Adam Cai on running a compliant crypto exchange

0:01how do we create the perfect cryptocurrency exchange I'm Ashton Addison from Block West capital for investment pitch media and today on click the Crypto Coin Show we have Adam Kai CEO of Virgo exchange Adam welcome back to the show it's a pleasure to see you again thank you Ashton for having me it was such a pleasure to come back again likewise great to have you here I'm

0:23excited to dive into your insights into the centralized cryptocurrency exchanges so much has happened in the last month or two with regards to crypto exchanges and you being on you know the inside of an exchange I feel like you have the insights into you know how do we properly manage a cryptocurrency exchange what are the right things to do what are the wrong things to do and what

0:43went wrong with the FTX debacle and how can we move past that and move forward towards mainstream crypto adoption so thank you so much for taking the time I would love to kick off our conversation with just starting with an overview of Virgo exchange and what you and your team have built up and then we'll dive into all the details yeah sure thank you Ashton so Virgo

1:05group actually started since 2019 we're starting as the Canadian exchange so a lot of users might know our brand robot CX that's how we started we started to run the exchange since 2019. so from day one our vision has always been trying to run a compliant reality exchanges and even at the time that you know the rap nation is not that clear but we're still trying to you know get

1:30our stuff you know through that process and to be as compliant as possible even though the speed of that turn is not that quick because of a lot of constraint but I think you know in the long run this will be very beneficial especially considering what happened to the industry so we have been now registered as a restricted dealer and MSB in Canada and we have been one of

1:54the you know popular exchangers in Canada and we're having you know safely operating for more than three years now recently we'll go group has make its first International expansion to Australia we have launched this year in October and we have seen quite a bit of you know user growth in Australian side and because of its you know fast payment network available in Australia I do

2:18think that's all it's also a pretty high potential market and we're certainly looking to go to more markets in the near future but it's you know certainly a very exciting industry and I think there's a lot of challenges I'm happy to chat about it today with you Ashley very exciting and great to hear that you're expanding as well you know starting out in Canada being a Canadian

2:41myself as well there's not as many options for Canadian exchanges where you can onboard you know CID as opposed to American I'm curious and when you started in growing through these first three years what are some of the things that you're attributing to the success and you know how quickly Virgo CX grew to get to this point yeah that's actually a good question I

3:05think you know what when we actually started a company you know the industry was also in a very bearish Market condition so I remember the Bitcoin price of time with slightly above students and dollars right so there's a lot of questions about the sustainabilities of the industry and whether you know there will be any success for the blockchain industry so I

3:25think that the first thing is certainly you know do you have a real passion for the blockchain industry right to really to kind of get through you know different market conditions trying to believe that it does have the future of it so this actually have need to have some internal drivers so that's something I see our team has even if like there's a lot of questions Outsider

3:43but we don't care like we still think that we should do our best to contribute so the second thing is really about trying to be able to attitude so a lot of times you know in a blockchain industry what we see is there are a lot of good ideas but when it comes to the execution point it becomes weak and this is especially the case where why a lot of people you know fall out in a

4:04very short period of time because you know they can and not find a proper Revenue models they cannot find you know constant incentives for the team to be motivated and there are a lot of you know challenges because of market price moves so in order to have sustainable business we actually need to be able to you know be able to execute well so that's something I think we have been

4:27always doing so I think last thing for the exchanges is also about internal controls so exchange to my eyes it's not about how quick you can grow even though sometimes I do feel you know kind of a living and jealous and Avid about other exchanges growing like you know in one year there becomes millions of users very quickly but if we think carefully

4:48do they really have internal control they have do they really have these structure to handle millions of users a lot of times the answer is no however people favor speed and weigh for more than you know quality and that's why we do see Sonic strangers not only about FTX we have seen so many exchanges fall out of time so I think you know in order to be sustainable

5:10we really need to have a medium to long-term View and that's what I think keep us running smoothly in the past three years very well said Adam and especially about the internal controls you know and making sure things are you know running smoothly because when you grow that quickly and sometimes it's hard to keep up and I would love to get your insights

5:33on you know the FTX insolvency you know they seemed like they were following all the regulations and like getting you know licenses or regulation in the states and elsewhere and like every same thing seemed fine but you know according to the internal controls and whatever was happening on the back end it wasn't fine at all and now there's millions of people that have lost

