Haru Invest 3rd Reddit AMA: Decoded

The company continues to stay socially near its investors but questions with demands for proof of reserves and certified auditing remain still incomplete.

On 23 February 2023 Haru Invest has conducted its third Reddit AMA[1](the previous two ones can be seen here and here), where I also had the pleasure to participate with my own set of questions[2].

This edition of the event was a little different from the others as it was announced only with 2 days of prior notice and perhaps not many users have caught up with it (as it was in the middle of the working week and many people are already distracted with way too many things). Additionally, this time the CEO, Hugo Hyungsoo Lee, has been joined by two additional employees in the AMA, with a person named James replying to legal-oriented questions, while Christen taking care of the generic ones.

In this post I am going to summarize the main findings of the answers provided by the Haru Invest team (which sometimes tend to express themselves rather cryptically).

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Auditing

The most popular question for the AMA was about the asset auditing process which the company has been trying to do since 2021 (which has been a topic of discussion in the previous AMAs too and BitYields has extensively compiled all the information on it available for you in our past review). Until now the main claim of Haru Invest was that since the company deploys user assets on multiple exchanges it is not possible to do classical "checks and balances" type audit via standard auditing techniques and the team has reiterated trying to collaborate with top auditing firms to create one for their business model which relies on distributed algorithmic trading[2][4]. A representative of the company has stated Haru Invest is still in the "consultations phase", precisely being stuck with defining ย "financial reporting standards"[1] with auditing companies[2].

It has been alleged over the official Telegram community of Haru Invest that the company has been partnering is PwC Korea[2], however during the AMA the firm declined to confirm a specific name, with limiting themselves to "top-tier global firms" (Editorโ€™s note: The โ€œBig Fourโ€ firms in auditing are Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young (EY), and Klynveld Peat Marwick Goerdeler (KPMG)).

Proof of reserves

Following the reiterations that an audit of Haru Invest couldn't be completed currently, some users have recommended a simpler approach of withdrawing all deployed assets, taking a snapshot and publishing the result to the investors[1]. Yet, Christen from Haru Invest has argued that "Pulling off from everywhere at the same time with all the assets will be a difficult task to do so, and it will be a task that is not worth risking our users earn rates", which immediately attracted a response from the community that most users would prefer reduced earn rates in exchange of more transparency[1].

Trading partners and asset security

The second most demanded topic was more details with regard the "trading partners" which Haru Invest employs in the execution of its algorithmic strategies (Editor's note: BitYields has concluded via systematic piecing of public information that no more than 50% of the tradable AUM is managed by an ~10 global trading firms, with which Haru Invest has partnered. Read more about our analysis here[2]). During the AMA the South Korean company has declined to confirm the number of the current trading partners and whether any of them has been dropped / added after the collapse of FTX in November 2022[1][2]. Although indirectly, Haru Invest has also acknowledged that it cannot provide warranty in case any of the partners mishandles the entrusted user assets[1][2].

Importantly, it has been also solidified that Haru Invest does not hold any native token assets of other exchanges[1](Editor's note: such as BNB token, NEXO token, etc.).

Haru Invest exposure to SEC staking regulation?

SEC (Editor's note: U.S. Securities and Exchange Commission) has announced on 9 February 2023 that it considers staking "an investment product"[7], therefore accusing the cryptocurrency exchange Kraken for failing to register it as such with the commission[12], eventually forcing the company to pay $30 million in disgorgement.

If we have to consider the technical term of what staking is (Editor's note: Staking is the act of a group of coin holders merging their digital resources to increase their chances of blockchain validating blocks and receiving rewards for their participation[2][6]), Haru Invest does not participate in staking (Editor's note: or at least we have no information about it[2]), rather being involved in active trading[2].

However, SEC has a complex history on defining what is considered a security and what is not when it comes to cryptocurrencies and companies and services related to it[2]. An article published in December 2022 in Harvard Law School on Corporate Governance suggests that a primary driver in SEC's decision logic is "whether the blockchain project associated with a cryptoasset is, at any point in time, `sufficiently decentralized`"[7].

Haru Invest confirms that it might be indeed exposed in future to U.S. regulatory crackdown [1]

Additionally, James from the legal department of Haru Invest has actually admitted that the US regulatory crackdown on staking services (which started with Kraken) might also impact Haru Invest users in United States[1] (Editor's note: As BitYields has revealed, Haru Invest is legally present in USA, together with an MSB license, via its Delaware company HaruUS. Read our ย full analysis about it here[2]). Ultimately, it is confirmed that Haru Invest might cease to offer services to U.S. persons, if needed[1].

However, it is important to note this is all still pure speculation, as it is not known whether the SEC would extend its interpretation of "investment services" to companies similar to Haru Invest too[2].

It is revealed that Haru Invest has actively engaged also in the EU but no further details were provided about how and where[1]. Moreover, James from the legal team of the firm has also shared that the British Virgin Islands Approved Fund formation of the company is also subject to the new VASP regulation scheme which has been announced in February 2023[2] and has 6 months of grace period for implementation[1] (Editor's note: The Virtual Assets Service Providers Act, 2022 (the "VASP Act") came into force on 1 February 2023 for companies in British Virgin Islands. The VASP Act regulates virtual asset service providers ("VASPs") and requires that VASPs be registered with the BVI Financial Services Commission[5]).

