The Future of The Financial System, Featuring Farzam Ehsani of VALR
Bit Podcast — Episode 27
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This week on The Bit, we’re joined by Farzam Ehsani, Co-Founder and CEO of VALR, to discuss new developments in the South African crypto market, including their latest innovation, VALR Arbitrage. VALR is partnered with Bittrex Global.
Here are the show notes:
[01:18] Revolutionizing Finance
[11:37] The Biltong Premium
[15:41] Don’t Say The “B Word”
[18:45] Crypto Humanisms
[29:53] All The Arbitrage
Stephen Stonberg: Hi, welcome to The Bit, the Bittrex Global Podcast where we give you the inside scoop on all things crypto. I’m Stephen Stonberg, the CEO of Bittrex Global. With the crypto markets in the middle of an epic bull run and news outlets throughout the west breathlessly covering every development in the space, sometimes it becomes easy to lose sight of the fact that crypto is a truly global phenomenon.
In fact, survey after survey from big-name resources, like Chainalysis, has shown that emerging economies in the developing world, not the West, are leading the way in terms of mass adoption, peer-to-peer trading and applying crypto to a variety of everyday use cases. And few spots on the planet have been as passionate about the crypto world as Sub-Saharan Africa, with adoption of P2P trade and transaction volumes significantly dwarfing those of other regions.
Founded in South Africa, VALR has emerged as one of the biggest exchange platforms in the country, servicing a public with a rapidly growing appetite for digital assets of all kinds of exposure to the quickly growing space. To help us get a better idea of the VALR platform and their innovative approach to the products and services that they offer, I’m speaking today with Farzam Ehsani, the Co-Founder and CEO of VALR. So Farzam, welcome to The Bit; excited to be chatting with you today.
Farzam Ehsani: Thank you so much for having me. I’m very excited to be here with you.
[01:18] Revolutionizing Finance
Stephen Stonberg: So the bull market, I would say, is still continuing. We’ve seen a bit of pullback, interestingly, in the news that another emerging economy has adopted Bitcoin as currency. But we’ll get into that in a bit. Really looking forward to discussing a lot of that plus some of the other trends shaping the broader crypto space, as well as how VALR has grown into such an in-demand platform in the South African market.
But before we dig into that, I always ask guests this question, and I wanted to ask you, Farzam, who or what got you into crypto in the first place? How did you hear about it, and how and when did you buy your first Bitcoin?
Farzam Ehsani: Good questions. So I heard about Bitcoin, probably in 2012. I thought it was a scam. I felt vindicated when the price crashed in 2013–2014. And then, I had a friend of mine who started a blockchain startup in San Francisco, Adam. Adam and I have known each other for a long time. He’s someone I deeply respect, and I called him up when I heard he was working in this “Bitcoin space.” And I said, “Adam, you’ve got to do something worthy with your life. This is kind of beneath you.” And he said, “Farzam, I don’t think you understand what Bitcoin is about. I don’t think you understand what this thing, blockchain, is.”
I had never heard of what blockchain was. That was probably 2014–2015 when we were having that conversation. He really opened my eyes to what this whole ecosystem was about. I think the main reason that attracted me to this space was the fact that I was in the financial space. I thought there was something deeply wrong with how our financial markets were working. I was always trying to find a way to make it better and I felt, “Wow, this is probably what I’ve been looking for.”
So that’s kind of what brought me to the space. You know, as everybody says, “I fell down the rabbit hole and never came out.” And then, when I started dabbling in Bitcoin, it was when the price was, I think, about $400 to $500. That was about 2015-ish, at that time.
Stephen Stonberg: Still very early days, right?
Farzam Ehsani: Yeah, still very early. Obviously, all of us wish we had put all our savings into Bitcoin at the time, but we didn’t.
Stephen Stonberg: Or Dogecoin, or Solana. Hindsight 20/20. That’s the nice thing about crypto: there are so many. There’ll be more where we’ve all blown it, right?
Farzam Ehsani: It’s true. It’s true. It’s very, very true.
Stephen Stonberg: I think what’s interesting is; similarly, you have quite a background in traditional finance and global markets. So was there any one single event or a series of events that made you sit up and really take notice of blockchain’s potential for finance and banking?
