"A lot of people have lost substantial sums of money," says Alan Silbert, North American CEO of INX. "And we have to rebuild trust in the space."
Recall how cryptocurrency exchange FTX used customer assets to support risky trading bets, which ultimately imploded the company and caused billions in losses for its users.
That kind of "greed and mismanagement" was "next level," Silbert added. "They put themselves out there as a regulated company, but it's become very apparent that there were really no regulators watching them whatsoever."
INX, meanwhile, is fully regulated, Silbert says, calling it the industry's "cleanest shirt." In fact, the INX Token was the first security token to register with the Securities and Exchange Commission.
Silbert went on to explain the role INX can play going forward, especially with legislators ramping up regulatory efforts. Below is our conversation, which has been edited for clarity.
For the full interview, watch the video above or click here for the transcript.
BZ: Alan Silbert, welcome to Benzinga Interviews. How are you keeping warm this crypto winter?
Alan Silbert: I'm an old-timer in crypto years. I've been around the space since about 2013. I was around for Lehman Brothers and some of the traditional world debacles. These crypto winters have a way of seasoning you or toughening up your stomach. I've been through a few of them and I think I've probably felt worse. Maybe when Bitcoin BTC/USD was at a high of $1,100 or $1,200, then went back down to sub-$200 at the time. And that was much earlier in the evolution of the ecosystem. I remember feeling at that point that crypto might be killed off for good. After we survived that — that kind of bear market — I don't have that feeling anymore. I think we're definitely here to stay. This current crypto winter is very painful. Things are happening that I would've never dreamed of in the space. But we'll come out the other side like we always do.
What happened with FTX?
FTX had some of the worst controls and business management skills. They were making bets, gambling with company funds and dipping into their clients' wallets; taking their money; and then betting them on their associated trading platform. This is a giant mess on top of everything else. Some of the other players in the space are just unwinding because their bets went the wrong way. But FTX kind of took it to a next level. They put themselves out there as a regulated company, but it's become very apparent that they were really no regulators watching them whatsoever. They were operating without really any controls. They had no real board. I think for the last several months, CEO Sam Bankman-Fried was the only board member. So there were no real board controls. The financials were getting audited by some weird metaverse auditing firm.
How is INX different?
Those initial coin offerings (ICOs) that were just getting thrown together with a white paper and tossed up against the wall — everybody was buying into them. And, people lost tons of money in them. And so our founder, Shy Datika, wanted to build a crypto trading and digital security platform from the ground up — one that was totally regulated. In contrast, a lot of the other trading platforms in the space have been formed by techies and coders without a traditional regulated mindset. Mt. Gox, for example, was put together by coders and gamers — no controls there. It was mismanaged. So one of the first things we did was push the first digital security IPO through the SEC. It was fully registered for the general public. We wanted to show that we could offer investors all the protections that they should have in the crypto space. We're audited by Ernst & Young; and have an incredible board of directors really. One of the members is David Weild, who is a former vice chairman of Nadaq. We did a fullblown prospectus, 200 pages, of all the disclosures and the risks. Our token holders get certain benefits, including a 40% cut of our net profits, first liquidation rights to our insurance fund (if in case of a change of control or a bankruptcy, the insurance fund would pay them). We have all the trappings of a real publicly traded company.
How can INX help distressed companies?
You have all of these companies in the space that are distressed or filing for bankruptcy. And in the U.S., bankruptcy courts will allow you to fast track a security token. And a security token, for the bankruptcy process, is pretty valuable.
So instead of just saying to the creditors, "We'll give you 5 cents on the dollar and be on your way" — similar to what Bitfinex did when they got hacked — you can offer them a security token. The ways you can structure it are just infinite. You can say to the token holder or creditor, "We're going to give you this token representing how much you lost and, for the next five years, you'll get paid out X percent of profits until you're made whole. Or, you'll get a coupon payment of x percent per year." You can structure it a million different ways.
The bankruptcy court helps you fast track this security into existence and you have all of the guardrails of a regulated instrument. It's proven very valuable in the current environment. We've been speaking with a lot of different companies that are in distress, investment banks and lawyers — they're very busy right now. We're educating a lot of them.
What would be 'over-regulation' from your point of view?
Right now, to operate in the U.S. is pretty onerous. It's already a burden, honestly. We roll up to, I don't know, probably a hundred different regulators, between our, SEC registrations and our FINRA license and money transmitter and even through state blue sky processes. It really needs to be streamlined. It needs to go the other direction. So this FTX debacle is going to set us back a few steps. In the U.S., we need more consistency of regulation. Instead of that you have many different regulators that have different rules and different thoughts. But here, through political influence, relatives with high-up friends, Sam worked his way into the upper echelons and was like their favorite person in Washington.
We took the slow and boring route. We've been accumulating licenses and, to go back to what I mentioned earlier about being the 'cleanest shirt,' there are very few companies like ours in the world that have the licensing that we do and that are clean and above board with the kind of controls, practices and licenses that we have in place. I speak to people now and they're surprised that a company like ours exists. Even some of the 'regulated' players in the crypto space are not operating with the licenses that they should. [After FTX] licenses became more valuable overnight.
Benzinga has an event coming up on Dec. 7 and Dec. 8 called the Future of Crypto. What does that future look like? What kind of a crypto startup will survive in 2023 and beyond?
I think the foundation has been built in the space to the point of where there's no turning back. Crypto is absolutely here to stay. Blockchain technology is here to stay. There's going to be a cleansing and a falling back onto its anchors, like Bitcoin — a purely decentralized crypto that's just never going to die. And the things you can do with Ethereum ETH/USD are pretty amazing as well. Like our token runs on the Ethereum blockchain. It's an ERC 1404 token. We can build things into our smart contract, like a whitelist, and our token can't get moved anywhere unless the center and receiver whitelisted. It's governed by the blockchain.
A lot of these technologies and features are pioneering the next iteration of fintech and they're not going anywhere. But you've got to do things the right way going forward. Regulators are going to be scrutinizing everybody under the sun that mentions crypto in their business plan; you have to do things right from the get go.
Why aren't companies doing it right from the get go?
It's expensive. It's just harder. People take the easier route. We were just very patient and deliberate, and it's a part the fabric of our company. We want to be in a regulated space and so we did everything the right way.
Right now, everyone is coming to you with questions. But are there any questions that you have? What would you like to see discussed at an event like ours?
I think we need to put all of our brains together about what the best way is to move forward in a regulated way while not squelching innovation or slowing down the space. And there's ways to do it. When I talk to people, I just try to pick their brains for how they think this is best accomplished.
Do we need to consolidate things under one regulator? Do we need to have state authorities that form a coalition together and have a more efficient path to licensing? How can we push things forward in a regulated, efficient way, so that we can bring this technology to the world, keep progressing it and keep these bad actors out?
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