MAS Offers Guidelines for Banks Handling Crypto-Related Clients

FTX Seeks Exclusion of Dubai Unit from Bankruptcy ProceedingsFailed crypto exchange FTX, which filed for bankruptcy in November, is now aiming to exclude its Dubai unit from the ongoing restructuring proceedings unfolding in the United States.Photo by Roman Logov on UnsplashNo previous business activityThe motion, filed with the bankruptcy court in Delaware on Wednesday, comes as FTX contends that its Dubai branch had not engaged in any business activities prior to the bankruptcy declaration, making its participation in the rehabilitation efforts unlikely.In the recent court filing on August 2, FTX put forth its argument that its Dubai unit, FTX Dubai, held a balance sheet that was solvent. Consequently, the exchange proposed that initiating a voluntary liquidation process in line with the laws of the United Arab Emirates (UAE) would expedite the distribution of its positive cash balance, settling liabilities, and liquidating assets.FTX Dubai, a wholly-owned subsidiary of FTX’s European arm, holds a sum of approximately $4.5 million across various accounts. However, $4 million of this amount remains restricted by the Virtual Assets Regulatory Authority (VARA) of Dubai, serving as a security measure for its license as a virtual asset service provider.Expired licensingFTX Dubai was originally awarded a license by VARA in July 2022, although it never got to a point where it offered any crypto-related services based on that license. On May 31 of this year, FTX Dubai management was informed by VARA that the regulator would not seek to renew the license if FTX Dubai didn’t act to terminate it. The license was subsequently suspended on July 12 by VARA.Licensing could have been useful to a new operator coming in to run the business. Earlier this week, the FTX Debtor filed a restructuring plan that leaves a path open towards relaunching the FTX International business outside of the United States. It’s clear that the current regulatory environment in the US is such that it’s simply not an attractive option to establish a restructured FTX business there.The FTX Debtor and its advisors are engaging with bidders for the business. In establishing a business on the right footing, it may be just as well that licensing will start afresh. To settle market doubts, the new entity will need to achieve a high level of compliance and industry-leading customer protections.FTX Dubai is now anticipated to collaborate with the designated liquidator to carry out essential administrative procedures, ensuring a systematic and efficient execution of the liquidation process. The company’s decision to file for bankruptcy on November 11, 2022, initiated bankruptcy proceedings for a total of 102 associated entities worldwide, reflecting the substantial impact of its financial turmoil.The matter is scheduled to be addressed in the court’s first hearing on August 23, shedding light on how the court will respond to FTX’s motion to remove its Dubai unit from the overarching bankruptcy proceedings in the US. This development underscores the complexities of a cross-border crypto bankruptcy, highlighting the intricacies of global regulatory frameworks in this evolving sector.

After being targeted in a $1.4 billion hack, the global crypto exchange platform Bybit was awarded in-principle approval to establish itself as a Virtual Asset Platform Operator (VAPO) within the United Arab Emirates (UAE). While Bybit announced the milestone via a press release published on Feb. 27, the approval had been awarded on Feb. 18, three days before the platform was hacked.Photo by Saj Shafique on UnsplashRegulatory challengesIn addition to the recent exploit, the crypto exchange platform had been having difficulties on the regulatory front in recent months, and from that perspective, this licensing award is a welcome development. Last December, the Malaysian Securities Commission reprimanded the platform and its CEO, Ben Zhou, for carrying out digital asset trading activities in Malaysia without having obtained the necessary licensing. Consequently, the firm left the Malaysian market, promising to return once it had obtained the required licenses. For similar reasons, Bybit left the Indian market in January, citing a need to “operate in full compliance” with local regulations. The company said that it was working with the regulator to finalize its registration as a Virtual Asset Service Provider (VASP) in India. The platform also experienced difficulties in complying with the recently introduced Markets in Crypto Assets (MiCA) regulation in Europe. However, it has been working with regulators in Austria in an effort to acquire MiCA licensing. Consequently, the French regulator, Autorité des Marchés Financiers, removed the firm from its blacklist. Earlier this month, Japan’s Financial Services Agency (FSA) ordered Apple and Google to remove the apps of a number of unregistered crypto platforms, including Bybit, from the Japanese versions of their app stores.  Commenting on this recent achievement in the UAE, Ben Zhou stated: “This approval marks a crucial step in our journey to providing secure and transparent crypto trading solutions. Bybit remains dedicated to working hand-in-hand with regulators to foster a compliant and innovative digital asset ecosystem to both retail and institutional investors in the UAE.” Hack falloutIt’s unclear to what extent the recent hack, which is understood to be one of the largest thefts of any kind, may be diverting resources and focus away from the efforts the company was making to address regulatory issues globally. However, it’s reasonable to assume that recent events make for a challenging time for the company. On Feb. 26, the Federal Bureau of Investigation (FBI) in the United States said that North Korea was responsible for the hack. The agency warned exchanges to freeze transactions linked to the stolen funds. The FBI outlined that “TraderTraitor” actors have been converting the funds to Bitcoin and other digital assets in an effort to launder the funds and eventually extract the funds in fiat currency. North Korea’s Lazarus hacking group has gained notoriety for its successes in hacking crypto platforms and the sophisticated nature of the attacks mounted in the process. The group is suspected of having hacked the Indian crypto platform WazirX last year, which resulted in the theft of $235 million in digital assets.