Farzam Ehsani: I think it was before I learned about blockchain, which was around the 2008 financial crisis; 2008 to 2009, where I just felt that all of the headlines around the world were about finance. And it was a space that I felt affects every single human being, and very few human beings understand this world. At least that’s what I thought. Then I got into finance, and I realized how few beings in finance, in regulatory bodies, actually understand finance themselves.
So at that point, I realized, “Gosh, our financial system needs a revamp.” And I think when I heard about blockchain technology, it was just a confirmation. It was like a huge light to say, “Wow, okay, this is so clear. There’s been a problem that’s been there for a long time. It’s getting worse and worse. This is a potential solution to many of the issues that we’re dealing with.” So that’s kind of the history of what made me so passionate about blockchain. It’s really its ability, and its promise, to revolutionize finance as we know it today.
Stephen Stonberg: I agree with all of that. I wasn’t thinking about blockchain in 2008. I wasn’t as forward-thinking as you.
Farzam Ehsani: I mean, I’d never heard about blockchain. Nobody had at that point.
Stephen Stonberg: But I agree with you. The analogy I make is that, back then, we were still seeing the internet revolution. And I think the internet revolutionized the finance system, like the way they interact with clients. Like the front end, but it didn’t touch the back office, which is completely antiquated. With the internet existing, obviously that’s enabled blockchain to take off.
But for financial services, I’d say that they’re not having their Amazon moment because the blockchain is the most efficient settlement system on Earth, compared to all these antiquated systems, which really got started post-WWII.
Some of them are from the 70s, with Bretton Woods. They’ve been putting tape and glue on them ever since. The banks have no incentive to change them because they make a lot of money. But now, “Oh, this new parallel system that operates 24/7 with no drag costs,” and everything else. This is huge. I think they’re just beginning to wake up to what this is. So for me, that was the kind of a “wow” lightbulb moment that went off.
Farzam Ehsani: Absolutely. Just to build on that a little bit, having come from a banking background and having left that banking background before I started VALR, you realize the power of vested interests.
Vested interests that are doing well in a current paradigm don’t want to see that paradigm change. They will extend it as long as they can, and they’ll hope they can keep milking that cow, so to speak. But what very few of them realize is that’s coming to an end.
And the more you delay it and try to just keep milking it to the last moment, the more you’re actually denying yourself a role in this new system. And that’s still, unfortunately, many of my conversations with many bankers here in South Africa. And what I’ve heard elsewhere is that’s still the case, although it is starting to slowly change.
Stephen Stonberg: I think it’s slowly changing. But I think this is moving so fast, and it’s already moved so fast beyond them. By the time they wake up, it’s going to be like Barnes and Noble.
This is my favorite analogy: it was THE bookstore in the 90s, and then they added Starbucks to the store. That wasn’t going to stop Amazon. Their heads were in the sand. I think the banks are the same now. They just think, “Oh, well, we’ll offer some Bitcoin funds. That’ll be fine.”
They don’t get it. It’s not about Bitcoin. It’s about blockchain. And that’s just the use case for blockchain. It’s fascinating. Moving on to the next question, which flows nicely, can you give us some background on VALR?
Because that’s obviously how you’re going after the space. How it’s grown into such an indispensable platform in the crypto space, especially in South Africa. How’d the team come together, and what sort of offerings are available for your clients?
Farzam Ehsani: Sure. So we started VALR in 2018, myself and three of my co-founders. We built the platform. It took us a good part of close to a year. We launched in 2019 and have been trading since then. So obviously, we have a partnership with Bittrex, and Bittrex has been critical to bringing liquidity into the local jurisdiction. That has been really great. Bittrex is one of our earliest investors as well as our partner.
Stephen Stonberg: Just to clarify with the audience, we have partner exchanges that license and use our technology, but they’re the exchange-facing clients.
Farzam Ehsani: Absolutely. Ours is a little bit of a hybrid because we also have our own matching engine. I’ll come to that in a moment, but effectively, the bigger picture is we offer 60 plus cryptocurrencies to our users. A lot of it is what’s called a simple buy-sell; just giving people a price and then being able to buy it immediately. Then for the Rand pairs, the local pairs — which are Bitcoin-Rand, Ethereum-Rand, XRP-Rand — we have order books that people can use to place orders, stop limits, you name it.
