Ajeet Khurana, the CEO of Zebpay, a global cryptocurrency exchange with business offices in Malta, Rezeknes, and Latvia, can recall that in 2012, “the first exchange-like businesses” that were established had operated more like over-the-counter (OTC) setups.
Khurana, a computer engineering graduate from the University of Mumbai, who also holds an MBA from the University of Austin, Texas revealed that six or seven years back, crypto exchanges were mostly managed without an order book.
Broker Fees Drop From 15% To 5%
Clarifying that he was not referring specifically to his crypto business, Khurana noted that around 2012, brokers were charging about 15% in commission fees for helping to settle cryptocurrency transactions. A couple of years later, Khurana pointed out that brokers’ fees fell to around 4 to 5%.
Attributing the significant and steady decline in broker fees to increased competition in the crypto industry, Khurana also mentioned that many users don’t understand the concept of a platform like Zebpay charging fees for their services.
He explained: “[Crypto traders] don’t see why [exchanges] should be charging any fee at all. The understand the [crypto] mining fee or what you would otherwise call a withdrawal fee. But they see us (Zebpay and other digital asset exchanges) like a platform and a platform should provide its services for free. So what we feel is that it goes with the ethos of the entire space.”
“Going With The Ethos Of Providing Free Services As A Platform”
He went on to explain: “Of course, going with the ethos is one matter. Being economically viable is another. [However, Zebpay as a company,] has done pretty well [in terms of revenue] in the last few years. We are grateful to our audience and we want [our business model to expand further.] So, we came up with a idea that why don’t we [start] enabling our audience, sync up with the way they would like us to think. And, if it can still be economically viable, then that would [work] perfectly. And that is what brought us here.”
He continued: “If we look at, let’s say the last full year of working in India...then the non-trading trading fee revenues [for Zebpay] accounted for about 10 to 12% of our total revenues. [This] means that the exchange fees, that is the fees charged on each transaction, accounted for [around] 90% of our revenue. [What] this means to us is that if we become more cost-conscious,
which [in practice] is quite difficult because we are quite robust on that end - or we could increase our volumes [by] let’s say 10x, then we make the same revenue even though we don’t charge an exchange fee. So, that’s the belief and the premise on which we’ve changed our fee structure.”
Khurana added: “At that point in time (when we were looking into the feasibility of altering our fee structure), our revenues came from just India. [And,] India has accounted for about 0.3% of the global [cryptocurrency trading] volume. When I [refer to] percentages...I am talking about projects officially listed [and tracked] on CoinMarketCap … Now that we are targeting many more markets, the very act of targeting 20% or 25% of the global market in terms of volume … that itself is like a 30x in terms of target audience. So, based on this defense, that you know we can develop a similar credibility and loyalty towards us in some of the markets as we had in India, it should become economically viable. So, that is the ethos as well as the economic model we will follow.”
Elaborating On The Breakdown Of Zebpay’s Revenue
When asked to clarify or elaborate on the breakdown of Zebpay’s revenue, Khurana said: “What tends to happen is that there are other revenue [streams] ...you know, whenever you withdraw [crypto,] or transfer coins from one address to another … a mining fee is levied. And, this mining fee cannot always be determined because it depends on network traffic and a variety of other factors. For instance, if I felt it could range from 8 to 10a … so these being very small numbers, I would probably charge 10a so that I don’t [go into] a loss. But effectively I may only have to pay 6a so I make ... when it’s added up, it does tend to become valuable. So, that would be one of the biggest sources of revenues.”
He further noted: “And, then there could have be some others - especially if you have some treasury management operation going on … that adds up a couple of percentages, etc. And going forward, though we haven’t had the concept of premium services … or subscription services or any of the others … and nothing [currently] is on the cards. But there are more creative fees that people have brought in … very simply because the promise of zero fees does not become a marketing gimmick.”
Comparing Crypto Exchanges’ Business Model To “Low-Cost Airlines”
The Zebpay CEO went on to explain: “Let me put it this way, if you were a low cost Airline and you allowed people to do everything without necessarily having to pay more than you advertised - then you are economically not gimmicky. But as soon as a person showed up, you charged them some [sort of] gateway fee or some sitting fee - or something along those lines. [Then, in this case,] they are being forced to pay a fee but under another name, [so] that’s gimmicky. So, what we are saying is that the basic cost of bringing in assets - which is fiat as well as crypto and transactions any number of times should [ideally] not have any friction.”
Khurana also noted: “[Currently,] we are creatively thinking of other options wherein we could make some money. And, then if nothing else … if you don’t add any more fees, then we could definitely make that 10% that I had [been referring to.] With sufficient volume, that could become economically viable.”
Is It Ethical To Sell Customer Order Book Data To High-Frequency Trading Firms?
When questioned about Robinhood’s business model, in which the company does not charge users any fees for crypto-related transactions, but it does make profits from selling its order books (which trades its customers made), Khurana said: “You know, there’s something called legal and illegal. Once something is legal, then you put it into the ethical framework. And, if it’s illegal, then the question of ethics does not arise. I believe that the world’s most evolved Bitcoin / crypto regulation comes from Malta - because it has taken the lead and has become the leader while others are trying to tap their existing regulations on securities or exchanges or money transfers or payments into virtual currencies. Meanwhile, Malta has a complete crypto regulatory Act and framework.”
He continued: “What that specifically says is that you can’t do what you just described. It [basically] says that if you do that, then you must give that fee back to the customers. [And let’s say] you transfer traffic from [Malta-based exchanges to some external] market or high-frequency trader or any of these - and they [pay] you a fee, then you have to give that fee to the customer. So first of all, in the jurisdiction that [Zebpay] is working in … this doesn’t become a possibility.”
