Austin Kimm speaks to Choise.com Founder and CEO Vladimir Gorbunov to respond to some of the community's questions in relation to the recent market turmoil, proof of reserves and risk management.
- 00:00 – 00:53 What was the cause of the recent market turmoil?
- 00:53 – 08:45 What was the actual reaction of the market?
- 08:45 – 10:40 Proof of reserves: is it really significant?
- 10:40 – 19:08 Too good to be true? High interest rates and risk management strategies
- 19:08 – 25:37 DeFi and its role in managing risks
- 25:37 – 29:02 Vladimir's thoughts on trust and future of Choise.com
Austin Kimm: OK everybody, thank you for viewing this video. This is Austin Kimm, one of the founders of Crypterium, now Choise.com. And today the idea is that we're going to respond to a few of the community's questions, particularly with relation to the recent market turmoil, proof of reserves and just generally risk management. And to do that, I'm going to interview my colleague and founder and CEO of Choise.com, Vladimir. So welcome Vladimir. I'm gonna throw some questions at you and hopefully you can answer them and keep the community nice and happy.
Vladimir Gorbunov: Thanks. Will be happy to be interviewed by you. It will be the first time, I think, that you are interviewing me.
Austin Kimm: Yeah, I think so. I mean, it's a bit odd, but let's give this a try. Alright. So let's start with the market, I think. It all started, I think everybody understands this, with the collapse of Luna that created a let's say a domino effect on other companies. Then coming into difficulty we had Celsius, we had BlockFi, Three Arrows Capital and of course the more recent ones of FTX and I saw today – Genesis as well filed for bankruptcy. So let's just start with a quick overview of the market and how you see it and what's the cause of all of this recent turmoil.
Vladimir Gorbunov: Yeah, that's a very, very good question. And I think that not so many people really understand the whole history of the things that happened during the last year. So I just want to maybe explain a little bit more why Luna collapsed and there was as I said domino effect. Then just get to Celsius, BlockFi, Voyager and even FTX. So most of the companies in the market. The reason for that was, first of all, that most of these companies, I mean Celsius and Voyager and lots of other companies, came to the market just before the last crypto summer. And around them there was a very good and interesting opportunity to make money. There were tons and thousands of different investment funds. Everyone thought that they were very good at investing because everything was really green, if you would invest anywhere a dollar you could probably earn two or three or five, doesn't matter. And some companies started to borrow money, some companies started to provide some yields and deposit accounts, etc.
And Luna at one time collected almost $40 billion in their stablecoin. That basically was hedged by the Terra Luna main token. And the whole strategy worked just because there were a lot of positive signs in the market, people put their money, so it was like a pyramid. But what happened in reality? I remember a lot of communications with colleagues in the beginning of the year. And they asked me: why didn’t you store your money in Luna? You can make 20% there in USDT. And that was the core logic and the core idea of thousands of different funds. They borrowed money, let's say, from Celsius for 10% and they then put them in for 20% and got this 10% margin. So that was not a small game. That was a really big fish game. I mean billions and tens of billions of dollars were invested this way.
But why didn't we? Why did we never use Luna or Celsius or anyone else? First of all because when I started to discover Luna at the end of 2021, there was still a big, pretty big amount of money there, and I thought “Ok. How can they make 20% if they are managing billions and tens billions of dollars?” Keep in mind that in May 2022 they were holding 40 billion, which means that they needed to generate a value of at least $8 billion a year. But what kind of business could generate $8 billion a year? What should it do? And we were never involved, never ever. When I spoke to anyone, I said the same: just, please, don't touch it.
But what happened then? When Terra Luna collapsed? No matter was it an attack, was it something else. Doesn't matter what happened there. But after a month, as you have mentioned, Celsius collapsed and all others. Why? Because they were so much involved, not maybe by themselves, but the funds of their clients were involved. And when they started to ask people to pay back the loans, for example, all those funds, and customers, and investors could just say “oh, sorry, we just have problems with Luna, and all our money is there”... And it was just the beginning.
The whole story later came to the FTX and to Genesis and to all of the companies in the market, because the market was still a young one, it was not really mature. And everything was united: one thing depends on another, one company depends on another. Same money was moving in a circle between one company and another. And even those good investment funds that were good before, one day just lost a lot of their money. They lost the opportunity to make that money. They didn't have any other chance to get their money back.
