The Holler

The institutionalization of cryptocurrency – a discussion with Phil Sham, CEO and Co-Founder of Aquanow

Episode Summary

A conversation with Phil Sham, CEO and Co-Founder of Aquanow to discuss the current landscape for investment in cryptocurrency as both corporates and institutions are beginning to legitimize its use as a store of value.

Episode Transcription

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Helen Hayes: Welcome to The Holler. I am your host, Helen Hayes. Please join me each week as I speak with industry experts and research analysts from around the world to bring you emerging trends and ideas that are impacting how we invest in global markets.

Phil Sham: This new digital economy in a secure framework. That can't come without working closely with the regulators and conveying that confidence to end users or investors into the space.

Helen Hayes: Welcome to The Holler. I'm delighted to have as my guest today, Phil Sham, Co-Founder and CEO of Aquanow on the institutionalization of cryptocurrency. As a bit of background for our Holler listeners, Aquanow is powering the next generation of digital financial services by providing digital asset liquidity, trading technology and infrastructure in both crypto and traditional financial markets. Welcome, Phil, so good to be speaking with you today. How's Vancouver?

Phil Sham: I'm doing great. Thanks so much for having me. I think the busy markets definitely help us keep our heads down through the Vancouver winter, but excited for summer to come and excited to be able to travel again soon.

Helen Hayes: Let's hope so. You know, when I look over the last year and I can't actually believe, Phil, that we're talking about a year, but here we are. We have seen a massive acceleration in digitization. And the most interesting thing is it's also really driven cryptocurrency and brought the topic in conversation in the markets around cryptocurrency, really front and centre. And when I think about cryptocurrency and maybe more specifically bitcoin, it's 12 years old now. It's amazing to think that its genesis was about twelve years ago. And when I look at the journey that we've gone on with cryptocurrency, whether we think of it from its beginning as a payment mechanism for Silk Road, I would say from a popular perspective, as a speculative asset for retail investors. But now I think we're seeing a structural shift as we are really starting to garner that interest from both corporates and institutions. And seemingly now we are making that structural move forward from it being viewed from an institutional lens. Cryptocurrency adoption seems really to be happening now, whether it's Tesla allowing you to buy a car with bitcoin or NHL paying their hockey players salary in bitcoin, how are you seeing cryptocurrency evolve?

Phil Sham: The recent macro development has definitely contributed to accelerate a growth in crypto in the past year. But if we kind of look back and look at how crypto has developed over the years, the annualized growth rates of cryptocurrency markets is around 150% since 2012.

Helen Hayes: Amazing.

Phil Sham: Yeah. So this has been happening for over a decade now and a lot of interesting things have been developed over time. If we look at the rally that had happened in the last year, I'd say there's a few things that look quite different from the past that we've seen. One is institutional focus. There's a lot of infrastructure that's been built, whether it's custody insurance, execution or connectivity in the past two years that have really met the needs for institutions to start to get involved. And if we actually look at the data, a lot of that activity is coming from North American institutional getting involved in crypto. If we look at the market buys versus market sells on Coinbase against the same data in Asian exchange, we'll see that the number is really positive in Coinbase. It's all really buyers in North America that's driving up this rally, very spot driven as well. We look at the Coinbase S1 reports, the latest state that they have is December of last year. 65% of their volume is institutional and that's up significantly from the past. The other interesting thing from the trader perspective is if you were to long bitcoin during North American hours and short bitcoin during Asian markets in the last eight months, you'll probably be seeing pretty persistent return on that bet. So that's also pretty fascinating, seeing a lot more involvement in our part of the world this time around.

Helen Hayes: Yeah. And Phil, you're giving someone a great trading strategy as we're talking through this, but so many people think it's just retail players in the market. And obviously what you're seeing is really the emergence of that institution. One fascinating topic for me, Phil, has been these headlines around the emergence of bitcoin on a corporate balance sheet. I just referred obviously to Tesla. We've seen Elon Musk put out tweets on his ownership of bitcoin and talk on the Reddit platform. What are you seeing in terms of the emergence of these players starting to buy bitcoin and incorporate them on to the corporate balance sheet and distribute crypto?

