Current issues related to economy, (responsible) investing, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Portfolio Manager Jean-Paul Koopmans on whether the collapse of cryptocurrency exchange FTX is the beginning of the end for the crypto currency. “The system behind crypto currency is very robust.”
Last week, FTX went under. The fact that this so-called crypto exchange had to file for bankruptcy rocked the crypto world. What does this debacle say about the reliability of crypto currency as an investment asset for (big) investors? And about the future of crypto in general?
Although institutional asset administrators such as Fidelity and BlackRock see opportunities in the use of blockchain, APG remains adamant in rejecting it. Reasons are that crypto currencies do not provide cash flow, unlike equities, for example, or protection against inflation, like gold. Another factor for APG is that crypto currencies are not supported by central banks, regulators are not in favor of them and the reliability of non-blockchain counterparties is a concern. Will the fall of FTX prove pension investors right or is it more complicated?
Jean-Paul: “Currently, investing in crypto currencies is still fairly ‘wild west’. This is because investor protection is not well anchored in regulations and there is little oversight from regulators. Therefore, there are too many players in this market whose only goal is to get rich quick without adhering to traditional rules. In my view, it is currently not responsible for a pension investor to invest in this market.”
Back to FTX for a moment. What exactly happened there? The crypto exchange was using its customers’ crypto currencies as FTX’s investment vehicle, Alameda Research, Koopmans explains. That was not in line with the promise crypto exchanges make that for every coin a customer deposits, they actually hold one and have it audited by accountants. “At FTX, it turned out there was fraud, because they didn’t also hold one coin for every coin deposited. Instead, they offset the losses they suffered with Alameda Research with money from customers on their crypto exchange. That went well as long as those customers didn’t demand their money.”
On top of that, another problem arose. FTX created its own currency, the FTT, and sold some of it to third-parties. Things went wrong when Binance, the world’s biggest crypto exchange and holder of much of the FTT stock, decided to sell its share. “What happened then was something you can call an exchange run. Everyone quickly tried to get their crypto coins out of FTX. But because FTX didn’t have enough crypto coins in stock - after all, they had lent them to their investment vehicle - they stopped letting customers withdraw their crypto coins. What good is your savings if a bank says, ‘you can’t withdraw it.’ Then that bank is basically bankrupt. And that is the case with FTX.”