By: Liew Li Ren
The FTX Collapse
On 11th November 2022, FTX filed for Chapter 11 bankruptcy [1]. Precipitating the collapse of this was an article on Coindesk which exposed the weak financials of FTX’s sister company, a trading firm called Alameda Research; these documents showed that Alameda was largely propped up by FTT, FTX’s native cryptocurrency and other coins heavily backed and promoted by FTX’s (now -ex) CEO Sam Bankman-Fried [2]. Smelling blood in the water, Binance head Changpeng Zhao, a rival cryptoexchange triggered a run on FTT by dumping more than $500 million worth of the coin [3]. From 6 – 8 Nov, FTT’s value nosedived from about $25.50 to less than $6 [4] as panicked owners tried to secure what they could through withdrawals, intensifying and perpetuating FTT’s collapse. As of 17 November 2022, FTT’s value has dropped some 98% [5]. The corollary effect of FTT and associated coins’s depreciation was the revelation of FTX’s real illiquidity and consequently, its inability to service liabilities owed to creditors, with just the top 50 being owed some $3.1 billion dollars [6].
The debacle supports the theory that perhaps there is something inherently unstable about crypto. Just a few months prior, there was a similar panic in the crypto-world, this time caused by a stablecoin, a coin specifically designed to be pegged to fiat currency. TerraUSD, was supposed to retain its peg to the USD through its link to a variable Luna coin designed to absorb volatility; an algorithmic supply mechanism ensured if the value of TerraUSD falls, traders could swap the weaker TerraUSD for Luna and bring TerraUSD back to its original value while making money off the trade, and vice versa were TerraUSD to rise above the US dollar [7]. Notwithstanding this protocol, a series of large withdrawals of TerraUSD triggered a similar selloff that saw the peg break and TerraUSD’s value to plummet to some 69 cents [8].
Another view could be that these failures were really caused by incredible mismanagement. Alameda Research had taken on insane leverage by using their stock of FTT coins as collateral to secure loans and then proceeded to lose big on risky investments [9]. When lenders demanded their money, FTX supposedly (and illegally) transferred customer funds to Alameda to service debts [10]. Accompanying this were shady and unreliable financial records and extravagant spending by FTX executives; FTX’s CEO, John Ray III, who oversaw Enron’s insolvency proceedings, summed it up nicely: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here” [11].
Regardless of the right view, one thing is clear: even for a nascent industry, the degree of professionalism and stability is inadequate to account for the incredible amount of funds poured into the crypto space. The high visibility of these failures forces regulators worldwide to respond to the unbelievable evaporation of money, much of it from ill-informed retail investors lured by ‘too-good-to-be-true’ returns, and Singapore is no exception. Opposition and Government MPs are already tabling Parliamentary Questions to hold to account, amongst others, Temasek, GIC and the Monetary Authority of Singapore (MAS) [12].
Crypto as it Stands in Singapore
One key difficulty with regulating cryptocurrency are the variant forms and functions that it can offer. Tan Shi Min, Deputy Director & Head of Payment Policy Division at MAS noted that it was evident already in 2019 that stablecoins could not fit easily with more traditional financial services (such as banks or money market funds) [13]. For example, if the digital asset would represent a security such as a share or bond, it will be regulated under the Securities and Futures Act (“SFA”), but if it represented an asset such as precious metal commodities, it will have to be regulated under the separate Commodity Trading Act [14].
There are other risk attendant to the cryptocurrency that deserve scrutiny as well. Grace Chong, Head of Financial Regulatory (Singapore) at Gibson, Dunn & Crutcher LLP noted core regulatory concerns of anti-money laundering (AML) and counter-terrorism financing (CFT) emerged first in 2017 given the anonymous nature of cryto-transactions, but MAS has since moved on to address issues of “technology and cyber risks, consumer protection, as well as financial stability” [15].
Following the passing of the Payment Services Act 2019 (“PSA”), so long as cryptocurrency is used as a means of payment (think Bitcoin), firms that are ‘dealing in digital payment tokens’ or have ‘any service of facilitating the exchange of digital payment tokens’ will qualify as a ‘digital payment token service’ and will be regulated under that ambit [16]. PSA assigns to MAS further powers to regulate payment service providers and address the previously mentioned concerns [17]. Therefore, crypto firms must be licensed under PSA and importantly, take measures to safeguard customer monies from insolvency.