So I remember my communications in the first half of 2022 when colleagues on the market told me that there are Tier-1 clients, Tier-2 clients, Tier-3 clients. Let's say Genesis and Three Arrows Capital would be Tier-1 companies. But… I said: “Ok, what if it's a Tier-1 company?” – “So it means that you can provide a loan without any hedge, it could be not collateralized”.
That was the whole idea of the market back in the beginning of 2022 and this picture totally changed after just half a year. And what we see now is that there are absolutely new roles on the market. And most of the companies that were involved in Terra Luna, big companies and… You should understand how big was Celsius, they had approximately $18 billion, and they got them in less than 18 months, meaning that they were receiving $100 million a month. So they needed to manage them, to really make money out of this money, to pay back some bills, etc.
So immature market, very intransparent business and all of these things with Luna – I recognize it as a total scam. That just brought the market to the situation where it is now.
Austin Kimm: Ok. So bearing in mind everything that's happened, how do you think the markets actually reacted, because in fact Genesis collapsed on the weekend and the markets moved less than a percentage point. So what's the actual reaction of the market to all of this?
Vladimir Gorbunov: Of course at the beginning this reaction was very strong. But what was interesting, at the moment we could say that this reaction was very mature, because the market cap today is approximately the same as it was before Luna crashed. Of course, it needs to be recovered. And I believe that crypto spring will probably begin later, in the next half of this year. But anyway, it shows that the crypto market isn’t broken because of FTX and the like. I could also say that the banking market was not broken by Lehman Brothers.
I think the market will recover. Now we see, after the first months of FTX collapse, some positive, green lights on the market. So funds are actively investing… And usually I recognize it by the amount of calls that I receive from my friends. In crypto winter my phone is silent. But in some active seasons people start to call me asking, how to buy Bitcoin, what I think about this or that cryptocurrency. And so I recognized that I started to receive these calls a couple of weeks ago. So let's have a look.
Austin Kimm: Alright, very good. So you mentioned FTX and the collapse and how it's not gonna kill the market, but the market has reacted to FTX differently than it did the other. I mean FTX hit the headlines of pretty much every major newspaper around the world, etc. And many of those companies, newspapers are saying the “I-told-you-so” type approach. But I think the more practical response is that almost all the exchanges and the big lending institutions for example have tried to show a proof of reserves. And OK, however, they pronounced themselves now, did the same on Friday. So what do you think about this rush for proof of reserves?
Vladimir Gorbunov: First of all, I think that the market needs to be much better regulated. And it will be regulated. I think this situation, and all of these cases during the last year will help regulators at least to understand how they want to manage the business, the market and what will be the requirements from the companies. Because two years ago you could say that we were a crypto bank, we could pay you 50% a week and no one basically would have stopped you from doing that. Keeping in mind that if you're a bank you have requirements for capital and there is a limited amount of actions you can do basically with funds.
So I think that regulator will be there and that this regulator will explain the whole market the rules how to work, how to provide better service, how to be much more transparent, what kind of investment actions should some crypto companies do, what are the requirements for the capital and should there be a board of directors and a lot of things that you can find on traditional markets. And that's good. Because if Celsius and some other players would just continue to do what they were doing, we couldn’t even imagine where we could have been today or in a year's time. Maybe the amount of money that people could lose would have been over hundreds of billions of dollars.
As for the proof of reserves, I don't really think that it's an instrument. For example, if a company just faces the problem of FTX and wants to do something really fast just to say we are not FTX, we are not Celsius, we are not BlockFi, we are good, then they will start to provide that type of documents. But if we look at the year or half a year ago, and come to Celsius or other companies like Genesis and even Terra Luna, asking them to provide a proof or reserves, they will provide it! And you will understand that the amount of their liabilities will be covered for 100%. Because they would recruit an auditor, because they would calculate assets triple or double time, etc. So they would do something. And I wouldn't say that they will lie. Sometimes they just don't know. They just don't really know.
Because if we look at banks, for example, if a bank has a liability of a billion dollars, and has a proof of reserves that they have this billion dollar in assets. What happens if every client of this bank goes to the office and takes money from his deposit account? It is very likely to collapse, but why will it collapse? Because they’ve been providing loans for 20 years, they’ve been providing mortgage. And sometimes it takes years to get this money back, to get to make them liquid again. But it's an operational business of each single bank. And on traditional markets you will find companies that are insuring this risk.
