On The Brink with Castle Island - David Low (Hata) on Crypto in Southeast Asia (EP.574)

Episode Date: November 13, 2024

David Low, CEO and cofounder of Hata joins the show. In this episode,  In this episode, Wyatt and David discuss: Crypto adoption in Southeast Asia Regulatory attitudes Operating a centralized exchange Bitcoin interest vs other cryptoassets in the region

This is Wyatt from Castle Island, and on today's episode of On the Brink, I was joined by David Lowe, co-founder of Hata. Hata is an emerging crypto-asset exchange serving the Southeast Asia market and a portfolio company of Castle Island. David and I chatted at length about the state of crypto in the region and what to be excited about. Without further ado, I hope you enjoy this episode. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them where the guests on this podcast are solely their opinions

and do not reflect the opinions of Castle Island Ventures. Guests and host may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep.

The federal government is stepping it to stabilize Fannie Mae and Freddie Mac. The two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. David, thanks for coming on the podcast, excited to have you joined today. I think it would probably be best to start with a quick introduction.

So I'd love to hear more about your personal background, how you got into crypto and what you're up to now. Sure, sounds good. So just a brief introduction of my personal background. I started my career as a lawyer. So I was a commercial litigator. I graduated in the UK, then went back to Malaysia, Falunport to be specific, spent about a year plus in legal practice before I then start moving into startups. I discovered Bitcoin in 2017. I would argue that I was very late into the scene, but some will argue otherwise in this day and age. But like most people who've discovered Bitcoin for the first time. When I discovered it, to me, it was revolutionary. I knew that this was a space to be in. This was definitely a technology that can disrupt many areas in industry, and in particular, obviously, the financial industry that has lost in inefficiencies and gaps still this day and age, and that motivated me to enter into this space. My latest employment before I came into founding the business, I actually joined a licensed crypto exchange in 2018. They were pretty small back then, but I let their business-built.

in Malaysia, supported their regulation engagements with regulators here in Malaysia, and then subsequently applied for a license and then built their business in Malaysia. I also supported them to expand across the region. So in particular, applying for licenses in Singapore, Philippines, Indonesia, also launching businesses in those markets, including Australia as well. After five years building a pretty decent exchange, I decided to leave their employment to found Hata because there are obvious market gaps that I still foresee in this day and age.

Happy to share more of that later as well. But yeah, that hopefully gives some color to listeners how I came about in space and right where I am today. Yeah, I definitely want to hear more about the market gaps you're talking about. One thing you said, which I think is interesting, your initial interest or draw to crypto and to Bitcoin specifically in 2017, was that out of pure interest for yourself? Or was it out of excitement having grown up in Malaysia

and the part of the world that you were in, and you thought there was specific application to that case, or was it from a legal point of view, or what drew you to it in the first place? I think the reason why I got into crypto is probably the reason why most people in this part of the world, especially in Malaysia and Singapore as well, got into crypto,

is because I was looking for an alternative investment to increase my wealth. It started from that point. So when I studied the chart of Bitcoin, I understand the technomics, it allowed me to really appreciate why the value has increased over time. And obviously, right, you learn about the use of blockchain and whatnot.

And that gives you a lot more confidence in the value of the technology that then motivated me to enter this space. And then that's when I start learning a lot more. But at onset, it was really from a pure investment perspective. I really trying to understand that space because I want to make money. And from there, the interest as an asset then grew into other use case, which then motivated me to build a career and a business. Yeah, that makes sense.

