The cryptocurrency market must face the reality of appropriate regulation if it is to evolve as an alternative financial ecosystem. That is the view of some crypto investors that AsianInvestor has spoken to since the Terra/Luna stablecurrency collapse.
Rajiv Manoharan, principal at Melbourne-based Manoharan Capital, who invests in crypto businesses, acknowledges the damage the recent turmoil has caused, but is more bullish than most about the asset class.
“This is, of course, a concern; no one wants to lose money or see instability and loss of confidence in any market. However, historically across equity markets and others, as part of the maturing cycle and institutionalisation of the crypto markets, these 'black swan' events are unfortunately going to be part of the digital asset and crypto journey.”
Others close to the market are more concerned with the structural problems that the debacle has highlighted.
“I believe some so-called Black Swan events are more a train wreck waiting to happen than an actual Black Swan event,” Singapore-based private financier Edward Foo told AsianInvestor.
"From my observations, we are still a while away from a meaningful crypto market. There are those who believe these market shakeouts are part and parcel of iterations and fine tuning. I do not personally think that is the case."
“The reality is that no one has the ability to accurately predict where crypto markets are headed now; even those who are in a strong enough position to guide market direction. Even they can get caught out.”
Timothy Tsui of the Hong Kong-based family office Arbutus and another experienced crypto investor, told AsianInvestor he was “quite shocked at the destruction of value. The speed of the UST (Terra) fall and the breakdown of Luna was immense. I have friends who had invested in UST. By the time they woke up, their money had vapourised.”
Foo is concerned for the investors who believe that the crypto market is secure and is regulating itself adequately. The reality, he said, is crypto markets have no failsafe mechanisms built into them.
“I have yet to see any viable risk compartmentalisation structures; plenty of great ideas but no real viable systems. Without regulatory oversight and with effectively weak legal structures, we have allowed a crypto market with serious systemic flaws to develop exceedingly quickly.”
Tsui also sees an inherent risk in algorithmic stable coins: "Because the industry is not regulated, they have no obligation to tell you how much reserves they have. So it’s an act of faith. It has created a lot of volatility in the crypto space."
Crypto analyst Brandon Carl argues that while stablecoins as a construct are relatively new, the concept of pegging one currency to another is not. But “in the absence of outside funding, it is impossible to create a successful algorithm.”
Carl believes stablecoin investors are long the credit of the stablecoin’s insurers.
“This is the equivalent of being short credit default swaps on the stablecoin insurers. As a closed system, this is inherently unstable. Since both parties must be compensated for the risk they assume, neither party can make the other whole without assistance from the outside world.
“In the event that the funding comes from new entrants into the stablecoin/insurer ecosystem, the system is definitionally a Ponzi scheme and is unstable.”
Foo says while he may not fully agree with Carl’s analogies, “the one thing that I do agree with is the danger of naked hedges (uncovered hedges) in a closed system.
“As such, in the short term, I am concerned about other train wrecks waiting to happen: crypto coins that are close in structure to Terra and Luna.”
Manoharan is a lot more bullish. He thinks crypto assets are entering a new, more mature phase after this latest correction.
"Absolutely, 100%. We are significantly increasing our weighting and allocation to crypto and see recent events as a massive buying opportunity. In Australia in particular, we are seeing the large banks and superannuation funds engaging more and starting to move. ANZ Bank has partnered with ZeroCap on the first Australian dollar backed stable coin."
REGULATION OF SOME SORT
In Asia, Singapore has taken the most proactive stance of any jurisdiction in Asia in allowing crypto to operate within certain boundaries. Globally, regulators have tried to keep it at arm's length. In September 2021, Gary Gensler, chair of the US Securities and Exchange Commission, described cryptocurrencies as "the Wild West" and suggested that much more regulation was needed.
Carl agrees that regulators should take some steps to enable the crypto industry to continue to innovate: "We must build our foundations on solid ground. Investments that are provably problematic should be appropriately regulated and efforts should be made to protect consumers against them.”
For the crypto industry to rebuild confidence, Tsui says "you need some form of oversight, otherwise it will remain a very volatile asset. I don’t think self-regulation is going to work."
But having said that, he also thinks regulation is counter-intuitive to the whole crypto industry, "which is trying to revolutionise the financial system without regulation".