It has been a challenging year for cryptocurrencies. The meteoric collapse of several industry heavyweights and their collateral damages have caused investors and regulators to put their guards up as significant cryptocurrencies continue to trade on multiple-year lows.

Coming off a blockbuster year and achieving an all-time high of over US$69,000 ($93,559) apiece on Nov 10, 2021, Bitcoin traded from around US$30,000 to US$40,000 apiece early this year. After reaching a peak of over US$47,000 apiece on March 30, the token’s value dropped by 18% over the next three months, exacerbated by the Terra Luna collapse.

Unlike “traditional” stablecoins backed by fiat money, terraUSD (UST) uses an algorithm to maintain a consistent value. These algorithms typically link two coins and adjust the prices depending on the supply and demand of investors.

After UST lost its peg on May 7, sparked by a massive sell-off, Luna also started to sell off — resulting in a vicious cycle that eventually caused Luna to drop from its high of US$125.85 apiece on March 31 to less than 1 cent just two months later. UST, meanwhile, is now just worth 2.5 US cents apiece.

Casualties include Three Arrows Capital (3AC), a Singapore-based crypto hedge fund ordered to liquidate on June 27 after it had borrowed billions of dollars to fund its trading and faced US$3.5 billion in creditors’ claims. Crypto exchanges with a presence in Singapore like Zipmex and Hodlnaut had also suffered significant losses, with the former currently seeking a buyout and the latter found to have lost US$180 million from the collapse.

‘Comparable to Mt Gox’

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While the Terra Luna crash dominated headlines — causing some positive news in the crypto market, such as the Ethereum Merge being drowned out — it has now been largely eclipsed by the recent FTX collapse. Hong Qi Yu, CEO of crypto exchange Tokenize, says the community was still largely unaffected by the five months following the Terra Luna crisis despite some notable casualties. FTX, however, dragged many giant players along.

“The FTX fallout is much larger, comparable to Mt Gox,” Hong tells The Edge Singapore, adding that FTX is one of the largest crypto exchanges in the world. A popular Bitcoin exchange in the early 2010s, accounting for 70% of all Bitcoin transactions at its peak, Mt Gox was liquidated in 2014 following a hack which caused some investors to lose millions of dollars in bitcoin. In October, Mt Gox trustee Nobuaki Kobayashi noted that the exchange’s creditors have until January 2023 to register and select a repayment method as part of the plan by which they will be compensated for their losses.

FTX filed for bankruptcy protection in November after its rival Binance pulled out of a deal to acquire the company. The move left investors and creditors facing billions of dollars in losses, and founder Sam Bankman-Fried resigned as FTX’s CEO, sending shockwaves throughout the industry. He was arrested on Dec 12 in Bahamas, where the company was based, after the US filed charges.

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Singapore’s state investment fund Temasek had to write off its US$275 million investment in FTX. “A loss is a loss, and always painful. A loss in what may turn out to be a badly managed company without adult supervision is egg on our face,” writes former Temasek CEO Ho Ching in a Facebook post on Nov 26, without making direct reference to Bankman-Fried’s tender age of all but 30 years old.

Hong believes that crypto is set to stay and the market will recover after a wave of consolidations as its long-term thesis has stayed the same. “I understand that people’s confidence is affected by the FTX saga, but we must remind ourselves why after the Mt Gox crash, Bitcoin recovered and even reached US$20,000 in 2017, [the all-time high at the time]. There was nothing wrong with Bitcoin, the technology is sound, and it is still playing the role of storage of value. The problems are on the operator’s side,” he adds. “I believe we are set to see the crypto market recover over the next six to nine months.”

Agreeing, Gemini Asia chief compliance officer Andy Meehan says it is easy to forget that cryptocurrency is a very young market. Bitcoin, for example, only started to be traded in 2009. “As such, repeated switches between bull and bear markets are to be expected, including crypto winters. However, crypto has shown before that it always comes out of periods like this stronger — and there is no reason to believe that this time will be any different.”

Independent Reserve managing director and country head for Singapore Raks Sondhi says the crypto winter will continue “a bit longer”. His firm will use this lull to focus on coming up with new products it can offer its clients.

“I don’t see this being the end of the crypto industry. I think this gives everyone in the industry a pause — an opportunity to re-evaluate what the can do moving forward. This gives investors time to consider their reasons for investing and whether they truly believe in crypto’s reputation as a store of value. If so, perhaps this is not a bad time to start dollar-cost averaging to gain exposure, as opposed to large ticket trades,” adds Sondhi.

