Implosion of FTX shows the need for proper regulation
- In light of the cryptocurrency industry’s crisis, insiders can no longer claim they are above regulation or that governments just don’t ‘get it’. The hype has turned out to be just like any other financial manias of the past
Cryptos are collapsing like dominoes around the world in the wake of FTX’s implosion, one of the largest exchanges of its kind. The crisis is sweeping our shores. The Hong Kong-based crypto exchange Atom Asset Exchange (AAX), founded just four years ago, has suspended all withdrawals since the middle of last month. Its management team is incommunicado and the size of the losses is as yet unknown.
A statement from AAX claiming “no funds have been compromised” is hardly reassuring to investors, given its de facto closure.
Hong Kong may have dodged a bullet after FTX left town while complaining about local regulations. But it remains to be seen if the ricochet still hurts thousands of local investors who are potentially exposed to AAX.
Despite the FTX fiasco, Financial Secretary Paul Chan Mo-po has said virtual assets and cryptocurrencies are “unstoppable”. The city is therefore eager to catch up with Singapore when it comes to financial innovations.
But Hong Kong should be mindful that the Lion City’s state investment arm Temasek has suffered “reputational damage” after a failed bet on FTX led to a write-down of US$275 million, or about 1 per cent of its net portfolio value of US$293.97 billion at March 31.
Regulators must not kill innovations or stifle the city’s ambition to become a virtual asset hub.
That said, they are rightly seeking better rules. When Chan said the government wanted to embrace “virtual assets”, there must be clear definitions to distinguish the digitalised forms of stocks, bonds, exchange-traded funds and other financial instruments which are already regulated, from newfangled blockchain-based instruments such as non-fungible tokens (NFTs), bitcoin and other digital tokens currently untouched by regulators.
Hong Kong crypto exchange AAX hit by losses at 10kM trading unit: source
Given their risks in terms of financial stability, consumer protection, money laundering and terrorist financing, there has to be proper regulation. As Chan has put it, the approach ought to be “same business, same risk, same rules”. In light of their industry’s crisis, insiders can no longer claim they are above regulation or that governments just don’t “get it”.
Originally invented to disrupt traditional banking and escape the clutches of regulators, the crypto hype turns out to be just like any other financial manias of the past.
Ultimately, adult supervision, sound management and risk-weighted capital allocation are still the golden rules when it comes to dealing with other people’s money.
