“FTX had gained investments from hedge funds, governmental guide funds and traditional companies,” Du says. “Now, those institutional investors are losing confidence in the crypto industry. They are either withdrawing money from the crypto world, or hesitating about investing in it.”

New Huo Tech, formerly known as Huobi Tech, also suffered from FTX’s collapse, he says. Hbit, a subsidiary of New Huo Tech, reported that it was unable to withdraw cryptocurrencies worth about US$18.1 million deposited on the bankrupt cryptocurrency exchange.

In response to its exposure to FTX, Du says he is now more aware and appreciative of the need for the government regulation of cryptocurrency companies.

“In all future cooperation, all of New Huo Tech’s subsidiaries will choose to team up with compliant crypto firms as far as possible to reduce our risks,” he says.

Regulation will facilitate industry’s growth

It has been 14 years since the “mining” of the first cryptocurrency, bitcoin, yet the cryptocurrency industry still has no unified global regulatory framework in place.

Demand for the introduction of more rules has been growing in recent years as digital currencies – existing only in computer code and originally viewed as niche products – have become more widely accepted.

The industry’s rapid, often volatile evolution, including the introduction of new products and offerings, has also heightened calls for legislation, with the complex nature of different digital assets raising questions of whether they are regarded as a currency, commodity, or security, and which authority should control them.

Gary Gensler, chairman of the United States Securities and Exchange Commission, the American agency regulating securities markets, told a 2021 Washington security forum that US Congress should grant the agency greater powers to protect investors in the cryptocurrency market, which was “rife with fraud, scams and abuse”. He said: “Frankly, at this time, it’s more like the Wild West.”

However, Du believes the crisis surrounding the collapse of FTX can have a positive, long-term effect on the industry and present great opportunities, with new areas of growth emerging in future.

The first step in the expansion of the cryptocurrency world will be to welcome new regulations, he says. “If the crypto market maintains its current scale, then it doesn’t matter whether it has regulations from the authorities or not.

“But if the industry wants to be a US$10 trillion, or US$100 trillion market, the whole industry needs to be regulated. No sovereign government in the world would allow a financial market of this size to go unregulated,” he says.

Data from the cryptocurrency asset, price-tracking website, CoinMarketCap shows the aggregated value of more than 22,100 digital currencies was less than US$795 billion up to the end of last December – a dramatic fall from November 2021’s record high of US$3 trillion.

Yet even at its height, the total market value of the cryptocurrency market was much larger than that of a single major multinational enterprise; Apple, the American multinational technology company, for example, as of this month, has a current market capitalisation of US$2.299 trillion.

Du believes regulations will make the cryptocurrency industry more transparent, help reduce the complexity of its internal management and avoid “behind-the-scenes” problems, such as the misappropriation of FTX clients’ assets.

Regulatory compliance of cryptocurrency companies can also attract greater investment in the industry from traditional financial institutions, he says.

Currently, traditional capital does not have enough access to the cryptocurrency industry. Du says that with the Type 4 (advising on securities) and Type 9 (asset management) compliance licences the company has obtained in Hong Kong, it can buy only a limited range of financial derivatives for clients.

Although the cryptocurrency exchange Huobi Global – alongside Binance – has relatively higher liquidity, compliance issues mean that to carry out transactions it must rely on Coinbase – a cryptocurrency exchange which has “less liquidity but is more compliant”, he says. “I think these [kinds of limitations] greatly affect the ability of ‘big money’ to get into crypto.”

However, things are starting to improve as the world’s securities authorities are starting to “catch up” with growing cryptocurrency demand, Du says. Those authorities covering jurisdictions such as Hong Kong, Japan and South Korea are consolidating regulatory frameworks to allow more licences to be issued to cryptocurrency companies.

In Hong Kong, a licensing regime for virtual asset service providers is expected to come into effect on June 1 to officially give the city’s market regulator, the Securities and Futures Commission (SFC), the mandate to provide oversight of the cryptocurrency industry.

As many virtual assets are not considered “securities”, they are outside the SFC’s existing remit. Companies hoping to seek SFC approval to distribute virtual assets must first obtain a Type 1 licence (dealing in securities).

Up to now the high thresholds have limited access to virtual asset trading to institutional investors. But it is hoped that the new licensing system will allow retail investors to enter the fray.