Phil Sham: Yeah, I think this has really come as a surprise to the industry is how the corporates are now looking at bitcoin as a substitute of cash in their corporate balance sheets. So we have Tesla, but we also have Square allocating 5%, we have MicroStrategy that's allocating basically almost all of their cash plus more and raising money to put more in. So we expect all these higher profile entrants to bring additional follow-ons into the market.

Helen Hayes: So how should we think about bitcoin in terms of its benefit for asset allocation?

Phil Sham: In fact, there is research from Ark that ran a simulation of portfolio optimization that shows that global institutions, if the objective is to minimize volatility in their portfolio, they should be allocating 2.5% to bitcoin. And if the objective is to maximize short ratio, they should be allocating 6.5% to bitcoin. To put this in context, that's two hundred thousand to five hundred thousand increase in bitcoin prices if this were to be adopted across the board.

Helen Hayes: One of the key topics that in 2021 people are focused on is this whole discussion, Phil, on inflation. And traditionally, if you look to hedge against inflation and portfolio construction, you would be thinking about gold. I wonder, is this Gold 2.0 and references to cryptocurrency? Is it too simplistic? And do you think it can act as a hedge for inflation?

Phil Sham: It's still very early on in the lifecycle compared to the history of gold. Bitcoin is around for just a little bit over a decade. But that being said, the way that I try to think about is I think there are some good properties of bitcoin that makes it attractive as a hedge. So bitcoin is scarce. You cannot print more bitcoin.

Helen Hayes: Yeah, there's a supply demand issue.

Phil Sham: Yeah, it's very easily accessible. It's portable and exchangeable. In fact, there's over one hundred countries that you can buy and sell crypto or bitcoin in a very frictionless way. But beyond that, I think about bitcoin beyond just the narrative around store of value. Last year alone, the bitcoin blockchain settled over a trillion dollars.

Helen Hayes: Unbelievable.

Phil Sham: That's a big number for the payment use case. If we look at North America and European firms, yeah, we can see a lot of the players that are coming into space. Weather now it's more of the traditional institutional investors or the retail investors that were coming in. But if we look at Middle East and Africa, for example, if you exclude the retail use case , like 50% of the transactions are attributed to merchants, whether it's on the payments or remittance use case, and it's growing very rapidly. So there are areas in the world, especially in the developing markets, that are using bitcoin in some other many different other use case as well. And we're seeing all those being developed over time. Going back, I think about inflation. Maybe one way to think about this is it's really an optionality bet on bitcoin being an inflationary hedge rather than it being a hedge.

Helen Hayes: Phil, if I think about the fact you used to work in capital markets and you've built out Aquanow from a trading and technology firm. When you take a step back, Phil, what have you seen really evolve in the market from a standpoint of arbitrage, whether it be bitcoin or an alternative cryptocurrency? And do you feel like the market is really starting to develop? I think you've mentioned a couple of times you're seeing a lot more institutional interaction in the market than you would have a year ago.

Phil Sham: Actually, yeah. In fact, a lot of those opportunities are what attracted me and my partners to start the company in the first place. Crypto is really an asset class and we kind of think like the market structure of crypto is really as global as it can get and it's really as fragmented as it can get. You get all these different markets running it that are non-standardized, different ways to express orders, probably a differentiated access in some of these markets, probably differentiated pricing when it comes to depending on who you are accessing in the markets. So that kind of market structure problem with something that really attracted me and my partners to enter the space to begin with. There's also, by the way, like no central clearing. At least people are building products around it, but there's no real central clearing when it comes to crypto. So for us, we have to build an internal tool to be able to allocate funds across different markets in real time based on conditions. And these are things that we never have to consider when we're trading Canadian equities, for example. Eleven different marketplaces, you just have express orders and assets. So all these frictions that comes with kind of an emerging market also creates a lot of opportunities for trading. I think a lot of times it's important to understand the risk that comes with taking advantage of these opportunities, because it could be the price discrepancy there, may be there for a reason, whether it's maybe credit risk related, maybe it's something to do with settlement. Maybe the code is never accessible. A lot of extra considerations have to be made. But it's definitely fascinating to be trading on this market.

Phil Sham: You said it brilliantly, right? I mean, this is evolving. And when you look at friction, you've got friction of, as you mentioned, settlement or credit risk and no central clearing. As the market evolves and we think about Aquanow, Phil, from a standpoint of your own platform and how you built it. And obviously, I think Aquanow is participating with larger firms all around the world. How do you and your co-founder think about as you continue to build out Aquanow, the role it's playing when you look at the evolution of the market in terms of how you're providing market solutions and really access.

