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Elliptic asks the “Big Crypto Questions” to Alessi Quaglini – CEO and co-founder of Hex Trust – in this series that aims to draw insights from leading figures in the crypto industry.
How did you first get involved in the crypto industry?
I was first introduced to the crypto world in 2014 during a coffee conversation with a fellow banker. He explained to me how Bitcoin could potentially disrupt banking and finance, which immediately caught my attention. After diving deep into the technology, I became fascinated, which led me to buy my first Bitcoin for around $300. It’s not very often that a new asset class hits the market in your lifetime, especially one as completely disruptive as cryptocurrencies.
I continued working in banking for several years until in 2017 I met my Hex Trust co-founder Rafal Czerniawski, who was the former head of technology at investment bank CLSA. After our shared passion for blockchain became apparent, we both realized the huge potential of building an institutional custody platform for digital assets, as at the time there were mostly only retail platforms available for asset protection. At that moment, the idea of Hex Trust was born.
What do you see as the most challenging in the crypto industry (and what are the opportunities)?
One of the biggest challenges is education, especially when it comes to the importance of using custodians to safeguard your digital assets. Many times, unfortunately, people often learn too late that you shouldn’t blindly trust centralized entities to hold your digital assets, as was learned during the FTX, Celsius, Voyager and 3AC crashes.
The Hex Trust was established to minimize this risk. We do not use client assets to generate returns for ourselves. The custodian – or its creditors – never owns the assets of the clients. We also ensure that clients’ assets are legally and technologically separate from Hex Trust’s assets, and we cannot use the assets for any purpose other than what the client orders. All of our client’s assets belong to the client and are traceable on chain, available for withdrawal at any time.
Even if clients are educated about this fact, another challenge we face in the psyche of crypto market participants is greed. People often know they should minimize their risks, but are seduced by promises of incredible gains and returns by using these centralized entities where they relinquish ownership of their assets. And often the lesson is learned only when it is too late.
If you could change one thing about the industry, what would it be?
The digital assets industry has a tremendous amount of positives, including its disruptive nature, rapid experimentation, resilience of market participants, and culture of hard work by dedicated individuals who build long-lasting markets. Each aspect has a role to play in creating an exciting sector that has captured the world’s attention in recent years.
The biggest negative has to be that with all the rapid growth and experimentation, unfortunately, there are failures, and projects don’t work for a variety of reasons. This causes investors to lose money, and due to the nature of the industry, a large part of the losses are borne by small investors.
When large funds and institutional investors lose their money in investments that fail, they realize that this is part of the game. Their investment strategy recognizes that there will be a percentage of failure, so they have risk management and asset allocation policies in place to protect them.
Unfortunately, this is not often the case for small investors. You hear too many stories of people losing their entire life savings because they held their assets with centralized entities that failed, or invested in tokens that went to zero. Ensuring retail investors are protected through regulation and effective policies would be one thing I would change. Yes, fortunes can be made, but stories of lives being seriously affected have been all too common over the past year.
What do you think will change in this industry in the next five years?
Previously, the only real use case that worked for blockchain technology was decentralized finance (DeFi). We’ve seen platforms like Aave and Compound have billions of dollars in loans processed using their oversecured lending protocols. Then we saw the launch of collateral-free lending protocols like Clearpool, which I co-founded, building for institutional adoption of DeFi.
Since then, however, we’ve seen the emergence of GameFi, Web3, and non-fungible tokens (NFTs) that will rapidly increase over the next five years. This thesis is one of the reasons why we launched Gryfyn, a joint venture with Anomica Brands. It is an institutional digital asset wallet and retail financial service to interact with the Web3 and the metaverse.
To date, most users of digital assets must be tech savvy. Setting up hardware wallets, sending transactions and storing your assets securely can be complicated. Moving forward, we’ll see simpler user experiences and platforms where you have no idea you’re actually interacting with blockchain technology at first glance.
What do you most like to do in your free time?
