Crypto regulation is essential for the small retail investor

A recent report by international crypto exchange Kucoin has shown that nearly 15% of Indians traded or invested in crypto in the past 6 months, a staggering 115 million investors!  According to WazirX, one of the largest crypto exchanges in India, 66% of users are under the age of 35 and additionally, over 50% of Indian investors plan to increase their investments in the next 6 months. This indicates not only strong adoption from the younger generation in India, but also a higher number of investors with conviction in crypto.

However, 2022 has not been a banner year for crypto investors in India or around the world, especially as the global economy teeters on the brink of a recession. With inflation raging out of control, Central Banks throughout the world have raised interest rates and stopped ‘printing money’ through quantitative easing which had the world awash in liquidity during the Covid pandemics dark days of 2020-21.

The world today is in a very different place compared to even a year ago and this is particularly evident in the performance of the crypto industry. Prices of the blue chips of crypto – Bitcoin and Ethereum – have both tanked, with BTC dropping close to 70% and ETH dropping 65% from their peaks as of end August 2022. Several so-called ‘altcoins’, like Avalanche, Solana and Fantom, have dropped even more, averaging a fall of close to 85%.  

The total crypto market cap stood at $1.09 trillion as of August 25. At its highest, it was at $3.009 trillion. Between April to June, the market wiped off close to $1.4 trillion. It is clear that we are in the midst of a crypto winter. The last crypto bear market in 2018 lasted almost two-and-a-half years, which is an indication that we may not see prices come back to all-time highs before late 2023 or early 2024.

In addition to an uncertain macroeconomic environment, there have been several events specific to the crypto industry which have caused this massacre in the markets. In May 2022, the altcoin $LUNA, along with its associated stablecoin $UST, wiped out $40B from the markets due to a fatal flaw in its mechanism to keep $UST pegged to $1USD.

This caused a ripple effect, which resulted in a broader market sell-off. Centralised lending and borrowing platforms like Celcius, BlockFi and Voyager faced insolvency due to their exposure to $UST. The pre-eminent crypto hedge fund, Three Arrows Capital, had to file for bankruptcy a few weeks later, as they had invested $500M in $LUNA a few months before the crash, and were liquidated when $LUNA crashed. More recently, Singapore-based crypto borrowing and lending platform, Hodlnaut, froze all withdrawals due to ‘difficult market conditions’, and has now been placed under judicial review.

What is very clear in these recent events is that a number of large institutional investors were completely decimated when the market crashed. These so-called accredited investors with years of experience in crypto were left naked when crypto prices crashed. But how about retail investors? The $LUNA crash in May wiped out the life savings of retail investors throughout the globe with desperate investors talking about suicide being the only option left for them. 

While one can argue that they knew what they were getting into, at the end of the day, retail investors are not as sophisticated as accredited institutional investors, and I would posit that some amount of regulation is essential to safeguard their interests.

A lot of crypto investors entered the markets in late 2020 or early 2021, when the crypto markets were in the middle of a bull run. Almost every single token went up in value during this period and investors had nothing much to do except to buy low and sell high. This is no longer the case, especially as most token prices are down by 70-85% and investors, particularly retail investors have been left ‘holding the bag’.

Regulation is needed to ensure that retail investors know exactly what they are getting into, and, particularly to ensure that they are unable to take leveraged positions without passing a number of pre-determined guidelines.

The recent taxation changes in India including the 30% tax on all crypto transactions has already caused volumes to crater in crypto exchanges in India.  But, taxation in itself is not a deterrent when markets are frothy.  Regulation should be put in place to protect retail investors when the downturn happens – which always will at the end of a bull market.  The losses suffered by retail investors around the globe when $LUNA crashed earlier this year destroyed many lives. Some measures must be taken to ensure that this doesn’t happen again.

Kunal Chowdhry

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Kunal Chowdhry is the chief executive officer and executive director of Apollo Singapore Investments.