Enhancing MAS’s regulatory domain is the Financial Services and Markets Bill (“FMA”). The essential function of this bill is to align the scope of Singapore’s digital token services to the enhanced standards sets by the intergovernmental Financial Action Task Force (FATF). While many virtual asset service providers (VASPs) would already be regulated under SFA or PSA, now all VASPs created in Singapore that provide VA services outside of Singapore will be regulated under FMA as a new class of financial institutions, including licensing and reporting requirements. FMA further introduces general powers to MAS over VASPs such as powers to conduct AML/CFT inspections and imposing requirements on technology risk management [18].
The Future of Singapore Crypto
Beyond statutory instruments already in force, MAS has presciently issued guidelines in Jan 2022 to warn the general public from trading cryptocurrency due to “sharp speculative swings” as well as cautioning crypto firms to only market crypto products on their own corporate websites, applications, and accounts [19]. Furthermore, MAS has released two consultation papers to propose even greater regulatory measures by amendment of PSA to “reduce the risk of consumer harm from cryptocurrency trading” and “support development of stablecoins as a credible medium of exchange” [20].
The latter is of particular interest; apart from disclosure requirements, MAS seeks to regulate issuance of stablecoins by forcing issuers to hold reserve assets equivalent to 100% of the par value of the outstanding stablecoin in circulation and further hold liquid assets valued at either 50% of annual operating expenses or an amount assessed by the firm to be needed to achieve an orderly wind-down (whichever is higher) [21].
MAS seems to have chosen stablecoins as the type of coin it wishes to be developed in Singapore’s crypto space instead of more volatile and speculative coins like FTT. The newly proposed reserve asset requirements notably ensures that even these stablecoins are truly and properly backed, especially since top stablecoins like Tether have been fined for lying about their reserves size [22]. Disclosure, licensing, and risk management requirements also seem designed to allow MAS to intervene quickly and prevent the incredible mismanagement witnessed at FTX, and if they indeed fail, ensure at least some degree of liquidity to service liabilities and debts. Of course, these measures have led to criticism by crypto firms, notably Coinbase, about stifling regulations [23] and there is a real possibility that in totality, they will hurt Singapore’s growth as a crypto hub. However, it seems from MAS’s cautious approach that the government would prefer to lose some of its comparative advantage in the Web3 space to ensure its pristine status as a traditional financial hub and step away from a repeat of the FTX tragedy that has befallen the Bahamian government. And that, is probably for the best.
References
[1]: Sigalos, M. (2022, November 11). Sam Bankman-Fried steps down as FTX CEO as his crypto exchange files for bankruptcy. CNBC. Retrieved November 29, 2022, from https://www.cnbc.com/2022/11/11/sam-bankman-frieds-cryptocurrency-exchange-ftx-files-for-bankruptcy.html
[2]: Allison, I. (2022, November 2). Divisions in Sam Bankman-Fried’s Crypto Empire Blur on His Trading Titan Alameda’s Balance Sheet. https://www.coindesk.com/business/2022/11/02/divisions-in-sam-bankman-frieds-crypto-empire-blur-on-his-trading-titan-alamedas-balance-sheet/
[3]: Osipovoch, A., Ostroff, C., Kowsmann, P., Au-Yeung, A. and Grossman, M. (2022, November 19). They Lived Together, Worked Together and Lost Billions Together: Inside Sam Bankman-Fried’s Doomed FTX Empire. WSJ. Retrieved November 29, 2022, from https://www.wsj.com/articles/sam-bankman-fried-ftx-alameda-bankruptcy-collapse-11668824201
[4]: McCabe, C. (2022, November 20) FTX Says Top 50 Creditors Are Owed $3.1 Billion. WSJ. Retrieved November 29, 2022, from https://www.wsj.com/articles/ftx-hires-bank-to-sell-salvageable-units-11668865049