Phil Sham: That's something that obviously we think about every day. Just for the viewer's perspective, Aquanow, what we do here is we provide liquidity infrastructure for cryptocurrencies like bitcoin and other digital assets. We're B2B. We service a large percentage of the Canadian markets and we have a pretty significant operations in other markets around the world as well. We work with a lot of different fintech companies and financial institutions that are distributing crypto or building crypto enabled financial services in the areas from payments, remittance, lendings and others that are exploring use cases when it comes to digital assets. And people work with us for a few different reasons. I think you mentioned earlier, which is access to markets. We have a pretty unique approach to liquidity. We built something that makes what we're seeing in traditional kind of capital markets where we take this quote unquote best execution approach when it comes to assessing liquidity. So we aggregate liquidity across global markets. We provide our customers with the single point of access to liquidity when it comes to encapsulating a lot of the problems that we mentioned earlier in terms of access and connectivity to allow our customers to kind of focus on the use case. And we also build a lot of the integrated solutions to enable different use cases ranging from washing infrastructure to different ways to express orders and to underwriting risks across the different parts of the transactions. And we process billions of dollars of monthly transactions across these use cases for our client partners. And we're excited to see all the development that's going to continue to happen in the space.

Helen Hayes: Phil, I would imagine, you just talked about, and this is something somewhat interesting, right, is that the cryptocurrency market seems like it's a twenty four hour, seven day a week market yet. Are you servicing clients twenty four hours a day, or how do you set up your infrastructure from a standpoint of supporting that? Because it is fascinating when you look globally and I can log on to Bloomberg at two o'clock in the morning and see a headline about cryptocurrency. So it doesn't seem that it's a market that shuts. Is that the right perception or am I thinking about it incorrectly?

Phil Sham: Nope, that's it. We run twenty four seven, three sixty five. Including any public holidays. And this is something that's making this market also very unique and interesting because you access any time of the day and in the digital age, there's really not too many reasons to not be able to do that with the technology that we have in our hands today. So that's interesting. I mean, from our perspective, we have an office here in Canada. We have an office in Hong Kong set up. We have traders in Singapore.

Helen Hayes: You're well staffed.

Phil Sham: We're staff. But most of the stuff is also done through automation. We're mostly engineers here, so we try to automate as much as we can. And then the humans are kind of the pilots that are piloting the machine that we built.

Helen Hayes: This is more for my own interest. Obviously, when we think about securities, equities, we think about it T plus two or a T plus three settlement. What would be a typical settlement on a bitcoin?

Phil Sham: Well, a bitcoin conference usually take on average ten minutes, but generally the constraint usually comes from the fiat side of the transaction. And actually client seller trades through our API in real time across a variety of different crypto currencies. And that's particularly important to some of the payment use cases and some other use cases. We do a lot of work in integrating this world and also too the banking system, whether it's like the open banking APIs in Europe and other ways to automate these processes. Though, another super fascinating thing about settlement is you look at Tether, which is a stable coin that's pegged to the US dollar. There's narrative around it. Why it might be. But the velocity of Tether, it's incredible. I think I saw a study, I think it's like over three thousand, the speed of which the settlement can go around, it's just incredible compared to like the banking system.

Helen Hayes: That's amazing. That's a good segue to talk about regulations. When I think about institutional mandates and covering institutional clients, regulation is key, right, depending globally. But if I think about Canada, I think obviously about our friends at IIROC. How are you and your partner as a firm in this industry? How are you seeing regulations evolving for cryptocurrencies here in Canada? I know that you're a member of the IIROC Crypto Asset Working Group, so I just wondered if there were things I'm assuming the regulator is spending quite a bit of time on this as this market continues to develop.

Phil Sham: Definitely tons of open dialogue between the regulators and the industry. The fascinating thing about crypto, it's changing so fast. Like if I had to guess what I would be doing today when we first started the company and the type of customers that we were servicing, I'll probably get it 20% right. It's like changing so fast and there's so much new concepts, new products that comes to the markets. And I think creating a generalized framework to fit all these in is probably quite difficult. You have tokens that look like payment tokens and you have smart contracts, you have tokens that frankly look like securities. And it's almost like they have to be looked at independently. But there are some themes that we're seeing in Canada and the US and even in Europe that has been emerging. And the most important thing from our observation has been AML risk.

