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
I agree that the lack of regulatory guidance in relation to the crypto industry (not just in the SMSF category, but across multiple facets) is one of the big barriers to adoption but I categorically disagree with banning the asset class outright.
By its very nature, crypto is a bearer asset, like cash and bullion. There are strict rules and clear audit guidelines around the custody of these assets. We need the exact same thing for crypto. While it’s very easy to verify the existence and control of crypto assets that are privately held (block explorers can verify the existence of assets on a public wallet and signing a gasless transaction can prove ownership), it is not so easy to do so if SMSF trustees keep their assets on an exchange. The implosion of FTX, as well as the flow-on contagion that has affected even local exchanges like Digital Surge, is further proof that SMSF trustees need to do more due diligence when selecting where to on-ramp and off-ramp the fund’s money.
If trustees are competent enough to do so, take custody of fund assets and treat centralised exchanges like a public toilet. There are a myriad of failsafes that you can implement such as Smart Contract Wallets with multi-signature functionality and social recovery functionality on products like Gnosis Safe and Argent to ensure assets cannot be lost. Professionals like accountants, financial advisors and lawyers can even play a key part in this endeavour by being one of the multi-sigs or guardians for their clients.
Furthermore, exchanges also need to offer custodial services similar to bullion vaults for trustees that may not be confident enough to take custody of their fund’s assets. This will ensure customer assets can easily be verified and reduces the likelihood of more funds being commingled with by the exchange and their related business, as was the case with SBF and FTX/Alameda.
SMSF auditors need to get off their high horses and understand that, like any other industry, there are many scammers and lemon investments but there are also many incredible investment opportunities in the crypto industry. The people that are knowledgable in the space should not be held back from investing a portion of their retirement savings because of a select few that didn’t do their research.