crypto strategy

Why Crypto Exchange Asset Proof Isn’t Reliable After FTX’s Collapse

The FTX Collapse is the story of a company that chose to operate outside of existing regulations while pretending to customers that it was regulated. Bankruptcy papers revealed a serious lack of accountability and risk control failures within SBF’s fallen empire.

This is the problem when it comes to unregulated platforms – client disclosure requirements are not as heavily regulated as regulated financial products like a managed fund or an ETF.

We have seen a few catastrophic system failures in unregulated crypto markets, which will see more enforcement actions against companies that were blatantly circumventing regulation.

Jeff Yew

We have taken the opposite approach – crypto assets have unique risks and characteristics that must be considered by product issuers and market operators to meet existing regulatory obligations and protect investors.

Do you think there is a “trustworthy” crypto exchange out there right now?

The real concern is that consumers are learning to trust the word of unregulated crypto trading platforms in the first place. Like most countries, crypto trading platforms and brokerages in Australia are unregulated. Altcoins traded on unregulated crypto platforms have the same regulatory legitimacy, or lack thereof, as items traded on Facebook Marketplace.

A true “exchange” is one that operates a financial market, such as the ASX, which must hold an Australian market licence. The problem with regulated financial products is that they are required by law to adhere to the various investor protection frameworks, such as transparent disclosures, custody laws, compensation and dispute resolution systems, which are backed by strict regulations to protect consumers.

Sam Bankman-Fried, founder and CEO of FTX.Credit:Bloomberg

Following the collapse of FTX, exchanges around the world are trying to allay investor concerns by providing proof of their reserves. Do you think this evidence is trustworthy?

Not quite, especially for those operating outside of regulatory boundaries. Because there’s no set rulebook to follow, every player seems to have a different way of bridging that trust gap.

However, the bigger issue is that they are unregulated, these crypto trading platforms do not and cannot provide full legal ownership of the asset to their clients.

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This is all the more critical for holding companies that have specific legal requirements such as a super self-managed fund (SMSF). Storing cryptocurrency on crypto-trading platforms could jeopardize the fiduciary’s obligation to secure absolute title to the asset.

Strictly speaking, very few crypto-asset unit financial products on the market could meet this legal requirement in Australia. The collapse of FTX has just sent SMSF auditors a rude awakening, and they will have until the end of the fiscal year to settle this with the SMSF administrators.

Do you think the collapse will shake institutional confidence?

Yes, and it will continue. We’ve seen institutional investors become aware of the distinction between bitcoin’s role as an emerging digital currency asset and the tech-driven crypto industry. The two categories pose different risks but are generally misunderstood – bitcoin competes with cash, while crypto competes with technology.

Although the current high volatility and declining bitcoin prices may deter some investors, I have started to see sophisticated and seasoned investors managing this by having appropriately sized positions or adopting a disciplined rebalancing strategy.

It is important to remember bitcoin as a network remains unfazed by the failures of the crypto industry to date, as the digital protocol does not rely on human intervention at all. Over time, I think more and more investors will recognize this.

This week, ASIC filed a lawsuit against Block Earner for allegedly providing financial products without the proper license. Do you expect to see more similar cases?

ASIC has made it clear that crypto is an enforcement priority for 2023, and we’ve seen a few catastrophic system failures in unregulated crypto markets, which will mean more enforcement action against companies that circumvent obviously regulation while describing that they were safe or licensed. .

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How do you make sure you avoid this kind of meltdown when investing through Monochrome?

To begin with, Monochrome is not a crypto trading platform. We are a licensed investment management firm offering investors regulated access to crypto assets in the form of traditional financial products. Our fund is professionally managed under an Australian Financial Services License, and the assets are secured by an approved depositary.

With the various issues and upcoming regulatory challenges facing crypto trading platforms, we want to set an example of how product issuers and market operators can meet existing crypto regulatory obligations.

It’s no secret that we are working on bringing a retail crypto fund to market. I think it would be a monumental step for Australian crypto and also for the financial services industry. Fears of further contagion among unregulated crypto players put our launch strategy on hold. We want to do things perfectly, not rush to be the first or cheapest product on the market.

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