We’re going to be rolling that out more and more. The thing with South Africa is the RAND markets are not as deep, obviously, as dollar markets. So you have to be very careful about diluting the liquidity that you have across multiple pairs.
And there are some times where for a particular pair against ZAR, for example, you won’t necessarily have enough liquidity. What that does is expose your customers to a tremendous amount of slippage. That’s something that you don’t want to be seeing all the time. So we’re very, very careful about what exchange pairs we offer on the platform.
We are going to be building more so, top story: 60 plus cryptocurrencies. We also have what’s called a VALR Arbitrage service, and I’ll come to that in more detail if we have some time. We also have what’s called a VALR Pay product. Effectively, the way to think about that is, it’s like a Venmo for South Africa. There isn’t any other product that works like that.
The payments in South Africa are very old-fashioned. You have to ask for someone’s bank account number, the name of the bank, the branch number, and all that kind of stuff, like create a beneficiary. Now with VALR Pay, you can send ZAR to any cell phone number, email address, or VALR Pay ID within seconds. And it’s free.
Stephen Stonberg: And ZAR is “Z A R” or “Zed A R,” depending on if you’re British. That’s the code for South African Rand, which is the currency of South Africa, for those listeners not familiar.
Farzam Ehsani: Absolutely, so it’s the local currency over here. When you start up a platform like VALR, or an exchange that really demands a network effect, you never really know what the success will be. And I remember my dad asking me a few months before we launched, “Are you doing well yet?” I said, “Wait a few months, let us launch, and within a few months, we’ll know whether we’ve kind of made it or not.” The liquidity will either be there or it won’t.
It was very difficult to get international market makers as well because of exchange controls in South Africa. So there were a lot of restrictions we had that we’ve been able to navigate through nicely. And so now we’re trading about 60 to 70 billion Rand since we started. That’s about $45 billion since we started, which is not huge in the global scheme, but it’s decent for the local market. On certain days, we’re the largest Bitcoin trading platform in South Africa.
Now we have a competitor over here in between the two of us. For Bitcoin trading, we account for about 95% of the exchange market in South Africa, so we’re very blessed. It’s just the start for us. We’re now looking to go international as well, bringing new products and services online. The team’s working hard. So it’s been a fantastic journey, a lot of work. But we’re really proud of where we’ve come from and where we are.
[11:37] The Biltong Premium
Stephen Stonberg: Now, it’s so fascinating. So I guess you’ve already covered the fact that VALR is in South Africa for anyone listening who hasn’t figured that out. And you’ve emerged as one of the biggest crypto exchanges by volume, as you pointed out, and we’re seeing so much demand for crypto throughout emerging countries like South Africa.
Can you talk about some of the other areas or use cases for crypto? Where are you seeing it? Is it mostly trading? Or is it really just for peer-to-peer repayments? And is this typical from the rest of the surrounding region as well?
I know that Africa in general, has been a leader. We’ve seen Nigeria having some of the highest penetrations of crypto usage. Typically, we find it in countries where there’s a lack of confidence in the Central Bank and where the local currency has devaluation potential. Maybe you can talk a bit about that and how it fits into the region.
Farzam Ehsani: I think the first use case we see is this is a store of value. This use case has been seen around the world when it comes to fiat currencies, but particularly in South Africa. Our inflation rates are much higher than what you have in the US or in Europe.
Stephen Stonberg: That’s changing, though. I think we’re catching up quite rapidly.
Farzam Ehsani: I think you are. I mean, that’s a separate topic we can talk a lot about, but I think we’re going to be in for some big surprises. And I think there are going to be some seismic shifts in our monetary system.
Stephen Stonberg: There might even be some interesting lessons to learn for the developed world, which has seen inflation in the late 70s, but you guys are used to it. Maybe we’ll start to see more crypto adoption here. So let’s talk about that. What do you think we’re going to expect?
Farzam Ehsani: Sure, so there’s that. Then there’s also the arbitrage service. Because of exchange control regulations in South Africa — and what exchange control regulations are are limitations on capital movements in and out of the country. Well, mostly out of the country, but there are limitations and administrative things that you need to do to get capital into the country. Because of that, what we find is there’s a little bit of an arbitrage.