New Huo Tech is in the process of obtaining more licences from regulators to bridge traditional companies with the cryptocurrency world, Du says. The company also communicates proactively with regulators for suitable regulatory proposals.

“With greater understanding of the industry, regulators will come up with more supporting policies and issue more licences, which I think is what we need to do,” he says.

Looking into decentralised finance

Du also predicts that the collapse of high-profile centralised cryptocurrency exchanges such as FTX could stimulate the growth of decentralised finance, or DeFi – a set of alternative financial services using cryptocurrency assets on a peer-to-peer network, which cuts out traditional centralised intermediaries.

“I have seen a surge in on-chained transactions recently,” he says. “More investors are turning to peer-to-peer crypto exchange services, as all transactions and data on a DeFi platform are recorded on a public ledger, making it transparent and easily auditable.”

He says centralised exchanges are taking care of assets on behalf of clients, but “it is not 100 per cent under your control, which might lead to disastrous consequences”.

The large number of clients’ assets accumulated at centralised exchanges also means that these platforms are easy targets of hackers. Blockchain data platform Chainalysis says 2022 was a record-breaking year for cryptocurrency hacking, with losses of US$3.8 billion – up from losses of US$3.3 billion in 2021 and only US$500 million in both 2019 and 2020.

In DeFi applications, investors manage cryptocurrencies and other digital assets through protocols, which are stored simultaneously on thousands of computers. They manage their own electronic wallets and use “smart contracts” to conduct transactions.

“DeFi’s algorithm makes it nearly impossible for hackers to steal funds,” Du says.

However, DeFi will not solve all of the problems for investors who have lost faith in centralised cryptocurrency companies, because it comes with protocol risks.

The DeFi app relies on embedded smart contracts to execute transactions automatically, and bad actors can exploit flaws in the algorithms and initiate hundreds of transactions – often within seconds – to steal huge sums of money. Decrypt, a cryptocurrency-focused digital media website, reported that in 2021 alone, DeFi users lost digital currencies worth about US$10.5 billion.

Du admits that there are challenges to overcome, but he foresees a bright future for DeFi as program developers will continue to upgrade and optimise the algorithm to avoid protocol risks.

He says New Huo Tech is working to build its first decentralised wallet, which is expected to be rolled out soon, to tap into new business from investors hoping to take advantage of new cryptocurrency opportunities.

The future of cryptocurrency industry

Du says cryptocurrency markets appear to be recovering gradually since the start of the new year.

Next year, cryptocurrency investors could see a sharp rise in the price of bitcoin, after the staging of the “fourth halving event” – where the rate of the supply of the cryptocurrency, and the reward for its production, is cut in half.

Since the world’s first cryptocurrency launched in 2008, past halving events, held every four years, have successfully counteracted inflation and maintained scarcity by cutting supply and raising demand – leading to dramatic bitcoin price rises.

“The logic is similar to the US Federal Reserve System to raise interest rates,” Du says. “I believe the crypto market is about to welcome a raging bull market next year. I expect the price of bitcoin at the end of next year will be US$200,000.”

The price of bitcoin rose from US$16,688 in early January to US$23,720 early last month. Despite its value fluctuating in recent weeks, the price of bitcoin has remained well above the US$20,000 mark.

New Huo Tech recorded HK$9.452 billion (US$1.2 billion) in revenues in the financial year up to June 30, 2022 – an increase of 1,447 per cent compared with the previous financial year. But because last year experienced so many “black swan events” – unforeseen and unlikely occurrences that typically have extreme consequences – the company’s gross profits fell by about 39 per cent.

This year, Du says his goal is to lead New Huo Tech so that it is regarded as “a respected crypto company”, which can take its place within the “mainstream financial sector”.

He foresees regulatory compliance and DeFi as two breaking points of the cryptocurrency industry.

New Huo Tech aims to expand its asset management, trust and custody, lending and over-the-counter brokerage business to make things easier for its institutional investors.

It has successfully obtained both Type 4 (advising on securities) and Type 9 (asset management) compliance licences from Hong Kong’s Securities and Futures Commission, and a Trust or Company Service Provider licence from the Hong Kong Companies Registry, and will apply for more licences from global regulators to attract the traditional investors keen to enter the crypto industry.

“We are optimistic that the industry will make a full recovery,” he says.