Hello, and welcome to the Download. I'm your host, Dave Richardson. And I got to tell you, we had our guest today on just before the holiday season to do an outline of what was happening with the Sam Bankman-Fried and FTX issue and the collapse of that business. And then I got into the New Year, and I got out and I was doing several speeches across Ontario, outside the Toronto area, and just person after person came up saying: wow, I really like the podcast, but I really loved when you had Karim on talking about cryptocurrency, but specifically the explanation of FTX, because all the stuff in the news that was happening. So many people are trying to explain it in a way that people could really get an essence of what happened, why it happened, the impact that it had on markets. But nobody in everyone's opinion, and mine as well, Karim, no one did a better job than Karim Hamasni, who is our crypto expert at RBC. So Karim, thank you for that. I went back and listened to it again. It's just brilliant and everyone seems to agree. Sometimes I'm a little off base with everyone else, but this time I was in line with everyone else's view.

Thank you so much, Dave. I really do appreciate the kind words and I'm happy to be here again.

This time we're going to get really more direct into the crypto space around the way a lot of people think about crypto day to day, which is it going up or is it going down? Is this the right time to invest? Is this not the time to invest? Like, wow, it's just dropped 50%, or wow, it's just up 50%! In this case, we've come into the New Year with some of that bad news, which as you explained, isn't just crypto. Crypto is around it, but it's really more a classic fraud that happens to have crypto on the edges of it. But nevertheless, in the media it was tied to crypto and just made people who might have been skeptical to begin with a little more skeptical. And we saw the cryptocurrency values come down all the way through to the end of the year, but then, boom, pop, we get into 2023 and we've seen a big rally. So what do you attribute that rally to and is it sustainable?

Yeah, it's a great question, Dave. And yeah, the rally is certainly notable. Bitcoin is up around 35% to 40% year to date. But we have to remind ourselves that swings like this are incredibly common in crypto. It is a volatile asset class, and we could easily see a pullback again. Is it sustainable? Well, there are some bullish factors. As you know, the crypto ecosystem can be plagued with really risky actors and they get too big and influential, like FTX and Alameda have in the past. And so, drawdowns like 2022 seem to flush out a lot of the bad actors and expose those that took on too much leverage and risk. Now, it might be too soon to say, but it is possible that most of the really risky actors got flushed out with the events of 2022. Also, macro factors have come into play. The market seems to believe that inflation is at or near its peak, which they suspect would get central banks to slow the pace of interest rate hikes. And it appears that crypto assets, like other risky assets, do pretty well in times of interest rate reductions. Now, on the flip side— or more bearish side I should say—, does that mean that the contagion in crypto is over? Well, perhaps not. A large lender in the space named Genesis just filed for bankruptcy not that long ago and that could certainly trigger some more contagion that we get to see. Many miners that mine Bitcoin and have huge mining operations are underwater now with the price of Bitcoin being so depressed. And they could be burning through the reserves, hanging on by a thread, waiting for a sizable recovery in price. And although Bitcoin is up, which is welcome news for them, it might not be up enough to save all of them. So there could be some more bankruptcies there as well. Now, to me, the biggest looming risk is the outcome of regulation. Regulators may choose to fight and overregulate crypto and if they do that, markets will react negatively. Alternatively, regulators may choose to foster innovation in the space while still setting up less prohibitive protected guardrails and the markets would react positively to that kind of regulatory clarity. It really is too soon to say exactly what stance regulators will take.

Actually, why don't we get into that when we talk about regulation? Any sense of the direction? Because I think one of the things, whenever I watch anytime a congressional hearing or something in Canada where lawmakers are interviewing people who are experts like yourself in the space, it's almost comical how little they understand about it and how it actually operates. So what do you think the direction will go in terms of regulation? Will it make any sense? What are your thoughts there?

It's really too soon to say. Right now, I do think that Congress and regulators are in that education mode. They're trying to figure out what this is, wrap their heads around it so they can regulate it intelligently. Now, I think that we're kind of near the tail end of that education, and they are more knowledgeable about crypto assets. And they could see it as a threat to the stability of financial systems— left unchecked, crypto could very well become a threat to the stability of financial systems—, or they could see it as an opportunity to bring financial innovation to north American shores or the US shores. And the thing is, if they regulate it and they're too restrictive to it, crypto innovation will just flourish in other parts of the world. If they're not restrictive enough, then there's going to be more incidents of fraud and consumers will see issues increasingly in the United States. So I think the goal for them is to try to strike that balance. And there certainly are people in congress who are saying that we need to foster innovation in America. And there are certainly people in congress that are saying we need to regulate the heck out of this. And so I think it's going to land somewhere in the middle. It's just too soon to say which side it will be closer to at this stage. But we're trying to keep our finger on the pulse of regulatory developments so that we can get a better sense of what's going to happen. But right now, it's still too soon.

As you say, this is really the most important thing that's going to happen in the not-too-distant future to the entire space. And the way you think about it, the way investors need to think about it, because that regulation will be there, it will be new, it will be different, and it may not be exactly what everyone wants.

