The canary in the coalmine
Why the Collapse of cryptocurrency exchanges should be a warning for SMSFs.
If you’ve heard about the collapse of the FTX cryptocurrency exchange recently and wondered what on Earth it was all about, I would suggest that most of the general public feel the same way too.
In simple terms, the FTX exchange was a trading platform to allow people to buy and sell cryptocurrency - similar to how traditional financial markets operate – with its collapse reportedly the result of a range of issues.
Most recent reports suggest the FTX owes more than US$3b to its 50 biggest creditors alone. Of the creditors not in the Top 50, I wonder how many of them have just lost their life savings.
While the downfall of the exchange, and its founder Sam Bankman-Fried, raises myriad questions – perhaps one of the most urgent is how can cryptocurrency, an asset within a famously unregulated and volatile market, be a permissible investment for retirement saving within a self-managed superannuation fund?
While the first, and arguably most well-known, cryptocurrency Bitcoin was launched in 2009, crypto has really only exploded in popularity in recent years.
What people may not realise – or maybe they do, and they don’t care – is that cryptocurrency operates in a highly volatile and completely unregulated market, lacking clear guidelines for traders.
It is with this background that I ask again – how and why can an unregulated asset be allowed within the confines of an SMSF, which themselves are bound by tight rules and regulations, and subject to regular audits and compliance checks?
Regulation is vital to protect consumers and assist in preventing fraud, scams and other forms of financial crime. As an example, SMSFs are not allowed to rent residential investment property to related parties, even at arm’s length. And yet as it currently stands, unregulated cryptocurrency is considered an acceptable investment to enable retirement savings.
There is a stark disparity here that doesn’t make sense.
While we cannot blame regulators for every failure, how many financial disasters will it take to regulate the crypto market? Surely it’s time for our questions to start being asked and answered?
When auditing SMSFs, it is my experience that some Trustees can be hesitant when they are asked for information on any crypto assets held in the Fund, a reticence that perhaps says something about the nature of crypto itself.
It’s not for me to say whether cryptocurrency is a good or bad asset – however I do say that those looking to trade in crypto need to ensure they’re carrying out proper research and due diligence before handing over their money, and I believe greater regulation will go some way to assisting in that process.
It will require a joint effort from global Governments, and it’s possible that we might start seeing action following any FTX-related investigations, which would be a positive start.
Until we see crypto markets take steps toward regulation and maturation, I would suggest we’re going to continue to see other crypto-related collapses, and unfortunately, more people watch their retirement nest eggs evaporate before their very eyes.
Naz Randeria, managing director, Reliance Auditing Services