Crypto custodian Hex Trust says the recent collapse of stablecoin TerraUSD (UST) and its sister token Luna will herald further intervention from regulators, paving the way for more asset managers to join the crypto space.
Ong Kong’s Hex Trust had been working closely with Terraform Labs when the Singapore-based company’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 nearly 20% for UST deposits. Over the next two days, UST lost its peg to the US dollar, falling 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 did not receive any information from Terraform Labs as the crash unfolded. Terraform Labs, which also developed Anchor, discontinued UST’s line of trading with other stablecoins, a clear sign that it could no longer defend the value of UST.
“Fortunately, we are very conservative from a risk perspective,” Hex Trust co-founder and CEO Alessio Quaglini said from the firm’s Hong Kong headquarters. “We are always over-collateralized, so we didn’t have to take any losses on the collateralized loan side.”
Hex Trust is a cryptocurrency escrow company that protects customers’ private keys (the passwords that allow users to send and receive cryptocurrency) from theft or accidental loss. Custodians typically earn fees for holding assets so asset managers can focus on investment decisions.
Quaglini believes that custody will be the “secret ingredient” for the long-term development of the blockchain industry, as companies like his enable traditional financial institutions. to safely navigate the rapidly evolving and volatile crypto markets.
In fact, the recent sell-off may prove beneficial, according to Quaglini, because it should encourage regulators to get more involved in crypto markets, which in turn will encourage faster adoption by the institutional investors his company serves.
In early June, Japan’s parliament passed a landmark law requiring stablecoins to be pegged to legal tender and guaranteeing holders the right to redeem them at face value. Meanwhile, a bipartisan pair of US senators has introduced a cryptocurrency bill that includes stablecoins, with the UK government proposing to amend existing rules to give the Bank of England the power to manage failed stablecoin issuers.
The crypto market is now in the “hospitalization triage” phase, according to Quaglini, with many investors continue to assess the damage and refocus their portfolios. “I think the beauty of this market is that it readjusts very quickly and very dynamically,” he said.
The crypto industry saw nearly $800 billion worth of wealth evaporate since May, according to CoinGecko as of Tuesday. Luna, which was created to help maintain UST’s peg to the dollar, plummeted to near zero.
Before the crash, data from CoinGecko shows that UST’s market capitalization had peaked at $19 billion in early May., and Luna had peaked at $41 billion in early April. But the two cryptocurrencies combined were down to around $1 billion at the end of May. The implosion wreaked havoc on Terra, the blockchain that was home to more than 100 decentralized apps and had almost 4 million users.
Accusations have recently been circulating on Twitter and in unconfirmed media reports about Do Kwon, the CEO and co-founder of Terraform Labs, cashing in $80 million a month before the crash. The businessman, however, has dismissed the accusations.
Meanwhile, Terraform Labs is reportedly facing investigations by the US Securities and Exchange Commission into whether the company’s marketing of UST violated investor protection laws, according to a report by Bloomberg News. Terraform Labs is also said to be under investigation by South Korean police over allegations that its staff embezzled some of the company’s bitcoin holdings, the financial times and Bloomberg reported. The investigation comes after a group of South Korean investors filed a complaint against Kwon and his founding partner Daniel Shin on two counts including fraud, the local Yonhap news agency said last month.
Despite all this, surprisingly, some crypto traders continue to express support for Terraform Labs’ move to revive the Terra ecosystem, including launching a new blockchain that ditches UST and runs solely on a new version of Luna. . To provide customers with access to claim the tokens, Hex Trust, along with various crypto exchanges like Huobi and Kucoin, have also supported the return of Terra.
“Anchor’s extreme speed of growth was what basically brought the entire 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 pretty big,” he added. “So I wouldn’t be surprised if the community continues to believe in what Terra has been building.”
But others remain unconvinced. The debacle has clearly affected investor confidence in the Terra ecosystem. that doubt appears to be reflected in the price of the new Luna, which fell as much as 77% in the hours after the Terra blockchain relaunched on May 28, according to CoinGecko. The crypto currency settled at around $2.5 as of Tuesday.
Meanwhile, Hex Trust announced a day earlier that it will also start offering customers access to decentralized applications built on Polygon, a rival blockchain that recently launched a multimillion-dollar fund to attract projects outside of Terra.
“The idea of Do Kwan starting a new project with the same leadership and some different incentive mechanisms is really challenging to attract investors and developers,” said Thomas Dunleavy, a senior analyst at crypto data firm Messari. “It’s almost all 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 cryptocurrency volatility since day one. It was founded during the “crypto winter” of 2018, when hundreds of token projects crashed, prices fell by 80%, and trading volume dropped for months.
Quaglini’s introduction to the world of cryptocurrencies came during a chat over coffee in 2014, when a fellow banker described to him how Bitcoin could potentially disrupt traditional banking and finance. Quaglini said he was instantly sucked into the technology and subsequently made his first bitcoin purchase for around $300.
“It doesn’t happen very often in your life that there’s a new asset class on the market,” said Quaglini, who most recently worked at First Abu Dhabi Bank after working at Spanish bank BBVA and the Italian securities commission. “All other asset classes are more or less similar in terms of how they are managed by centralized entities, but cryptocurrencies are completely disruptive,” he said.
The 39-year-old founded Hex Trust in partnership with Rafal Czerniawski, former chief technology officer at investment bank CLSA. The duo spent close to two years preparing for the launch of their custody platform and onboarded the firm’s first batch of clients in late 2019.
Last March, Hex Trust jumped on the NFT bandwagon and became the first licensed custodian to offer blockchain-linked artwork and other digital collectibles to institutional clients. It has since expanded further by partnering with Hong Kong-based blockchain powerhouse Animoca Brands in a joint venture to build an NFT wallet for gamers.
“That is the once-in-a-lifetime opportunity to partner with the most successful player in the ecosystem and have the opportunity to really scale our platform and offer it to millions of customers who play the most famous. blockchain games,” Quaglini said.
Under the association, players of Animoca titles, including the flagship metaverse game the sandbox, you will be able to store your in-game assets with Hex Trust. The company’s wallet will be integrated with Animoca’s investment portfolio of more than 340 companies related to NFT and blockchain projects, and eventually with others outside of the Animoca ecosystem.
“There is no winner-take-all scenario here… it is quite common for investors to have assets in multiple places, just like people have money in multiple bank accounts,” said Yat Siu, co-founder and chairman. of Animoca. “I certainly see Hex Trust as one of the main ones.”
Although Quaglini says custodial services are a secret ingredient, word gets out. Cryptocurrency exchanges such as Brian Armstrong’s Coinbase and Cameron and Tyler Winklevoss’s Gemini have already acquired their own custody infrastructure companies. Meanwhile, digital payments giant Paypal has bought a cryptosecurity startup and BNY Mellon, the world’s largest custodian bank, has formed a new unit to help customers protect, transfer and issue digital assets.
Hex Trust, for its part, is now busy setting up a new regional center in Dubai, Quaglini said. The expansion plan comes after Dubai passed a new law in early March regulating virtual asset businesses, including trading and custody services. The new legislation has already enticed billionaire Changpeng Zhao’s Binance, Sam Bankman-Fried’s FTX, and several other crypto exchanges to settle there. Quaglini said Hex Trust also plans to set up additional regional offices in Europe and the Bahamas.