In this episode, we explore the evolving crypto landscape of Canada with Adam Cai, CEO at VirgoCX. We will discuss the regulatory challenges, innovative projects, and potential future scenarios that are shaping Canada’s crypto industry.

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Full episode transcript:

Varad Mehta: Hello everyone,and welcome to Simplify Payments, a new podcast series presented by Paramount Commerce. I’m your host, Varad Mehta. In Simplify Payments, we’ll take a closer look at new and emerging financial technologies and practices with industry experts. In our second episode, we’ll learn about Canada’s crypto landscape with Adam Cai, the CEO of VirgoCX. Please sit back and enjoy the show. Adam, how we always begin our podcast is by asking our guests a few fun questions. I had a couple lined up for you, and after that, we’ll get to the main topic. The first one I had is that you studied very close to the East China Sea. First of all, how beautiful is that area where your university was? They’re like small islands, really close to the East China Sea. Did you ever get to visit any of them?

Adam Cai: Yeah. I was spending my university time at Shanghai, China. It’s a definitely beautiful city close to the East China Sea. There’s, I guess, a very modern city, but obviously you have a lot of tourist attractions you can go to feel the nature, beauty of things. I personally didn’t go to these small islands, but mainly I was spending time there within the city. I would say there’s a lot to check out already. Maybe next time when I go back to Shanghai, I will check out those small islands.

VM: I envy you because where you studied, that’s a beautiful area. I looked it up on the map. There’s water bodies all over it. I was like, Adam is doing really well. I was like, that looks really fun. My second fun question for you, Adam, is that if you were a shark on Shark Tank or a Dragon on Dragon’s Den, which shark or dragon would you prefer partnering up with?

AC: That’s another amazing question. I’m actually a pretty big fan of Dragon’s Den or Shark Tank, back then, back into the school when I was studying in school. Obviously, this is a very interesting business show talking about and helping entrepreneurs to raise capitals. And most sharks are pretty sharp, let me put it that way. For me personally, I enjoy hearing Kevin O’Leary talk. He’s a pretty nasty guy on the show, but I heard that he is a pretty nice person off the show but maybe just the dramatic theme of the show. There’s also another lady I actually particularly like. I think her name is called Arlene. She is a big marketing guru. I think she’s pretty logic, very sharp, and I think she’s pretty good, I would say, like a mentor to us if we’re ever given a chance to help us to obviously have a better marketing and everything. I think she’s a pretty good partner. I would like to learn for sure.

VM: I think with your story, I think Adam should be a dragon or a shark. If folks are listening, please get Adam on that program. Now, moving on to the topic of the day, trying to understand the crypto landscape of Canada, I think you being an expertand having years of expertise in this field, I think we would love to get your views and expertise on this. I’d like to start out by VirgoCX is so well-versed within the crypto regulations throughout the world. Can you just briefly describe maybe the regulatory environment for crypto exchanges within Canada? How do they work and what is it all about?

AC: Sure. I think Canada is actually leading the word in terms of defining such a challenging landscape. Like trying to provide regulatory guidance and clarities as to how you should run the crypto exchange. I think Canadian regulatorshave done a great job on that. Since 2021, I think we’re already starting to work with the security administrators all across Canada, trying to define what is the industry rules. I’ll try to work with them, try to work with us to provide obviously guidance for us as well as for us to submit application to them. Within Canada, first thing comes first, any exchanges that custody clients assets, working as central exchanges, doing the auto book, stuff like that, has to certainly get the restricted dealer license from the security commission. Also very soon, I think all the exchanges will fall under MAROC. Now it’s called CIRO supervision. This is a very tight, I would say, regulatory body overseeing all the dealers, brokers for that purpose. I think Canada does provide a very clear guidance and how you should play by the rulebooks. Obviously, we have been doing that since 2022, May 31st, when we actually got registered as one of the dealer with our the security commissions and all the provincial security commissions across Canada. I think this is great trying to protect investors not to see another FTX event, not to see another crypto CX event. At the end of day, no matter how much money you make in the crypto world, if the principal cannot be protected, then it is useless. I think this is useless. I think this is very important. We’re seeing certainly really positive things in the industry movement in Canada.

VM: Interesting. Maybe when you traveled outside and studied other markets, do you see differentiating factors between what Canada is doing for crypto versus what other countries are doing for crypto?