5:55money in The Exchange you know what do you think went wrong there and then how can we prevent that sure yeah I think this one first of all if we look here found a high level perspective so this is actually a lack of understanding of what is a rarely The cryptocurrency Exchange so there are you know different levels so the first level is what a lot of trainers say oh we're

6:20regulated because we achieved MSB license and we achieve materializes MSB us or MTR across different states but if you actually analyze that closely what that does that really entails like these license are mainly for the anti-money laundering purpose right so it's mainly for the AML purpose so that means the framework for those regulations is not actually going to analyze how tight your

6:44internal control are and how much measures you have put in to protect user assets and this is actually not the purpose of those regulations to be honest so that's why when people use those things to say they're regulated then the users are very easily deceived because they thought they're regulated but they actually need not sure and I think that's that's something that industry

7:05have to you know give themselves well educated to the level that they understand what each license entails and what does that I should govern and for example in Canada we have right now about 10 platforms that receive the security dealer license so that process is actually very difficult so the control supervision is up to a level of being like almost similar to a security

7:27broker right so in that way you know certain control will be much higher it cannot say 100 bulletproof but still it's much better than you know any kind of antimony on your purpose licensing so that's the first thing so people have to be very cautious about when any people tell you like we're regulated really asking the question like what do you mean by regulation

7:49and the second thing yeah okay yeah so the second thing I also want to say is you know FTX the reason why this time they have such a big problem is obviously they have a such a weak internal control right from the front Insider information seems like you know Sam himself maybe with you know the connection with one or two people

8:16they can move billions of dollars found out and they can easily appropriate cards for to send to Almeda and they can buy luxury condos house like in Bahamas like for that kind of things yeah to me it's just they have a very weak control not only for their key man risks such as one person can do so many things but also they don't have an internal Department that are able to supervise

8:41what key person does and they don't have like a proper oxidation process in place to say that whether the current files are indeed being safeguarded so there are so many weaknesses in internal control and I think that's why FTX also had an issue is you know there's just not not enough eyes but what's very important for its changes great points Adam and I

9:06am starting to understand you know that difference more and more when you know there's a regulated exchange and sure that means that you know the customers have to put their kyc information in but does that mean that the founders of the exchange you know can hold all the funds and move it wherever they want I feel like that's something totally different

9:24And what we saw with Sam doing that there was a notion over social media after with like all the exchanges saying well if we can provide proof of reserves proof that our customers funds are backed one to one then everything will be okay do you think that this proof of reserves of the customer's funds is the solution or part of the solution to solving this problem

9:50I think it only partially solves the problem so proof of the reserve in most cases is a spot auditing so it does actually tell you at this point of time you know the you know there are certain cryptocurrencies in those wallets right however there are two key questions why I'm saying only partially solve discretion because you know for one is for a lot of offshore exchanges

10:14you don't really know what's the actually the customer numbers in their system right because their system is not soccer compliant they don't provide Financial audit statements so you don't know anything about it so if they tell you okay I have like you know six billions of dollars of crypto assets with us but they only tell you okay they have a lot of money this only tell you

10:35one part of the question right they don't tell you the other part of the question so you don't know why that's 100 or not to be honest that's the first thing so the second thing is it's really also about you know how often do you do that auditing right if you only do once a while it doesn't like give you enough guarantee you know this will always be the case and even if some

10:58people you know connecting with some real-time auditing software you have to still ask a certain question is who controls those words and what are those audits are safe right because even if like you say okay I have automatic those wallets if it's like you know if TX cases where one person can move all the money away it doesn't matter whether you have proof Reserve or not it's just

11:19not safe yeah definitely good point and obviously having you know the CEO of an exchange being able to move funds without permission of anybody else sounds like a red flag what's the proper way an exchange should go about you know having the authorization to move funds around yeah actually that's that's a very good question it's all very technical

11:46It always you know depends on you know each trend is operational model but I think you know if you guys you know look at you know some of the guidelines around the security rug leaders in Canada it does actually have some you know kind of clarity provided users in terms of how do we at least Virgo CX got across phones is we actually have to

12:08separate our assets majority of it you know more than 80 of it will go to your qualified custodian right now so we actually use combats custody and obviously in the future we're looking to potentially become qualified to study ourselves not because there are a lot of things we have to go through in order to become have that status and the remaining assets obviously you have to

