Dear Clients and Partners,
Unfortunately, the ripple effects of FTX and Alameda’s downfall will continue to be felt for some time to come, with almost all of the major crypto market participants negatively affected either through direct, or indirect losses of varying magnitudes.
I am pleased to confirm again that OSL has had zero impact from this event, nor did we have any impact from the Luna/3AC related events earlier this year.
“How is this possible?” one might ask, particularly given the size of our business and the volumes traded on the OSL platform.
Let me share more:
The founders of our firm have owned and operated crypto platforms full time for around 10 years and as a leadership team, we’ve been through many cycles, have witnessed dozens of hacks, hundreds of firms fall by the wayside, thousands of scammers at work and millions of people who’ve been impacted by what could be described as skullduggerous behavior on the polite end of the spectrum, but more accurately in many cases, outright criminal behavior.
This history has enhanced our instincts and has added to our risk management, trading, compliance and security know-how honed throughout decades of experience leading large teams in highly regulated traditional financial firms.
We’ve combined these skills with a world-class technology capability to deliver one of the safest and most trusted crypto platforms in the world. We believe our continued growth and asset inflows over the last few years is testament to that.
In recent days, as asset inflows from both existing and new OSL customers have intensified, we have rightly been asked, “are you guys OK?” I would expect anyone who cares about their assets to ask this, and in response we share the following:
- OSL is a subsidiary of HKSE-mainboard-listed BC Technology Group – both OSL and BC Group are audited by PwC – our audited financials are publicly available
- The business is supported by a number of blue-chip institutional investors, including GIC and Fidelity International
- We were one of the first crypto firms in the world to secure insurance for our crypto wallets and maintain 100% coverage on hot wallets
- We are compliant with the relevant licensing regimes in the jurisdictions in which we operate – Hong Kong, Singapore and the Americas
- In Hong Kong, our OSL Digital Securities business is regulated by the Securities and Futures Commission (SFC) for Type 1 (broker/dealer) and Type 7 (providing an Automated Trading Service (ATS)) activities for virtual assets
- We voluntarily opted into the HK regime over two years ago and as a result, OSL Digital Securities delivers arguably some of the highest levels of investor protection anywhere in the world through the following:
- Client assets (fiat and crypto) are fully segregated and custodied in a bankruptcy remote trust structure
- We run transaction monitoring and market surveillance and we conduct customer suitability tests and assets go through a rigorous due diligence process before being admitted to our platform
- We have robust risk management systems and processes that have been built using the principles learned through many years of traditional finance experience
- We run continuous reconciliations to the blockchain
- We support FATF Travel Rule
- We operate a 24/7 wallet operation which exclusively uses cold wallets for both deposits and withdrawals – In addition, a minimum of 95% of these assets are insured
OSL also employs the same governance controls that are commonplace in large, regulated businesses, including segregation of duties, first, second and third lines of defense, conservative risk management practices, stringent AML and KYC procedures, rigorous counterparty due diligence assessments and regular reviews of trading and settlement limits. Furthermore, we consolidate the list of counterparties we interact with to a small number of high-quality participants.
Having said all of that, when it comes to our broader view on asset safekeeping and the way the industry will evolve, we’d also offer the following perspectives:
- If you are an experienced crypto participant, the safest place to hold your assets is on your own hardware device – you literally hold the keys!
- For those who can’t, or don’t want to hold their own assets, there are a few high quality participants globally who can deliver customer asset segregation and insurance coverage to some degree. In addition to OSL, some others we believe offer this sort of protection include: DBS, Zodia Custody and Fidelity Digital Assets. There are undoubtedly others but we encourage you to do your own research and read the fine print!
- Over time, we expect the market structure to evolve to the point where in most tier one markets/jurisdictions, crypto exchanges/brokerages will very likely not be able to commingle client assets and moreover, there will likely be an expectation that tier one platforms will need to utilize separate, standalone custodians in the same way that major participants do in traditional asset classes
- We also believe that the abhorrent behavior of some of the participants in the space goes against the initial intent behind the crypto movement. That said, the recent events have bolstered our view that the crypto/digital asset market will evolve into a more robust and sustainable ecosystem with a much higher reliance on:
- High quality, properly regulated firms that embrace risk management, security and compliance
- Quality decentralized platforms that are able to reduce the reliance on centralized venues whilst balancing the associated smart contract/AML & KYC risks
- Finally, whilst we applaud the efforts of those in the industry attempting to afford participants greater transparency by performing proof-of-reserve exercises, we are of the opinion that such initiatives have limited value as the proof-of-reserve snapshots do not reveal audited fiat reserves, client and company liabilities, company loans or much of the other required information necessary to ascertain the financial health of a firm operating in this space
- When a firm is holding clients’ monies linking to TradFi, for now the traditional structures will better provide consumer protection; regular transparent audits, trust structures to provide bankruptcy remoteness, and regulators to supervise. Over time we hope DeFi provides more effective alternatives, but for now they are clearly required.
Whilst we remain convinced by the long-term prospects and viability of the overall digital asset ecosystem, we know there are many people in the marketplace who are hurting right now. Some have lost their life savings, some have lost their reputations and others have lost funds they’ve managed on behalf of clients. If you’re an institution or a professional trader/investor and you want to mitigate your counterparty risk and have access to world-class liquidity and customer service, please contact us today via www.osl.com or at [email protected].
We are here to help in any way we can, and will be advocating hard with regulators and participants alike to ensure that this space matures to the point where it can rightly be woven into the mainstream domain.
Best regards,
Wayne