If you’re familiar, or if listeners are familiar with the kimchi premium in Korea, we have what I like to call the “biltong premium” here in South Africa. Biltong is beef jerky for those that don’t know what it is. In South Africa, it’s a very popular snack over here. So we see Bitcoin prices trading anywhere recently between, say, 2–5% above international prices in South Africa. And so, what we as VALR do, is we actually help our customers monetize that premium. It’s a quick trade.
But basically, you take your Rand in South Africa, you buy dollars with it through the traditional financial system, you buy crypto offshore and you send that crypto to VALR. You set it immediately, and we do it on a hedged basis. So you can effectively lock in 200 to 500 basis point profit in a matter of seconds. Now, it sounds almost like a scam. So that’s why we’re very, very careful about even how to market it. There are limitations. The reason it exists is there’s a regulatory, structural reason that exists. And no individual can take advantage of that ad infinitum.
So everybody has about $70,000 that they can do that with, and then it stops. Then they need to apply for a larger allowance. And then even that larger allowance has a limit to it. Obviously, if that limit didn’t exist, that arbitrage opportunity wouldn’t exist either because the trading would just bring it in line with international markets. So we help people take advantage of their capital allowances to monetize them if they’re not using them for other reasons. So that’s a pretty cool product that I’m very proud of, that has really been able to help a lot of people with some pretty nice pocket change.
Stephen Stonberg: That’s amazing.
Farzam Ehsani: Other things that they’re using it for are payments and things of that nature. But we’re still like the rest of the world for the most part, unless people are using the lightning network in certain areas. We’re not seeing the payments use case as a huge thing. It definitely does exist, but I think that’s where there’s going to be a lot of growth in the future once we get layer two solutions down the road.
[15:41] Don’t Say The “B Word”
Stephen Stonberg: Excellent. So it’s been over two years since you’ve opened your doors for business. In that time, as you mentioned, you’ve emerged as not the largest but definitely one of the largest in South Africa in terms of trading volume. Can you walk us through this whirlwind of the last two years? How were you able to make a name for yourself in the industry so quickly? Was it through your background in traditional finance?
Farzam Ehsani: So before VALR, I was the blockchain lead at one of the largest banks in Africa, actually, the largest bank by market cap. And by virtue of my role there — so that was in 2016–2018 that I held that role — at that time, I was very lucky to have such a role so early on in a traditional financial institution.
Stephen Stonberg: Amazing that they even had that. I mean, that’s when JP Morgan’s CEO was still calling it “rat poison squared” and all sorts of awful things.
Farzam Ehsani: Absolutely. So I think Warren Buffett was calling it “rat poison squared.” I think JP Morgan, I mean, Jamie Dimon was threatening to fire all of his traders and calling them stupid for trading it. But anyhow, things have changed there as well as at JP Morgan. So, it was something that I had talked to the organization about — about Bitcoin and blockchain.
And at the beginning, they said, “What are you talking about? First of all, don’t even mention that word, Bitcoin. That’s drug money. And we don’t deal with that stuff in the bank and blockchain. What’s blockchain?” After some discussions, they allowed me to set up this Fintech unit at the bank to drive the blockchain and the cryptocurrency space. Now at the time, it was very early on. As I said, not very many people knew about it. And so, we set up what’s called the South African Financial Blockchain Consortium. It was a group of 55 financial institutions, including regulators that came together once a month.
I chaired it. We basically held discussions and educated one another about the space. I think by virtue of that, there was some media attention about me, and I got to know the crypto community pretty well. So I was very lucky that once we left, or once I left with a couple of my colleagues from the bank and started VALR, we didn’t start from zero. People knew us in the industry; they knew who we were. There were a couple of players in the industry, and it was still a time where people didn’t really know who to trust.
In this new space, there were circulars from the central bank and from the national treasury saying, “This is really risky stuff, don’t enter this space.” So I think, by virtue of that background, people knew they could trust us. And from there, we put in a lot of work. There was a team. We kept listening to our customers and tried to keep shipping products that they wanted. So we’ve got a long way to go, but it’s been a fantastic couple of years so far, and we’ve got some mighty, mighty ambitions for the next couple of years as well, which I’m very excited about.
