ong Kong’s Hex Trust had been working closely with Terraform Labs when the Singapore-based company’s crypto tokens, UST and Luna, collapsed early last month. The crypto custodial firm said it had managed to avoid the “bloodbath” by liquidating its collateral positions in the days just prior to the implosion.
Hex Trust had seen the warning signs begin to emerge over the weekend of May 7 and 8, when investors started pulling their funds out of Anchor Protocol, a crypto lending platform that promised nearly 20% interest payments for deposits of UST. Over the ensuing two days, UST lost its peg to the U.S. dollar, plunging by as much as 25%, according to tracker CoinGecko.
Although Terraform Labs was one of the investors in Hex Trust’s $88 million funding round announced in March, the crypto custodian said it didn’t receive any information from Terraform Labs as the collapse unfolded. Terraform Labs, which also developed Anchor, suspended UST’s swap line with other stablecoins—a clear sign that it could no longer defend UST’s value.
“Luckily we’re very conservative from a risk perspective,” Hex Trust’s cofounder and CEO Alessio Quaglini said from the firm’s head office in Hong Kong. “We’re always over collateralized, so we didn’t have to take any loss from the collateralized lending side.”
Hex Trust is a crypto custodian firm that safeguards clients’ private keys—the passwords that allow users to send and receive cryptocurrencies—from theft or accidental loss. Custodians typically earn fees for holding assets so that asset managers can instead focus on investment decisions.
Quaglini believes custody is going to be the “secret ingredient” for the development of the blockchain industry over the long term as firms like his enable traditional financial institutions to safely navigate the fast-evolving and volatile crypto markets.
In fact, the recent sell-off may turn out to be beneficial, according to Quaglini, because it should spur regulators to get more involved in the crypto markets, which in turn will foster faster adoption by the institutional investors that his firm serves.
In early June, Japan’s parliament passed a landmark law that requires stablecoins to be pegged to legal tenders and guarantee holders the right to redeem them at face value. Meanwhile, a bipartisan pair of U.S. senators have introduced a crypto bill that includes stablecoins, and the U.K. government has proposed amending existing rules to give the Bank of England the power to manage failed stablecoin issuers.
Zinnia Lee/Forbes Asia
The crypto market is now in the “hospitalization triage” phase, according to Quaglini, with many investors still assessing the damages and reorienting their portfolios. “I think the beauty of this market is that it readjusts very quickly and dynamically,” he said.
The crypto industry saw nearly $800 billion worth of wealth evaporate since May, according to CoinGecko as of Tuesday. Luna, which was created to help maintain UST’s peg to the dollar, crashed to near zero.
Before the meltdown, CoinGecko’s data shows that UST’s market cap had reached a high of $19 billion in early May, and Luna’s had peaked at $41 billion at the start of April. But the two cryptocurrencies combined were down to about $1 billion by the end of May. The implosion wreaked havoc on Terra, the blockchain that had hosted more than 100 decentralized applications and had nearly 4 million users.
Allegations have recently been circulating on Twitter and in unconfirmed media reports about Do Kwon, the CEO and cofounder of Terraform Labs, cashing out $80 million a month prior to the crash. The entrepreneur, however, has dismissed the allegations.
Meanwhile, Terraform Labs is reportedly facing probes from the U.S. Securities and Exchange Commission on whether the company’s marketing of UST had violated the investor protection laws, according to a Bloomberg News report. Terraform Labs is also said to be under investigation by South Korea’s police for allegations that its staff embezzled some of the company’s bitcoin holdings, the Financial Times and Bloomberg reported. The probe comes after a group of South Korean investors filed a complaint against Kwon and his founding partner Daniel Shin on two charges including fraud, local media Yonhap News Agency said last month.
Do Kwon, cofounder and CEO of Terraform Labs.
In spite of all this, surprisingly, some crypto traders continue to voice their support for Terraform Labs’ move to revive the Terra ecosystem, which includes the launch of a new blockchain that abandons UST and runs solely on a new version of Luna. To provide clients access to claim the tokens, Hex Trust, along with several crypto exchanges such as Huobi and Kucoin, have also backed Terra’s comeback.
