‘So much worse this time’: FTX wreck a bitter pill for long-time crypto investors

IN 2015, then 24-year-old Josh learned of the Ethereum blockchain project, liked its value proposition, and decided to invest in the cryptocurrency.

At the time, bitcoin prices had crashed after an exuberance-fuelled boom. Josh has since been through several highs and lows, including the 2017-2018 bubble and the scandal-ridden crypto meltdown that began in the middle of this year.

Like some Singaporeans, Josh had grown accustomed to the high risks of investing and speculating in digital assets for the promise of high returns. He’d even escaped the Terra-Luna crash by the skin of his teeth.

But nothing has cut as deeply as the recent implosion of FTX – one of the world’s largest crypto exchanges, and seemingly a credible one.

“This isn’t a failure of crypto. It’s just completely criminal,” said Josh, a tech employee who requested his real name be withheld as family and friends are unaware of his situation. He estimates 10 to 20 per cent of his overall assets are stuck in FTX, a once-glorified company whose road to bankruptcy has been likened to the Enron scandal.

Users are reeling from the revelation that the exchange might have quietly lent billions of dollars worth of customer funds to its affiliate trading firm, Alameda Research, to bankroll risky bets.

FTX’s founder Sam Bankman-Fried (popularly referred to as SBF) told investors that Alameda owed FTX about US$10 billion, according to The Wall Street Journal (WSJ). FTX appeared to have about US$16 billion in customer assets, said WSJ’s sources.

The extent of the impact on Singapore-based investors is unclear; but the country accounted for about 5 per cent of online traffic to FTX.com last month, according to data analytics platform SimilarWeb. That ranks Singapore fourth, after Japan, Korea and Germany.

Some users The Business Times spoke to said they had felt safe using FTX partly because of its backing from blue-chip investors including Sequoia and state investor Temasek, which reportedly poured about US$200 million into the exchange.

“These guys were funded by the Who’s Who in venture capital, right?” said Josh. “And SBF was supposed to be something good about the industry, but he turned out to be the absolute worst.”

“There was the sense that FTX knew what they were doing; (there was) an aura of prim and properness in how they were conducting themselves,” said George – another user who has about US$300,000 worth of assets on FTX, and who spoke on condition of anonymity.

FTX’s stunning downfall in a matter of days has shone a spotlight on the personality-driven nature of the crypto world and the intermediary risks of using platforms such as FTX, whose businesses are far more complex than traditional exchanges.

As the market turned increasingly sour this year, Singaporean user Kevin sold crypto and left US dollar balances on FTX. He now has about US$500,000 worth of assets stuck on the platform, and minimal hopes of getting it back.

“If you were investing in something speculative and volatile, and you had a loss, you take it because it’s a risk you signed up for. People don’t sign up for the risk of your US dollar balances going missing,” said Kevin, who works at a Web3 startup and similarly requested anonymity.

Kevin, whose assets in FTX represent about half of his net worth, still counts himself better off than some of his peers, who are at risk of losing US$1-5 million, or 80 to 90 per cent of their net worth.

FTX’s stunning collapse could lead to tougher regulation of crypto platforms’ business conduct. Most crypto exchanges are unlike traditional stock exchanges, which earn a bulk of their revenue from fees charged for trading on their marketplace.

Crypto exchanges often play multiple roles simultaneously: marketplace, custodian platform, broker-dealer, market-maker, lender or borrower, and/or a trader for their own or related accounts. Such an arrangement is littered with risks, and is how FTX ended up with billions of dollars in client money it is now struggling to return.

These exchanges do this in an opaque environment and with little to no regulatory supervision. Most jurisdictions that have proposed rules to safeguard customer interests, including the European Union and South Korea, have yet to fully implement them.

Regulators have raised concerns over conflicts of interest that may arise from the multiple business activities of crypto exchanges. The Monetary Authority of Singapore (MAS) has flagged that entities conducting proprietary trading and market-making services could potentially front-run customers’ orders. 

In Singapore, licensed entities are regulated for technology risks, and money laundering and terrorism financing risks, but not for safety and soundness. While Singapore users could access FTX.com, the overseas platform was not licensed by MAS.

The regulator began consultations in October on its proposed measures for business conduct. They include segregation of customers’ assets, a restriction on lending the assets out, and restricting trading platform operators from buying or selling crypto for their own accounts.

MAS’ powers, however, extend only as far as its jurisdiction. Some industry observers have noted that regulations have been uneven globally, and users have easily accessed international exchanges based offshore.

“The difficulty with regulation is that there is regulatory arbitrage,” said George, the FTX user. “It appears that you need to have baseline standards across the world. Some exchanges will always find a place where it’s not so stringent and open there, but at least users would know which ones are ‘tier one’ regulated exchanges (so to speak) and feel more comfortable using them.”