Sounding a timely note of caution on cryptocurrencies amid FTX crash
Notwithstanding investment losses, the long-term performance of S’pore’s investment entities is still healthy. As for retail investors, the old adage applies: Do not put all of your eggs in one basket.
Grace Ho
Insight Editor
FILE PHOTO: The logo of FTX is seen at the entrance of the FTX Arena in Miami, Florida, U.S., November 12, 2022. REUTERS/Marco Bello/File Photo REUTERS
Dec 1, 2022
Many experts have been predicting an extended crypto winter, especially after the
epic flameout of TerraUSD and Luna in May. But hardly anyone saw this coming: the
spectacular collapse of cryptocurrency exchange FTX, which turned out to be a massive fraud.
Last year’s Crypto.com sales pitch, intoned by actor Matt Damon, now seems almost anachronistic: “History is filled with almosts. With those who almost adventured, who almost achieved, but ultimately for them it proved to be too much. Then there are others. The ones who embrace the moment and commit... They calm their minds and steel their nerves with four simple words that have been whispered by the intrepid since the time of the Romans: Fortune favours the brave.”
What Damon failed to mention was that the first person to utter “fortune favours the brave” did not live long enough to experience good fortune. When Mount Vesuvius erupted in AD79 and destroyed the city of Pompeii, a Roman naval commander by the name of Pliny the Elder ignored the advice of his men and steered directly towards the volcano, hoping to pull off a miraculous rescue.
But he breathed in the thick fumes and died before saving anyone. The last known detail about him is that he was seen leaning on two slaves and trying to stand, with little success.
Hoping to minimise the risk of crypto investors’ fortunes going up in smoke is the Government. On Wednesday, Deputy Prime Minister and Finance Minister Lawrence Wong warned Singaporeans that even if a cryptocurrency platform is well managed,
cryptocurrencies themselves are highly volatile and have no intrinsic value.
“Those who trade in cryptocurrencies must be prepared to lose all their value. No amount of regulation can remove this risk,” he told Parliament, adding that the Monetary Authority of Singapore (MAS) has consistently warned since 2017 that dealing in cryptocurrencies is hazardous.
Arising from
Temasek’s US$275 million (S$377 million) investment loss in FTX, the supplementary questions from MPs centred on risk management and tolerance, stress testing, regulations, disclosure and the impact on retail customers.
To Ms Tin Pei Ling’s (MacPherson) question on whether FTX was the only cryptocurrency-related investment that Singapore’s investment company Temasek, sovereign wealth fund GIC and MAS were exposed to, Mr Wong replied that GIC and Temasek have exposures to new technologies and early-stage companies, and these investments are within the overall context of the risk parameters set out by the Government. Temasek’s present exposure to early-stage companies is about 6 per cent of its overall portfolio.
There will be other companies in the digital asset space that GIC and Temasek have invested in, but they are within these limited parameters, said Mr Wong. “And so if you talk about concerns of a broader fallout, I think it would be relatively contained.”
To Mr Saktiandi Supaat’s (Bishan-Toa Payoh GRC) question on whether investment entities build into stress test scenarios the risk of cryptocurrencies and digital assets blowing up, Mr Wong gave the assurance that such scenarios are taken into account. This is not just for MAS and the financial sector, but also for the Government’s overall investment portfolio.
Mr Gerald Giam (Aljunied GRC) posed two questions: the risk tolerance levels spelt out to Temasek, GIC and MAS and whether they are published anywhere; and if the President has any say in the setting of their investment parameters, mandates, objectives or risk tolerance levels.
Mr Wong reiterated that the Government does not decide on or micromanage investments, nor does it prescribe asset classes or assets. But it has a role in appointing board members and senior management, and holds them accountable for delivering good long-term performance.
“The President is part of this governance process too because she, in terms of the appointments of people, has the powers as well,” he said, adding that there are processes and risk metrics to monitor, as well as clear accountabilities.
The amount of risk that the Government has set out for GIC is expressed in its reference portfolio, which is made up of 65 per cent global equities and 35 per cent global bonds. Mr Wong noted that it is different in Temasek’s case because it is largely an equities investor, but it puts out in its annual review some of its risk considerations and its risk parameters.
One question that received ample airing was Mr Leon Perera’s (Aljunied GRC), on why GIC is subject to audits by the Auditor-General’s Office but Temasek is not, when both manage public funds.
Mr Wong observed that it is not unusual for private auditors to audit public agencies, whereas the Auditor-General has a remit largely within the public service and government ministries.
“For some stat boards, for a commercial entity like Temasek which also within it has a portfolio of listed entities, well, I think we should let commercial auditors do their job,” he said, adding that if there are good reasons, the Government will have “no hesitation” about asking the Auditor-General to go in to do a full audit.
He also replied to Workers’ Party chief Pritam Singh (Aljunied GRC), saying that Temasek’s internal review would be led by people who are separate from the investment team that made the FTX decision.
“So they will be separate, they will not be clouded by what steps were taken, and they will report directly to the board,” he said.
For retail investors, the main takeaway is this: There will be some basic investor protection measures for digital payment token (DPT) service providers that are licensed in Singapore. These include administering a risk awareness test, segregating customers’ assets from their own assets, and refraining from operating a trading platform while simultaneously taking proprietary positions from their own accounts.
But MAS cannot prevent DPT service providers from failing or customers from suffering losses, a point that Mr Wong took pains to emphasise several times on Wednesday. Also, even the most comprehensive system in Singapore will not stop some Singaporeans from accessing overseas crypto investment platforms online.
FTX’s bankruptcy filings have described a governance mess, with the crypto exchange deeply tied up with former chief executive Sam Bankman-Fried’s trading firm. Yet, thanks to almost messianic boosterism and Fomo (fear of missing out), retail and institutional investors
showered FTX with love and cash in spite of multiple red flags – from its countries of incorporation and operation, to its inexperienced team and skeletal board.
Any lapses on the part of institutional investors in conducting their due diligence should rightly be investigated. But to those who expect perfect information and zero losses, consider this too: If market manipulation is already a problem with stocks which are highly regulated and widely understood, how much worse is the problem with crypto, where almost every asset is new and there is even less transparency?
Mr Wong assuaged the members’ anxieties and stressed the need to look at the bigger picture, saying that the Government evaluates investment entities based on their long-term performance, and their track records show that they have performed creditably even in challenging environments.
“What is important is that our investment entities take lessons from each failure and success, and continue to take well-judged risks in order to achieve good overall returns in the long term,” he said.
He also noted that Temasek’s FTX loss will not affect the stream of income from the reserves available for the Government’s Budget or the Net Investment Returns Contribution (NIRC), because NIRC is tied to the overall expected long-term returns of Singapore’s investment entities, and not to individual investments.
As for retail investors, the old adage applies: Do not put all of your eggs in one basket. Another line should be added to this: Never jump in just because an established institutional investor has invested in a company; and be very, very wary of investing in crypto.