Exactly. And it changes every day. Even today, senior members of the White House published a letter to Congress saying that they really want them to accelerate their efforts in regulating crypto assets. And the tone of that letter was quite bearish. They were pointing out a lot of the flaws in crypto and some of the challenges that they have with it. So you can get a sense as to where different parties in the US regulatory system sit in their perspectives against crypto. So, it'll be interesting to see how it plays out.

Getting back to this recent rise in crypto— we'll just stick with Bitcoin because that's what is most widely quoted, most people are familiar with— any levels on Bitcoin that people should be paying attention to in terms of, as you say, the impact on miners, the impact of where people had gotten in? Has it reached a point where it's a nice exit point for some of those people who want to get out at this point?

Yeah, there's a growing field of on-chain analytics. The Bitcoin blockchain is public, so you can see all the information as it happens in real-time on the blockchain. And so, some people try to prescribe certain actions to certain transfers. They'll look at newly created Bitcoin and attribute those to miners. They'll look at transactions to and from crypto exchanges and attribute that to sell or buy signals and they try to get information around there. And with that, they try to put a price that shows who's underwater and who's above water. And right now, we're still kind of in that underwater phase despite the recent rally in Bitcoin. So it hasn't necessarily gone up enough to cover some of the costs of many of these miners or some of those investors that bought earlier on in 2022 that are now very much underwater. So yeah, there's a lot of research in this space. It's something that we are looking at on my team just to try to understand a bit more of this on-chain analytics and how it translates to price. But it's still such an early space and there's a lot of noise in blockchain data that we have to figure out how to cut through before we can try to tell a more concise and coherent story.

So Karim, with all that said, what is the current state of crypto and blockchain? Anything we should be paying attention to right now in terms of specific players or specific news that's going to happen that could shift the market?

Yeah, certainly Dave. There's still significant development effort on the tech side of crypto and it remains quite strong. There are projects that are still in the works, the blockchains are still doing what they're designed to do and there are several technical and usability enhancements that are in the pipeline. The market side of crypto took a beating. Coinbase, which is one of the largest exchanges in the world, they laid off around 2000 of their 5800-employee workforce over the last year and revenues have gone down significantly. Coinbase is cutting back on some of the aggressive growth factors that they were expanding into. So I do think that they'll survive this bear market, but they certainly are taking a beating. Binance, the largest crypto exchange, is under increased scrutiny from regulators. Reuters reported that Binance allegedly commingled collateral with user funds and that's of course raising some red flags. The US Department of Justice has gone after a small, relatively unknown exchange called Bitzlato that has ties to money laundering. And there are claims from Reuters again that over $340,000,000 of funds were traded between Bitzlato and Binance, which also is concerning news. Gemini is a New York based crypto exchange founded by the Winklevoss twins of Facebook fame and they got caught up in the Genesis bankruptcy and are a major creditor seeking repayment. It's looking doubtful that they'll recover all of what they've lost so far. So in the end I do think that existing market players in crypto will come under more scrutiny and more pressure. But once again, this is part of that flushing out of the bad actors scenario that I mentioned earlier.

Always a good podcast when we can get the Winklevosses in there. So we add all this up, Karim, the big start, the regulatory challenges we're going to be facing, some of the individual players with layoffs and commingling. What does this all mean? Why don't you take a look forward through the remainder of 2023, what do you see?

Yeah, so I feel like 2023 might be a year of sideways action, mostly. Before the last Bull Run, there was a lot of builder activity in the space and major household names began announcing initiatives in crypto. Firms like Visa, Mastercard, PayPal and Square, and others, released products and services in the space and that built a foundation for bullish sentiment which led into that Bull Run. It's unlikely that we will see similar announcements in 2023, so we're kind of missing that foundation. We'll still experience volatile swings, but I feel that they could just as equally go both ways, either up or down. What we can expect is some regulatory clarity and that regulatory conversation to heat up in 2023. And with that, whatever comes out of it will fuel market movements, the direction is still yet to be known.

So you think the adoption in, for lack of a better term, the mainstream financial world will continue to accelerate through 2023? That's one of the themes?

We see more activity amongst the fintech set. Some of the more mainstream fintech players are more active in the crypto space. Some of the larger financial institutions that may have had crypto projects are rethinking how active they want to be in the space. So I do suspect that some large financial institutions have probably put on pause or are reassessing their crypto strategies, but the fintech players themselves are going to remain active and continue to build.

Do you think a good regulatory environment would invite large Canadian and large American banks to be more active in this space and really make a full commitment to it?

Of course. Yeah, I do. Several surveys amongst institutional players have said that regulatory clarity is one of the number one concerns on the minds of large financial institutions. So if there is regulatory clarity and the guardrails are defined, and large banks and financial institutions know what they can play in, they will likely play in that space. It's just a matter of getting that clarity which we just don't have today.

Excellent. Well, Karim, as always, thanks for popping on. I asked you to come on really short notice, so I really appreciate you jumping on because again, this is something that's capturing some headlines, particularly in the financial news, but I think more broadly, and a lot of people track Bitcoin and other cryptocurrencies. So great to have your perspective because again, you just explain the space better than anyone I've seen. So thank you very much.

Thanks a lot Dave. I really appreciate you having me back.