Helen Hayes: Right. Of course, Anti-Money Laundering risks.

Phil Sham: That's right. And in Canada, the FINTRAC has come up with some framework for money service businesses for crypto businesses that specifically addresses transactions when it comes to digital assets. That's super helpful for industry participants here to kind of get some clarity in terms of how this is being looked at. The other areas that I think is important is investor's protection. And the CSA came up with a guidance last year with a proposed framework around trading platforms. We'll see around the custody of assets and protecting the ownership of these assets for the end customers. But we also see OSC taking actions on certain bad behaviour in the marketplaces. And I think that's just going to be an iterative process. And I was very impressed to see that how some of the work on the server inside and enforcement side that the regulators have taken effect on as well in this space.

Helen Hayes: Right, weeding out some bad actors. And also, I think it is important to show that accountability as those frameworks that you've talked about have continued to evolve, right? From an investor protection perspective.

Phil Sham: Exactly. And I think Canada, the regulators have done a really good job finding that balance between allowing innovation and protecting investors. And we work with most of the firms in Canada. And almost everyone we work with are working very hard, well intentioned companies that are really sharing the objective to open this market up for Canadians to allow them access to this new digital economy in the secure framework. That can't come without working closely with the regulators and conveying that confidence to end users or investors into the space. So I think it's just going to be an iterative process. We're just going to continue to see innovations coming out of Canada with the support of balance regulations. That said, we do have the first bitcoin ETF approved, right, in Canada. Regulators are really open for innovation and it's a really exciting place to be for crypto.

Helen Hayes: Yeah. It's Todd Coupland, our Technology Strategist at CIBC, has talked a lot about the next evolution of tech companies here in Canada. And I do think there's some very exciting things that are happening. And certainly crypto and this bitcoin ETF was fantastic to see that structure be launched in Canada as, again, we move towards that institutionalization and that accessibility of products, right, for mainstream. Obviously, Phil, if we think about one thing over the last year, bitcoin up over 500%, but we've seen a huge amount of volatility in the price of bitcoin and other crypto currencies. Robinhood has now become a common name that everyone knows about. And certainly one of the outcomes of the pandemic has been people working from home and opening up, I mean, the numbers are staggering in terms of people's first retail accounts. So with Robinhood and this phenomenon of day trading, certainly cryptocurrency has also been a key topic amongst what we'll call millennial investors. And I'd love to get your thoughts and really, from your own perspective, having a marketplace. What are your observations around the millennials? Most of us reading the paper headlines or The Holler listeners at home are seeing the headlines around Reddit and Twitter and Discord. And I just wonder how much of this information is perhaps incorrect or presented in a way that from your perspective, sitting front and centre, dealing with crypto trading every day, you have a different view.

Phil Sham: I want to address the volatility comment first around crypto. The way that I look at as volatility is really a feature of crypto, and without volatility, we're probably not going to get the attention that's needed and the adoption that's needed for this to become something that's mainstream. So I think volatility has to be there because we're so early on still in the evolution of crypto. Volatility has been coming down over the years and we expect that to continue to happen. But it's still a good feature to have to get the attention that the industry needs. In terms of the Robinhood situation, a few observations there. The millennials and Gen Z obviously grew up with emerging technology and if they're thinking about investing, high tech companies and cryptos are always been top of mind to that demographic. When we look at how information is disseminated and how communities are being built around these projects, the social media platforms has really played a huge role. The first thing I check in the morning is probably bitcoin price.

Helen Hayes: After that?

Phil Sham: And then it's Twitter and Discord and Reddit and these platforms, because this is where a lot of the projects or updates are posted in those channels. A lot of the community updates and your customer feedback is coming from those channels. So we spend a lot of time going through those social media channels to make sure that we're servicing our customers in the way that makes sense to them.

Helen Hayes: Interesting. When I think about it, when you talk about the opportunity to serve this demographic, right? And it's amazing to see the innovative products and that's attracting that millennial mindshare and capital. One of the things that's interesting to me is here in Canada, we're also seeing the evolution of the family office, the wealth client. And when I worked in Europe for CIBC, there is a whole huge family office community that's in Europe. And I think we're seeing that evolve here in Canada. The other thing outside of family office is also the introduction of the robo advisors as investors look for more economic ways to have access to the market. So when I think about whether it's robo advisors or the family office, Phil, how are you seeing those two verticals start to adopt cryptocurrency and their approach to accessing the market or their asset allocation?

