Explainer: Why are crypto firms getting into trouble here, and will this affect the fintech sector?

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

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

“I invested on behalf of my mother and this was part of her pension sum,” said the 27-year-old accountant, declining to be identified. The returns he has, valued at about S$36,600, are locked up in the stock market.

“So I will rely on instant noodles for the next 24 months to try and save this amount (to give my mother).”

In an update to users on Friday (August 19), Hodlnaut revealed that it had let go of 40 employees and that legal proceedings are ongoing between the firm and the police here.

The firm said: “While Hodlnaut is unable to disclose any information in this regard, these actions are being taken in what we believe to be in the best interest of users.”

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

When asked, the police said today that they cannot comment because the case is before the courts.

Hodlnaut is among a number of cryptocurrency exchanges and firms based in Singapore that have found themselves in deep water. Zipmex and Vauld have applied for protection from creditors for the past two months.

Creditors are usually people who have traded and earned on these exchanges and platforms.

As for Hodlnaut, a court document showed that as of August 8, there are 17,513 users “who have actually deposited tokens and are likely to be creditors of the Hodlnaut Group”, said director Zhu Juntao.

When TODAY approached the Monetary Authority of Singapore (MAS) for comment on this latest development, the central bank reiterated its warning that licensed digital payment token service providers here “are not subject to risk-based capital or liquidity requirements”.

These service providers are also not required to protect customer money or digital tokens from insolvency risk, an approach taken in most jurisdictions.

“This is also why MAS has continuously reminded the general public that cryptocurrency trading is very dangerous,” it added.

“Not only are the values ​​of cryptocurrencies extremely volatile, customers’ money is not protected under the law.”

Professional services and auditing firm KPMG said in its Pulse of FinTech report released in February that the crypto segment accounted for a third of total investment in Singapore’s financial technology (fintech) industry, which reached a five-year high of $3.94 billion (about 3, 94 billion dollars). S$5.5 billion) last year.

Investments in Singapore’s crypto and blockchain companies rose to $1.48 billion last year. This was 10 times that of US$110 million in 2020 and almost half of the Asia-Pacific total for 2021, it added.

With the effects of TerraUSD’s meltdown in May still spreading to drag down other crypto platforms based here and overseas, TODAY spoke with experts and industry insiders to take a closer look at the continuing wave of crashes, what it means for investors and consumers, and whether dents. Singapore’s position as a fintech hub.

WHAT’S CAUSING THE RECENT FLOUR OF CRYPTO CRASHES?

Associate Professor Cindy Deng Xin of the Nanyang Business School of Nanyang Technological University attributed the recent development “to the external gloomy macroeconomics and internal lack of proper risk control”.

The projected interest rate hike affects market liquidity in general, but “cryptocurrency suffers the most as a risky asset”.

“Internally, many crypto-enterprises lack a robust risk control system and use high leverage, which makes them easily fall into a pervasive crisis,” the banking and finance lecturer said.

She said similar issues also plague platforms based abroad, although the number of cases involving firms registered here may be due to “a lot of crypto companies (that have) opened offices here” since Singapore established itself as a fintech hub.

Anton Ruddenklau, partner and global head of fintech at KPMG International, told TODAY that the latest developments played out against a “perfect storm of market failure and value loss in the crypto sector”.

The storm, he said, came about because of three main factors:

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

WHAT IS THE ‘CONTAGION EFFECT’?

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

She said that when TerraUSD lost its link to the US dollar after the crash in May, it had “a ripple effect on many crypto businesses, first on relatively larger ones and then on smaller ones that use the services of larger ones”.

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

However, TerraUSD maintained the price fixation via algorithms, meaning a computer code, which controls the token supply. It was pegged to USD 1 via the minting and burning of its sister coin Luna each time the stablecoin was bought or sold.

Terraform Labs, which is behind TerraUSD and its token Luna, 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 different forms, is backed by other cryptocurrencies.

“So, if a major ‘coin’ falls in price, this can have an impact on the other currencies that are backed by it or rely on the original coin for stability, liquidity reserves or fixing a price.

“Hedges were also made against other mainstream cryptocurrencies for these interdependent coins, so they also fell as a result.

“This produced the contagion effect as both real economic asset reserves and market liquidity were not in place to stop any extensive decline.”