Are Managed Crypto Funds Risky? See how senior industry insiders explain
With rumors of insolvency swirling around the likes of Celsius and Three Arrows Capital, investors are left to ask a simple question: What happened to funds supposedly in “safe custody”? As it turns out, a small group of cryptocurrency firms started using customers’ deposits to trade leveraged, delivering the promised high APY returns on so-called fixed-income instruments. Things go well when the market is considered to have unlimited potential.
However, the firms suffered heavy losses on their positions as token prices plummeted, and withdrawal requests increased as investors rushed to protect their capital. The selling pressure causes the price of the token to fall, and investors' initial principal may also be wiped out because the company is said to be insolvent.
Not all asset custody firms have taken huge risks with client deposits during bull markets to attract more capital. Cointelegraph News Editor Aaron Wood interviewed Leslie Hsu, Head of Business Development at Bit.com, at the European Blockchain Convention in Barcelona. Bit.com is a centralized cryptocurrency exchange launched in Seychelles in March 2020. Hsu put it this way:
“So at Bit.com, we’re actually using a third-party escrow service. Once all assets are in escrow, the exchange doesn’t take your money or your customers’ assets for things like margin trading.”
However, Hsu explained that because of the concept of regulatory arbitrage, it is difficult for the administration to crack down on so-called bad-behaving custodians who take unreasonable risks with client funds. “Different countries have different regulations. For example, in the United States, they only allow entities registered in the United States to trade there. Currently, there is no single international legislation that covers all potential cryptocurrency-related issues.” In some Jurisdictions, gaming laws even take precedence over administrative regulations when it comes to regulating digital assets.
In another roundtable, Cointelegraph executive editor Alex Cohen spoke with Michael Lau, head of global sales at regulated cryptocurrency exchange Bullish. For Lau, the issue of trust is not just the ability to create a service, but how to execute it, he explained:
"From our perspective, we decided to be regulated. So there's an element of accountability, right? Someone is actually auditing our internal work to make sure we're actually delivering on the promises we've made."
Lau shared that when he first joined the industry in February 2020 after his career in traditional finance ended, he was amazed at the level of retail user engagement with digital assets. "I remember that the retail users of the New York Stock Exchange are only about 20%, and the retail users of the Chinese Stock Exchange are about 40%, but I really studied cryptocurrencies, and they are all retail users, and very few institutions are involved."
But Lau said he was fairly comfortable with the industry's continued need for regulation. "Fund managers need to have a level of professionalism and responsibility. As an investor, I want to know I'm going to be protected. I want to know that fund managers are following the rules. I want to make sure there's a proper segregation of assets. So we noticed , the need for regulation has increased a lot recently.”