Interesting conversation and insights with the four co-founders of BxB Inc. The interviewees included:
- Hwan kim – Co-founder & CEO
- Jiho Kang – Co-founder
- JJ Peterson – Co-founder
- Alex Friedberg – Co-founder
Some have argued that the term ‘stablecoin’ is a misnomer – would you agree?
- Yes, that’s true. A stablecoin is only as stable as the underlying asset, whether it’s a fiat currency like the Korean won or any other traditional asset, like gold or real estate. One danger is to expect a stablecoin that’s pegged to one currency (in our case the KRW), to remain stable against another asset, like the US dollar. Obviously, as the two fiat currencies fluctuate in price against each other, so would any cryptocurrency asset that is pegged to them.
- There’s an exciting opportunity to further educate the market about stablecoins and cryptocurrencies in general. We see that as one of our roles, in order to grow the market for the benefit of all.
- In the case of KRWb, it’s a representation of an equivalent volume of fiat KRW that has certain use cases outwith the traditional financial ecosystem and affords holders of KRWb certain benefits, like hedging foreign exchange risk.
From a personal perspective, why did you decide to address the Korean market specifically?
- Blockchain technology and the cryptocurrency ecosystem caught our interest in 2013. For example, I started mining Litecoin in 2013. Myself and Hwan also have a lot of experience doing business between Korea and Silicon Valley and that gave us deep insight into the how the Korean banking system worked when it came to foreign exchange.
- In early 2017 we realized that the price of Bitcoin was trading at around a 10% – 15% premium in South Korea compared to any other market. There was a lot of speculation around why this was happening – conspiracy theories about Chinese gang influence was NOT true. It was the result of market inefficiencies in foreign exchange. The high demand for Bitcoin in Korea and the difficulties in purchasing Bitcoin from outside the country meant that people were willing to pay a premium.
- In a perfect market, price differences across markets don’t exist. That’s when the BxB team started actively trading cryptocurrency in and out of Korea – taking advantage of an opportunity while trying to solve the problem of dangerously inflated prices. As seasoned entrepreneurs we weren’t interested in a get rich quick scheme and put tremendous effort into finding a way to combat the market inefficiencies and grow the crypto ecosystem.
- Through these activities we gained immense knowledge of the legal, regulatory, financial, tax, accounting, etc. aspects of crypto in Korea. This new knowledge synergized well with our existing experience in building consumer tech businesses and made it easy for us to roll this knowledge and expertise into our Korean Won deposit backed stablecoin.
- Korea is also one of the top cryptocurrency markets globally, where our team’s background allows us to launch products in this market better than other entities that don’t have a truly international skill set or deep local knowledge about the unique situation in Korea.
What are the benefits of fiat-backed tokens (like KRWb), compared to those backed by other assets or algorithmic controls?
- It’s easy to define and assign a clear value to the token if it’s pegged to or redeemable against a fiat currency. It would be hard to earn trust if it’s more complicated than that.
- While the crypto market has grown substantially, there is no proven way to stabilize or predict the price of cryptocurrency at the present time, outside of fiat or asset backed tokens.
- The ability to create foreign exchange baskets, based on fiat backed tokens, in order to hedge currency volatility could be extremely powerful. In fact, there are already examples of this happening in places like Africa where currencies can see massive price fluctuations over very short periods of time. A fiat backed cryptocurrency token could enable it’s holder to avoid a scenario where their own local currency volatility exposes them to a large risk.
- We have the ability to offer much higher transparency and simplicity for a fiat backed token compared to algorithmic controls. They can be complicated to understand and it’s hard to guarantee functionality in such a new and volatile market. Ultimately algorithmic controls for stablecoins haven’t been fully tested yet – even if they seem stable now it’s difficult to predict what will happen as the market expands in the future.
There are already popular USD-backed stablecoins, why do you anticipate the need for a separate KRW backed stablecoin?
- While the US dollar is the world’s reserve currency, not every country is denominated in USD – we do not live in a single currency world.
- A KRW backed stablecoin serves two primary use cases:
- For local Koreans, it gives them an opportunity to denominate in a KRW derivative in the crypto-economy. This reduces their foreign exchange exposure and simplifies prices. For example, a Korean trader using USDT as their base trading currency might have made more USDT on their investment, but could effectively lose money on the exchange between the USD and KRW, based on fluctuations in price between those two national currencies.
- For the global market, KRWb is a KRW derivative that can be held offshore. This is a huge benefit for entities with South Korean interests, because it is extremely difficult and/or costly to do so with fiat KRW, given the current regulatory landscape.
What makes Korea such an important market for the crypto-economy?
- Korea is a top 10 global economy and Koreans have a high affinity to technology and more recently cryptocurrency.
- KRW based cryptocurrency trading accounts for 30% of global cryptocurrency trading volume. Some estimates say that 30% of the Korean population has experience purchasing cryptocurrency – making it truly mainstream.
