1. This year you launched three Crypto indexes that correspond with top blockchain projects (Smart LyCI, Pay LyCI, LyCI). Were the transactions on blockchain included into the Indexes’ model? If yes, then how different blockchain transaction fee structures influence these Indexes?
Our guiding principle for the design of LyCI is simplicity. We have opted to weigh the weight of the cryptos as a function of the size of market capitalization and exclude any other factors, such as fee structures. There are other factors that we could have included, such as liquidity of the underlying instruments. Liquidity is a key parameter because this influences the transaction costs of hedging. We have decided to disregard these other factors in favor of a transparent and easy to understand product.
2. What challenges did you face while launching a tokenized securities exchange? What features it will have? When you plan to launch it?
Regulatory approval has been ‘the’ obstacle. For outsiders, it is difficult to imagine how much effort had to go into preparing the application. Legal work, descriptions of computer systems, regulations, detailed business models, policies, etc. are all fundamental aspects of such an application. In total, our application has 160 annexes. We expect the official go-ahead at the start of the second semester with the go-live for family and friends in the 3rd quarter with an official launch in January 2020.
3. What blockchain is the most suitable for Digital Securities in your opinion: private or public and why?
There is only one answer – the ‘public’ blockchain. Why? Private blockchains are enhanced database systems with good backup facilities. Private blockchains cannot serve as global security depository for Digital Securities. The big value add of Digital Securities is the capability of peer-to-peer transfer anywhere around the world, independent from a local security depository such as private blockchain.
4. What would you say about a stiff competition among crypto exchanges as the biggest ones try to capture a significant chunk of the market?
When the Internet started, there were early leaders that dominated the space but did not survive in the long run. They had the wrong business models and did not survive. We will see the same as happening in the crypto space. The existing crypto exchanges rely on ticket fees to generate revenues. In my mind, the future of exchange is a zero fee exchange. The existing players will be cannibalized by this development. Lykke aims to precipitate this development by building a zero fee exchange, where we earn money from the performance fees of asset management products, such as the LyCI token, an index of the top 25 cryptos with minute-by-minute rebalancing.
5. The recent report by The Blockchain Transparency Institute (BTI) claims that over 80 percent of trading volume in the top bitcoin trading pairs is faked by wash trading. What is your opinion on this?
Fake trading is a big issue and undermines the credibility of the new exchanges. The operators of the exchanges are not aware of their responsibility to build a solid reputation that in turn builds trust. The financial system of the future will be built on the blockchain exchanges and integral to this vision is predictability, quality and trust. Wash trading undermines credibility and needs to be stopped. Exchanges can do this quite easily because they can implement the necessary supervision tools.
6. What can you say about IEOs (Initial Exchange Offering)? What perspectives do they have? Do you plan to launch your own launchpad?
Initial Exchange Offerings (IEOs) will be the next big thing in the whole blockchain revolution. The advantage of an IEO is the involvement of the exchange in the capital raise that reduces the risk of scams. Critical for the long term success of IEOs is the system of crowd intelligence that identifies scam projects and is an effective filter against such projects. Exchanges have to reinvent AirBnB-like rating systems for IEOs. At this stage, this is not yet happening. The exchanges have not yet put the right tools in place, so lots of work is required.
7. How can you estimate the legal framework in terms of exchanges? What key issues need to be solved in the near future?
It is a matter of time until the distinction between unregulated and regulated exchanges will disappear. Very soon all the exchanges will become regulated exchanges. In the age of blockchain with straight-through processing, slick user interfaces can hide the complexities of regulation and offer a big competitive edge to regulated exchanges over unregulated exchanges. Regulated exchanges can offer their users literally all types of assets, not just those tokens that are deemed cryptos and utility tokens; at the end of the day, the distinction between security and crypto/utility tokens is pretty arbitrary.
8. What are the top three trends in the crypto exchange business? How have the preferences and behavior of the crypto trader changed in recent years?
The biggest trend is consolidation: the big exchanges are winning the race and the smaller players will disappear; they cannot compete on an equal footing. The second trend is that crypto markets are not anymore unidirectional and crypto investors have to be discerning about which projects will succeed and which projects will turn sour. This will turn index investing into the big theme, where traders will have a lot lower spreads than in the underlying instruments. The third big trend is the bigger context of replacing the existing financial system with a blockchain-based financial system. So the existing crypto exchanges will ultimately morph into the new exchanges that power the global financial system, something far more ambitious than what is currently in the public eye.
9. Do you think that cryptocurrencies and Blockchain will fix the global remittance industry?
Yes, definitely. If I did not believe this, I would not be building Lykke. The cryptocurrencies can fix the global remittance business, but not in the way that the current players envisage. We need to develop a whole ecosystem of cryptocurrencies, stable coins and important lots of local utility and security tokens in the emerging countries. These will cover the last mile of how the people in the target countries can spend the money locally. The reform of the global remittance industry is more complex than meets the eye.
10. In conclusion, could you tell us the most prominent achievements of and goals of Lykke for the nearest future?
The biggest success is the LyCI family of indices. LyCI is a service token that gives ‘one-click’ access to buying the top 25 cryptos by market capitalization. The index is rebalanced minute-by-minute. There is also a PayLyCI and SmartLyCI and others will follow. The family of index products is a huge cost saving and simplification for investors who want to get exposure to the crypto markets. They do not have to think of rebalancing, re-evaluating, or consider which crypto is likely to win the race. Now they can just invest in the index of choice. This is so much easier than doing the rebalancing themselves.
The next immediate goal is to expand the universe of LyCI tokens, possibly also launch a short LyCI. ShortLyCI will make it easy for crypto investors to hedge their crypto exposure. Further down the road is the fully regulated Organized Trading Facility (OTF), which is a full securities dealer license, but this is not around the corner. This will still require many months of preparation work.