The crypto industry had a whirlwind experience last year (2022), from issues around trust, to cryptocurrencies losing some of their value, and a pertinent question has been whether the storm is over. Importantly, what can be done to especially address the issues of trust as it pertains to users’ funds held by exchanges.
NADEEM ANJARWALLA, director, Binance East Africa in this interview with CALEB OJEWALE, speaks on these issues and offers insights. Excerpts:
Considering losses experienced in 2022 from digital assets/cryptocurrency, which included about 60 percent loss of bitcoins value, and trust issues as well, what is the outlook for this year?
I will break down my answer into three parts. Firstly, as you know, 2022 was indeed a volatile year for crypto due to various reasons including macroeconomic reasons.
I think the global economic outlook generally across different markets took a bit of a hit and the crypto market was one of them. However, education and awareness are crucial for building adoption in this early stage of the ecosystem, both locally and globally.
Secondly, the technology underpinning crypto and blockchain, which is decentralized, remains strong, with a 30 percent increase in value to date despite market volatility.
I think most importantly, the use cases that crypto offers very much address some of the shortcomings of existing financial systems and doing so would only drive further adoption.
It takes huge amounts of effort to rebuild trust with consumers and with the population at large. It is an uphill task to make sure that we have the right principles in place and Binance is leading the way; we published six commitments that we believe are key for healthy centralized exchanges and they cover a wide range of areas and I’m happy to take you through that.
Regarding the losses that were incurred last year due to the decline in the value of cryptocurrencies, do you foresee any potential recovery of those losses?
As I mentioned earlier, there are global macroeconomic factors also at play here. In short, we don’t look at a short-term perspective, instead, we look more at building the ecosystem for the longer term.
So do you think that there will be a recovery?
Absolutely! As I mentioned earlier, I think the value propositions of what cryptocurrency and blockchain technology provide are only going to be further strengthened with time. Short-term volatility is expected, and you see that in any emerging technology that is released, now the main question is about time.
Are you noticing any hesitancy in users’ confidence and willingness to hold onto digital assets such as cryptocurrencies?
First, we need to recognize that people have lost and when that happens, there is a need to look inward and make sure that we treat security and trust with extreme importance.
There are several things that we do continually to boost our protocols and standards to make sure that we have the highest quality and security measures.
We also build strong partnerships with law enforcement bodies for there to be full transparency and accountability and ensure that we have strict measures in place.
In addition to building the ecosystem more, I think the fundamental part that Binance does is ensuring that we have strong reserves. We have established the Secure Assets Funds for Users (SAFU) fund to cover extreme circumstances.
This fund is over a billion dollars now, and we believe that others in the industry should commit to doing something similar. We also recommend that there should be avoidance of excessive leverage.
Sharing live proof of assets is also one of our ongoing commitments to transparency and building our trust in the ecosystem, this is something that we have become more aware of.
Sharing these details is a starting point and we will continue to work and create a Merkle tree proof of funds. Our objective is really to allow users of our platform to make informed decisions that are aligned with their financial goals.
So, in terms of building trust, I think the answer here is, there are the right protocols in place and security measures to build trust. For instance, one bank going down does not mean a distrust across all banks in the industry.
For consumers to be able to make informed decisions, they need to understand where their digital currency is stored, and how confident we are in these protocols that have been put in place for their digital currencies to be protected.
A core principle in blockchain and crypto is the idea of decentralization: that is, no one entity is in charge, therefore no one player can destabilize the ecosystem. Have the events of last year altered this principle?
I think fundamentally, decentralization remains a core principle in cryptocurrency and within blockchain technology.
As you know, with blockchain technology, the nature of this industry and its disruption is based on decentralized control.
The decentralization part largely refers to the control and value of the asset and it is really to empower individuals.
We believe that is why regulations should be there to drive decentralized platforms and provide much more robust systems.
We do not believe that the consequences of last year’s events should shake the fundamental principles behind what blockchain stands for in its decentralization.
To move on, let us focus on Binance as an organisation. How transparent have you been in light of all these issues around trust?
We have exemplified our commitment to transparency in many different ways over the years. I will highlight a few of them and demonstrate where we are leading by example and demonstrate a lot of integrity with our initiatives.
The first thing is the proof of reserves. I think to demonstrate our fully collateralised user assets, at the end of 2022, we introduced a proof of reserve system to prove that we possess sufficient funds to support our users’ assets on a one-to-one ratio, as well as additional reserves.
As I mentioned earlier, we also shared six principles at Binance that every other centralized exchange should adopt in order to ensure trust with users.
Our primary commitment is really to protect users, and as such, our user funds must be kept safe at all times. It must never be mismanaged, and our exchange operations really should be transparent.
The six commitments are: being risk averse with user funds, never using needed tokens as collateral, sharing live proof of assets, keeping strong reserves, avoiding excessive leverage, and strengthening and enforcing security protocols.
In addition, last year in November, we introduced our industry recovery initiative, and this new initiative really evaluates investment opportunities and blockchain projects and companies facing significant short-term difficulties; we’ve committed a large sum of one billion dollars to the recovery pool with a commitment to increase this number if necessary and we’ve had a lot of other participants in the industry join as well.
Read also: 2022 in review: How Binance is accelerating adoption, education, and transparency across Africa
As an industry, what needs to be put in place to ensure that users and the funds that they commit in this ecosystem remain protected from exploitation by intermediaries, exchanges, and other players?
I think there are three key points here. Firstly, I believe that cooperation with law enforcement is imperative in order to facilitate investigations and retrieve any funds that may be stolen.
Secondly, better onboarding and quality control programs to equip new projects with adequate security measures are essential to avert feelings of fear, uncertainty, and doubt, and make sure that there’s confidence.
One of the key lessons from the past is that regulation can play a crucial role in the revival, long-term success, and broader acceptance of cryptocurrency, particularly in growing markets across Africa.
Then I think one of the key lessons from the past year is that regulation can play a crucial role in the revival, long-term success, and broader acceptance of cryptocurrency, particularly in growing markets across Africa.
I think providing safety and peace of mind for users can really help restore the industry’s image and renew customers’ trust in cryptocurrency. Those would be the three things I would say that would need to be put in place.
There remains a significant lack of understanding regarding digital assets, cryptocurrencies, and even the underlying blockchain technology. How can more accurate and comprehensive information be provided to a larger audience, enabling them to engage with this ecosystem from an informed perspective rather than being swayed by emotions or social influence?
We know that knowledge is key in unlocking further adoption and understanding cryptocurrency in the digital asset space. I think education remains integral to the success of all facets of our operations.
What I would say is, one of the key learnings to take away from the whirlwind fiasco of the past year is that users and stakeholders must be adequately equipped with relevant and accurate information throughout.
I think crypto education is imperative to build trust for them to really understand the industry and all the different elements that you have alluded to including a lot of the different digital assets that exist.
To achieve this, Binance and other exchanges can really leverage education and existing media channels to engage and communicate with target audiences in order to provide them with more information, and accessibility to relevant resources to fill the knowledge gap.