I'd love to hear more about what the market gaps are that you identified for Hata, and it might be helpful to loop in some color on the Malaysian market and Southeast Asian market as you see it more broadly now, as well as what your previous role was, and where you see there being an opportunity and what you're so excited about with the Hata opportunity. Sure. So maybe I'll just complete some of the background. My previous role, I was the regional general manager for Luno, which is a pretty popular licensed crypto exchange based off in South Africa, they're in London,

and they are obviously now in Southeast Asia as well. Being in that business gave me the opportunity to really give into the market to see what are the good stuff and the gaps. I think that there are still a opportunity for retail users in Malaysia and in Southeast Asia to access better exchanges. I think most users listeners will recall what happened to FTX. It's not just FTX. In the last cycle, there were a lot of exchanges that went bus.

for poor reasons like FTX, but some just because they're not sustainable, right? So there are still a lot of exchanges that lacks the right governance, management, and business plan to keep themselves afloat and then provide a good product and service to users in this day and age. So I think that was the first gap. So there's still a lot of opportunity for retail playing. And considering that the market is still expanding in size, that motivated me to believe that whilst we have a pre-decent adoption on a retail market in the last three to five years, the market is still growing, and there's still more opportunities to then capture new market shares

of new people who explores the technology for the first time. So that's one. The second piece is because of development from the US. So it's very common for any development. The Asian market was look at the US as a market as an indicator of what may happen in this part of the world. In the US, institution adoption of crypto has taken shape. There's ETFs. There's huge family offices investing in crypto in their balance sheet, but we don't necessarily see that in Asia. And in Malaysia in particular, there are actually no clear ways for these institutions to participate in this space. The exchanges as well that has been operating in Malaysia and in this region are also just getting started to get themselves ready to serve institutions. But having said that the needs of the institutions are vastly different from the needs of the retail.

The way you onboard them, the way you serve them, the way you provide them with the right sense. support is very, very different. For a retail investor, providing basic and significant information, letting them having a simple ability to fund $5,000 is good enough. But when it comes to intuitions, they want more than that. They need guidance on first, how do they get on boarded? There are documentation is a lot more complex than a normal user, and the loss are not clear. The second part is taxation. How does these guys recognize assets in their balance sheet? That is not clear either. And so I think the exchanges like myself, we play an important role to first know. not just providing that door for them to enter this space, but beyond that, we need to work

with various established associations, tax agencies, regulators, tax authorities to then provide a clear picture of how these can, things can happen before the institutions get educated and then enter the space for the first time. And that's when you see your next 10-X growth in the space, hopefully in the next 10 years as well. So I think these are what getting me really excited. These are the gaps that I see. And hopefully I can then serve these two segments of the market that have very different needs in a very, very responsible way. Yeah, the institutional market is something that we've been very excited about here for a long time. For the benefit of anyone listening, what does the institutional footprint look like in your regional market? Are

they banks, asset managers, family offices? What sorts of customers do you expect to come into the space? Yeah. So I think from where we see large institutions, sovereign banks, wealth funds. They are still monitoring the space very closely. So they're not yet at the level where they want to step into this space with their money immediately the next day. But we see a much larger appetite from high net worth. So these are the guys who have, let's say, for example, 5 million, 10 million, 50 million, an asset value in their investing portfolio. They've typically dabbled in the stock market, in commodities or in safer investments. For example, like unit trusts, they are looking into the space for the first time.

And those guys who are trying to get these guys in are obviously brokers and asset managers. So in Malaysia, for the first time, the Secrets Commission have actually licensed two asset managers to provide fund management service in crypto, but they need liquidity. So where do they source liquidity? And because of how regulators are crafted, regulars will always indicate to these asset managers or fund managers to source liquidity locally from local exchanges. And that is when Hata coming to the picture to provide these liquidities in order for them to then hold these assets in their balance sheet. And so high net worth market has started.

We've seen a lot of high net worth coming to this space, wanting to invest in crypto. They don't want to put their money into a spot exchange themselves and own the crypto themselves. Or they want to park that money with an asset manager just to manage their funds for them while they sleep. But when it comes to family offices, we have seen some interest in the space. It's only a matter of time before they cross that line and get into this space for the first time as well, which are very excited about. Got it. And I'm curious, when you identify that market opportunity, Coinbase is obviously a very U.S. or North America-centric business, but you have finance outside of Luno, you have OKX.

