In this edition of the Star Investing podcast, we sat down with Adrian Przelozny to talk through how Australian investors should view cryptocurrency, who the typical ‘investor’ is and his personal take on how to conduct research on cryptocurrencies and what to look out for.

We talk about how cryptocurrency exchanges work and the function they play in the wider market, why Independent Reserve uses physcial vaults to store cryptocurrency just like a typical bank and Facebook’s transactional currency Libra.

We also talk through the company’s growth plans and what needs to be done from a regulatory standpoint in the Australian crypto sector.

Today we have Independent Reserve CEO Adrian Przelozny on the podcast. Tell me: a cryptocurrency exchange, how on earth did you create something like that?

Adrian: So we had the idea to start Independent Reserve back in 2013. We really saw a need for an exchange in Australia. Back then there was only one exchange in the world called Mt gox. It was pretty obvious this thing wasn’t very good. I think it took about 2 or 3 weeks to open an account at the time. I think during the time my account was being verified the exchange was being hacked and was down for a week and then it came back up… it was very much an amateurish operation. It wasn’t designed to handle the number of users that they had.

My background was in IT, I ran an IT consultancy before Independent Reserve. We felt like we had the expertise in-house to create a secure reliable exchange that works in the way people expect. People are used to using platforms like CommSec and e-trade and they just expect things to work.

We felt that we could really take this whole industry to the next level. So we incorporated Independent Reserve mid 2013 and spent 18 months building out the platform. We launched November 2014 and the markets were pretty quiet for the first couple of years and then I suppose things turned around about 18 months ago. We really found ourselves on a hockey stick curve. There was huge interest in cryptocurrency. Everyone wanted to get involved.

There was a little bit of a bubble, and I suppose it’s a little bit more sane now than what it was back then. The whole industry has matured, we’ve seen industry regulators get involved. The growth of the industry has been tremendous.

We’ve now got about 120,000 customers on our platform, about 8,000 of those are SMSFs which is very encouraging to see. The average investor has transformed from the early technology adopters to the forward thinking investors. People that want to diversify their investments are looking at cryptocurrencies as an asset that’s not correlated to other things. So it’s just really become something that you have in a balanced portfolio now.

So normally in a balanced portfolio you’d have some property, some resources shares, some cash, some bonds. Now you think people want a little slice of digital currency? 

Adrian: It’s the joker in the pack. Uncorrelated to a lot of the other things that you may have in your super. Also it’s becoming easier to get into the space now. Now that regulators are involved it’s a lot safer. There are now insurers, for example Independent Reserve started to offer insured accounts about 3 or 4 months ago. This allows you to store cryptocurrency in Independent Reserve in an insured account meaning that should anything happen to us, there is an insurance underwriter who is basically there to make sure that your cryptocurrency is safe and you are protected.

What do you think is the general understanding of mainstream Australia of what cryptocurrency is?

Adrian: It’s still very much a niche but I think the understanding of most people is improving. We now have 120,000 customers on our platform. Three years ago we had maybe 10,000 or less.

Where are they based? Are they primarily based in Australia or all over the world?

Adrian: Most of our customers are based in Australia (about 90%). The rest are mostly based in New Zealand. I think we are the largest cryptocurrency exchange in New Zealand and we have a small sprinkling of customers from Europe and Asia.

Could you give us a profile of some of the customers that use your platform. Is it anything from tradies to typical retail investors through to sophisticated investors? Do you genuinely get a real mix?

Adrian: There really is quite a mix. It really began as early technology adopters and libertarians who were coming into this space. Now we’re seeing the average age of our customers increase, so when we started the average customer was maybe 25 years old. Now they’re about 35 years old. They’re still mostly males but we are seeing more and more women get involved. As this becomes a more acceptable and mainstream investment, you will see more average mums and dads get into this space as well.

Would you describe having digital currency as a risky investment?

Adrian: Well it’s obviously a very volatile investment and by definition that it makes it risky so everyone should always do their due diligence about any investments they do. Cryptocurrency isn’t any different. There’s a lot of information out there, and also a lot of misinformation out there, so do your research before you invest. 

You invest at your own risk so it’s about knowing: what is the currency you are investing in, what is the team that is behind it? What is the issue it’s trying to solve? What is the market Cap? What is the liquidity like? All the questions that you’d ask yourself investing in shares also apply to cryptocurrency.

Can you explain how the exchange works?

Adrian: Independent Reserve is an order book exchange. This means that we’re are platform that allows customers to trade amongst each other. We don’t actually trade on the platform ourselves, we just provide a marketplace where people can put orders on our order book, and when two people want to trade with each other… then they trade on our order book.

