Tuesday, 21 February 2023
by Berkeley Lovelace
When Stockhead sat down late last week with Adrian Przelozny, CEO of Independent Reserve, the chat ranged broadly – from crypto regulations and mainstream adoption, to bear-market headwinds, banking-sector perceptions and more.
It’s one of Australia’s oldest and biggest, fully licensed crypto exchanges, which Przelozny founded in 2013 with his best mate Adam Tepper, who introduced Przelozny to crypto in 2012. Tepper, who Przelozny cites as the visionary behind the business, was tragically killed in a motorcycle accident in Thailand in 2015.
In fact, Stockhead is speaking to the Independent Reserve boss the afternoon before the annual memorial day the exchange holds for its missed comrade. A day that usually involves go-karting or other car-related activities, as Tepper was an avid motoring enthusiast.
Przelozny’s background, like Tepper’s, is in IT consultancy but also software development, so his move into the crypto space seemed like a reasonably natural progression.
And since those early startup days for the exchange, when he said “few wanted to know”, when getting a crypto platform off the ground with regulatory approvals proved challenging, and when “people thought we were building a dark market”, he’s been able to help grow the business into a highly successful outfit with 80 employees and close to 300,000 customers.
One major feather in the exchange’s cap was achieving regulatory approval outside of Australia as well, in the Singaporean market – no easy feat. In fact it was the first crypto exchange in the world to gain a licence to operate from the country’s financial regulator and central bank, the Monetary Authority of Singapore.
Segueing into the topic of regulations, Independent Reserve helps, with other prominent exchanges and entities, to lead the way for the local industry in terms of its consultative and collaborative approach with government and financial regulators.
“Broadly speaking, our attitude to regulation has always been that it is going to be a necessary part of the industry if crypto is ever going to hit the mainstream,” noted Przelozny.
“Ever since we began Independent Reserve in 2013, we’ve always talked to the regulators, to ASIC, and we’ve always tried to encourage an attitude of consultation with the industry to create a set of rules that protects consumers and helps growth.”
Independent Reserve worked particularly closely with the Liberal senator Andrew Bragg and many others last year on bipartisan draft legislation for a regulatory framework for the crypto industry in Australia. It was a 12-point set of proposals that Przelozny believes addressed the balance of consumer protection and innovation-friendly regulations well.
“Unfortunately,” he says, “these legislative proposals haven’t had the traction they deserve.”
So where do you think the current government is at with regulations and its “token-mapping” audit of the industry?
“The Labor government wants to go kind of back to the beginning and, you know, figure out what tokens are out there, what they do and how to classify them, creating legislation based on that foundation,” replied Przelozny.
“I see the token-mapping exercise in two different lights. One – it’s a bit disappointing as we were quite close to having some pretty good draft legislation in place several months ago now. So I think we’re now at least 12 months behind where we could have been.
“But, the silver lining is, it’s at least encouraging that the Labor government is taking the industry more seriously now. And from reading through the consultation paper, it is quite encouraging seeing the amount of effort the Treasury has put into it. It doesn’t seem too prescriptive at this stage, which is a concern a lot of people had – it’s quite high level.
“I think they’re on the right path, but the frustration is it’s set us back as we’ve kind of been here 24 months ago. A lot of people in the industry tend to view it in that light.”
The US Securities and Exchange Commission, led by its chairman Gary Gensler, seems determined to crack down as hard as it possibly can on various sectors of the crypto industry in America. In particular staking-as-a-service and stablecoins, if its recent actions against Kraken and Paxos are indicative of wider policing aims.
With that in mind, we asked the exchange boss the following:
When thinking about regulatory framework in Australia, is there a worry that those wielding power here could be all-too easily influenced by what they see happening in the US?
“I think it’s a valid concern to have,” said Przelozny. “And we’ve already seen ASIC take some enforcement action against a few companies here. But I don’t think regulation via enforcement is the way to go, and I would like to think that’s not the path taken here.
“We first need a framework in place where everybody understands what the rules actually are so that they can play within them. Right now, the rules are very unclear.”
Do you have particular concerns about the targeting of exchanges and staking over in the US?
“There’s no doubt it’s caused a stir over there, but the thing is with Independent Reserve, we’ve always taken a pretty risk-averse approach to how we run our business. We haven’t engaged in any of the more exotic activities of allowing people to earn a yield on their assets. I mean, we looked at it, but we decided it was outside our risk appetite.
“When you start offering yield, and earning yield, you’re kind of in a race to the bottom in terms of risk. You want to offer more and more yield for customers, they might not be fully aware of how the yield is generated, and it just puts you on a very dangerous path, as we’ve seen with some other exchanges and crypto companies.
“But the SEC crackdowns are concerning from the aspect that I don’t think they’ve provided convincing reasoning behind the enforcements. If they can do that, and it’s applied to coins such as USDT, then that would cause a major ripple effect through the market.
