Transcript of our Q&A #6
In this Q&A episode 6 we have a very special guest, Nick Kuria from Purpose Investment, Canada who is the issuer of Purpose Spot Bitcoin and ETH ETFs. Then we cover 2 important twitter threads on interoperability in blockchain space that our users need to be aware of, and we’ll finally analyze the Binance Bridge DeFi hack. In summary, here is what you will be learning about:
Question 1. Tell us about Purpose Investment and what you offer, and how you are involved in the crypto space.
Question 2. What is your take on Coinbase/Circle and how a stablecoin issuer generates money? How is this different/similar to the Purpose cash management Fund?
Question 3. Can you explain why Canada has a BTC and ETH Spot ETF whereas the US does not? Any comment on if Blackrock's recent announcement would make it a reality with its partnership with CF Benchmarks?
Twitter Thread #1: SWIFT is working with Chainlink on a Cross-Chain Interoperability Protocol
Twitter Thread #2: Circle to launch Cross-Chain Transfer Protocol for USDC
DeFi Hack Analyzed: Investigating the Binance Bridge hack which resulted in initially $500+ million stolen.
So, Nick, thanks for joining us today. Can you tell us a little bit about Purpose Investments and what you guys offer, and how are you involved in the crypto space?
Thanks, Pratik. Thank you for having me. I'll give you a little bit of background about purpose investments. Purpose Investments is part of Purpose Unlimited, and Purpose Unlimited is a financial technology company. We are innovation-led. We're based out of Canada, and we've got three business units. We have Purpose Investments, which is an asset management business, and purpose investments launched the world's first, Bitcoin and Ether Spot ETF. We have a second business unit called Purpose Advisor Solutions, which is focused on building out technology platforms to enable, advisors to build independent advisory practices. And then we have a third business called Driven, which specializes in providing small businesses with credit and loans. So that's sort of the Purpose’s family of companies. I joined Purpose about six months ago.
My background is sort of a bit eclectic. it's a combination of, I started in management consulting. I'm an electrical engineer, sort of by trade. I spent some time in corporate development, and deal-making effectively. I then also led a technology-enabled venture, So started a new venture, and scaled that. I joined Purpose, recently as, as head of Crypto and, really focused on, building upon a leadership position that we've developed, in launching the world's first Bitcoin and Either ETFs, and growing that platform because, again, we have a deep thesis on crypto and, we certainly recognize some of the potential and capability that crypto offers. So excited to join and happy to talk about the space.
Great. Fascinating. I would have a question, leading on to crypto and Purpose Investment involvement. What would be your take on Coinbase-Circle, and the way that stablecoin issuers generate money, and how is this similar to or maybe different from than Purpose Cash Management fund, but on a broader spectrum maybe you can talk also about stablecoin and how institutions can benefit from it.
Yeah, so look, I mean, I think there's been a lot of chatter around stablecoin, especially given sort of what happened with Terra and Luna and I think it's, it, it can become a bit of a trap to sort of paint, stablecoins with one brush, right? You have to sort of step back and ask yourself, what, role stablecoin plays? and they play a very important role. when you think about the crypto economy and the crypto ecosystem part, part of what you know is going on is, we're building a decentralized banking system, right? Like a decentralized financial system, in the crypto space. and one of the core components and core foundational building blocks that's gonna be required to do that, is this concept of a stablecoin because, ultimately, financial, systems are built on trust, right?
And, although, the first crypto assets, Bitcoin, Ethereum, and others, they've proven to be very resilient networks, one of the big criticisms of the crypto has been the extreme volatility, right? and when you think about it, people trusting crypto and the ecosystem, as a store of value, as a financial form of, of representation, you have to have that level of trust. And it's really hard to do that when the volatility, is quite high. like, think of just basic products, you think about like the most basic financial principle, which is lending, bringing together people who have capital and people who need capital and connecting them.
How, how do you lend on a product where the value is so volatile? It just becomes, fundamentally difficult to do that. And that's where the role of something like a stablecoin comes in. What a stablecoin allows you to do is it allows you to sort of, provide a bit of a scaffolding and almost like, provide a crutch that says, look, we're gonna smooth out the volatility. Now, how do we implement stablecoin? There's a variety of schools of thought but when you think about stablecoin, there are a couple of different types. So, we know what circle has launched, which is an asset-backed stablecoin, which is pegged 1-1 to US dollars.