So what I want to say is that a proof of reserve is just something that some companies start to use as a proof, but it is not a proof. We can make any kind a proof of reserve, even for a billion dollars. But who needs it? I mean, I can show you this and that.
I think that the most important role of the crypto businesses is to be audited and to be audited first of all by the regulators. The regulator should come and do an audit of all of your liabilities, of all of your procedures for money management to understand the business model that you have. And if the regulator says “yes, I’m renewing your license, I’ve audited this business”, then it's something much bigger, than just to paint or to put down some figures on the paper.
And for me it's just like a game. I strongly believed that those companies before they provided this proof of reserves, were looking at other companies, saying “Ok, this company has a billion proof of reserves, let’s do 2 billion. Let's just show that we're better than they are.” I am 100% sure that it works like that because the crypto market infrastructure is not a traditional banking system, it's not as mature. In the banking market, I think it takes tens of years to build it really effectively, to make everything really transparent and the same things will happen in our space.
And what is really good about Choise.com, is that I don't know whether most of our viewers and clients know or not, but we were audited by the regulator during a year until the end of 2022. It was a successful audit and they renewed our license, but it took us six months. We were providing everything, even the business models, all the liabilities. We showed how we managed client funds and all of the things. And this is a complicated thing. I mean four or five people out of our team were involved in that type of process. And that’s important for us. But we were doing this not just to show some papers, or that we had a billion dollar in liabilities and they were covered for 100%.
Austin Kimm: So. The “too-good-to-be-true” sort of comment. I do remember many times we had this conversation: how are those sorts of companies making such a return. And I guess when you read some of our own comments a few of the customers basically asked the same question about us. And we provide today earnings products and provide interest rates that are potentially higher than maybe Celsius was providing at the time of its collapse. So how will we do all that? What are we doing differently?
Vladimir Gorbunov: It is important to say that, first of all, you always have to take into account the size. Like providing a 10% return, for example, on a product when you have 10 million to manage is very different from providing 10% when you have 10 billion to manage. And there are so many ways in which you can manage the money. You can utilize exciting niche strategies for some 100 million, you can do the same when it comes to billions of dollars and that's very important to understand.
Luna had such a major impact on the market as the 20 billion or 40 billion or so were utilized several times in a small number of companies, that was a problem. And if a company grows $5 billion in just one year, as I said before, that is just extra 100 million for example a week and it has a promise of high returns, so it is outsourced to third parties who need to earn even more, so that they also have a margin and so on.
Choise.com for example does not manage billion of dollars. It’s good and it’s bad, but we are not managing billions of dollars, therefore it doesn’t have and has never had the need to outsource money to third parties to manage. So the whole idea of our earn programs and yield programs is based on two major things. First thing is very, very high diversification. We never put anywhere more than 5% of our funds. But the second thing, if we are talking about the interest rates, is that there are a lot of strategies where you can do much, much more than those 10%. But it's limited in the amount of money that you can use, for example, we have a set of strategies with the maximum amount of money we can invest, 20 million, 30 million, 50 million. We have bigger strategies where we can invest over 100 million, but not a billion.
And coming back to your question we could provide our customers with much higher yields. Only for the last six months on average we were making over 15%. But if we provide our customers interest rates at 15%, that will be too-good-to-be-true. And we try to avoid those types of ideas and thoughts about us.
But of course while we grow, while we grow our assets under management, while we're making bigger, we cannot leave the same rates, but we're very transparent in this way. And we have a strategy, an internal strategy for example, where we at the moment provide 10% or 8.8% maximum on USDT or some stablecoins. But only a couple of weeks ago we were defining how we would lower our interest rates after this and how our assets under management would help. So a very-very clear strategy on how to manage funds, how to diversify the portfolio. But it doesn't mean that we will pay 15%, when we manage $10 billion. That's just maybe the market will be mature enough and that amount of money will also be possible to manage with the high interest rate. But at the moment we understand that diversification in the maximum amount of money we can invest in one strategy just won't give us a chance to use the same interest rates.
But we can think that maybe we can make them lower because our team is really happy now, we have pretty good returns and we have a pretty good margin, keeping in mind that we only use natural market strategies. Neutral market strategy means never borrowing from anyone, never putting money under risk at all, if we open a position, we have a hedge for this position. So we use arbitrage, we use DeFi, and we use very diversified DeFi as well. We use at least 15 different pools and different coins, and each coin in each different pool we even hedge with futures. I mean using natural market strategies is that you have 0% risk rate, 100% covered liabilities on the assets. And this strategy is very actively used for both institutional clients or B2C clients as well.