It’s a buy-sell by appointment?

Adrian: I suppose you can think of it as eBay but for cryptocurrencies.

So your business model would be that you take a little fee?

Adrian: We take a very low fee in every transaction, the lowest in Australia. Our fees start at half a percent, and depending on how much you trade they can go as low as 0.1% of the trade.

In terms of the Quantum of what people hold, talk to us about that… what sort of trades go through the platform?

Adrian: I guess as we’ve grown we found that we’re holding more and more of our users assets. So at last count we were holding about 300 million dollars worth of user assets. That’s a mix of AUD, bitcoin, etherium and other cryptocurrencies. Our volume in the last 12 months was about two and a half billion dollars so it has really grown into quite a sizeable business.

Do you stay awake at night thinking I have “hundreds of millions of dollars on our platform” – which typically if you were in a bank there would be a big locked faults underneath layers of concrete where is yours are so we’re in the cloud?

Adrian: It’s interesting that you would say that we actually do use a lot of vaults! We store most of our cryptocurrency offline. What that means is that it is not connected to the internet in any way. So it is, I guess, there is no way it can be hacked. We use more than 1 vault, we have procedures in place where no one person can access the vault… pretty much exactly as you said. So it’s held in volts over concrete making sure that no one individual person can get access, so is actually not much different to a bank. So I do sleep pretty well at night which is very good.

Facebook got into cryptocurrency recently with Libra. What did you make of those developments?

Adrian: I think it’s a very exciting move. They have a user base of about 3 billion people worldwide so they have incredible reach so this is what could be potentially bring cryptocurrency to the mainstream. 

Libra is a transactional a currency – it is not designed as an investment as much… but it is designed as I guess a cryptocurrency that people could use to transact with each other really easily. It will be really interesting to see what happens with Libra, it has caught the eye of a lot of regulators worldwide. A lot of regulators are asking a lot of questions about how Libra will be regulated, how it will be policed, what about privacy – there’s a lot of questions that need to be answered. But I think Libra has the potential more so than anything else to really take cryptocurrency into the mainstream

Looking into your crystal ball, talk to me about how crypto can be used in transactional forms across retail and restaurants?

Adrian: I see cryptocurrency being used more and more online. There is a problem that lots of online merchants have, which is online fraud. There is a lot of fraud that happens online and usually merchants are liable for that fraud. Not a lot of people know this: for example, if someone uses your credit card and then you tell the bank that it was not you, it is usually the merchant that is liable to refund those funds to the bank. 

So cryptocurrency gets around this problem, where merchants aren’t liable for the fraud that happens. So I do see many use cases for cryptocurrencies online specifically.

You mentioned before the hockey stick growth of the business that was off the back of the bull run of Bitcoin. We we saw a lot of ICOs flooding the market. A lot of those have dried up and be weeded out. You mentioned the regulators – is there anything they could be doing more to improve the market? Are you happy with the ways things are progressing?

Adrian: I think we are on the right track. The first regulator to start regulating was AUSTRAC – that was after about a 2 year engagement period with the industry. I personally spent a lot time at AUSTRAC, educating people at AUSTRAC about what cryptocurrency is, what a cryptocurrency exchanges is, which parts can be regulated, which parts can’t, which parts should, and how we can apply regulation in a way that protects but doesn’t place too much of a burden on an industry that is quite small in relation to other industries.

So AUSTRAC began to regulate this space in April last year. Independent Reserve was the first to be regulated by AUSTRAC. We have a great relationship with them and I think this area is working really well. I think the next regulator off the rank will be ASIC which needs to have a look at what happens with ICOs and they are already having a very close look at this. Yes there were a lot of ICOs last year and there were quite a lot of people who lost a lot of money because there was I suppose an over-exuberance and people didn’t do their due diligence. The level of research they did in their investments probably wasn’t up to the level that it should have been. Some people took advantage of this but we are seeing ASIC and the RBA as well now start looking into this area more and more and I think we will see more regulatory initiatives from those regulators in the next 12 to 18 months.

What would be your advice to someone who doesn’t currently hold digital currency but is thinking of potentially giving it a go? 

Adrian: My main advice is to do your research to understand what it is that you’re investing in. Then start slowly – never invest more than you can lose as this is a risky area to invest in. Also to carefully choose the exchange that you use because not all exchanges are the same. The fees differ, the level of service is also not the same across all exchanges so read the reviews online and educate yourself.