The cryptocurrency market must face the reality of proper regulation if it is to evolve as an alternative financial ecosystem. This is the view of some crypto investors who Asian investor has spoken since the Collapse of stable currency Terra/Luna.

Rajiv Manoharan, director of Melbourne-based Manoharan Capital, which invests in crypto businesses, acknowledges the damage caused by the recent turmoil but is more optimistic than most of the asset class.

“That is, of course, a concern; no one wants to lose money or see instability and loss of confidence in a market. However, historically, in stock markets and otherwise, as part of the cycle of maturation and institutionalization of crypto markets, these “black swan” events will unfortunately be part of the journey of digital assets and crypto. »

Others close to the market are more concerned about the structural problems that the debacle has highlighted.

“Based on my observations, we are still a long way from a meaningful crypto market. There are those who think these market shakes are part and parcel of iterations and adjustments. I personally don’t think that’s the case. “said the Singapore-based private. financier Edward Foo, said Asian investor.

“The reality is that no one has the ability to accurately predict where the crypto markets are heading right now; even those who are in a strong enough position to guide the direction of the market. Even they can be surprised by surprise events”.

“Having said that, I believe that some so-called Black Swan events are more of a train wreck waiting to happen than an actual Black Swan event.”

Timothy Tsui of Hong Kong-based family office Arbutus and another experienced crypto investor, said Asian investor he was “pretty shocked by the destruction of value and 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 evaporated.

Foo’s is concerned for investors who think the crypto market is secure and regulates itself adequately. The reality, he said, is that crypto markets do not have built-in security mechanisms.

“I haven’t seen viable risk compartmentalization structures yet; lots of great ideas but no real workable systems. Without regulatory oversight and with effectively weak legal structures, we have allowed a crypto market with serious systemic flaws to grow extremely rapidly.

FUNDAMENTAL DEFECT

Tsui sees an inherent risk in algorithmic stablecoins: “Because the industry is unregulated, they have no obligation to tell you how many reserves they have. So it’s a leap of faith. It’s 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 external funding, it is impossible to create an efficient algorithm”.

Carl believes that stablecoin investors have long been the credit of stablecoin insurers.

“It equates to being short credit default swaps on stablecoin insurers. As a closed system, this is inherently unstable. Since both parties must be compensated for the risk they bear, neither party can fix the other without help from the outside world.

“In the event that the funding comes from new entrants into the stablecoin/insurer ecosystem, the scheme is by definition a Ponzi scheme and is unstable.”

Foo says that while he may not entirely agree with Carl’s analogies, “the only thing I agree with is the danger of bare hedges (uncovered hedges) in a closed system. .

“As such, in the near term, I’m concerned about other trainwrecks waiting to happen: cryptocurrencies that are close in structure to Terra and Luna.”

Manoharan is much more optimistic. He believes that 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 view recent events as a massive buying opportunity. In Australia in particular, we are seeing major banks and pension funds engaging more and start moving. ANZ Bank has partnered with ZeroCap on the first Australian dollar-backed stablecoin.”

SOME KIND OF REGULATION

In Asia, Singapore has taken the most proactive stance of any Asian jurisdiction in allowing crypto to operate within certain limits. Globally, regulators have tried to keep it at bay. In September 2021, Gary Gensler, Chairman of the United States Securities and Exchange Commission, described cryptocurrencies as “the Wild West” and suggested that much more regulation was needed.

Carl agrees that regulators should take certain steps to allow the crypto industry to continue to innovate“We need to build our foundations on solid ground. Investments that are obviously problematic need to be regulated appropriately and efforts made to protect consumers against them.”

For the crypto industry to regain its confidence, Tsui says “you need some form of oversight, otherwise it will remain a very volatile asset. I don’t think self-regulation will work.”

But that said, he also thinks regulation is counter-intuitive to the entire crypto industry, “which is trying to revolutionize the financial system without regulation.”