Commentary: MAS proposals on the right track, but retail investors should still steer clear of crypto

Date: November 17, 2022

First published in Straits Times on 16 November 2022

In the light of the collapse of the FTX cryptocurrency exchange, the recent proposals of the Monetary Authority of Singapore (MAS) to reduce risks of crypto trading take on an even greater significance.

Among the proposals are that digital payment token (DPT) service providers will be required to provide relevant risk disclosures to enable retail consumers to make informed decisions regarding cryptocurrency trading.

They must also disallow the use of credit facilities and leverage by retail consumers for cryptocurrency trading and will be required to implement proper segregation of customers’ assets, mitigate any potential conflicts of interest which arise from the multiple roles they perform, and establish processes for complaints handling.

Although the measures are clearly timely and will afford greater protection for crypto traders, the Securities Investors Association (Singapore), or Sias, would like to make its position very clear and emphasise three critical points.

The most important point is the Government’s stance that all retail investors should steer clear of investing in cryptos.

An MAS spokesman earlier this week said: “MAS has been continually reminding the general public since 2017 that dealing in cryptocurrency is highly hazardous’.”

The regulator also noted that although DPT licensees are regulated for risks related to money laundering, terrorism financing and technology, they are not regulated for safety and soundness.

“They are not subject to risk-based capital or liquidity requirements, nor are they required to safeguard customer monies or digital tokens from insolvency risk,” added the spokesman.

Second, even if enhanced measures are introduced, they will not apply to foreign-based operators and exchanges.

With the Internet making financial markets borderless, it is impossible to protect retail investors from losses when transacting on platforms managed by foreign operators not regulated by the MAS, or not operating within Singapore. Should the untoward happen, they are on their own.

The collapse of FTX – which Fortune magazine reported “was run by a gang of kids in the Bahamas who all dated each other’’ – should by now provide a stark and painful reminder that the crypto world could easily allow rogue operators and charismatic fraudsters to exploit regulatory arbitrage to bypass the rules and regulations in a jurisdiction where they might be seen as too stringent.

Although the technology behind cryptocurrencies holds some promise, retail investors must know that the actual trading of crypto is fraught with huge risk. Worst of all, digital currencies lack any fundamental backing and therefore value, which makes valuation impossible.

Despite this, hordes of retail investors are still trying their luck in crypto markets, driven mainly by greed without proper consideration of risks. Many scams and failures in investments appear to have not deterred them from taking chances.

As it stands today, crypto trading is the purest example of the “greater fool’’ theory, more akin to gambling based on buying today on the hope of selling to the next greater fool tomorrow.

Value in such a world revolves entirely on speculation that, one day, the DPT will be worth more than it is now. It is hard to dispute critics who have called this the ultimate example of a Ponzi scheme.

FTX’s bankruptcy comes just a few months after the meltdown in TerraUSD and Luna, which led to billions being lost. The most prominent crypto, Bitcoin, has also not been spared from the fallout of these crashes and is now hovering around the US$17,000 level versus its high above US$66,000 a year ago.

Although one Bitcoin is said to be trading for around US$17,000, one expert has pointed out that punters are actually better off thinking of one Bitcoin being worth 17,000 Tether stablecoins. Today, one Tether equals one US dollar, but tomorrow it could easily be worth US$0.000001.

Some might say that the widespread acceptance of cryptos as a medium of exchange is only a matter of time, but Sias notes that Bitcoin was created almost 14 years ago in 2009 and is yet to gain universal use.

Furthermore, El Salvador’s decision in September 2021 to make Bitcoin legal tender in the country has turned out to be an unmitigated disaster. According to most reports, the adoption rate there has been almost zero and the country’s debt-to-GDP ratio – a key metric used to compare what a country owes with what it generates – is set to hit nearly 87 per cent in 2022, stoking fears that the nation is not equipped to settle its loan obligations.

Last but not least, Sias notes that almost all crypto trading is not regulated or supervised by government agencies. Thus, many of the markets or platforms may lack critical system safeguards, including customer protection, and this in turn makes customers vulnerable to scams, hacking and manipulation.

SIAS would recommend full regulatory supervision of crypto companies in Singapore where trading in crypto is involved.

Against this backdrop, retail investors would do well to understand that, even with the most stringent of measures in place, the risks remain as large as ever because cryptos lack any fundamental backing. As MAS has stated, “regulations cannot protect consumers from losses arising from the inherently speculative and highly risky nature of DPT trading’’.

All told, the advice remains unchanged as it has been for several years now, namely, stay away from trading crypto because of one simple fact – the risks far outweigh the rewards.

  • The writer is Mr David Gerald, Founder, President and CEO of the Securities Investors Association (Singapore)