AC: Yeah, I think let’s just picka few markets actually we entered. We entered Australia some time ago. Actually, last year. For the Australia market, the regulatory body currently is still under AUSTRAC, which is equivalent to FINTRAC in Canada, which supervises anti-money laundering activities. I think that is still a little bit lighter when it comes to the regulation compared to security regulations in Canada. When it comes to US, obviously, SCC now is being pretty hostile to the industry. I don’t think they are in a position to provide a clear guidance anytime soon for the crypto exchanges. Right now in US, you’re probably still looking at MSP and the FinCEN, in each state. We’re talking about some states need MTR license, some states don’t, depending on each state’s regulations. I think if you look at Hong Kong, they’re now introducing the new rules for the virtual asset service providers, obviously also provide that clarity, trying to run exchange over there. I think in a world, if you look from a word perspective, I think the future direction will be the central exchanges have to be defined as a financial service company because you have to really just protect user assets. I don’t think anti-money laundering itself is enough. You really need to have that accountabilities for the company. I think that will be the future trend and we are well-positioned for such evolved evolutions because we’re already actually ready for that.

VM: Nice. Maybe going away from the regulations, have you noticed any trends within the Canadian crypto market? There were some crypto exchanges who probably moved out of Canada or ended their offerings within the Canadian market. What trends have you noticed? Maybe just like the example I gave.

AC: Right. The main reason for a lot of global players to exit in Canada are two things. One is it is pretty difficult for them obviously to get a license in Canada, considering I would say what I call the historical liability. It’s quite a bit of legacy issues they have to resolve. The second thing is there’s a big discussion currently going on stable coin regulations in Canada. USDt currently is banned, unfortunately, for all the centralized exchanges in Canada. But for most global players, the majority of trading volumes are USDt pairs. Obviously, they’re not going to be able to do it without USDt. That’s also another limiting factor. I think in terms of the industry per se, I think the regulation is providing good guidance. But in the meantime, the industry ecosystem is trying to ask more now from the regulator saying that, Okay, you know what? When can we extend potentially the, I guess, the accepted crypto assets, which is currently the only one that do not have trading limit, BTC, ETH, LTC, and BCH. But obviously, there are a lot more cryptocurrencies people who would like to trade more. I think that will need some discussions with the regulators and when that can be broadened. Also in terms of there’s a lot of discussion about how to protect investors away from major losses, all those, I guess, anti-scam, anti-spam. There’s a lot of trend over there. It’s quite a bit of a challenging moment, especially actually in the bearish market. You just see these people now emerging, trying to really take advantage of the fragile ecosystem. We just have to take positions to protect our users.

VM: I think you answered what my next question is going to be, but do you see any challenges for crypto exchanges who are or who want to establish a business within Canada? I think you really said that the regulations are tightening up. There’s rules that you have to play by. There’s probably limited offering for consumers. What specific challenges are there for crypto exchanges who are currently operating, such as yourself or who want to establish their business within Canada?

AC: Basically, the barrier of entry right now for the crypto business in Canada is becoming very hard. It’s no longer just two-man shop can run it. Not possible. You actually have a strong compliance structure, strong legal team, strong tech team like auditing all the way through. You have to also get to SOC auditing as well to have the data privacy, and all kinds of that stuff. It’s actually, technically speaking, just launched a financial service company now. The barrier of entry is pretty high. But the other thing also very importantly is the business opportunities. Within the current landscape for Canada, which is only allowed is the spot trading. As we all know, the crypto trading space, the major volume does not come from the spot. It comes from derivatives. You talk about margin trading, perpetual swaps, option trading, all kinds of that stuff. But none of that is permissible currently in Canada. Obviously, we’re exploring what can be done in the future. That would also be one thing for the other players to look at Canada is, okay, there is a huge cost for compliance, so what’s the revenue opportunities? If you only have a spot, it may not be balanced out. I think that will be another factor the newcomers will evaluate.

VM: Interesting. Maybe apart from, we spoke about regulators, but I would love to know your take on how maybefinancial institutions view the rise of cryptocurrency or maybe the emergence of cryptocurrency within Canada. Is there a possible collaboration between the two maybe traditional financial institutions and crypto exchanges? What would that look like?