Japanese Exchanges Canvas Regulator to Permit 10x LeverageJapan’s cryptocurrency exchanges are advocating for looser regulations on margin trading, despite the global digital asset market crash experienced last year.According to a report published by Bloomberg on Monday, The Japan Virtual & Crypto Assets Exchange Association has revealed that many industry insiders are seeking leverage limits of four to 10 times for retail investors.Currently, customers are limited to doubling their exposure through borrowing. Genki Oda, the Vice Chairman of the association, believes that relaxing the leverage rule could enhance Japan’s appeal to crypto and blockchain companies, thereby stimulating increased trading activity.Photo by Su San Lee on UnsplashOngoing discussionJapanese digital asset exchanges are currently engaged in discussions to establish a consensus on the recommended leverage limit. They are planning to present their proposal to the Financial Services Agency (FSA) as early as next month.While Japan has made some efforts to ease certain cryptocurrency regulations, such as token listing and taxation, the overall regulatory environment is considered strict. The FSA expects crypto firms to provide solid justifications for loosening margin trading caps, demonstrating how it would contribute to the government’s objective of expanding blockchain-based industries. However, the agency remains open to discussions with digital asset businesses on the matter.Plummeting trade volumesPreviously, Japanese crypto platforms offered leverage up to 25 times, resulting in annual margin trading volumes of approximately $500 billion in 2020 and 2021. However, after the FSA imposed a limit of two times to curb excessive speculation and protect investors from amplified losses, trading volumes plummeted by 75% in 2022.In other parts of the world, digital asset exchanges typically offer spot margin trading with leverage ranging from five to 10 times the initial deposit, depending on local regulations. Some platforms even offer more aggressive lending options, often associated with speculative behavior that can generate waves of greed and fear within the crypto market.Oda argues that digital asset volatility has decreased since 2020 and asserts that Japanese exchanges are well-prepared to assist investors in managing the risks associated with margin trading positions. However, any relaxation of leverage rules is not expected to occur before 2024.Leverage dangersLast year’s global cryptocurrency downturn exposed risky practices and resulted in numerous bankruptcies. Regulators worldwide have responded by implementing new rules and regulations that address the lessons learned. While leverage might be in the interests of the exchange operators, many industry commentators have warned that leverage brings about market weakness.Caitlin Long, Founder and CEO of Custodia Bank, has been one such commentator, warning that massive leverage “built an industry of insolvent intermediaries” on a “foundation of sand”. It’s commonly believed that leverage leads to unsustainable market bubbles rather than iterative organic market growth.In 2022, an index tracking the top 100 cryptocurrencies partially recovered, showing a 33% increase since the beginning of this year. However, the market still faces challenges, as institutional and individual investors have exited, leading to reduced liquidity and lower expectations for price volatility in Bitcoin and other cryptocurrencies.