Why do you think this is a portion of the market that is less conducive to someone like that taking share where they already have very wide market penetration versus some other segments where they've done very well? Yeah, I get that question a lot. I think another way to ask the question is what would make Hata different, right? Hata is a spot exchange. change just like Binance, how can we then make sure that we set up our presence whilst guys like Binan are still operating in a large steering? It goes back to licenses. A lot of people don't realize the better have a license. License gives you trust. But beyond that, it provides comfort

and it allows institutions to then go to their board and get legal mandates to invest into the crypto. Family offices, huge families or institutions or big companies or even public companies, they need border approvals. They need to know that when they park their money somewhere, it's done in a fully regulated environment, just like a bank or a fund manager. And without that kind of safeguard, they'll never enter the space.

And so this is why guys like me important, Hata's important, but we want to play that role. I would even argue that large institutions, public companies, family offices, they will never park their money on likes of finance because they are not local, they are global, but they don't have office in this part of the world. and therefore they need that safeguard in order for them to put their money in for the first time.

But beyond that, we have Fiat Rails, which is important. We have US dollar rails. For any listeners out there, the US dollar market is one of the most traded hot markets for trade settlements in Asia. Everyone knows that. Everyone still use a swift network to do that. People still use US dollars to move their monies across Asia. And so then these monies are allowing these monies to then enter the space for the time is critical. And we provide that.

But beyond that, because we're also licensed in Malaysia, we also provide the Malaysian ring it reels. So therefore, what it means is these institutions can then basically just use their bank account and do a direct bank transfer into an exchange like us and not worry that the money belongs further. And we have then safeguards that was required by regulators to then protect these monies and ensure that these monies are properly converted and stored in a safe manner as well. And that is why license exchanges will always have a huge role to play,

compared to global exchanges such as Binance. Is the licensing itself enough, or how do you establish trust for those larger players to come use the exchange? Yeah, I think from a business perspective, the license is enough because the regulators, for example, the Secrets Commission are very reputable. Regulators such as LeBouan Financial Service Authority, which is another regular that supervisors is to operate the U.S.E. Exchange, outside U.S., they are very reputable as well. for these guys, as long as your license, they have the safeguard to at least start a conversion with you.

Then it's up to us to then demonstrate what was approved by regulators that can then protect their funds. So they still need those details to be in the picture. And then after that, it's all about, okay, how safe is crypto? What's the value proposition? And yeah, yeah, yeah, yeah. Yeah, it's interesting. I think people looking from the outside have a perception that you'll have Coinbase and

Binance and maybe one or two other exchanges that'll take share across markets. but you have these very idiosyncratic regulatory setups across different countries, which obviously you know a lot about giving your legal background. Without giving away your secrets, I'd love for you to talk more about the Malaysia in particular regulatory scene because it's very unique the way that there's different governance bodies that are looking over stable coins and crypto assets because I think here in the U.S. we think about them as being one and the same. So we'd love to hear more about that.

Yeah. So I think in Malaysia we have a very unique way of governance. governing crypto. So crypto is governed as an asset class. The Securities Commission then regulates it as a form of security. So unlike the US, the Securities Commission in Malaysia is very open-minded. They recognize crypto as a legitimate form of investment because of data that was given to them, they're convinced that this is an asset class that will grow for a long period of time, and therefore that motivated them to then regulate it, obviously to also protect investor protection. Stable card is not so clear-cut. That is under the purview of the same.

central bank, which is another regulator at the same level as a CICBIS Commission, and their role is to govern the movement of money. So for a stable coin in Malaysia, unfortunately, at this point in time, it's not yet legalized. You wouldn't find any stable coin being introduced, but that will change over time. As we've seen in every part of the world, as technology grows in adoption, as the mass market adopts it, more regular as at some point will have to then regulate it. So I believe it's only a matter of time. But outside Malaysia, then you have a different kind of ways to manage it, which is what I interestingly observed. For example, in Singapore, there is no two regulators. There's only a single regulator, which is the Monetary Authority of

Singapore. They regulate both money and assets. And so therefore, they regulate crypto under their payments of the Business Act, which is interesting. So any crypto exchanges, whether you're facilitating crypto payment or you're facilitating crypto as a formal investment, you then have to apply for a license with the MES and you get regulated under that. but generally speaking, crypto is seen as a payment instrument rather than just being defined purely as an asset class, right? When you move into Indonesia, which is a whole different program altogether, they are a bit more fragmented like Malaysia, so there are multiple different regulators.