Essentially what they're saying is, look our coin is worth 1 US dollar, and the reason it's worth 1 US dollar is because we have dollars in reserve that backs the value of it. So that to me, is just a very easy intuitive concept. So I think, it plays a really important role. How they generate money, that's where the slippery slope comes in. If you're Circle, you're sitting on all these reserves of US dollars, and they're just sitting there. And on any given day, I'm sitting on this reserve of US dollars that's earning me almost no interest, maybe sitting in, some bank account. And then the temptation comes in. Well, why don't I, invest this in T-bills? They're quite liquid and relatively safe. Then you follow that logic and it's like, well why not increase the duration of those T-bills? You earn a little more yield. Then it's like, wait a minute, here's a safe investment; it's a mortgage-backed security, backed by the government! And so, you can start seeing that progression, of risk like a classic risk-return curve. The more risk you take, the more return you get, and when you're sitting on a pile of reserves, the temptation to generate those returns becomes increasingly large.
It's gonna be really important for there to be some discipline in having these stablecoin issuers manage their reserves. Some of it is also buyer-beware, right? So unlike, a fiat government-backed currency where, by law, governments can legislate the use of a currency in a country. I think with stablecoin, there needs to be a little more diligence on the part of the user. and I think, at the same time that there probably needs to be some form of discipline, that the industry enacts, and if the industry doesn't enact it themselves, at some point, regulators are gonna force them to do it. So, you have the choice, either you self-discipline yourself or you wait, until some bad actors create scenarios that attract attention. That's how I'd look at the stablecoin ecosystem, but fascinating space I would say.
Insightful. I would have a follow-up question regarding, what you mentioned about discipline for those stablecoin issuers. So what would be, in your opinion, the safest or more secured way to manage the treasury, basically the reserve of a stablecoin issuer? So you mentioned T-bill, but, would you think that there's another way to generate some type of yield on those reserves?
This is a classic cash management strategy. And you always have to balance your yield with liquidity and risk. On the liquidity side it's like, if you ever have a run on the coin, you have to be able to honor those redemptions. Can you access liquidity? Any instrument that's being used that's a top consideration, comes down to sort of a blended approach. You may see a world emerge where there are different grades of stablecoins, just like today there are different levels, of cash investments.
Like you could put your money in a money market fund, you could put it in a high-interest savings account, you can put it in a checking account, you could put it in a term deposit. There are just so many options. And they each have their own sets of characteristics, they pay different yields. You could lend out your cash as private credit. You might actually see different stablecoins that get issued, backed by different treasury management strategies. And each of those may carry different risks and different rewards. So you might have, a stablecoin that yields 2% that is very safe, and it's all in, sort of highly redeemable T-bills. Or maybe even held in cash and so you could have that on one end, and then you might on another end have, a stablecoin issuer that says, we're going to hold a diverse portfolio of generally low-risk assets. So that could be how the landscape evolves.
So Nick, coming back to ETFs, Purpose is the first to launch a spot ETF for Bitcoin and Ethereum. I'm wondering why is US lagging, why was Canada, a go-ahead with spot ETF, but the US is still holding back? With BlackRock's collaboration with Kraken and Coinbase, do you think those things are gonna make it happen? Or are there some other reasons why this is not happening in the US and it already happened in Canada?
There are a couple of things. One of the major hurdles as to why spot crypto funds have not emerged yet, is purely regulatory. The SEC has not approved and the logic that they've provided, at least my understanding is, they've deemed crypto, Bitcoin and Ethereum as commodities, not securities. There's a test that the SEC applies. It's called the 'Howey Test’. And the 'Howey Test' has four prongs to it and the 'Howey Test' is used by the SEC to determine where they have jurisdiction. Then there's another regulatory body and, I'll butcher the acronym, that regulates, commodities.
So what the SEC has effectively said is, look, crypto fails 'Howey Test'. It fails the 'Howey Test' for the fourth prong, which suggests that ‘is the value generated, through the efforts of others?’ And the argument is, Bitcoin, Ethereum, don't generate their own cash flows. It's not like there are people out there that are management of a company that is trying to increase the value of Bitcoin. Bitcoin just trades because of supply-demand, or Ethereum, is the same thing. Given that that's the SEC's interpretation, they've effectively said that we don't have full jurisdiction over this, therefore, we need collaboration with another government regulator to do it.