Phil Sham: We've seen a lot of robo advisors like the Challenger banks. And in Europe, you mentioned a lot of electronic money institutions are getting heavily involved into crypto. And that, I think, has been a very positive impact on adoption. It provides broad distribution and legitimacy to the space. And what's also interesting is the introduction of these kind of retail distributors, I call them, hasn't really taken away volume or activities in some of the traditional kind of crypto businesses. So these are additional market entry that we're seeing in the markets. And I think that's also a really big plus and interesting data point that we observe. The family office crowd is interesting, I saw there was a survey in 2020, 9% of European family offices are now participating in crypto one form or the other. And I think the number in North America, it's around 5%. But this is the 2020 number. I can tell you the conversations that we're having on the sales desk here. It's at least ten fold in the last six months. So not every conversation results in a transaction, but there's definitely lots of conversations around thinking about crypto as part of the asset allocation strategy for these players.

Helen Hayes: You've touched on a lot of important points, whether it's family office or we're talking about an asset allocation call. And I think this is where the whole theme of, I feel like we're on the cusp of this whole institutional move towards adopting cryptocurrency within the investment framework. And when I think about digital wallets and I think about fintech, certainly here at CIBC, we have our own Challenger bank through our Simplii bank. We seem to be starting to see the digital bank of the futures evolve. I mean, we even saw this week a couple of folks leave Goldman Sachs and go to Wal-Mart as they start to look at their own digital bank. Now, we've talked about infrastructure, and I wonder if you could talk a little bit more for our Holler listeners, Phil, around what you mean by a use case. And as the industry evolves, when we think about the financial platforms, what are the interactions that you see or how do we move away from all these silos across the industry to what is a more inclusive industry overall?

Phil Sham: From the perspective of use cases, we're seeing so many different things that's being developed in the marketplace and so many experiments that's happening in the markets. Always, the biggest use cases is payments and remittance, microloans, how credit is being looked at. All these different verticals. We've seen a lot of interesting innovations around how to use leverage blockchain technology to potentially remove some of the frictions or reduce some of the cost when it comes to those type of service and clients and those type of instances. One of the things that really happened in the last two years in crypto is, a lot of the promises that the community made to everyone in a 2017 run, we now have the infrastructure to fulfil those promises. And whether it's infrastructure around allowing institutions to invest or infrastructure on the protocol level, that allows us to build really scalable high throughput use cases to service different type of traditional industries. I think those are all being played out as we speak. One of the really interesting features about blockchain is all these financial platforms that we mentioned that historically operate independently of each other can now really be programed to interact with each other. We've seen a lot of people doing a lot of interesting work to bridge a lot of these different business use cases together. There's still a lot of improvement that needs to be made. It's still pretty early on. I think that user interface needs to be vastly improved across the various applications in order for us to get adoption. But this is all happening as we speak.

Helen Hayes: As a Canadian bank, in terms of accelerating adoption, and as we look at market growth, how do you think the Canadian banks are positioned, but how can we help accelerate that adoption and market growth?

Phil Sham: We talk about a of the innovations that happen in the space. I think Canadian banks and global banks, they would need to lend the strong franchise that they have to help institutionalize the space for the safety and the benefit of all the investors and all the participants that are entering the market. There's a pretty high probability of success, in my view, that this is going to become the future. And we're already seeing a lot of the US, a more established institution, starting to get involved. Goldman just announced launching the cryptocurrency trading desks.

Helen Hayes: They did, yeah.

Phil Sham: BNY Mellon and JP Morgans are getting into the custody business. Fidelity has been involved in the space for a very long time. I expect Canadian banks will probably follow that route very soon.

Helen Hayes: Well, certainly you and your colleagues are front and centre of an evolving and developing market. Thank you so much for your time today. For our Holler listeners who are looking to learn more about Aquanow services, please go to Thank you so much, Phil.

Phil Sham: Thank you for having me.

Helen Hayes: Please join us next week for more insights from industry experts and up to date research calls from across our Global Markets platform. I'm your host, Helen Hayes, and this is The Holler.

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