Regulatory improvements and implications

The fallout of both Terra Luna and FTX have raised the importance of closer crypto regulations as global regulators strive to find the balance between innovation and consumer protection. In the UK, for example, an amendment to the financial services and market bill to regulate all crypto assets was proposed on Oct 27.

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Similarly, the Thai Securities and Exchange Commission is planning to tighten the supervision of digital asset firms. In July, the regulator announced that it seeks to amend its existing regulations to include stricter quality requirements for managing and licensing crypto custodians.

Players and investors here have seen some notable moves by the Monetary Authority of Singapore (MAS), one being the crypto marketing ban. On Jan 17, MAS released guidelines which prevent crypto players from promoting their services to the general public in the city-state. The announcement of the guidelines has bewildered many, as they were unaware of the impending guidelines before the official release.

In the wake of the FTX collapse, Independent Reserve CEO Adrian Przelozny points out that Singapore’s advertising ban inadvertently exposes consumers to crypto schemes, scams, unregulated exchanges and other riskier investments as they turn to search engines and social media platforms as resources.

He argues that allowing regulated industry players who have gone through the necessary checks and balances to communicate with consumers will drive awareness of safer options for investors genuinely interested in cryptocurrency. “We have repeatedly expressed that silence hurts consumers the most. More importantly, we must look at practical steps to ensure that we can responsibly communicate with investors in Singapore as a licensed and regulated exchange. This will prevent investors from being exposed to and trading with unlicensed entities and avoid a potential repeat of the recent FTX events.”

Independent Reserve’s head of compliance, Rajiv Premkumar, says the MAS has been very wary of retail participation due to the asset class volatility, as reflected in its guidelines. Singapore’s approach to cryptocurrency may seem “overly strict” compared to other jurisdictions in the region, but it has allowed the regulators to be closer to the ground and identify the risks between different entities.

“I expect it will be a top-down approach, and we will have all these generic requirements and consultation papers being issued. As the market becomes more mature, and as the regulators start recognising operational issues that may crop up, they will start to break it down little by little,” adds Premkumar.

https://s3.ap-southeast-1.amazonaws.com/www.theedgesingapore.com/public/usr/eijawu/39748f-Global-adoption-and-consideration-of-digital-assets-by-segment.png

Chart: Global adoption and consideration of digital assets by segment. (source: Fidelity Digital Assets)

Tough business environment

Singapore’s tighter regulations on retail investors have caused many players to consider enhancing their capabilities to cater to institutional and accredited investors instead, says Tokenize’s Hong. Tokenize, for instance, has launched a separate platform for institutional and high-net-worth investors (HNWIs). Tokenize Premier on Nov 1 supports options, derivatives, futures and spot trades.

“Recognising that this is an under-represented market is one way we are currently navigating the tough business environment. Our booth at Singapore Fintech Festival 2022 focused on acquiring institutional and HNWIs, instead of retail,” says Hong

Another name that launched its institutional service around the same time is Cake DeFi. The platform Cake DeFi Enterprise is aimed at institutional investors, and plans to offer decentralised finance services such as liquidity mining, token swaps and lending in the initial phase before further expansion.

Cake DeFi co-founder and CTO U-Zyn Chua says the launch was in response to the many institutional business enquiries it had received over the past year, indicating a strong demand for institutional decentralised finance services and not merely retail investors looking for a quick punt.

Regarding events that investors can look forward to in the next 12 months, Sondi cites further regulatory developments worldwide. In the US, for example, a regulatory panel comprising top financial regulators has recommended that the US Congress pass legislation addressing risks that cryptocurrencies pose to the financial system.

In early 2024, the bitcoin “halving” is expected to occur. This may be a catalyst that investors can look forward to, says Independent Reserve’s Sondhi. Halving is a quadrennial phenomenon where the block reward — or the number of bitcoins miners get by successfully mining a block of the cryptocurrency — falls to half its value. In 2024, the Bitcoin block reward will drop from 6.25 BTC per block to 3.125 BTC per block.

Historically, this event can be seen as one of the driving factors behind bitcoin’s previous bull runs. Over the last three halvings in 2012, 2016, and 2020, bitcoin saw short price corrections followed by a prolonged bull run between six to 12 months. After the last halving in 2020, Bitcoin’s value rose 366% and 559% over the next six months and 12 months, respectively.

“Hopefully, we see more optimism in the larger crypto space following up to the next Bitcoin halving,” adds Tokenize’s Hong.

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