[5]: Mack, E. (2022, November 23). The Fall of FTX and Sam Bankman-Fried: A Timeline. CNET. Retrieved November 29, 2022, from https://www.cnet.com/personal-finance/crypto/the-fall-of-ftx-and-sam-bankman-fried-a-full-timeline-of-events/
[6]: Sigalos, M. (2022, November 11). Sam Bankman-Fried steps down as FTX CEO as his crypto exchange files for bankruptcy. CNBC. Retrieved November 29, 2022, from https://www.cnbc.com/2022/11/11/sam-bankman-frieds-cryptocurrency-exchange-ftx-files-for-bankruptcy.html
[7]: Q.ai (2022, September 20). What Really Happened To LUNA Crypto? Forbes. Retrieved November 29, 2022, from https://www.forbes.com/sites/qai/2022/09/20/what-really-happened-to-luna-crypto/
[8]: Ostroff, C. and Osipovoch, A. (2022, May 10). Cryptocurrency terrausd falls below fixed value, triggering selloff. The Wall Street Journal. Retrieved November 29, 2022, from https://www.wsj.com/articles/cryptocurrency-terrausd-falls-below-fixed-value-triggering-selloff-11652122461?mod=article_inline
[9]: Kauflin, J. (2022, November 21). How did Sam Bankman-Fried's Alameda Research Lose So Much Money? Forbes. Retrieved November 29, 2022, from https://www.forbes.com/sites/jeffkauflin/2022/11/19/how-did-sam-bankman-frieds-alameda-research-lose-so-much-money/?sh=5b96032a44c9
[10]: Michaels, D., Yu, E., and Michaels, D. (2022, November 12). WSJ News Exclusive | Alameda, FTX Executives Are Said to Have Known FTX Was Using Customer Funds. WSJ. Retrieved November 29, 2022, from https://www.wsj.com/articles/alameda-ftx-executives-are-said-to-have-known-ftx-was-using-customer-funds-11668264238
[11]: Hern, A. (2022, November 19). Polyamory, penthouses and plenty of loans: Inside the crazy world of FTX. The Observer. Retrieved November 29, 2022, from https://www.theguardian.com/technology/2022/nov/19/polyamory-penthouses-and-plenty-of-loans-inside-the-crazy-world-of-ftx
[12]: MPs to discuss Temasek’s investment in FTX, repealing S377A and amending the Constitution to protect definition of marriage—CNA. (2022, November 25). Retrieved November 29, 2022, from https://www.channelnewsasia.com/singapore/parliament-order-paper-temasek-ftx-377a-marriage-constitution-nov-25-3100376
[13]: Understanding Crypto Regulation in Singapore (2022, July 19) TRM. Retrieved November 29, 2022, from https://www.trmlabs.com/post/understanding-crypto-regulation-in-singapore
[14]: Perreire, K. G. and Lin, Y. The Virtual Currency Regulation Review: Singapore (2022, September 7). The Law Reviews. Retrieved November 29, 2022, from https://thelawreviews.co.uk/title/the-virtual-currency-regulation-review/singapore
[15]: Understanding Crypto Regulation in Singapore (2022, July 19). TRM. Retrieved November 29, 2022, from https://www.trmlabs.com/post/understanding-crypto-regulation-in-singapore
[16]: Part 3 of the First Schedule, Payment Services Act 2019
[17]: Ibid.
[18]: Sections 19 – 20, Section 29, Financial Services and Markets Act 2022
[19]: MAS Issues Guidelines to Discourage Cryptocurrency Trading by General Public. (2022, January 17). MAS. Retrieved November 29, 2022, from https://www.mas.gov.sg/news/media-releases/2022/mas-issues-guidelines-to-discourage-cryptocurrency-trading-by-general-public
[20]: MAS proposes measures to reduce risks to consumers from cryptocurrency trading and enhance standards of stablecoin-related activities. (2022, October 26). MAS. Retrieved November 29, 2022, from https://www.mas.gov.sg/news/media-releases/2022/mas-proposes-measures-to-reduce-risks-to-consumers-from-cryptocurrency-trading-and-enhance-standards-of-stablecoin-related-activities
[21]: Ibid.
[22]: CFTC Orders Tether and Bitfinex to Pay Fines Totaling $42.5 Million | CFTC. (2021, October 15). CFTC. Retrieved November 29, 2022, from https://www.cftc.gov/PressRoom/PressReleases/8450-21
[23]: Chiang, S. (2022, November 4). Coinbase criticizes Singapore’s crypto regulations, urges city-state to embrace retail trading. CNBC. Retrieved November 29, 2022, from https://www.cnbc.com/2022/11/04/coinbase-criticizes-singapores-crypto-regulations.html