[18:45] Crypto Humanisms
Stephen Stonberg: Great, really interesting. Let’s move on to some of the biggest stories in the crypto ecosystem. One of the top stories that has been emerging over the past several weeks revolves around the whole flippening argument: the idea that Ethereum is going to eventually overtake Bitcoin as the number one crypto asset.
Is it valid? Honestly, it’s not too far-fetched, given the sheer variety of use cases that Ethereum solves, not to mention the rollout of Ethereum 2, and its explosive growth in DeFi and NFTs.
What is your take on this argument? Do you think Ethereum is going to eventually supersede Bitcoin as a de facto store of wealth in the crypto world? What do you make of the recent bull run of the market that’s seeing newer assets like Cardano and Solana literally soar into the stratosphere?
Farzam Ehsani: That’s a great question. So I think it’s still very early. I have a great love for Bitcoin because Bitcoin was kind of the first, and it kind of paved the way for all these other crypto assets to come through. And so, I think Bitcoin still has a long way to go and I think it’s going to keep going; it will serve as a store of value. I think Ethereum is great, but I think it is also having quite a lot of competitive chains that are coming for it, like you just mentioned.
Obviously, I think Cardano has had a few issues with their smart contract deployments recently but Solana’s there as well. I think there’ll be more in the future. It depends on the time horizon you’re talking about. I think actually, in the future — if I can just take a really big step back and talk about issuance algorithms of money in human history — the way I like to think about this is that we’ve gone from natural issuance algorithms, where the money we used was naturally occurring.
It was either gold, or shells, or cowhides, or whatever it may be. And maybe humans had some impact on that, which is breeding more cows, etc. But shells, or gold, or metals, etc, they’ve all been naturally occurring. There’s been a natural issuance algorithm, if you want to think about it.
Then we moved from those natural issuance algorithms to having money that represented those natural assets. But then, we kind of took those natural assets away, for example, in 1971 with gold. We were left with a human issuance algorithm, which is seven monetary policy committee members sitting around a table, looking at a few metrics, and deciding how much money should be in the economy or not.
Then we’ve gone from that into a pretty rudimentary programmatic issuance algorithm, which is Bitcoin, right? I think the Bitcoin issuance algorithm is fantastic, from the perspective that you know exactly how much it’s going to be and what it will be in “x” amount of years.
And we know exactly what that will look like. But it’s a pretty dumb issuance algorithm, so to speak. I think that humanity may, far down the line, realize that there are also issues with that kind of simplicity. It’s great that it’s simple.
But there are also issues when it comes to social justice. I think that we may, in the future, move to issuance algorithms that are based on principles of social justice that will benefit the whole human race, because as you know, in the crypto sphere or the crypto space, if you’re talking about inequality in any country, the inequality in the crypto space is even greater than the inequality that we have in the most unequal countries of the world.
I think that’s something that will need to be remedied; that’s something we don’t talk enough about, I think. But I say all of that to come back to your original question about the flippening. I think we’re still so early. I think anything’s possible. And we all need to have a dose of humility to see what happens because it would be very arrogant to presume we know what’s going to happen in such a dynamic space that’s moving so rapidly.
Stephen Stonberg: Blockchain is the real story; crypto is a use case of blockchain. I think people get confused about how to think about it. And then, within the crypto use case of blockchain, yes, obviously, Bitcoin and Ethereum are your biggest tokens.
But who knows? So, I will bet that blockchain is definitely here to stay. That’s not going anywhere. But I agree. It’s unclear if both of these will even be relevant in 10 years or 20 years, let alone their interoperability between each other.
Farzam Ehsani: If we have some time, I’d love to chat about that; what you said about blockchain versus crypto. And because I think blockchain is amazing, but I think blockchain has also been touted as the solution to so many things that it’ll not be suitable for. So that’s a sign. We can come to it if we have some time at the end of the podcast, but I just wanted to place that there.
Stephen Stonberg: Absolutely. So two of the biggest stories in the crypto-blockchain space over the past year have revolved around DeFI and NFTs. What’s got you excited about each of these topics? What plans does VALR have to integrate more closely with decentralized finance and non-fungible tokens?
Farzam Ehsani: Very excited about both of them. DeFi is just amazing because we were a centralized institution; we’re a centralized exchange.
Stephen Stonberg: As is Bittrex.
