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Explainer: Why are crypto firms here running into trouble and will this affect the fintech sector?

SINGAPORE — The implosion of TerraUSD and its paired token Luna in the cryptocurrency exchange market burnt a 27-year-old Singaporean in May, but being young and digitally savvy, he continued to trade on cryptocurrency platform Hodlnaut. This time, with his mother's savings.

Explainer: Why are crypto firms here running into trouble and will this affect the fintech sector?
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  • Three Singapore-registered cryptocurrency firms have sought protection from creditors recently
  • This was after the folding of Three Arrows Capital in July
  • Experts pointed to an unfavourable macroeconomic environment and a contagion effect in the crypto ecosystem
  • To bolster Singapore’s aim to be a fintech hub, the authorities need to regulate the crypto market but also encourage innovation, the experts added

SINGAPORE — The implosion of TerraUSD and its paired token Luna in the cryptocurrency exchange market burnt a 27-year-old Singaporean in May, but being young and digitally savvy, he continued to trade on cryptocurrency platform Hodlnaut. This time, with his mother's savings.

Now, he is feeling the heat and is despondent. Hodlnaut has suspended the withdrawal of yields by users and the Singapore-based cryptocurrency exchange has applied for creditor protection.

“I was investing on behalf of my mother and this was part of her retirement sum,” the 27-year-old accountant said, declining to be identified. The yields he has, valued at about S$36,600, are locked up in the exchange.

“So I will be relying on instant noodles for the next 24 months in order to try and save up this amount (to give my mother).”

In an update to its users on Friday (Aug 19), Hodlnaut revealed that it had let go of 40 employees and that there are ongoing proceedings between the firm and the police here.

The firm said: “While Hodlnaut is unable to disclose any information in this regard, these actions are taken in what we believe to be in the best interests of our users.”

It had 30,300 users as of Aug 8, with 14,316 of them in Singapore.

When asked, the police told TODAY that they are unable to comment because the matter is before the courts.

Hodlnaut is among a string of cryptocurrency exchanges and firms based in Singapore that have found themselves in deep water. Zipmex and Vauld have filed for protection from creditors in the past two months.

Creditors are typically people who have traded and made earnings on these exchanges and platforms.

In the case of Hodlnaut, a court document showed that as of Aug 8, 17,513 are users "who have actually deposited tokens and who are likely to be creditors of the Hodlnaut Group", its director Zhu Juntao said.

When TODAY approached the Monetary Authority of Singapore (MAS) to comment on these recent developments, the central bank repeated its warning that licensed digital payment token service providers here “are not subject to risk-based capital or liquidity requirements”.

These service providers are also not required to safeguard customer monies or digital tokens from insolvency risk, an approach taken in most jurisdictions.

“This is also why MAS has been continually reminding the general public that dealing in cryptocurrency is highly hazardous,” it added.

“Not only are the values of cryptocurrencies extremely volatile, customers’ monies are not protected under the law.”

Professional services and audit firm KPMG said in its Pulse of FinTech report released in February that the crypto segment accounted for one-third of overall investment in Singapore’s financial technology (fintech) industry, which hit a five-year high of US$3.94 billion (around S$5.5 billion) last year.

Investment in Singapore's crypto and blockchain companies surged to US$1.48 billion last year. This was 10 times that of the US$110 million in 2020 and nearly half the Asia-Pacific total for 2021, it added.

With the effects of TerraUSD's meltdown in May still spreading to pull down other crypto platforms based here and overseas, TODAY spoke to experts and industry stakeholders to look into the continuing spate of crashes, what it means for investors and consumers, and if it is denting Singapore’s position as a fintech hub.


Associate Professor Cindy Deng Xin from Nanyang Business School at the Nanyang Technological University attributed the recent developments “to the external gloomy macro economy and internal lack of proper risk control”.

The projected rise of interest rates affects market liquidity in general, but “cryptocurrency suffers the most as a risky asset”.

“Internally, many crypto ventures lack a robust risk control system and use high leverage, making them easily fall into a cascading crisis,” the banking and finance associate professor said.

She said that similar problems are also plaguing platforms based overseas, though the number of cases involving firms registered here may be due to “many crypto businesses (having) opened offices here” since Singapore has established itself as a fintech centre.

Mr Anton Ruddenklau, partner and global head of fintech at KPMG International, told TODAY that the recent developments played out against a “perfect storm of market failure and loss of value in the crypto sector”.

The storm, he said, came about due to three main factors:

  • Business models predicated on bull market economics that may not be fundamentally sound
  • The “Covid investment bubble” in private and public markets that have burst
  • The actions of institutional, short-term investors that “try to produce alpha returns by trading on (market) volatility”, which only served to exacerbate it further


Another reason for the rapid fall of crypto exchanges is the "cascading crisis" that Assoc Prof Deng mentioned earlier.

She said that when TerraUSD lost its peg to the United States dollar after the crash in May, it had “a cascading effect on many crypto enterprises, first on relatively bigger ones and then on smaller ones that use the services of larger ones”.

TerraUSD, also known as UST, is a stablecoin — a type of cryptocurrency that is supposed to maintain a stable price over time by being pegged to the value of an underlying asset such as the US dollar. 

However, TerraUSD maintained its price peg via algorithms, meaning a computer code, that control its token supply. It was pegged at US$1 via the minting and burning of its sister coin Luna each time its stablecoin was bought or sold.

Terraform Labs, which is behind TerraUSD and its token Luna, is based in Singapore. Its South Korean co-founder Do Kwon is under investigation for misleading investors in South Korea and the US. 