That's where the roadblock sets in because now all of a sudden you've got two regulators that have to collaborate to make this happen and build alignment. It's already difficult enough to get over the bar with one regulator. Now you gotta coordinate between the two. and I think that's probably, one of the big reasons that, that this is being held up in the US, right? and I think in Canada, ultimately, look, we, we, we received approval from the OSC, to go forward. and so I think, they had a bit of a different interpretation on, on how to sort of, how they would classify cryptocurrencies.
So, it’s an interpretation dilemma. The thing that BlackRock, some of the partnerships that they're exploring and others as well, many players are trying to make this happen in the US. I'd say any sort of this initiative is a good thing because it means people are trying. And they're having the dialogue, they're testing, they're experimenting. At some point, those experiments will create the impetus for regulators to look at this and make it a priority and find a solution. Because if the market demands it and needs it, it needs to be solved.
That's one part of the story. And then the other part, that the SEC, has also talked about is, this idea of being concerned with market manipulation. They're still looking for some sort of satisfaction to reassure us that investors are protected and that these markets are not prone to market manipulation and that one's a bit trickier. Structurally it's a bit trickier because crypto in some form is permissionless. You don't really know who's behind the scenes and you don't know who's acting on whose behalf. That is a tricky area to navigate, but I think they're solvable. We've got centralized exchanges and there's KYC AML, there are all sorts of processes that you can put on it. So I don't believe that that's gonna be the hold-up. I think it's really around getting two government agencies to coordinate.
Interesting. I definitely share this, point of view. Almost like, at some point, there will be too many institutions or regulated, if I could say that are entering crypto, like BlackRock, and Nasdaq, pushing regulators to, do the work, although they're doing it right now, spinning it up. And I would say BlackRock, the deal might have been in the works for quite some time since they announced it. that's not something that they can just, do with the snap of a finger. so definitely sharing this point of view that more entrants, will spark, better regulation and hopefully on board, even more institutions, into the space.
Yeah, there are many examples of this. You look at the taxi industry and Uber. They operated in the gray area for a long time, and we're starting to see their emergence. Airbnb is the same thing. You're seeing regulations emerge. Because it's too big now. You can't put the genie back in the bottle. People already use it in such a widespread manner. I think it, let's call like 20-25% of the population have bought or sold crypto. It’s not a niche. It's quite a widely used product.
You have advisory services as well. I'm just curious, are you advising anybody in the US to launch ETFs, or are you planning to launch an ETF if they approve if the regulations happen to be favorable?
No, our advisory solutions business is geared towards financial advisors. You call them Registered Investment Advisors, RIA. These are financial planners, financial advisors that work with individuals and families to help them build a financial plan and manage their wealth. And so we have a business unit that focuses on building solutions, technology platforms, back office functionality, and portfolio management as a service, that provides all of those capabilities to financial advisors so that they can run their own independent practice. We allow advisors to operate in different models so they can retain their brand. If you had your own financial advisory practice with your brand, we would power that in a white-labeled manner.
Got it. Jerome, do you wanna add anything to it? Any final words?
Um, I would say, yeah, on the institutional adoption, we recently published a report talking about, the different barriers to entry that institutions face, most notably custody, access to, trading, and best execution, amongst other topics. And, readers can, can look for it on, our website here
Awesome, Nick, it was a very powerful, valuable lesson. So thanks for your time. Thanks for joining us today.
Okay. No, thank you guys. Appreciate it.
Take care guys.
SWIFT is the interbank messaging system that allows for cross-border payments and, Chainlink is a provider of price feeds and other data to blockchains. They are working on a cross-chain interoperability protocol (CCIP). This will enable SWIFT messages to instruct on-chain token transfers, helping the interbank network to communicate across all blockchains. Chainlink co-founder Sergey Nazarov said that this will accelerate the adoption of blockchains and benefit various institutions across capital markets. SWIFT’s Strategy Director Jonathan Solé said that one of the reasons working with Chainlink on CCIP has been successful is that there is “undeniable interest” in crypto from institutional investors. Traditional finance (TradFi) players want access to various digital and traditional assets on one network that can connect different types of asset classes
Coinchange Take: Well, there is no doubt that we need more interoperability in crypto. There are too many Layer 1 and Layer 2 chains each in different technical languages, making it harder for one to use their digital assets across all of them. So this partnership is a very good sign that the traditional payment rails that connect the major banks across the globe are experimenting with chainlink which is a very well-established protocol in the DeFi space. We will see how this initial proof-of-concept goes.