There is a central bank. There is the commodity regulator called Barpepti. They are the ones who regulate the commodity market in Asia. And what they decided back then was to then regulate crypto under the community ministry. It's been done for, I think, at least four years. but now that the market has grown significantly large, the central banks for the first time is actually going to take that portfolio back

under their jurisdiction, and I believe that will happen sometime next year. So different market have different ways of regulating it, but ultimately the overall big picture is that crypto is being legalized, and I think it's only a matter of time where we see payments coming to the space for the first time. I imagine given there's no setup for a venue based in Malaysia to allow for the purchase of stable coins,

you probably get fairly common secondary trading and peer-to-peer trading networks for the assets where you can't do so on a venue. Oh, yeah, 100%. We don't have the data. But again, we're always on the ground, right? For every 10 crypto users that we speak to, at least 2 to 3 are using crypto as a formal payment. Wow. You have another couple of guys out of the 10 who will say that, hey, they store their wealth in stablecoin in USD or USDC.

they put it in a yield-generating product just for them to earn that extra 4 to 5% on an annual basis, which basically beats the rates of local banks here already. You get different guys who want to really enter the space for the first time using crypto for different purposes, which is why I think it's only a matter of time when these segment users grows to become more than the 2-2-3, where they become like 50% for example. Regulins who look into regulating that in a whole different way altogether. And what assets are you seeing draw the most interest, both from your retail and for institutional users? I think for first time users, it's always the most popular coins.

So I talk about Bitcoin, Ethereum, Solana in this cycle, or NXRP. So these are always the three to four cryptos that draw some retail and institutions in. Is that a lot of trading volume? Yes, trading volume as far. These four coins has the most trading volume across exchanges. I guess I mean users are trading and not just buying and holding, or what are the habits like? I think it's both buying, holding for long-term investments. it's still the, what we call the blue chip cryptos.

These other cryptos has been in space for a long time. For trading, most of the trading volume are still centered around these coins. But the other coins also have pretty good adoption as well. Uni-link. We've seen some demand for Tron, B&B, obviously, there's another one as well. That's finally demanded. Once users start discovering coins beyond the typical form. Yeah, I got it.

And are users concerned you guys custody, user assets? Is there much concern around that? Do you laugh for self-custody? or how do you guys look at the setup that you're providing? Users are always concerned about custody for sure, because of past incidents. Users are a lot more careful now, which is why I think licenses are important.

So we are centralized exchange. We store users crypto on their behalf. We keep it on the liability side of the balance sheet because that's a liability and debt that's owed to users. But beyond that, because we're regulated, regulators who also have learned from the past, especially in the case of FFTX, they want exchanges to be a lot more responsible.

And so in our case, what we can say is that the requirements of at a minimum, a hot multi-signature wallet or an MPC wallet is the minimum requirement for an early stage change. But once you start maturing, then a cold wallet as a requirement by regulators is a must. But beyond that, regulators look deeper into the details as far. They look into who in a company has access to these cryptos and how is the exchange for its horizon like Hata place framework to prevent one of the founders to take their money and run away. So putting governance control in place and demonstrating that that has been put in place is critical. The set up an internal audit function. The report to the board is important.

The regulators also requires a monthly submission of data to make sure that they check whether the crypto in your asset is indeed there or not. And then obviously you are then subjected to an annual audit by a repeatable audit firm. That's the legal requirement required by the securities commission as well. Comes in the place. So with a license, there's a lot more supervision. There's active supervision, in fact, by regulators. which allows the users to be safeguarded, even if they prefer to keep their cryptos in a centralized exchange,

such as startup. Got it. The new users are seeing come in. I'd say on the retail, but maybe even more so on the institutional side, are they underserved and looking for venue to trade crypto and they're ready to go, or do you find yourself doing a lot of work as well as the company and trying to get people to invest in the asset class where they might not have been there before, or what does the flow look like?

