodian company that protects customers’ private keys – the passwords that allow users to send and receive cryptocurrency – from theft or accidental loss. Custodians generally earn fees for holding assets so that asset managers can focus on investment decisions.
Quaglini thinks custody is going to be the “secret ingredient” for the development of the blockchain industry in the long term, as companies like his enable traditional financial institutions to safely navigate the fast-moving and volatile crypto markets.
In fact, the recent selloff could prove beneficial, according to Quaglini, as it should spur regulators to become more involved in crypto markets, which in turn will drive faster adoption by institutional investors than his firm. serves.
In early June, the Japanese parliament passed a landmark law that requires stablecoins to be pegged to legal tender and guarantees holders the right to redeem them at face value. Meanwhile, a bipartisan pair of US senators have introduced a crypto bill that includes stablecoins, and the UK government has proposed changing existing rules to give the Bank of England the power to manage crypto issuers. failing stablecoins.
The crypto market is now in the “hospitalization triage” phase, according to Quaglini, with many investors are still assessing the damage and reorienting their portfolios. “I think the beauty of this market is that it readjusts very quickly and dynamically,” he said.
The crypto industry has seen nearly $800 billion in wealth evaporate since May, according to CoinGecko on Tuesday. Luna, which was created to help keep the UST pegged to the dollar, crashed to near zero.
Prior to the collapse, CoinGecko data shows UST’s market capitalization peaked at $19 billion in early May., and Luna’s had peaked at $41 billion in early April. But the two cryptocurrencies combined had fallen to around $1 billion by the end of May. The implosion wreaked havoc on Terra, the blockchain that had hosted more than 100 decentralized applications and had nearly 4 million users.
Allegations have recently circulated on Twitter and in unconfirmed media reports of Do Kwon, the CEO and co-founder of Terraform Labs, raking in $80 million a month before the crash. The contractor, however, denied the allegations.
Meanwhile, Terraform Labs would face investigations from the U.S. Securities and Exchange Commission over whether the company’s marketing of UST violated investor protection laws, according to a Bloomberg News report. Terraform Labs is also reportedly being investigated by South Korean police for allegations that its staff misappropriated some of the company’s bitcoin holdings, the FinancialTimes and Bloomberg reported. The investigation comes after a group of South Korean investors filed a lawsuit against Kwon and his founding partner Daniel Shin on two counts, including fraud, local news agency Yonhap said last month. .
Despite all of this, surprisingly, some crypto traders continue to voice support for Terraform Labs’ decision to relaunch the Terra ecosystem, which includes the launch of a new blockchain that ditches UST and only runs on a new version of Luna. . To provide customers with access to claim the tokens, Hex Trust, along with several crypto exchanges such as Huobi and Kucoin, have also supported Terra’s comeback.
“Anchor’s extreme growth rate was what essentially brought the whole blockchain to a point where the total value locked in the UST stablecoin was too large for the market capitalization of the Terra blockchain itself,” Quaglini said. .
“Other than that, what Terra had built was really impressive and the community was quite large,” he added. “So I wouldn’t be surprised if the community continues to believe in what Terra has built.”
But others remain skeptical. The debacle has clearly shaken investor confidence in the Terra ecosystem. This doubt seems to be reflected in the price of the new Luna, which fell 77% in the hours following the relaunch of the Terra blockchain on May 28, according to CoinGecko. The crypto coin settled at around $2.5 on Tuesday.
Hex Trust, meanwhile, announced a day earlier that it would also begin offering customers access to decentralized applications built on Polygon, a rival blockchain that recently launched a multimillion-dollar fund to attract investors. projects away from Terra.
“The idea of Do Kwan starting a new project with the same leadership and different incentive mechanisms is really hard to get investors and developers on board,” said Thomas Dunleavy, principal analyst at crypto data firm Messari. . “It’s almost just speculation at this point. I don’t see where there is long-term viability for a fundamental investor. »
Licensed in Hong Kong and Singapore, Hex Trust has been managing crypto volatility since day one. It was founded during the “crypto winter” of 2018, when hundreds of token projects collapsed, prices plummeted 80%, and trading volume declined for months.
Quaglini’s introduction to the world of crypto came during a coffee chat in 2014, when a fellow banker described to him how bitcoin could potentially disrupt traditional banking and finance. Quaglini said he was immediately captivated by the technology and then made his first bitcoin purchase at around $300.
“It doesn’t happen very often in your life that a new asset class hits the market,” said Quaglini, who most recently worked at First Abu Dhabi Bank after working at Spanish lender BBVA and the commission Italian securities. “All other asset classes are more or less similar in terms of being managed by centralized entities, but cryptocurrencies are completely disruptive,” he said.
The 39-year-old founded Hex Trust in partnership with Rafal Czerniawski, former technical head of investment bank CLSA. The duo spent around two years preparing to launch their custody platform and onboarded the company’s first batch of customers in late 2019.
Last March, Hex Trust jumped on the NFT bandwagon and became the first licensed custodian to offer blockchain-related artwork and other digital collectibles for institutional clients. Since then, it has grown even further by partnering with Animoca Brands, the Hong Kong-based blockchain powerhouse, in a joint venture to create an NFT wallet for gamers.
“This is a unique opportunity to partner with the most successful player in the ecosystem, and to have the opportunity to really evolve our platform and offer it to millions of customers playing in the most famous blockchain games,” Quaglini said.
As part of this partnership, players of Animoca titles, including the flagship metaverse game the sandbox, will be able to store their in-game assets with Hex Trust. The company’s portfolio will be integrated into Animoca’s investment portfolio of over 340 NFT-related companies and blockchain projects, and possibly others outside the Animoca ecosystem.
“There is no win-win scenario here…it is quite common for investors to hold assets in multiple places, much like how people hold money in multiple bank accounts,” Yat Siu said. , co-founder and president of Animoca. “I definitely see Hex Trust being one of the leading ones there.”
Although Quaglini says child care is a secret ingredient, word is spreading. Crypto exchanges like Brian Armstrong’s Coinbase and Cameron and Tyler Winklevoss’ Gemini have already acquired their own custody infrastructure companies. Meanwhile, digital payments giant Paypal has bought a crypto security startup and BNY Mellon, the world’s largest custodian bank, has formed a new unit to help customers hold, transfer and issue digital assets.
Hex Trust, for its part, is currently in the process of setting up a new regional hub in Dubai, Quaglini said. The expansion plan comes after Dubai approved a new law that regulates virtual asset businesses, including trading and custody services in early March. The new legislation has already attracted billionaire Changpeng Zhao’s Binance, Sam Bankman-Fried’s FTX and several other crypto exchanges to set up shop there. Quaglini said Hex Trust also plans to establish additional regional offices in Europe and the Bahamas.