Farzam Ehsani: As is Bittrex. And I think that there will be space for both decentralized exchanges and centralized exchanges in the future. I think there’s an overemphasis of everybody holding their own private keys, and I think that’s because a lot of trusted institutions, or supposedly trusted institutions (this is in society) have betrayed the trust of the public. So there’s this pendulum that has kind of swung back from centralization to decentralization, but I think that there’ll be scope for both of those entities or those types of entities: centralized and decentralized.
But DeFi and NFTs are very exciting to me. Just the option of being able to interact with the protocol without having any so-called “counterparty risk” is mind-blowing to me. It’s difficult to understand when you come from traditional finance because you’re always dealing with counterparties in traditional finance. So here, there are other risks. You have to try to understand what the risks are. Are there any vulnerabilities in the protocol? And as we know, there’s been plenty in the ones that have been there.
But it is such a powerful democratizing force when you don’t need to ask for permission to be able to engage in the financial sphere. And in the last few decades, we’ve had to ask for more and more permission to be involved in the financial system. I think that needs to change. The pendulum needs to swing back.
Regarding NFTs, I have to admit, initially, I thought, “my goodness, this is a huge bubble, and it’s going to burst, and it’s just going to be horrible.” I do think, by the way, there are going to be some prices of certain NFTs that are going to plummet like crazy, but I think they are totally overvalued. That’s not even a controversial statement to make.
But the power of creating art and assigning ownership to it, and making that very clear for the world to see; and making that programmatic; and combining that with fungible tokens, which is money; and then creating the NFTs and the FTs, and bringing them together for payments, and being able to remunerate creators — I think is a very exciting thing.
If we, again, take a step back and look at capitalism, capitalism has always tried to maximize profits by bringing down your marginal costs to as low as they can be, and maximizing whatever you can charge for a product. But capitalism didn’t really anticipate what you do when the marginal cost goes to zero? How can you start charging for things that are going to zero?
Through technology, innovation, and advancement of humanity — many things. The marginal cost is going to zero, not just in the digital space but close or near zero in the physical space, as well, with recycling new ways of obtaining energy and things of that nature. So when you have this abundance now, when costs go down, the question starts to become, “what are humans to do?”
There’s a lot of lines of thought that say that humans’ time will be freed up to engage in creativity, in creating art, creating music and creating things that uplift the soul. I think NFTs are just the beginning of a glimmering of where we say, “Wow, okay, so people can create, people can then attribute ownership, and then people can actually benefit from things that they create.” I think it’s a very powerful thing. I don’t know where it’s going to go, but I think it’s tremendously powerful.
Stephen Stonberg: I have to agree. There are exciting NFTs. I mean, there are two types of tokens: fungible or non-fungible.
So with fungible, you don’t care which one you have, like a $1 bill. Or a Bitcoin and NFT, meaning you care which token it is. It represents something specific. I think today’s use case is just new digitally created art represented by a digital token. I agree with some of that.
Who knows if the art is any good? There are a lot of weird things in the regular art market. So I agree that it’s a bit of a bubble, I’m sure, with some of that stuff.
But that’s just touching the tip of the iceberg for applications of NFTs. What if you used it for existing, real art? Or to make it more transferable? Like with any real asset, like real estate and anything else, not to mention digital versions of those too.
So I think, again, like any new technology, you tend to have weird bubbles, but eventually the dust settles. I’m very bullish on NFTs, but I’m not sure that the current examples of them are the best use cases for them.
Farzam Ehsani: Absolutely, and I think with VALR — you asked what we’re doing about it. We’re looking at both very, very carefully to see what our plays will be there.
Stephen Stonberg: I think just on DeFi, our view is similar to yours. It’s super exciting. Ironically, a lot of the DeFi tokens are listed on Bittrex, which is a centralized exchange.
Hopefully, that irony is not lost on you and some of the listeners, but I think that is the problem with DeFi. Or the challenge, I would say, is that you still have to worry about whether there’s regulatory compliance and money laundering.
Whoever’s facilitating that, even if it’s on a centralized exchange, a regulator will just let it form over substance and say, “Well, you’re de facto acting as the introducing party to these individuals on your website,” or whatever platform you’re providing. And then, you don’t have KYC and AML.