Yeah. So it depends on the market segment for small medium enterprises, small companies and medium companies, because they are a lot more ready to try. So we do get queries organically without us putting a single marketing dollars. Then come to as asking us, how can we access and invest in crypto into our balance sheet? So that's pretty organic, which is why we intend to do a lot more work to advertise and position ourselves correctly to serve these segment of market. But then when it comes to larger companies, public companies, public companies, companies, institutions, family offices, they are still on the side requiring a lot more education because they just don't know how their cryptos can be safeguarded and they don't understand the space enough, although they've heard of the opportunities, but there's still a lack of understanding of what the technology can do that provides them the confidence that this is a long-term play rather than a short-term one. So those are the guys that we are actively reaching out to to speak to right now to educate just so that when they are ready, when they have the right mandate internally, the first exchange I think of is Hata and will be right there to then

meet the needs. And broadly speaking, what are you excited about over the next five years, both in the region and for Hata? What trends in we'll see emerge and what should people be aware of? I'm most excited about the growth still. I think that there's a long way more to go before we hit the ceiling in terms of adoption for crypto. So, for example, again, speaking from experience in 2017, before crypto was legalized in

Malaysia and even in Southeast Asia, nobody believes in it. Everyone thinks that crypto is a scam. It's not an instrument that's serious. Fast forward today, we estimate that 3 million retail users in Malaysia have already accessed crypto. Compared to the total population of Malaysia, it's about 34 million. That's representation of about 8%. So from 0 to 8% in 4 years, that's pretty impressive. And so we do think that with retail settlement continue to grow, I do think that it will double up over the next five years. Plus, for the first time, serious money coming larger money coming institutions into this space will then spread the entire growth of the industry and i think that's what i'm really excited about the second pitt is obviously the use case

most people invest in crypto because they want to make money whether it's in a short term or a long term investment something i'm really excited about is the payment use case we do see a lot of some companies coming to us already asking us hey how do we facilitate the movement of money from a cross-border perspective for example we've heard of people saying i've got a client in, let's say, Hong Kong, wanting to move stables into Malaysia to convert into ring it or US dollars, or they want to convert that into Singapore, just so that they can then complete a purchase of a property. And we've got several companies that we're talking to actually right now in Malaysia that wants to figure out how we can do that. That is another part

that I'm really excited about it, because then allows crypto to be used on a recurring basis, on a more frequent basis, and on a transactional level, which will then allow the growth to really 10x. Can you do that from a compliance perspective right now? we can 100% because crypto is really regulated as a form of asset. So from a compliance perspective, our obligation is to ensure that when we facilitate the value transfers of these funds through crypto, the customers are screened. They are not coming from illicit activities. And there are many technologies that's really been established that allows us to do that.

And then ensuring that the customer's fund flows are first party, not third party. So if you open an account, only you can fund an account. and the size will also make sure that it mirrors and is the representation of the intention of you want to want you to pay a property. For example, you tell us, right, you want to buy a property. We'd probably expect $100,000 or $200,000 kind of a check size. We wouldn't expect a $10 million check size. So ensuring that all the information tallies and is consistent will then allow us to operate this in a compliant manner. Got it. Well, David, I appreciate you joining. I think that's covered most of the topics I was really keen to learn about. So appreciate

you coming on and excited to hear how everything goes in the coming months. Thanks for inviting. Thanks for supporting as well. Cass Island are very supportive investors on our board. We recently close a 4.2 minute fundraise primarily led by Cass Island as well. So we really appreciate it. We hope with your backing and your insight from the US, we can then really grow crypto in Southeast Asia into the size of where we see in the US today. We hope the same. Excited, David. Thanks again. Thank you. Thanks for the time. Thanks for listening to another episode of On the Brink with Castle To find out more about Castle Island, visit Castle Island.V.C. To listen to all of our podcast episodes, please go to On the Brink-Podcast.com

or just click on the tab in our website. Thanks for listening.