With rumors of insolvency flying over crypto firms like Celsius and Three Arrows Capital, investors couldn’t help but ask themselves a simple question: What happened to all the funds that were supposedly in “secure custody”? It turns out that a small fraction of cryptocurrency firms have started leveraging customer deposits to deliver the supposedly promised high returns on fixed income instruments. Things were working fine when you thought the market would go up forever.
However, when token prices crashed, these companies simultaneously suffered huge losses on their positions and a surge in withdrawal requests, as investors scrambled to protect their capital. The combination of selling pressures led to a decline in coin prices and the likely disappearance of investors’ initial capital as companies became insolvent.
Not all asset custodians took huge risks on customer deposits during the bull market in an attempt to attract more capital. At the European Blockchain Convention in Barcelona, Cointelegraph News Editor Aaron Wood spoke with Bit.com Head of Business Development Leslie Hsu. Bit.com is a centralized cryptocurrency exchange launched in March 2020 in Seychelles. This is what the executive had to say:
“At Bit.com, we actually use a third-party escrow service. Once all assets are in escrow, the exchange will not use your money or customer assets for things like margin trading.”
However, Hsu explained that due to a concept known as regulatory arbitrage, it would be difficult for administrative bodies to crack down on so-called bad custodians who take unreasonable risks with client capital. “Each country has different regulations. For example, in the United States, they only allow entities domiciled in that country to operate there. Currently, there is no single international legislation that covers all possible issues related to cryptocurrencies.” In some jurisdictions, gambling laws even take precedence over administrative regulations when it comes to regulating digital assets.
In another panel, Cointelegraph editor-in-chief Alex Cohen spoke with Michael Lau, global head of sales at regulated cryptocurrency exchange Bullish. For Lau, the question of trust is not only in the ability to create services, but also in the way of executing them:
“From our point of view, we decided that one day we would be regulated. So there is an element of accountability, right? Someone is auditing our inner workings and making sure that we can actually deliver on the promises that we make.”
Lau shared that when he first joined the industry in February 2020 after a career in traditional finance, he was surprised by the high level of retail participation in the digital assets sector. “I remember the New York Stock Exchange is only 20% retail, and the Chinese Stock Exchanges were about 40% retail, but I really looked at crypto, and it was all retail with very few institutions on it. “.
But Lau said he is quite satisfied with the continuing demand for regulation in the sector. “There is a certain level of professionalism and responsibility that is required of fund managers. As an investor, I want to know that I am going to be protected. I want to know that the fund manager is compliant. I want to make sure that there is proper asset segregation. So lately we have noticed an increased demand for regulation.”
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Investments in crypto assets are not regulated. They may not be suitable for retail investors and the full amount invested may be lost. The services or products offered are not aimed at or accessible to investors in Spain.