12:28make sure that it's always multi or validations like I think in any period of time you definitely need to have a few people a few Key Management staff to be able to approve it never at no time you have 1 person to approve our transactions and also in Canada there's our specific rules about your hot wallet asset this is how she actually wrote you might see

12:54your letter which is very different team compared to the rest of the world not like no other country have such rules which is you have need to have 100 of the cash reserves according to a Canadian financial institutions to cover any hot water assets you can speak so this is really trying to say that you know at the beginning you know we're trying to say okay we're learning we're

13:15trying to get ourselves better but obviously we recognize the risks are there so if anything happens we still have the money to pay back users at least it's not the hamburger this asset so I think in Canada there are already a very strict framework to determine how you're gonna consider the clients assets what control level you should have what insurance you should have so I think

13:37this is a good foundation obviously it would not be optimized yet you know because obviously it's not the most Capital official way to do it but I think over time with this guideline with the framework I think we will find a really good balance point a tree should kind of assets are safe and in the meantime we also achieve Sound Capital capitalistic

13:58wow that's great to know Adam thank you for that and moving forward D did the FTX insolvency and all of the contagion that's happening affect in any way the way that Virgo exchange is operating are you changing anything or are you guys good to go yeah that's actually a very good crash and easy question for us is simply no

14:25because the reason for that is initially when we choose a liquidity provider actually I think that's what caused a lot of ecosystem players to lose money or even becoming bankrupted is because they have so much money in the FTX account to trade you had there's nothing wrong with that to have you know hydrogen exposure over there but the problem is when we start to do the third

14:50party due diligence rftx what we realized it first fall to my point earlier is they're not regulated at all like they only have like you know antibody laundry license but that didn't tell us anything about the their internal control right so there is a red flag over there so the second thing the obviously the fact that they're based offshore and all kind of

15:10that stuff also you know give us not enough Comfort even though they have a much Big Brand but to us brand value only adds a little bit of coins it's not enough just to say you're big right so when we do the third party due to this we didn't pass FTX Global right we will look at FTX us at the time but the fact that they don't actually even accept you Canadian clients so that

15:36kind of about to get us away from that so all in all like the reason why we're not exposed is because they simply denim parcel was a part of DDE on day one that's great to hear and I dodged a bullet there Adam now like one of the reasons why FTX was so popular and a lot of people liked using it was because they had a lot of products you know and it was fast

15:59and you know the functionality seemed good but just the assets that people wanted to trade and they were even moving into stocks and you know staking and things like that having good products obviously the more good products you have the more people are going to want to use the exchange I'm curious on you know where Virgo is standing in terms of bringing

16:20in more products that people want to use and maybe you can just talk about you know what are the main products and what's the big Focus coming up yes that's actually a very good question I think in the past we had our main value proposition is acting as a fear gateway to Canadian leaders and now to Australian users trying to you know Bridge the needs

16:42between the feared assets and the crypto assets so that what we have been doing in the past few years and well now we have been realizing is this is not enough because it will only do that way the users have natural demands to withdraw the assets you know to put into any exchanges trying to do a lot of other things to fulfill their training needs so in order to really try

17:06to internalize the users from a specific country specific Market our product offering just have to be you know more Diversified and that's why we decided recently we launched you know Advanced Training tool called great trading which provides an automatic training tool to allow people to buy low and sell high and it gives them the chance to you know

17:26configure their own you know meters to do a lot a little bit automations on the training features and also we're certainly looking to add you know other services such as staking so right now it's already in the final stage of getting approval and trying to get the product you know developed tested well and we're going to potentially launch that in a very near

17:47term so we're certainly trying to see okay what are some of the features we can kind of learn from the offshore exchanges however we want to make sure that those features we can put them in a properly regulated framework right we want to get people the safety in mind so they don't need to worry about oh their ass is going to be lost overnight right yeah and in the meantime which should

18:13also give what people want I think that's something the industry directly exchanges industry have to realize is if you don't do well you don't get things done properly people just have no choice but to take risks yeah well I'm excited I would love to have a you know function to automatically Buy Low and sell High so I'm looking forward to checking