The company has doubled-down (again) on its belief that proper licensing is a high priority for them in order to achieve long-term transparency and stability[1].

Other major risks for Haru Invest

Up until BitYields has published its in-depth analysis of the inner workings of Haru Invest in February 2023, there has been hardly any information about the particular risks to which the business model of the company is exposed.

Since the business model of Haru Invest primarily relies on trading (and particularly unique mechanisms in the crypto derivative markets), it has been acknowledged that should crypto derivative markets be closed - or these mechanisms removed - that would ultimately result in the calamity of the company[1] (Editor's note: Stated in other words, Haru Invest does not appear to specialize - at least currently - in being competitive in "traditional algorithmic trading" which utilizes only spot markets. This is quite surprising, as many other less sophisticated firms than Haru Invest have been able to reap respectable profits even via trading on regular spot markets, however without the consistency of the current business model of the company[2]).

An important confirmation has also been made that Haru Invest currently uses only centralized (Editor's note: derivative) exchanges, without having a presence in decentralized ones, such as dYdX, Hegic, Lyra, Synthetix, GMX, Ribbon Finance, UMA and others[1][2]. For the list of supposed centralized exchanges which Haru Invest utilizes for trading, please refer to our in-depth Haru Invest analysis[2][3].

Threat monitoring mechanisms

The team has properly acknowledged that they consider their risk assessment methods to be perfect, but has confirmed they have a risk management guidebook via which they monitor exchange stability daily[1]. Additionally, they claim to be able to withdraw assets instantly (Editor's note: However, they do not acknowledge that exchanges might halt withdrawals unilaterally). Yet, during its 3+ years of existence the current threat monitoring model of Haru Invest has proven to be quite successful in dodging bullets[1].

Strategies

An important confirmation has been made that the trading strategies used for Haru Earn Plus and Haru Earn Explore are fundamentally different from each other (with the first group being significantly more conservative[112] (Editorโ€™s note: secure)).

New features

A "badges system" has been announced to be added to the "My Freezer" menu in the Haru Freeze & Marketplace product, which allows the users to "unlock" different badges based on statistics such as how long they have been using the platform and the size of their investments (although the badges currently provide no rewards, nor can be seen anywhere)[1]. Currently they are useful for "entertainment purposes" only[2].

It has been hinted again, that a rumored Community platform for Haru Invest users only might be also under development[1].

It's surprising that this time the team has not made promises for any new Crystal collection updates[1] (Editor's note: Read more here about Haru Invest Crystals) as Haru Freeze & Marketplace has already been the - apparent - favorite product of the team (despite being underutilized by most users, including me - I have never used it to this date[2]).

Finally, a mysterious promise of a new promotional event has also been sprinkled by Christen, which is always appreciated by users, of course[1]!

Referral program

The referral program of Haru Invest has been significantly altered in October 2022, with the reducing the referral earnings from 5% to 2% (while also introducing an out-of-reach Ambassador program which has been nothing but impossible to for 99% of the users, who have simply stopped promoting the platform[2]). Instead, the new program was supposed to provide +$50 in BTC both to the referred users and the person who has invited them via one time payment. Sadly, this has not only created an outrage among loyal users who had their earnings reduced by 3%, but also attracted a gigantic wave of abusers who have deposited money only to grab the referral reward and have then immediately ditched the platform[2].

There has been already a topic which brought this issue to Haru Invest publicly with suggestions for adjustments to the program, but this has fallen to deaf ears by the management.

When asked about the status of the program (which was previously supposed to be restarted in December 2022), Christen has cryptically remarked that the company is "waiting for the right timing..."[2], with another mention that users will be informed when the firm "comes with a better program than before"[1].

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Reference:

  1. Reddit, Our AMA session is here, get your questions ready!, 23.02.2023: https://www.reddit.com/r/HaruInvest/comments/10w3rcn/haru_invest_review_is_haru_invest_legit
  2. Personal research and findings of the author.
  3. BitYields, Haru Invest Review: Is Haru Invest safe? Features, Interest rates, Strategies and Risks, 07.02.2023: https://bityields.medium.com/haru-invest-review-is-haru-invest-legit-and-can-you-trust-them-with-your-crypto-9abbdd6365f#43f7
  4. Reddit, Haru Invest AMA: Celebrating Haru Invest 3-year anniversary, 04.09.2022: https://www.reddit.com/r/HaruInvest/comments/x3s3gp/ask_hugo_anything_haru_invest_ama_celebrating
  5. Mondaq, British Virgin Islands: Ten Things Every VASP Should Know About The BVI Virtual Assets Service Providers Act, 2022, 22.02.2023: https://www.reddit.com/r/HaruInvest/comments/117vuh6/our_ama_session_is_here_get_your_questions_ready
  6. Binance Academy, What is Staking?, 22.09.2019: https://academy.binance.com/en/articles/what-is-staking
  7. NASDAQ, Here's What the SEC's Staking Crackdown Could Mean for Ethereum, 16.02.2023: https://www.nasdaq.com/articles/heres-what-the-secs-staking-crackdown-could-mean-for-ethereum
  8. Harvard Law School Forum on Corporate Governance, Why Cryptoassets Are Not Securities, 06.12.2022: https://corpgov.law.harvard.edu/2022/12/06/why-cryptoassets-are-not-securities