Supplements » Jersey Report 2018

CRYPTO Q&A: Shaping the future of cryptocurrency

CyptocurrencyCould asset-backed cryptocurrencies provide a safer investment than the likes of Bitcoin? We talk to Shyaam Namas, head of sales, strategy and partnerships at AAA Reserve.

How does AAA Reserve work?
The AAA Reserve currency (AAA) is an asset-backed stable coin. AAA is backed by a basket of currencies (the top six traded), with holdings in cash and fixed income investments, with the price of each AAA coin equal to the price of the net asset value (NAV) per coin.

Currently AAA = $1 (€0.81); and this is displayed publicly at all times on our website.

The primary purpose of AAA is to act as an effective store of value and unit of measurement: stable in real terms, appreciating in nominal terms.

The stability of AAA is enabled by exchange rate controls and investment diversification. Together, these enable the price of AAA to fall within a narrow and forecastable range, which is stable in real terms.

The proceeds from the issuance of AAA (and all subsequent issuances) are placed into a ring-fenced special purpose vehicle (“issuer”). The issuer will allocate the proceeds (through third-parties) into fixed income and AAA-rated loan investments, with a portion held in cash.

What made you choose Jersey?
We selected Jersey as it was clear that they are one of the most forward-thinking and co-ordinated jurisdictions for cryptocurrencies. They were proactive and engaged in reviewing our approach and have enabled an important initial step in regulating the issuers of future crypto-assets. We were able to engage with all the parties we needed, in a co-ordinated and effective manner, including the regulator and Jersey government.

How are regulatory frameworks evolving to accommodate crypto-assets?
There are mixed views on regulation regarding cryptocurrency/blockchain and most of these views are evolving. While the biggest concern for crypto-based currencies is around the aspect of anti-money laundering and anti-terrorist financing, ensuring investors understand the risk involved while investing in initial coin offerings (ICOs) is also a key area of concern for most regulators.

Countries such as China have a clear view on where they stand regarding cryptocurrencies (banning ICOs and freezing bank accounts of exchanges), while at the other end of the spectrum, Switzerland wants to be known as the crypto nation and has set up a working group to explore technology-neutral regulation for ICOs. The EU is still deciding (France and Germany being very vocal about the demerits of crypto), while there are clear indications from the UK regarding having a regulatory framework to monitor cryptocurrencies and blockchain-related investments.

This year will be an important one for cryptocurrencies, especially for stable coins given the role they can play in bringing about stability and providing the necessary confidence to the market.

Are cryptocurrencies a bubble, or is there a long-term future for them?

The business model around issuing “tokens (i.e. cryptocurrencies) for services” provided on a platform will continue to evolve and, in our view, a more stable, less volatile set of cryptos will be an important step towards mass adoption and realising of the actual underlying benefits of a decentralised business model.

We are currently seeing a plethora of business models emerge but most of the focus has been on ICOs for obvious reasons and we believe this model of raising funds is bound to change. We think there is tremendous use for a decentralised system to deliver real-world benefits, with the bubble around cryptos being replaced slowly with more stable coins as we progress into the future.

What are the key challenges for crypto-assets now?
Crypto-assets is a term used to describe cryptocurrencies which are backed by some form of real asset or collateral. They form at the conjunction between the distributed ledger technology inherent in blockchain implementations, and asset management vehicles.

Crypto-assets have the ability to transform the asset management industry by significantly lowering the cost of enabling investors to access returns from, or allocate capital to, any asset class. The key challenge relates to the regulatory analysis: crypto-assets are inherently borderless in terms of their transferability, yet most crypto-assets will need to adhere to local regulations. This creates an inherent conflict between the ownership and transfer of the asset, and the underlying regulations.

What opportunities does blockchain offer the asset management industry?
Blockchain is a foundational technology and we are only in the experimental phase, with the potential for it to alter the sector’s fundamental business model considerably. Better visibility of assets, ownership, seamless on-boarding, streamlined management of model portfolios, automated trading and settlement mechanisms (especially in the syndicated market), speed of clearance, better risk assessment through visibility around trading history – all will bring about changes with the way we invest, trade and manage funds globally.

The concept of a centralised entity to perform these functions will be tested – we imagine this to be a slow and transitionary state, i.e. the move from centralised to decentralised. The opportunities are many, but the challenges are equally complex. Once implemented, blockchain should help reduce operational expenses across the sector, removing redundant functions and creating new market paradigms and opportunities for investors and managers alike.

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