Austin Kimm: Ok. I think that's the first time you've mentioned or we've mentioned DeFi and we as a company have a bet quite big on DeFi. We built a market leading platform that aggregates customer transactions, simplifies the whole process, but it's a DeFi transaction customer-to-customer. So how do you manage the risk in that environment for our customers?
Vladimir Gorbunov: I would say that risks in DeFi are not the same. DeFi is much more transparent than CeFi, but principles of the risk management we apply are very close or same. So as you know we’ve built Charism protocol – probably the first of its kind aggregating earnings marketplace. And here the customer himself can choose where to put the money. So the contract is between them and the earning platform, we just provide the tools to make it all happen. But, as I’ve already said, the same principles would be applied. For example, if we see that too much money goes to a particular protocol, no matter how attractive it might be, we remove access to the protocol. So we will apply exactly the same risk management principles.
But using DeFi we want to provide this choice to our customers. And I strongly believe in DeFi, I'm a big believer in all the technologies behind the DeFi. If you just go on Uniswap, you will find very interesting tools, you will find some interesting services. And of course if you look at the whole crypto industry, there are a lot of interesting cases, interesting pools that we will integrate to our customers to make their choice bigger.
But anyway, on our side at least, try to understand that if 99% of all clients’ funds go into one single protocol at least in the beginning we'll start to inform about potential risks. And on the next stage we probably will close this protocol, or integration with protocol for a certain period of time.
Austin Kimm: Ok, alright. Thank you. So let me just summarize it if I may. So, markets are generally quite mature to the current problems. We're expecting an upside and maybe we're already starting to see the upside. Proof of reserves is interesting, but nothing as robust as an audit by regulation, which I think you mentioned is going to increase. You gave us a very good review of our own risk management strategies and how we're able to offer returns to customers – perhaps better than many of the market players which is a consequence of the fact we're not outsourcing and at the same time we're also at this point in time not managing billions which has a positive impact as as as you mentioned. Any last thoughts you'd like to give our customers about Choise.com, why should they trust their money to us rather than somebody else out there?
Vladimir Gorbunov: As I said, you cannot sell trust – you can only deserve it. So, I would say that we are trying to do this. We started five years ago with a very simple idea: how to make it easier to buy Bitcoin, how to make it easier to spend Bitcoin. And while the market was growing, while new technologies were appearing, we tried to all the time be on the same page with our clients. So we analyzed their needs, and we tried to implement the products that they wanted to have. We are not playing in pumps and dumps, we are not playing in hype things. We think a couple of times before we launch something. We have a lot of licenses. We have a lot to lose I would say: our big client base and licenses and services.
I didn't even talk about B2B. I mean the last year was not really easy for anyone in the industry but our revenue went up and the reason was only the B2B. We diversified in this field a couple of years ago. And for B2B, when we are providing some white label solutions and our infrastructure to third party companies, it doesn't matter whether the market goes up or down. These companies just pay us for integration, they pay a monthly fee and our revenue is growing and it's bigger than it was a year ago. So that type of diversification really makes us stronger.
The thing that we survived after a couple of crypto winters and this one was not the new one for us, makes us not only stronger but much more intelligent in our decisions. So I wouldn’t say that the market was just perfect, or all our plans that we had at the beginning of 2022, but we did everything we could. And we are very happy with what has happened.
And the decisions that we made a couple of years ago about the future of the company, whether we need to go in this or that direction, were absolutely right, absolutely correct: not to try to compete with all that type of hype companies and to follow the strategy that we use.
So I think we will just try to implement new products and deliver them to our customers. We will try to implement new services. We will try to make our customers happier. And of course the biggest priority for us any time will be to be one of the safest and most reliable products in the whole crypto industry. But I don't want to shout about it and say that we are very good, come to us please. No. As you mentioned, we didn't start any deductions like proof of reserves. And we are not saying: please, trust us, we are very good. We were very silent and the reason for that was that we were just the company that was growing revenue each single month, that was implementing new products.
And I'm a big believer. The crypto audience likes the word “bullish”. I'm very bullish about Choise.com. And I believe it’s for our community, we can make it much bigger and much stronger together.
Austin Kimm: Ok, excellent. Thank you, Vladimir. That concludes our interview, and I hope that anybody who watches it, enjoys it and everyone's gonna follow up. Thanks everyone for watching.
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