AC: Actually, that’s a really good question. I was attending an event last night with KPMG that literally talked about this topic. That got me triggered into that. I think the traditional financial institutions, for them to hold crypto as a speculative asset, I would say that is still not very popular right now. It’s too volatile for them as an investment. However, there are a couple of use cases, I think at least two that would be pretty attractive to them. The first one is stablecoins. Using stablecoin as a payment tokens trying to increase the speed of the payment across globe, I think that is being assessed by payment service providers, even by certain banks acting as stablecoin custody. I think there are quite a bit of discussion over there. I think the rise of stablecoin and if you look at their transaction amount, dollar value, or the number of transactions, it’s actually astonishingly high. You’re talking about you can be comparable with PayPal, Visa, all kinds of that stuff. Certainly, it’s not a noticeable area. The second thing I would say is the tokenized security token. You’re putting real-world assets on chain. You’re talking about putting the, I guess, the debt securities such as US bond, US treasuries. You’re talking about corporate bond, putting on chain. We’re seeing a huge increase recently when it comes to the real-world assets on chain. Just seeing the last year and in 2023, really on the debt side, we’re seeing from $100 million from beginning to now over $600 million. The total RWA assets there could be $3 billion. It’s still relatively small, but considering the bond that, and also a lot of people now working on real estate, fractionized investment into real estate. I think this asset class in nature is more familiar with the traditional financial institutions. They’re certainly interested in holding, investing, facilitating the users. But now it’s really about how can we make sure that technology is fully ready, and in the meantime, the regulatory oversight can also be there to provide that comfort to the institutions. I think stablecoin adoptions and real-world asset adoptions will actually potentially grow quicker than just Bitcoin, ETF investment. But obviously the crypto ETF and stuff like that has been there for a long time. I’m still a firm belief that SCC has to approve one Bitcoin ETF very soon. They just have no choice. But when it comes to true financial institution adoption, I think the other two asset class will have higher chance to be bigger adoption, I would say.

VM: Interesting. I guess my last question would be that what is next for you? What is next for VirgoCX? Maybe if you could just provide maybe a brief summary of what you see in the future for crypto in Canada. Do you see more regulations, more players moving into the market? What do you see?

AC: Yeah, I think first of all, from our VirgoCX side, our positioning is we will no longer just be an exchange per se. We want to be a comprehensive digital asset service provider. That would include exchange. We recently acquired an asset management company now rebranded to real world asset, digital asset management, which we can provide crypto private fund, crypto supplement accounts, as well as future crypto ETF, providing the world solutions to the people that are needing it. Also we’re looking at real world assets. What can we do with it? How can we bridge that and make sure that the circulation is fractalized and we create values for the ecosystem? Certainly, we’re definitely looking at all these components that are, there’s a way we can make it compliant and then we can be more or less a comprehensive service provider. Also we’re looking at international expansion too. We already expand to Australia, US, looking at Hong Kong as well. Hong Kong and UK, United Kingdom as well. Obviously, these regions, we’re hoping that by sometime next year we can have a good presence over there so that we can be a little bit more or less a global organization on that front. From a Canadian perspective, I think regulation definitely going to be tighter, no doubt. But also in the meantime, we’re just hoping that even with the tighter regulations, there could be more business opportunities and business models that could be permitted within Canada. I think that we will need to achieve some balance. You cannot just have higher cost of regulatory oversight, but in the meantime, you don’t have any business opportunities. I think that is something we definitely need to keep in mind and also trying to work with regulators, trying to achieve that balance. Last, whether it’s going to be new people coming to Canada. Yeah, I think ultimately it will because Canada is providing a much better regulatory oversight compared to US right now. Definitely much better. But in the short term, I don’t think so because the market is a little bit currently pretty suppressed and also the barrier of entry is pretty high. It’s no longer just easier to do something in Canada. I think we will need to go through that consolidated phase, getting things straightened out, and when the next market comes, we will see what happens.

VM: Amazing. Adam, I really want to thank you for your time today. This is such a complex topic and such an interesting one that people want to know about, so I’m happy that you were able to join us and answer so much about regulations, what’s happening in the industry, what trends you see, and obviously what the VirgoCX team is working on. You have some cool stuff that you’re working on with your team. Thank you so much for joining us today, and I hope whoever that ever listens to this episode can take a lot of knowledge from what Adam shared with us today. Please, if you have any questions for us or Adam, please do comment down below because learning about crypto and what’s happening within the landscape is important. Again, thank you so much. Thank you so much, Adam. Thank you.

AC: Thank you so much for having me.

VM: That is our episode for today. I want to thank Adam Cai, the CEO of VirgoCX, for joining us today and providing his expertise. If you have any questions for us or Adam, please do comment down below. If you enjoyed today’s podcast, then please like, share, and subscribe to our YouTube channel. Thank you so much for tuning into the Simplify Payments podcast presented by Paramount Commerce. I’m your host, Varad Mehta, and I’ll see you soon.