“The extreme speed of growth of Anchor was what basically brought the whole blockchain to a point where the total value locked in the UST stablecoin was too big for the market cap of the Terra blockchain itself,” Quaglini said.
“Apart from that, what Terra had built was really impressive and the community was quite big,” he added. “So I wouldn’t be surprised if the community will keep on believing in what Terra has been building.”
But others remain unconvinced. The debacle has clearly knocked investors’ confidence in the Terra ecosystem. That doubt appears to be reflected in the price of the new Luna, which plunged as much as 77% in the hours after the Terra blockchain relaunched on May 28, according to CoinGecko. The crypto coin settled at around $2.5 as of Tuesday.
Hex Trust, meanwhile, announced a day earlier that it will also begin to offer clients access to decentralized applications built on Polygon, a rival blockchain that recently launched a multimillion dollar fund to lure projects away from Terra.
“The idea of Do Kwan starting up a new project with the same leadership and some different incentive mechanisms is really challenging to get investors and developers on board,” said Thomas Dunleavy, a senior analyst at crypto-data firm Messari. “It’s almost all speculation at this point. I don’t see where there’s any long-term viability for a fundamental investor.”
Licensed in Hong Kong and Singapore, Hex Trust has been managing crypto volatility from day one. It was founded during the “crypto winter” of 2018, when hundreds of token projects collapsed, prices tumbled 80% and trading volume dwindled for months.
Quaglini’s introduction to the crypto world came during a chat over coffee in 2014, when a fellow banker described to him how bitcoin could potentially disrupt traditional banking and finance. Quaglini said he was instantly engrossed by the technology and subsequently made his first bitcoin purchase at around $300.
“It doesn’t happen very often in your life that there’s a new asset class coming to the market,” said Quaglini, who most recently worked at First Abu Dhabi Bank following stints at Spanish lender BBVA and the Italian securities commission. “All the other asset classes more or less are similar in terms of how they are handled by centralized entities, but cryptocurrencies are completely disruptive,” he said.
The 39-year-old founded Hex Trust in partnership with Rafal Czerniawski, a former tech chief at investment bank CLSA. The duo spent about two years preparing for the launch of their custodial platform and onboarded the firm’s first batch of clients at the end of 2019.
Zinnia Lee/Forbes Asia
Last March, Hex Trust jumped on the NFT bandwagon and became the first licensed custodian to offer blockchain-linked artwork and other digital collectibles for institutional clients. Since then, it expanded further by partnering with Hong Kong-based blockchain powerhouse Animoca Brands in a joint venture to build an NFT wallet for gamers.
“That is the once-in-a-lifetime opportunity to partner up with the most successful player in the ecosystem, and to have the opportunity to really bring our platform to scale, and to offer it to millions of clients playing in the most famous blockchain games,” Quaglini said.
Under the partnership, players of Animoca’s titles, including flagship metaverse game the Sandbox, will be able to store their in-game assets with Hex Trust. The firm’s wallet will be integrated with Animoca’s investment portfolio of more than 340 NFT-related companies and blockchain projects, and eventually with others outside of Animoca’s ecosystem.
“There’s no winner-take-all scenario here…it’s quite common for investors to hold assets in multiple places, just like how people hold money in multiple bank accounts,” said Yat Siu, cofounder and chairman of Animoca. “I certainly see Hex Trust being one of the major ones out there.”
Although Quaglini says custodial services are a secret ingredient, word is getting around. Crypto exchanges like Brian Armstrong’s Coinbase and Cameron and Tyler Winklevoss’ Gemini have already acquired their own custody infrastructure companies. Meanwhile, digital payments giant Paypal has purchased a crypto security startup, and BNY Mellon, the world’s largest custodian bank, has formed a new unit to help clients safekeep, transfer and issue digital assets.
Hex Trust, for its part, is now busy setting up a new regional hub in Dubai, Quaglini said. The expansion plan comes after Dubai approved a new law that regulates virtual asset businesses including trading and custodial services in early March. The new legislation has already attracted billionaire Changpeng Zhao’s Binance, Sam Bankman-Fried’s FTX and several other crypto exchanges to set up there. Quaglini said Hex Trust is also planning to establish additional regional offices in Europe and the Bahamas.


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