“The industry has always had in the back of its mind, though, that once it grows to a certain size, the incumbents would try to fight back hard. And in this case the incumbents are the regulators and the central banks of the world.”
Things have largely picked up in the crypto market so far this year, price-wise. Out of the woods, are we?
“I don’t think we’re out of the bear market yet, no,” believes the IR boss. “Unfortunately, I think there’s still a lot of headwinds. And these headwinds will continue. And I think new ones will continue to be created throughout the year.”
Sentiment’s certainly been creeping up across the Cryptoverse, though, hasn’t it…
“Yeah, but I think as long as we’re in an environment where interest rates are high and interest rates keep increasing, and inflation is not under control, I think risk assets, not just cryptocurrency assets, will continue to face a tricky time.
“The FTX debacle has been a huge black eye for the industry, plus now we’re seeing this this onslaught of regulatory action, it’s created a lot of uncertainty that’s going to add further negative effects on how people perceive the industry.
“And I do expect this to continue throughout this year. The narrative will begin to change once we get a bit closer to the Bitcoin halving happening in May 2024 – that should start to dominate conversations, which could coincide with a loosening of monetary policy around the world at that stage, too.
“Those factors, along with the right kind of regulatory environment, could create a perfect storm for the market to really turn upwards in a pretty violent way.”
Do you think once those things occur, mainstream adoption of crypto will really take hold?
“I think mainstream adoption is already here to a degree. We do a survey every year and the last one revealed that one in four people in Australia own or have owned crypto in the past. That’s pretty mainstream. But you could also argue that people don’t regard it as a serious asset class yet, and I think that’s understandable.
“I think given all the things that have happened in the past 12 months, that’s a reasonable view to have. But I think regulation is the solution to that to make sure that we don’t trust people to do the right thing, but we instead have oversight to make sure that they do.”
Part of your career pre-crypto industry was in IT with the National Australia Bank. Do you have any intel about how the banking industry here views crypto?
“I think it’s largely there to see – banks have now become more comfortable with the idea of blockchain and cryptocurrency, to the point where they’re even starting to create their own coins. Both ANZ and NAB have stablecoins now. I guess three or four years ago no one would have thought anything like that would happen.
“And when the Commonwealth Bank announced [in late 2021] that they were going to pilot a crypto-trading service that would ultimately be for all their customers via internet banking, I mean, that was crazy.
“I guess ASIC said to them that is crazy, and they changed their minds! So I mean, banks are big, complicated beasts with a lot of people working there with different agendas and different dynamics. But I do think these are signs that voices inside the banks see a future in crypto, and they’re giving it more and more airtime.
“I think over time, banks in Australia will begin to pivot more and more, to become crypto friendly. And I think if we see more regulation in Australia, it’ll remove a lot of their perceived risks and help grow the industry exponentially here.”
There have been some fears circulating about the US government and SEC looking to curtail the crypto industry there through preventing banking involvement. Does that sort of thing keep you up at night?
“There is always a concern that, like I said before, the incumbents – governments and regulators – could influence the banking industry to not work with the crypto industry. It’s potentially an existential risk for a lot of companies, especially exchanges.
“Banks have been hesitant in the past to work with what they see as a risky industry, but it also hasn’t proved impossible, either.
“Those risks have always been there, but the crypto market has made it past many risks, many bear markets. I’m very bullish on it, very, very positive on its future as a whole.”
You’re one of the few (if not only) locally built exchanges to have expanded internationally. Do you have further global plans?
“We’re looking at a few of the other markets in Asia right now. We’re putting some attention on our office over in Singapore and some attention into expanding into other areas.
“The Hong Kong regulator released a whole bunch of rules late last year, which look pretty promising. And there have also been new regulations announced in the UAE, about two or three weeks ago.
“So, as the ecosystem in our region matures, there will be expansion opportunities, and we’re looking at Asia and the Middle East, more so than Europe and the US, partly because of distance and different time zones.”
You guys are the official crypto exchange for the Sydney Swans AFL club, which is a pretty big deal. Do you have any other eye-catching partnerships or announcements on the cards?
“We’ve actually acquired one of our competitors here in Australia, which we’ll be announcing properly soon, in mid March. And we’re trying to coincide that with the AFL season.”
Is it related to the AFL or Swans, then?
“All I can say at this stage is that it’s a major announcement, but it speaks to the stage we’re at right now – looking to grow.”
So you haven’t been tempted to downsize to cut costs for bear-market survival? Several other crypto exchanges and companies have gone down that path…
“No, we’ve managed to avoid that. The industry is highly cyclical, as you know. So it’s easy to over-hire in a bull market and then realise, well, you can’t afford to have all these people any more in a bear market when the revenues drop.
“It’s not just the crypto industry, of course that’s struggled with that – a lot of the major tech companies, too – Google, Facebook, Microsoft.
“But for us, I guess the main message is that we’re here, we’re still going strong, we’re bullish and we’ll be here for many years to come.”