Khurana also pointed out: “Interestingly, since you mentioned Robinhood, you should know that I don’t keep up-to-date on a daily basis - but the last time I checked, Robinhood is also in crypto. Now what they do there is that though you can buy and sell Bitcoin on Robinhood - you can’t withdraw Bitcoin. That means, effectively, you’ve got an entry where it says so many Bitcoins have been purchased on your behalf. But the moment you take it out, so a lot of regulations get triggered in the format of a suspicious transaction reporting, etc. So, the last time I checked, they were not allowing you to withdraw coin.”
He added: “So, [what makes] Robinhood unique … is that [let’s say] it has been moderately successful in the stock market game and it’s trying to apply that model here (with crypto) which I think is reasonable in the infant stage that are industry is in. But I think our industry, like all other industries will [develop] its own model as it grows up.”
Zebpay Might Consider Adding Derivatives Or Swaps, Not “On The Cards Right Now”
In response to a question about whether Zebpay will ever consider adding cryptocurrency derivatives or swaps contracts - which BitMEX has become known for - Khurana said that Zeppay is not considering such options at the moment. However, he also stated that Zebpay has not ruled out the idea completely and it’s possible the exchange operator could introduce similar trading options for its customers in the future.
As noted by Khurana, advanced forms of cryptocurrency trading options “represent the [potential] for evolution of the crypto industry and [at the same time,] the potential of the industry. These product offerings also present certain “operational challenges, regulatory challenges, but that’s naturally going to be the case with every new thing that you do. I like these instruments, never invested in them - or never participated in them. But, I am glad that these opportunities exist.”
He continued: “But something interesting to [consider,] let’s say a Bitcoin exchange-traded fund (ETF) is approved, or some other mass market institutional supported investment vehicle does [emerge.] Let’s say that the US Securities and Exchange Commission (SEC) allows an ETF, and then that ETF chooses not to invest in the underlying. That would be really unfortunate because we are all hoping that the ETF is allowed and that people simply go to Nasdaq and [purchase such a contract.] And then somebody goes and buys Bitcoin with that, right? But with these complex notes, probably you can just bypass the 21 million limitation because you can issue any number of notes. So, that’s my [view] on that.”
Far Less Than 1% Of World’s Population Has Participated In Crypto
Commenting on the actual percentage of people, globally, who’ve really participated in the cryptocurrency market or industry, Khurana believes it’s “much less than 1%.” Currently, competition in the crypto space can be described as “not who takes whose customers, but [rather] who [onboards] the new customers which is a very different sort of competition,” Khurana argued.
He added: “You can sort of conduct a social experiment [by] asking people about Bitcoin. One thing is, people are very interested in it. Second is, they already have a very strong opinion about it, regardless of how much they know about it. Now, sometimes this opinion is that, I would like to try, but I don’t know how to do it. I’m not saying that’s the most common opinion, the most common opinion tends to be pretty illiterate. That’s what my observation has been, but those people who want to do it, but are not motivated enough to actually do it - potentially could be incentivized by some [creative] incentivization schemes.”
Although not mentioning it explicitly, when we brought up some questionable examples of trading incentive schemes being offered by certain exchanges such as offering a chance to win Lamborghinis, Khurana acknowledged that crypto firms had resorted to this because it might be hard initially to onboard new users who might not be too familiar with the concept of trading digital assets.
The Zebpay CEO went on to mention that traditional e-commerce companies had also offered some non-conventional types of incentives when trying to attract new users. These incentives included things like “free shipping” or “buy 1, get 1 free” etc. (which is still offered), Khurana pointed out.
Ridiculous Offers Like Lamborghinis Only Attract Customers “Until You Offer It“
He further noted that “the idea is that if something is ridiculous, then it attracts the customer only until you offer it. And the moment you don’t offer it, they go away. Now that meant that the incentive was the real attraction. However, if you can give a sample discount, or any such promotion which causes them to try it out, then when you withdraw that incentive, they continue to do it. I think that’s [an example] of a reasonable marketing promotion. Now, before you start something, you can’t predict it, but that’s where your intent comes into picture. So, you know … we have never given [away] a Lamborghini and that’s never going to show up on our roadmap.”
He added: “But I can understand from their perspective, and the kind of customers they want to attract... I could see why some exchange would want to do that.”
Is Transaction Fee Mining Too Good To Be True?
In response to a question about explaining the idea behind transaction fee mining, Khurana said that “effectively, what’s going on is that they are charging you a fee, and selling you another token.” He explained that while they are “claiming to give it free, but if you take the full picture [into account,] you gave them some money. [There’s] some part of it where they’re giving you a token, like an exchange token. One of the advantages of giving people an exchange token (we have never issued such a token) could be that now that token can only be used on the exchange (that issued it) because it’s not listed anywhere else.”
“For instance, you’re using a credit card, or a frequent flyer program, [there are eventually] a lot of points accumulated. You know there’s a sunk cost fallacy - where you feel that now if I did not use it, I’m losing something. [This] is the opposite of, if I did something, I would gain something. So, I can see that people are probably doing that as a psychological trick. I am not extremely comfortable with the concept of transaction fee mining because it has two legs that make me uncomfortable.”
He went to on state: “One, I have not been able to come up with a … token-based economic model for an exchange token. I have not seen that … something convincing there. And, on the other hand, I also feel that … when you tell people something is free but you’re charging something for it anyway … that also makes me feel a little uncomfortable. [This] is why we created a brand promise of zero fees. We wanted to be [clear] that we weren’t say “zero fees, but this” or “zero fees, but that” - which is also why we’re so upfront about what are the fees, when we say zero fees. Coincidentally, Robinhood and others, do likewise.”