The collapse of FTX exchange, the second largest crypto trading platform globally, serves as a timely wake-up call to regulators in India. FTX’s fall highlights the risks from allowing private crypto trading platforms to function without any regulatory supervision; it highlights the vulnerability of investors and spotlights how such unregulated platforms can jeopardise the credibility of the financial system.
With the speculative fervour in private crypto assets cooling considerably since the last quarter of 2021, following China’s ban on trading and mining in these assets and sharp price correction due to tighter liquidity, framing regulations for crypto trading platforms took a backseat in recent months.
Also, trading volumes on Indian crypto trading platforms have contracted sharply since January due to the punitive taxes imposed on crypto trading in the last Budget. But there are many crypto trading exchanges still operating in India. They are facilitating not just crypto trading, but also offering other linked products.
News reports based on bankruptcy filings of FTX reveal that the entire $32 billion empire of Sam Bankman-Fried was a chimera, which had fooled even sophisticated private equity and venture capital players such as Sequoia Capital and Ontario Teacher’s Pension Plan.
The conglomerate was built with FTT, the cryptocurrency launched by FTX. As the value of FTT soared from around $2 to $78 in 2021, so did capital available with FTX and its group company Alameda, a crypto hedge fund. Value of FTT and other cryptocurrencies owned by Alameda before its collapse was around $12 billion. Alameda used the money to pump up the value of FTT besides buying other crypto start-ups and little-known crypto currencies.
FTX focused on exotic instruments such as perpetual futures and derivatives of cryptocurrencies, which were away from regulators’ radar. Of concern is that the company maintained scant records of its acquisitions, asset purchases and advances to employees and did not have either an accounting or a human resources department.
When the value of FTT plunged following the adverse report in CoinDesk, most investors in FTX could not get their funds out; many hedge funds are now facing a closure due to this.
The FTX episode can very easily replicate in domestic crypto trading platforms, since they too are unregulated. There are no stipulations regarding the accounting and transaction records to be maintained and no requirement for periodic public disclosure of their accounts.
Besides, there is no networth criteria for these platforms, nor any trade guarantee reserve to protect investors. Many domestic crypto trading platforms have also launched products linked to cryptocurrencies such as futures and options, fixed deposits, lending and borrowing, The Hindu cited.
If left unregulated, more such linked products are likely to be floated posing a threat to small investors and to the financial institutions linked to these exchanges. The RBI should also be concerned about money laundering through these assets. A regulatory framework will be useful in preventing a FTX-like saga in India.