In explaining the “contagion effect” seen in the crypto ecosystem, Mr Ruddenklau said that much of the crypto market, particularly cryptocurrencies in all different forms, is backed by other crypto currencies.

“So, if one large ‘coin’ takes a tumble in price, this may have an impact on those other currencies that are backed by it or relying on the initial coin for the purpose of stability, liquidity reserves or pegging of a price.

“Hedges were also made against other mainstream cryptocurrencies for these interdependent coins, so those also tumbled as a result.

“This delivered the contagion effect as both real economy asset reserves and market liquidity were not in place to halt any widespread decline.”


The following are the notable Singapore-registered crypto firms that have tumbled since May when TerraUSD and Luna crashed.

1. Three Arrows Capital

The collapse of stablecoin TerraUSD and its paired token Luna resulted in huge losses for holders such as Three Arrow Capital, news agency Reuters reported in July. A company executive from Three Arrow Capital told Wall Street Journal in June that the firm had lost about US$200 million (S$278 million) of its investment in Luna.

The firm filed for bankruptcy in early July.

2. Vauld

Business magazine Forbes reported that Singapore-registered crypto lender Vauld blamed bearish sentiment fuelled by the collapse of TerraUSD and Luna, other platforms pausing withdrawals and Three Arrow Capital defaulting on its loans for sparking “significant” customer withdrawals of US$197.7 million since mid-June.

The company revealed in a statement last month that it had sought protection from creditors.

3. Zipmex

Zipmex filed for a six-month insolvency protection on July 22 after two of its borrowers, Babel Finance and Celsius Network — both crypto trading platforms and lenders — got into liquidity troubles following the global cryptocurrency crash.

In a statement on its website, Zipmex said that as of July 21, the company was owed a net amount of US$48 million by Babel Finance and US$5 million by Celsius Network.

4. Hodlnaut

On Aug 8, Hodlnaut withdrew its application for a licence to provide digital payment token services in Singapore, the Monetary Authority of Singapore said.

The next day, the authority rescinded its in-principle approval for Hodlnaut under the Payment Services Act.

In an affidavit filed to the Singapore High Court dated Aug 12, of which a copy was seen by TODAY, Hodlnaut’s director Zhu Juntao said that in order to maintain competitive interest rates for Singapore users earlier this year, Hodlnaut Singapore had lent tokens deposited by users here to Hodlnaut Hong Kong, which were then converted into USTC to stake into a high-yield savings account.

USTC, or TerraClassicUSD, is the new avatar for TerraUSD after it crashed. TerraUSD now trades under USTC since the Terra blockchain — the platform supporting the many applications that let users swop crypto coins for gains — stopped working and it was de-pegged from the US dollar on May 9. 

Hodlnaut said that it was also affected by the bankruptcies of Celsius, Voyager and Three Arrow Capital, witnessing a “greater than usual net outflows of around US$150 million” from June 14 to July 15.

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Mr Lin Ruizi, a restructuring and insolvency lawyer from law firm Shook Lin & Bok LLP, said that the protection sought by troubled crypto companies shields them from any civil claims by creditors.

Mr Lin, who co-heads crypto disputes at the firm, explained that this would give the companies space as they try to rehabilitate the business or reach a compromise with creditors, or both.

However, these moratoriums do not cover criminal investigations.

“Criminal proceedings are a separate matter and don't involve competing creditor interests over the assets of the company,” he explained.

On whether customers could ever recover assets stuck in the beleaguered platforms, Assoc Prof Deng from Nanyang Business School said: “It depends on whether they can find liquidity to inject into the project, say, whether the acquisition of Vauld by Nexo goes through or Zipmex can successfully raise additional funds from shareholders.”

Mr Chia Hock Lai, co-chairman of the Blockchain Association Singapore, said that some layoffs can be expected as the companies cut costs and undergo restructuring.

“However, given that the three companies do not have a large operation in Singapore, the number of staff members affected should be less than 100,” he added, referring to Vauld, Zipmex and Hodlnaut.


Mr Shadab Taiyabi, president of the Singapore FinTech Association, does not see the developments having a “material impact” on the broader fintech industry here.

“Singapore recognises that distributed ledger technology (supporting cryptocurrencies) offers many benefits and that certain use cases are here to stay, which is why the country continues to remain open and welcoming of the new technology and certain use cases.” 

However, Mr Ruddenklau from KPMG International and Assoc Prof Deng said that the troubles hitting crypto firms here highlight the need for authorities to balance between implementing regulations that protect consumers and encouraging crypto and Web3 innovation.

Web3 or Web 3.0 is an idea for a new version of the world wide web, which incorporates concepts such as blockchain technologies and token-based economics.

Mr Ravi Menon, managing director of MAS, said in July that Singapore would take steps to put in place more regulations to better protect retail investors from the risk of cryptocurrency investments.

“We are actively promoting the digital asset economy, where we can use these technologies to solve real problems like cross-border settlement, cross-border trade finance, more efficient capital, market activities, trading and so on. (They have) a whole range of applications,” he said then, adding that cryptocurrency is “just a small sliver of that ecosystem”.

The future of embattled cryptocurrency firms here remains uncertain. However, some investors — such as the 27-year-old who invested his mother's savings — are looking to distance themselves from such volatile tokens.

“I will probably never touch crypto or investments and stick to Singapore Savings Bonds from now on. The risk is just not worth it,” he said.

Related topics

Hodlnaut crypto TerraUSD investment fintech MAS cryptocurrency

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