Crypto contagion ‘to wipe out’ almost half of Australian exchanges

The comments come amid widespread movement among Australian exchanges, which are the first port of call for investors looking to trade local currency for crypto.

Earlier this month, Chinese-founded Huobi Group registered as a digital currency exchange provider with AUSTRAC.

Lack of rules

Last year, a Senate committee on Australia as a technology and financial center heard that there were no external audit rules or IT security standards for crypto exchanges in Australia.

The application process for AUSTRAC licensing requires an AML/KYC policy, a pre-written one that can be easily obtained online, and then an online form.

While Huobi has been on a global tear, it was forced to shut down its Thailand operations this month, after failing to comply with Thai Securities and Exchange Commission regulations.

Crypto exchanges are largely differentiated by the coins they offer on their platforms and do not always perform due diligence before allowing users to buy and sell them.

Some exchanges move more towards “banks” that offer their own financial products to users on their platforms.

Australian-founded crypto exchange Zipmex is currently trying to recoup $69 million of depositor money it collected through a “savings product” called ZipUp+.

Zipmex further lent the money to another crypto company called Babel Finance, which has reportedly lost $225 million in other crypto games.

McGrathNicol’s Mr Caddy says this kind of leverage and interconnection will create a further domino effect across the industry.

“[Those types of businesses] will be the first to fall, he said.

“Then there will be others who will not realize what has happened to them in terms of the deposit of their crypto, but they will not know what has happened to it and whether it has been exploited again, or moved on again.”

Cross-border regulatory hurdles will make it more difficult and costly to unbundle failing businesses and recover funds, Caddy said.

Financial engineering

“When the tide rises, it covers all the mess for everyone else, but when it starts to recede we’ll see what’s underneath come to the surface,” he said.

“You have smaller companies that are basically doing some kind of financial development, and I think it will have gotten too sophisticated or too big on a lot of them and it will be a day of reckoning.”

Now that interest rates are rising and inflation is starting to bite, money has been flowing out of riskier assets like cryptocurrencies.

This outflow, Caddy said, will weaken crypto operators that have not developed risk management strategies or internal systems to deal with a liquidity crisis.

“As one or two go, you’ll have a bunch falling by the wayside because they’ll have cross-invested, or crossed the cryptocurrencies between the exchanges, or leveraged up,” he said.

McGrathNicol director John Feeney said it was difficult to predict when the collapses would happen, but reckoned there would eventually be fewer than 10 firms.

“I can’t give you a date or week, but it’s pretty soon,” Mr Feeney said. “Who would you lend to at this moment? You will not trust the counterparty in the digital asset space at this time.

“We need many exits to have more established, credible, conservative organizations with more concern for the end consumer at the end of this journey.

“A collapse in asset prices, rising interest rates and increased capital costs, overextended leverage, poor business models, inexperienced managers, it’s a shock, moving too slowly to solve problems, calling in loans, fear of lending to other counterparties – it feels like 2008 all over again.”