“This fallout [from FTX] has created a lot of uncertainty out there … It’s made me very cautious. How bad is it going to get?”
DigitalX chief executive Lisa Wade responded that she shared their concern about the short-term market outlook, warning that more “bad news” could emerge as other cryptocurrency businesses and networks became affected.
“What is going on with FTX has massively increased volatility in the market,” she told the AGM. “There could be a little more contagion. We can’t control that but what we can do is be the people that understand it the most and watch it the closest.”
Ms Wade, a former head of digital innovation at National Australia Bank who joined the small-cap crypto firm in January, said she had made decisions in recent weeks to eliminate “counter-party risks” that could threaten the security of crypto assets held in DigitalX’s funds or on its balance sheet.
“We don’t keep money on exchanges [any more],” she said. “We were staking on Binance in the fund previous to the FTX fallout, but we have stopped doing that due to the volatility. We analysed everyone in the market and the only way we could see a safe way of [staking] was to do it ourselves.”
Ms Wade said the company had developed its own “staking nodes” into the ethereum network, built on Google infrastructure, and was increasingly using offline “cold wallet” hardware devices to store clients’ and its own crypto assets. “The only time our money is ever on exchange is to transact,” she said. “That is done very quickly and then the money goes straight back into our cold wallet.”
The revelation comes as scrutiny mounts on the business model of crypto exchanges or “hot wallets”, which often monetise their customers’ assets in complex ways (with or without their consent) and are vulnerable to cybercrime.
Binance, the world’s largest crypto exchange – which in Australia is run by former DigitalX chief executive Leigh Travers – was a primary competitor of FTX’s and instrumental in its downfall. Binance founder Changpeng Zhao (CZ) was an early investor in FTX and its native token FTT, but blew the whistle this month on alleged misappropriate use of funds at his rival.
After lobbing a surprise non-binding takeover bid for FTX on November 9, Binance gained access to FTX’s financials and subsequently walked away, with CZ tweeting that FTX’s problems were “beyond our control or ability to help”. FTX filed for bankruptcy in the US two days later.
It is understood DigitalX’s decision to dump Binance was part of an effort to limit exposure to exchanges, rather than specific concerns about that company.
DigitalX chairman Toby Hicks, a Perth-based lawyer, told the AGM he was putting his personal reputation at risk by being involved in the controversial crypto industry because he believed in the “opportunity the technology presents”.
“We are not gamblers,” he said. “We are not gamblers with our shareholders’ money and we are not gamblers when it comes to speculative crypto assets or digital tokens. That is why … we have built a strong research-focused team that has enabled us to avoid issues that have confronted others.”
Ms Wade told the Australian Financial Review Super & Wealth Summit earlier this month that DigitalX had sold its units in FTX’s FTT token when rumours of its financial misdeeds began to emerge.
All five of the company’s AGM resolutions were carried, including Mr Hicks’ re-election, albeit with a 26 per cent protest vote against the adoption of an employee share incentive plan.
DigitalX shares closed flat on Thursday at 2.7¢ a share. They have lost 77 per cent of their value in the past 12 months as crypto markets plummeted from their all-time highs in November last year.