I’m a big fan of tennis – I play and watch. I was able to visit Wimbledon last year, which was an amazing experience. You can also find me on the slopes regularly boarding. I also recently became a father, so there is nothing I would rather be doing now than spending time with my family.
What role/responsibility do you have in the company?
As CEO of Hex Trust, my role and responsibilities are to lead the team, set the vision, manage stakeholders and investors and build the culture for our growing company which now numbers over 170 people.
The exact responsibilities have changed since we launched Hex Trust in 2018. When we were an early stage startup, building trust and credibility in the market was the biggest challenge and focus. Now that we have secured that trust, my biggest responsibility is to ensure that it remains and that we continue to build and evolve with the ever-changing market dynamics.
What do you think about regulatory development – scope, timing and fragmentation – and what steps can be taken to improve it?
One of the most important steps regulators can take is to make it mandatory for centralized crypto companies (especially exchanges) to use a qualified custodian to hold client assets. If that were the case, then we wouldn’t have seen stocks fall like FTX over the past year. It is imperative to protect users and ensure that their assets are held in segregated accounts, using fully licensed, independent and “qualified” custodians.
It is vital that regulators enforce this to ensure that with a custodian, all client assets are legally and technologically segregated, available for public scrutiny via block explorers, and secured. Also, it is crucial that the centralized entity discloses assets as well as liabilities so that everyone knows the state of the company you are dealing with. The sooner jurisdictions regulate and enforce this, the sooner we will have a healthier crypto market for all participants.
As regulatory frameworks begin to evolve, what changes do you think will be necessary for your role, your teams and the compliance organizational structure itself?
At Hex Trust, we welcomed the regulatory frameworks that would be introduced from the very beginning of our journey when the idea was formed in 2018. We knew institutions were coming, and we knew regulation was coming, so we built Hex Trust from the ground up with this vision of the future.
We welcome increased compliance policies, more advanced and thorough global regulations and further appropriate licenses to be awarded to companies that build the right way. We are committed to this vision and are continuously optimizing our compliance policies, security framework, operational controls and obtaining licenses in key jurisdictions globally.
Our goal is to stay one step ahead of regulators so that when licenses and policies are introduced, we will be the first company to be able to obtain them. A great example of this is Dubai, where Hex Trust was the first virtual asset custodian to be fully operational.
If you could send one message to regulators/legislators in Asia Pacific, what would it be?
One of the toughest jobs for regulators is that the industry is moving incredibly fast. Inevitably, you will always be a step behind the industry, given how quickly technology advances. Just look at the last few years after the rise of Bitcoin and Ethereum, to the multitude of altcoins that were created during 2017. Then we had the rise of DeFi, the emergence of NFTs, GameFi, and now the metaverse. So we recognize that it’s a tough job for regulators to keep up.
What I would advise is to try to have a progressive policy that allows for experimentation without jeopardizing the investor’s funds. For example, forcing centralized entities to use custodians to protect client assets instead of allowing them to use these assets to leverage and lend for additional returns.
I would also advise regulators to create policies that will enable market participants to attract global talent, provide subsidies to encourage companies to set up shop in that region, and facilitate operations.
Which country’s regulatory regime or attitude towards cryptocurrency do you value the most?
There are many favorable regulatory regimes in the world, many of which are the ones under which Hex Trust is licensed today. We are set up to serve the global market 24/7 in a multi-jurisdictional manner. Our most recent active market is Dubai, where we became the first fully operational virtual asset custodian.
Over the past few years, Dubai has made significant strides to become a global crypto hub by actively promoting the use and adoption of blockchain. One aspect that stands out is that their government has a ‘metaverse strategy’, which is positive to see. Their goal is to attract more than 1,000 companies to the sector, creating over 40,000 virtual jobs by 2030 by fostering innovation, establishing a collaborative environment and developing global standards in building safe and secure platforms for users.
Alessio Quaglini is the CEO and co-founder of Hex Trust
Regulation on compliance with the law
