This article was first published on Ignites Asia.
Many retail investors in Singapore had flocked to use the disgraced exchange, reassured by the US$275M injected into FTX by state investment firm Temasek.
The sudden collapse of Bahamas-based cryptocurrency exchange FTX has had a “chilling effect” on the Singapore crypto fund space, forcing product providers to delay and cancel planned fund launches this year as they re-evaluate risk assessments, as well as wait for investor confidence to return.
Traditional fund firms that had previously expressed interest in entering the crypto funds space may face even higher barriers to entry due to the greater scrutiny on virtual assets by banking and insurance partners, as well as regulators.
The global cryptocurrency market and enthusiastic investors had a tumultuous year in 2022. But some scandals were much closer to home for Singapore investors, including the bankruptcy in June of crypto hedge fund Three Arrows Capital, which was founded in the city-state, and the insolvency of Singapore crypto lender Hodlnaut in August.
Patrick Tan, Singapore-based general counsel and co-founder of blockchain analytics firm ChainArgos, says the collapse in November of FTX was “probably the last straw on the camel’s back”.
“I don’t think it’s possible to overstate the significance of that in terms of the chilling effect it had, at least on the Singapore market,” say Tan.
Singaporean retail investors had flocked to FTX, especially in light of Singapore state investment firm Temasek’s US$275 million investment in the company, which “probably cemented the perception in many retail investors’ minds that this was a safe exchange to trade on”, he adds.
FTX, which was founded in Hong Kong in 2019 before relocating to the Bahamas in 2021, was “a favourite stomping ground” for a lot of actively managed crypto strategies in Singapore, and a lot of them “would have been wiped out” by its collapse as well, he notes.
Among the managers that Tan works with and speaks to on a regular basis, there has been a definite slowdown in launches in crypto funds for accredited and institutional investors, with firms opting not to go ahead with non-fungible token funds and decentralised finance-focused strategies in particular.
Adrian Chng, Singapore-based founder and chairman of Fintonia Group, says the collapse of several crypto institutions last year has “impacted the credibility of the industry” among Singapore investors, with most of the Singapore crypto hedge funds he knows having done “particularly badly” as a direct result of FTX.
“It’s been difficult for crypto-native active fund managers to get more allocation of assets,” says Chng.
Most of the investors who are still interested in investing would be accredited or high-net-worth individuals, he says.
“If we were to talk about the traditional institutions like insurance companies, pension funds and endowments, I think the events of 2022 have probably pushed them back in terms of allocating significant amounts into the industry,” he adds.
Fintonia was the first fund manager regulated by the Monetary Authority of Singapore to launch bitcoin funds for accredited investors in November 2021.
Since the launch of the firm’s physical bitcoin and secured yield strategies, the price of bitcoin has plunged from around US$60,000 to around US$16,000 at the end of 2022.
Chng says the funds have managed to increase inflows in that period, but “obviously not as much as we’d hoped for”.
Much of the inflows were from investors who had already committed to allocating a percentage of their portfolio to bitcoin, he adds.
Irfan Ahmad, Singapore-based Asia Pacific product lead at State Street Digital, believes the impact of the FTX fallout has not had quite the same effect, however, and says he has seen “continued interest” from Singapore managers looking to launch crypto funds.
He says there are still managers out there that are looking to benefit from the perceived return profile of digital assets, and crypto fund clients have not asked him to “pump the brakes” on engaging their fund services, says Ahmad.
But ChainArgos’ Tan questions whether there really is genuine investor appetite, arguing that some of this perceived interest in setting up a crypto fund is actually from so-called “crypto whales”.
The term refers to individuals or institutions that own large amounts of cryptocurrency, and Tan says many of them are setting up funds that are really just made up of their own proprietary capital in order to do business with institutional-grade service providers.
The only way these investors or entities can get access to institutional-level custody services is to become an institution, he says, so they have no choice but to set up a proper fund structure.
“I cannot say that necessarily reflects increased interest from accredited and institutional investors,” he adds.
What he is seeing from investors is that most are deciding to “sit this round out”, with nobody wanting to make the first move.
People are still curious, but nobody is in a rush to actually put any money in, as opposed to 2021, when people would “write a check first and ask questions later”, says Tan.
Re-evaluation of risks
Aside from slumping investor interest, many crypto fund firms are choosing to delay launches because of the need to do further due diligence on the potential risks involved.
Grace Chong, Singapore-based of counsel and head of the Singapore financial regulatory practice at Gibson Dunn, says risks related to insolvency, counterparty, security and custody are an “enhanced priority” for managers now.
This re-evaluation of risks is taking place within the context of a market where there is now a question of whether there is “sufficient trust” in crypto fund firms to launch certain types of strategies, especially decentralised finance and lending-related products, Chong notes.
Investors have much higher expectations now when it comes to the structure of the investments, the specific underlying assets, and custody-related issues, and fund managers are facing increased scrutiny over how they are addressing operational resilience and counterparty risk concerns, she adds.
Fintonia’s Chng says that after the fallout from FTX, investors who are still interested in cryptocurrencies are now very much focused on investing in firms that are licensed and regulated in Singapore.
“Twelve months ago, if you said to somebody, ‘we’re an MAS-licensed fund manager’, people would say they don’t really care and just go to an exchange or an unregulated player,” he says.
“I don’t think it’s going to be possible for unlicensed players to really play a major role in the industry going forward,” he adds.
Singapore regulators have been clamping down on retail cryptocurrency trading, including cracking down on public advertisements by digital payment token providers last January. The MAS also launched two consultations in October proposing stricter access to crypto trading services by retail investors.
Chng says that the more traditional fund managers are likely to find it increasingly difficult to enter the crypto funds space because of elevated scrutiny from banks and regulators.
Banks consider cryptocurrencies to be a high-risk asset class, he notes, and fund firms considering launching such funds run the risk of getting de-banked due to concerns over how these risks will impact their non-crypto business.
Traditional fund firms have also been unable to get insurance for their directors, officers and other business areas because crypto activities are not covered by most insurance plans, he adds.
Regulators are also ramping up queries on how crypto fund assets will be custodised and who their counterparties will be, he says.
“These three issues have made a crypto fund go into the ‘too hard’ basket,” says Chng.
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