- Blockchain and cryptocurrency have the potential to reduce the cost and complication of cross-border capital circulation. This could have an positive impact on the Korean economy, while mitigating the concerns of the Korean financial regulators (which is why there are strong capital controls in the first place).
What led to the negative sentiment towards stablecoins in 2018, despite the launch of so many stablecoins?
- We believe there are two main factors
- Whether warranted or not, we think it started with the negative sentiment around the Tether (USDT) reserve controversy – the claims were that USDT was not in fact pegged to the value of the USD and there were questions about Tether’s actual reserve amount that were not answered convincingly.
- However, the popularity of Tether then led to the abundance of new stablecoins. Many projects made false claims about capabilities or transparency and a handful of others failed to maintain price stability against whatever currency they were intended to be pegged to. These factors led to a mistrust of all stablecoins.
How will KRWb combat the negative sentiments leveled at stablecoin projects?
- The most important factor is building and keeping the trust of those who use our services. We have designed KRWb to be fully transparent through our regular 3rd party audits, open access to discussions with the team, willingness to fully welcome regulation, and of course maintaining full, provable collateralization of KRWb tokens with fiat KRW.
Does KRWb intend to address other markets with a similar fiat-backed token in the future?
- This is not in the current road map. However, we do have aspirations to have strong collaboration with other stablecoin projects and our entire executive team are active members of the stablecoin community.
What are the key benefits of KRWb to Korea users?
- Ability to trade crypto-to-crypto globally
- Ability to denominate in KRW while still participating in the global crypto-economy
- A stable store of value that is pegged to KRW
- Cost effective value transfers
What are the key benefits of KRWb to global users / businesses?
- Ability to have access to the Korean crypto-economy without the need for an onshore entity or bank account
- Ability to use KRWb as a cost effective foreign exchange hedging product
- Over time, it should reduce friction for doing business with Korean Won, (import/exporters doing business with Korea)
What are you doing to foster rapid adoption of KRWb, at a time when most cryptocurrencies are losing value?
- First of all, it must be noted that the most prominent cryptocurrencies are still up 2x~3x compared to 2016 or 2017, meaning the industry is still going through a great growth and build cycle.
- We’re focusing on transparency as a core fundamental aspect to build a product that has tangible benefits to users so that people are actively using KRWb to solve real world problems from the get go. These problems include inefficiencies in the current foreign exchange landscape and issues around the ‘Kimchi Premium’ (high price of some crypto assets in Korea compared to the rest of the world). These issues can be detrimental to users at times and we’re determined to address these issues for the benefit of all those that want to participate in the crypto economy and conduct business into and out of Korea.
- Many cryptocurrency users are migrating funds into tokens with a stable value – this fact makes it a good time to launch KRWb – a token with its price pegged to the Korean Won.
- The consensus in the cryptocurrency industry is that, despite the current storm, the market will continue to mature. Bear markets and high volatility doesn’t mean people stop trading, it means they change trading strategies. Stable assets are essential to executing those strategies in times of market flux, like we’re experiencing at the moment.
- We’re deploying this to the global market in an effort to give people a completely new way to engage with Korea, creating new opportunities that can help to normalize the market. There aren’t constant crazy spreads anymore, but we’ve recently observed that the Korean market still lags global markets. For example, when Bitcoin rallies on Binance, it takes some time for the Korean markets to react and vice-versa.
USDT came under fierce criticism over its collateralization to the USD – what are you doing to guarantee and prove collateralization?
- We have dedicated an entire section of our site to increasing transparency (https://krwb.io/transparency.html) making our source code, smart contract, and most importantly the KRW fiat balances and 3rd party audit attestation reports publicly available.
- We have a strict policy around not minting any tokens until backing funds have been secured. We don’t even pre-mint tokens for fiat KRW that are expected to be remitted the next day.
- We’re absolutely committed to ensuring that KRWb is provably collateralized.
What are your long term plans for KRWb and BxB Inc.?
- We feel that traditional money, although it works today, is inefficient. Tokenizing money on the blockchain means cutting out the middleman on everything from paying for your dinner or paying taxes to banking and foreign exchange. We want to revolutionize the way people think about money and how it works through tokens pegged to different assets.
- We want to create multiple business lines and tools for people to leverage KRWb as a Korean Won derivative for things like payments, lending, margin trading, foreign exchange hedging, options, and more.
The Korean economy is predicted to contract (in real terms) in 2019 – is this a concern for you and will it prevent your users from wanting to hold assets in a KRW-backed derivative?
- The global economy has seen an incredible bull run since recovering from the 2008 financial crisis. Yes, we have seen growth slow compared to previous years and that is expected to continue in the short term, but Korea’s economic outlook is comparable to other markets like China, Europe and the US.