18:36that out and are you optimistic about you know centralized exchanges and you know potentially including more D5 functionality and it moving into 2023 you know because I've heard from others that you know obviously people that leave too much on exchanges or they're relying on centralized parties and there's that trust factor and something goes wrong A lot of people

19:00are moving towards D5 or self-custody are you optimistic about centralized exchanges continuing to grow as we move forward yeah like I found my personal perspective centralized exchanges in the future will still be you know existing so the reason for that is you know there needs to be always a Gateway for people to you know exchange crypto to Fiat assets right whatever

19:26they need and when it comes to defy because of the fact that the kyc is not up to level and I don't think that if I will fulfill the needs for the bridge between the Fiat assets or crypto asset at all so I think you know because of that reason the central exchange will always exist to play a role however what I think will really have diminishing you know hope actually for the

19:50central exchanges are actually indeed those offshore exchangers where in the past they have been very loose you know on kycaml have been really loose on the you know internal control side after collapse of FTX people now are going to have a very simple question if FTX can collapse what can assure you not to be a collapse right so I think that question

20:14will remain unanswered for a lot of unrealistic strangers in the near turn on a middle term so I think in the future Central exchange is going to be heavily regulated and I would even not categorize it to be a technology company anymore I would categorize it as a financial service account so only with that we can gain the trust again back from the users

20:39yeah no I agree and it's very hard if you have you know fiat currency or Canadian dollars how do you get that into D5 without you know the centralized exchange and without doing something sketchy you know obviously you want to trust the financial institutions to be that onboarding for you so from what I understand Virgo is one of the best places to

21:03start if you're starting with Canadian dollars to get into crypto and now you've mentioned that you've also expanded out to Australia which is super cool as well besides those places what are the sort of the next stages of growth you know for international expansion so for our approach we take a little bit different approaches a lot of people

21:24just going directly to us because we think the U.S market right now are very competitive right so we're trying to service you know those countries that are less competitive but also share a similar cultural background there Canada and also you know they have a very robust payment capabilities on a fewer side so that's why we choose Australia we have a

21:48724 real-time payment that's why we're also looking at the UK we have that fast payment as well and they have also clear regulatory framework to you know to regulate exchanges so we're you know certainly looking to you know get those three countries trying to be well established in the next year or so and then we may look at some Asian countries as well you know we

22:10have a strong Asia background we're looking at Hong Kong so Hong Kong race like announced a big announcement they're trying to get back the market shares of becoming the Hub of Asia for blockchain well used to be heavily influenced by China but now they kind of have their own you know kind of opinion on that so that's good to hear and also we're looking at Singapore

22:30as well you're quite a bit of you know market shares over there so all you know I think there's still so many growth opportunities out there and we still think like it's still early right from the Bank of Canada research paper right now I believe I feel don't remember around we only got 13 of 14 of people who got cryptos right and the privacy in Twitter 2017 it's only five

22:52percent so I would say like you know there's so much room to grow definitely well that's great to hear and you know even then it's already doubled so I can imagine it will probably grow even quicker and that's exciting to hear about the Asian markets as well but for right now what is the best way for people you know Canadian Australian UK people looking looking into this

23:16to learn more and to get started with Virgo sure yeah so after all these you know three years building like right now we do have a very you know seamless experiences for users you can register account and most of times which is a you know quite instantaneous if you are you know didn't have any issues at all a funny channel are both Canadian side and

23:39Australian side have been you know near the instant as well so it's actually right now the barrier of using Alternatives that has been significantly lower and you have a lot of automation already out there to have a very small experiences so all you need to do is you know go to the website you know try to check out we do have quite a few blog sections to tell you know how to use

23:59exchanges you know some kind of basic knowledge about blockchain Industries and some of the very important features to look for if you're concerned about the Securities and we're certainly very happy to answer any kind of crashes you have you know to custody funds with us so all this information are public available online and you know we're always very happy to

24:21answer any questions if you have further just to our support emails and I will occasionally organize you know information sessions such as whether you Ashton and the other people just trying to voice a bit more about our opinion and I think in the future we will do certain more to educate the markets and we're very happy to share you know all the information about your needs

24:41sounds great Adam thank you so much I will leave the link to the Virgo platform and the Social Links as well in the description box below I appreciate you taking the time thank you for the insights into how to properly run a cryptocurrency exchange and all the best with Virgo moving forward and let's follow up in the near future thank you Ashton appreciate that