I think it’s going to be a challenge for them to figure out how the regulators are going to deal with that. But I agree with you that clearly somebody will solve it. I think eliminating counterparty risk is so revolutionary, coming from traditional banking and having lived through 2008. So I think the pros outweigh the cons, but there’s a lot of work that’s still to be done. It’s early days.
Farzam Ehsani: Correct. Lots of moving parts.
[29:53] All The Arbitrage
Stephen Stonberg: Moving on to something that really caught my attention: VALR Arbitrage. Your team unveiled this service earlier this year.
So capital’s guaranteed. Payouts are either in Bitcoin or South African Rand, and it provides an ideal, not to mention a convenient, way for South African retail investors to earn a bit of passive income on the side. Who doesn’t like income on the side?
Can you walk us through the VALR Arbitrage service, what it involves, and give a little bit of background on how this concept was developed?
Farzam Ehsani: So VALR Arbitrage is a really phenomenal product. The price of Bitcoin trades at a little bit of a premium to international prices. It’s, right now, about 2–5%. About five years ago, I remember it being about 30%. And the reason for this premium is there are exchange control regulations or capital controls in South Africa, where people are limited to taking money out of the country. For whatever reason, whether it’s if they want to buy Bitcoin or if they want to go on a holiday, there are limits that exist.
So what we’ve done is help our customers monetize that premium by effectively taking the money that they have in their own bank account and using it to buy dollars in the traditional financial system. We have nothing to do with this leg of the trade. Then once those dollars are offshore, we help those customers buy crypto, send that crypto to VALR, and then sell it on VALR to capture the premium. That premium, as I said, is about 2–5%. Because we offer this product in a hedge on an automated basis, we’re effectively capturing 200 to 500 basis points in a matter of seconds, right?
We’ve got to be very careful because that sounds like a scam, and so we’ve got to be very careful about how we market this. But this is not something that can be done indefinitely. It’s a structural arbitrage that exists because of capital controls. An individual can only do this up to the equivalent of about $70,000; a million Rand, which is called their “single discretionary allowance.” And then, with permission from the authorities, or the revenue service here, specifically, the South African revenue service, you can get access to another 10 million Rand if you have permission to take that offshore. Then we can make the trade for you again.
So it’s for a total of about 11 million Rand — close to a million dollars — not quite, call it $700,000–800,000 per year that you can trade. That’s why the opportunity exists, and I think it will continue to exist so long as these capital controls remain in place in South Africa.
Let me just tell you a little bit more about why that exists. When we raised our initial funding and our seed amount, as mentioned earlier, it was from Bittrex. We brought that money into South Africa. It was in dollars. It landed in South Africa in dollars. Regulations required us to convert it into ZAR (into Rand), which we did. Then a few days later, we said, “Okay, we need to buy some Bitcoin. So let’s go and buy on Bittrex.” So we went to the bank to send some of our Rand. We wanted to convert it back into dollars and send it back to Bittrex.
The bank said, “Oh, sorry, no you can’t.” And I said, “What do you mean we can’t? We just brought this money in. Why can we take it out?” There’s no balance of payments code or what’s called a buck code. Therefore there is no way for you to send money out of South Africa to buy Bitcoin. So no company and no legal entity in South Africa is allowed to take a cent out of South Africa to buy crypto offshore.
The only access and the only way to buy crypto offshore in South Africa is via each individual South African citizen or resident that is over the age of 18 years old, that has an allowance of a million Rand initially and up to 10 million more. They’re able to take money offshore, buy Bitcoin, and send it back. That’s why there’s effectively a Bitcoin shortage, if you want to think about it like that, in South Africa.
Stephen Stonberg: I think in any market where you have exchange controls, where the government limits the currency — and effectively they have done this with Bitcoin so it’s caused their scarcity value. The onshore Bitcoin trades at a premium.
Farzam Ehsani: Exactly. And just like the “kimchi premium,” I call it the “biltong premium” here. So the kimchi premium is in Korea, and it’s over here in South Africa.
Stephen Stonberg: It’s fascinating how you even have exchange controls, in fact, in the crypto world. That’s the thing. Just because the trade settles in the blockchain doesn’t mean it isn’t subject to exchange controls. Now, I’m sure that some South Africans have crypto in some of these unregulated, non-South African exchanges, but the day they want to bring the fiat back into South Africa, they’re always going to have issues and problems.