Speaking of Interoperability our second thread is also an announcement about Cross-chain interoperability.
Circle, the company behind the stablecoin USDC has announced the launch of a Cross-Chain Transfer Protocol that will support USDC interoperability. This new protocol is permissionless and enables USDC to be sent natively (not wrapped versions) across ecosystems, improving liquidity and reducing fragmentation of bridged assets.
Developers building wallets, bridges, payments apps, financial services tools & more will be able to deliver simple, cross-chain USDC transactions – simplifying the user experience and maximizing capital efficiency. developers can build new experiences that stack together the various functionalities and benefits of trading, payments, NFTs, gaming, and more.
@allbridge_io, @avalabsofficial, @avalancheavax, @axelarcore, @BitGo, @LayerZero_Labs,
@lifiprotocol, @SocketDotTech, @wormholecrypto will be the first to integrate Cross-Chain Transfer Protocol within their platforms. It is expected to go live later this year on Ethereum and Avalanche mainnet.
Coinchange Take: Again, this signifies there is so much need for cross-chain support for the native tokens. So far we have managed to use wrapped versions of USDC or USDT on chains that do not support the native assets directly. However, it is clear that the wrapped versions are not the most ideal way of expanding to new chains as the stablecoin issuers cannot track these wrapped versions or they cannot blacklist them in case of a hack. Overall this is a positive for the space and I think we will see other stablecoin issuers take this path as well.
BNB Chain, the blockchain, is composed of BNB Beacon Chain and BNB Smart Chain (BSC). BSC Token Hub bridge was exploited and the hacker took 2,000,000 BNB worth about $570m. The BNB Chain was halted after the exploit was discovered. A tweet from the official BNB chain Twitter account indicates the chain is back in operation after pushing out a software update to freeze hackers' accounts. The chain validators adopted a software update that would close the exploit used by hackers to drain funds.
But the way the attacker executed the exploit was by forging proof of validity on two separate blocks. This is the second hack of its kind, where Wormhole bridge suffered an exploit from a similar attack vector. In short, there was a bug in the way that the Binance Bridge verified proofs which allowed the attacker to forge arbitrary messages. Fortunately, the attacker here only forged two messages, but the damage could have been far worse.
An interesting thing to note is that Binance is the largest user of the Cosmos software. Binance Token Hub inherits from the Cosmos IBC repo. IBC stands for Inter-Blockchain Communication and “is a protocol for interoperability between different ledgers. It is being designed and implemented as a core component of the Cosmos network, where multiple tendermint based or non-tendermint based ledgers connect to each other.” as per Cosmos’ Medium. The crux of the problem is that a hacker was able to forge a Merkle proof. A Merkle proof is a cryptographic proof. Many blockchains store their data in a Merkle tree so that proofs can be produced proving some piece of data is included in the tree. Merkle proofs are used heavily in IBC so that e.g one blockchain can prove it has a packet destined for another. Of course, it would be a big problem if you could prove that some piece of data is in the tree but it actually isn't. This is basically what happened with Binance.
Coinchange take: What do we learn from this and how can Coinchange mitigate such risks?
Coinchange doesn’t participate in liquidity provisioning on bridges. So such hacks do not affect our user funds. Secondly, we must all take security seriously. This incident is an opportunity to remind everyone of the importance of strong security practices in the software development lifecycle, to spread some awareness of what IBC is and how it works, and to invite the entire ecosystem to help improve IBC. This should be true for the other types of bridge implementation across ecosystems as they are key to a successful interoperable crypto landscape.
This concludes our 3-2-1 Q&A Blog. We’ll see you in the next one, two weeks from now. Meanwhile, kick back and earn passive income using Coinchange. Sign up today!
In the world of cryptocurrencies, stablecoins have emerged as a digital medium of exchange with the stability of traditional fiat currencies.
Receive monthly news and insights in your inbox. Don't miss out!