- The Korean economy is likely to, by and large, maintain its current strong position in the global economy. There are still large numbers of Koreans participating in the crypto-economy and global companies are still doing business in Korea. Based on these facts, we believe there is a strong need for KRWb now and for the foreseeable future.
What type of businesses are most likely to use KRWb and how do you expect them to use it? (actual use cases)
- It’s extremely difficult for Korean businesses to participate in the crypto economy locally. KRWb is a way for those companies, including emerging startups, to access both the local and global cryptocurrency markets legally. With KRWb they could easily OTC trade fiat KRW for KRWb to gain access to KRWb listed exchanges. It would also allow them to raise funds from global investors holding KRWb.
- Let’s look at a practical example: A foreign business might know it has a 10 billion KRW expense into Korea in 6 months (approx. $9mil USD). It’s feasible that over the next six months the exchange rate could go against the business by 10%, meaning an actual increase of 10% in the cost of that contract. Without any foreign exchange risk hedging, having to pay an additional 1 billion KRW (approx. $900K USD) could be a major risk to the business. Using NDF contracts to hedge the currency risk will also increase the costs associated with paying the expense. The tokenized properties of KRWb would allow the business to cost-effectively hold a stable pegged value to KRW for 6 months, without the need for an on-shore Korean entity or local bank account.
The regulatory landscape for cryptocurrencies and blockchain-based companies in Korea is uncertain – is this a concern? What do you see happening from a regulatory perspective in Korea in 2019?
- There are always inherent risks of launching new products in markets with uncertain regulations. We’ve spent the better half of 7 months doing our legal due diligence and preparing ourselves on how to mitigate any potential future regulatory challenges.
- We expect that the FSA and other Korean government offices to release additional guidelines for the crypto industry – we absolutely welcome this next evolution in the market and welcome the opportunity to work with regulators and other top Korean projects to add value to the cryptocurrency ecosystem.
- Our goal is not to undermine regulation, but as entrepreneurs we just couldn’t wait until regulators clarified all the nitty gritty details. We have a sensible approach when it comes to self regulation; anything that is a risk to us (the company) is a risk we’re willing to take as entrepreneurs, but anything that is a risk to our customers (KRWb holders) is unacceptable. We’ve crafted our internal policies based on this simple premise to fill in the gaps in the very few existing regulations applicable to cryptocurrency.
A large number of Korean exchanges were very recently assessed as being insecure through a government audit – how does KRWb intend to ensure that exchanges that list KRWb will be secure?
- As in traditional financial markets (or in fact any industry), there is no single solution to security. We are taking many measures to mitigate security issues. These include conducting proper due diligence on exchanges before we list, working with exchanges that have a solid track record and meeting the teams face to face to discuss listing security. Additionally, we look at the tech stack of the exchanges themselves, giving preference to exchanges that use safer solutions like the BitGo hot wallet system, or other time tested tech stacks.
- We have a number of security measures baked into the KRWb smart contract itself, such as a response mechanism in the event that large volumes of KRWb tokens are stolen and the ability to blacklist specific wallet addresses that have been deemed harmful. The fiat reserves in our accounts are also held securely in a bank and as such are protected by banking grade security measures. Of course, the beauty of blockchain is that all transactions are fully traceable and we have playbooks for a wide range of disaster scenarios, either through human error or manipulation.
How will the independent audit process work and will you be publishing reports publicly?
- Absolutely, we’re 100% for full transparency in our process and our service providers. Our attestation reports will be posted publicly with the key details of each report made visible.
- At minimum, we have committed to publishing our fiat balance attestation reports on the KRWb.io website (https://krwb.io/transparency.html) on a regular basis – we’ll start with monthly publishing and adjust as needed or depending on community feedback. The reports will be available in both Korean and English translations.
2018 was a tough year for the crypto-economy – what are your projections for the industry in 2019?
- We expect to see the market stabilize compared to the last two years and also see more actual product launches.
- In 2017-2018 many companies raised large sums of money for blockchain and cryptocurrency projects. In 2019 we fully expect to see the launch of a greater number of compelling use cases for the technology than in the previous year. We are confident that these will help to drive sustainable growth of the industry, while addressing the legitimate concerns of many investors who are keen to see forward progress of the projects they’ve backed.
- We expect to see fairer valuations of companies developing projects and in terms of cryptocurrency prices, as we start to better understand where the industry places, and holds, value.
- Hopefully, more regulations will allow larger institutions to become more comfortable entering the space – although many institutions are already entering and expanding their traditional services with added blockchain support.
What role do you see stablecoins playing in the crypto-economy in the future? (1yr / 5yrs)
- We believe that in the coming year stablecoins will be a big driver of adoption into the crypto-economy. We expect massive increases in liquidity and adoption at the institutional level after there is more trust and stabilization around fiat pegged tokens. This should lead to fundamentally new ways to trade money globally – fiat pegged tokens could be a significant driver to this revolution.
- In 5 years, we could easily see tokenization, at different levels, of every world currency.