Farzam Ehsani: Well, bringing fiat is not an issue; bringing crypto is not an issue. But getting it out again is an issue. That’s why the opportunity exists.
Stephen Stonberg: Fascinating. So, since we’ve come to, sadly, the end of our podcast, I have two more questions for you. Projecting ahead in the crypto space is hard to do, seeing as how things move so quickly.
But I’m sure the audience would love to know, and again, you’re not getting investment advice, just a thumb in the air kind of approach. What do you think the price points for Bitcoin and Ethereum will be by the end of the year? Do you have any views on some of the other ascendant assets like Solana and Cardano?
Farzam Ehsani: Sure. So the price of Bitcoin by the end of the year — It’s so difficult to tell. It would really just be a shot in the dark. I do think it’s going to be up. I think that there’s a good chance that we exceed our all-time high at the $65,000-ish mark that we’ve had. Ultimately, if we take a little bit of a longer horizon, I think the price of Bitcoin in dollars is going to reach infinity. And the reason I say it’s going to reach infinity is that Bitcoin and other cryptos are going to outlive the US dollar.
And if the US dollar dies, where there are not enough US dollars, you can give it to me to give you a Satoshi. That means the price of Bitcoin is going to be infinite. I think that there’s going to be a path to infinity. There will be a path that includes some dollar figures. Then at some point in the future, those dollar figures are going to be irrelevant, and we’re going to just see a higher price. Now, if the dollar fails, then everything priced in dollars is going to be infinite as well.
Stephen Stonberg: I think the world has other problems if the dollar fails rapidly.
Farzam Ehsani: By the way, that world is not something — the crash of the dollar is not something that I’m looking forward to. I do think it will happen and I think there’s a good chance that it will happen in my lifetime. I don’t think it will be a pretty picture, and it’s not something that I wish upon the world. I think it is inevitable. So that is something that will come in.
A cursory reading of history tells you that once you have fiat currencies that are really unbounded by anything, by anything scarce, then it starts getting printed like crazy. And if you look at the federal balance sheet that’s over a trillion dollars now, and it was 1 trillion not even about a decade ago.
There are issues that we have. Okay, so that’s kind of on-price. I think that there will be a few. I think there will be many of the assets that we see today that will have a value of zero. And I think the market will just decide. I think there needs to be a consolidation at some point. There will be different types of use cases. But I think, for the most part, we’ve got tons and tons of projects, which are amazing and which are beautiful.
But just like with this Cambrian explosion of the .com era when many of those stocks had sky-high valuations and then crashed, and then a few jewels are still around today and providing great value, I think we’ll see similar things in the crypto space.
It’s very, very difficult to tell which ones and I kind of shy away from trying to guess them because I find it not so helpful. But that’s one of the main reasons we started valr.com, to allow our customers in the market to decide. And I think it’s a great business model as well because we make revenue from people trading on the platform and expressing their views in the market.
Stephen Stonberg: Right. I think it’s really interesting what VALR has done so quickly. But it’s fascinating, and obviously, you’re our largest exchange partner, so we’re really happy to continue to work with you, and we expect to continue with VALR. Like us, respect for rules and regulations is highly appreciated.
So, Farzam, thanks so much for coming on the podcast and talking with us about the fascinating things VALR is doing in the crypto-blockchain space. We really learned a lot about the projects you’re doing and the unique things in the South African market. So again, we’re looking forward to great, great news in the future from VALR.
Farzam Ehsani: Thanks so much Stephen, it was a really great pleasure chatting with you. I really enjoyed it. Thank you so much.
Stephen Stonberg: Thanks Farzam.
Thanks for listening to the Bit, the Bittrex Global podcast. Our guest today was Farzam Ehsani, the Co-Founder and CEO of VALR. To learn more about VALR, visit the VALR website, which is valr.com. That’s, “V A L R dot C O M.”
To learn more about Bittrex Global, visit global.bittrex.com. And please make sure to subscribe to our podcast. You can find us wherever you get your podcasts. Thank you for listening and for making The Bit one of the fastest-growing podcasts in the world of crypto. I’m Stephen Stonberg, the CEO of Bittrex Global.
