Explanation: Why are crypto firms having trouble here and will it affect the fintech sector?

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Explanation: Why are crypto firms having trouble here and will it affect the fintech sector?

SINGAPORE — The implosion of TerraUSD and its paired token Luna on the cryptocurrency exchange market burned a 27-year-old Singaporean man in May, but being young and digitally savvy, he continued to trade on the Hodlnaut cryptocurrency platform. This time, with her mother’s savings.

Now he feels the heat and is discouraged. Hodlnaut has suspended withdrawal of returns by users and the Singapore-based cryptocurrency exchange filed for creditor protection.

“I was investing on behalf of my mother and it was part of her retirement pension,” the 27-year-old accountant said, declining to be identified. The returns he has, valued at around S$36,600, are locked on the stock exchange.

“So I’m going to rely on instant noodles for the next 24 months to try and save that amount (to give to my mum).”

In an update to its users on Friday August 19, Hodlnaut revealed that it had laid off 40 employees and that there was an ongoing lawsuit between the company and the police here.

The company said, “While Hodlnaut cannot disclose any information in this regard, these actions are being taken in what we believe is in the best interests of our users.”

It had 30,300 users as of August 8, including 14,316 in Singapore.

When questioned, police said TODAY they were unable to comment as the matter was before the courts.

Hodlnaut is one of a series of Singapore-based cryptocurrency exchanges and companies that have found themselves in deep water. Zipmex and Vault have filed for protection against their creditors within the past two months.

The creditors are usually people who have traded and earned income on these exchanges and platforms.

In Hodlnaut’s case, a court document showed that as of August 8, 17,513 are users “who have actually deposited tokens and are likely to be creditors of the Hodlnaut Group,” its manager Zhu Juntao said.

When TODAY approached the Monetary Authority of Singapore (MAS) to comment on these recent developments, the central bank repeated his warning that digital payment token service providers licensed here “are not subject to risk-based capital or liquidity requirements”.

These service providers are also not required to protect customer funds or digital tokens against the risk of insolvency, an approach taken in most jurisdictions.

“This is also why MAS has been continuously remind the general public this cryptocurrency trading is very dangerous“, he added.

“Not only are cryptocurrency values ​​extremely volatile, but customer money is not protected by law.”

Professional services and auditing firm KPMG said in its Pulse of FinTech report released in February that the crypto segment accounts for a third of overall investment in Singapore’s financial technology (fintech) sector, which reached a five-year high of $3.94 billion (about S$5.5 billion) last year.

Investment in Singaporean crypto and blockchain companies jumped to $1.48 billion last year. That was 10 times that of US$110 million in 2020 and nearly half of Asia-Pacific’s total for 2021, he added.

With the effects of The May Collapse of TerraUSD Still spreading to take down other crypto platforms based here and abroad, TODAY spoke with industry experts and stakeholders to review the continuing series of crashes, what this means for investors and consumers, and whether it harms Singapore’s position as a fintech hub.

WHAT CAUSES THE RECENT SPALE OF CRYPTO CRASHES?

Associate Professor Cindy Deng Xin of Nanyang Business School at Nanyang Technological University attributed recent developments “to external macroeconomic gloom and internal lack of adequate risk control”.

The expected rise in interest rates affects market liquidity in general, but “cryptocurrency suffers the most as a risky asset”.

“Internally, many crypto companies lack a robust risk control system and use high leverage, which easily causes them to fall into a cascading crisis,” said the associate professor of banking and finance. .

She said similar issues plague foreign-based platforms as well, though the number of cases involving companies registered here may be because “many crypto companies (having) opened offices here “since Singapore established itself as a fintech hub.

Mr. Anton Ruddenklau, Partner and Global Head of Fintech at KPMG International, said TODAY that the recent developments have unfolded against a “perfect storm of market failure and loss of value in the crypto sector.”

The storm, he said, is due to three main factors:

  • Business models based on a bull market economy that may not be fundamentally sound
  • The “Covid investment bubble” in private and public markets that burst
  • The actions of short-term institutional investors who “try to produce alpha returns by trading (market) volatility,” which have only exacerbated it further

WHAT IS THE “CONTAGION EFFECT”?

Another reason for the rapid fall of crypto exchanges is the “cascading crisis” Professor Assoc Deng mentioned earlier.

She said that when TerraUSD lost its peg to the US dollar after the May crash, it had “a cascading effect on many crypto companies, first the bigger ones and then the smaller ones that use the services of the largest”.

TerraUSD, also known as UST, is a stablecoin – a type of cryptocurrency believed to maintain a stable price over time by being pegged to the value of an underlying asset such as the US dollar.

However, TerraUSD has kept its price fixed through algorithms, i.e. computer code, which controls its token supply. It was pegged at US$1 via the minting and burning of its sister coin Luna whenever its stablecoin was bought or sold.

Terraform Labs, which is behind TerraUSD and its Luna token, is based in Singapore. Its South Korean co-founder Do Kwon is under investigation for misleading investors in South Korea and the United States.

Explaining the “contagion effect” seen in the crypto ecosystem, Ruddenklau said that much of the crypto market, especially cryptocurrencies in all their forms, is backed by other crypto. -currencies.

“So if a large ‘coin’ drops in price, it can impact other currencies that are backed by it or that rely on the initial coin for stability, liquidity reserves, or an anchor. ‘a price.

“Hedges were also made against other common cryptocurrencies for these interlocking coins, so those also fell accordingly.

“This had a contagion effect, as the real economy’s asset reserves and market liquidity were not in place to arrest any broad-based decline.”

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