News analysis: What does FTX's crash mean for Temasek Holdings, and should such entities invest in the crypto industry?

SINGAPORE — The fall of crypto exchange FTX last week should be seen as an isolated incident, not as a systemic failure of the industry, and should not deter institutional firms from investing in such outfits, said analysts.

Instead, FTX's demise, which was shocking to many, should underline how important it is for investors to study the risks they take when they park their money in a lightly regulated industry, they added.

FTX's collapse has led to a further tumbling in crypto assets such as bitcoin and ethereum, which had already taken a battering earlier in the year.

Noting that an exchange this large has never failed in this manner, Blockchain Association Singapore co-chairman Chia Hock Lai said: “I think it’s an isolated incident and there’s an element of fraud involved.”

Mr Chia added that FTX was one of the largest crypto exchanges in the world, with a high trading volume and institutional investors such as venture capital firm Sequoia Capital and state investment firm Temasek Holdings.

According to Forbes, Temasek has a 1 per cent stake in FTX and the value of its investment at its peak last January was US$320 million (S$439 million).

In response to TODAY's queries, Temasek said that it had no further comment. It had previously told Reuters that it was aware of the developments between FTX and Binance and was engaging FTX in its capacity as a shareholder.

TODAY takes a look at what the crash of FTX means for Temasek and if it is prudent for such institutional investors to invest in the industry.

WHAT HAPPENED TO FTX?

FTX, which is headquartered in the Bahamas but managed from the United States, is a cryptocurrency exchange, which means it helps people to buy and sell crypto assets.

FTX had valued its assets at between US$10 billion and US$50 billion, and listed more than 130 affiliated companies around the world, according to its bankruptcy filing.

Last week, FTX sought bankruptcy protection after a rapid series of events that unfolded largely on Twitter which involved FTX attempting to sell a large part of its operating business to rival Binance after customers fled the exchange over fears that the firm may have had insufficient capital.

But just as quickly as Binance offered its rescue package in the form of an acquisition, the company backed out of the deal.

And within only a few days, the multibillion-dollar crypto exchange went from crypto leader to bankrupt. Its chief executive officer and founder also resigned.

Hours later, the trading firm said there had been “unauthorised access” and that funds had disappeared. Analysts say hundreds of millions of dollars may have vanished.

Social media users also debated whether the exchange was hacked or a company insider had stolen funds —  a possibility that analysts did not rule out.

The Monetary Authority of Singapore (MAS) said earlier this week that FTX is neither licensed nor exempted from licensing here amid reports that many Singaporeans had invested in the beleaguered firm and are now at risk of losing their money.

Among the questions that have been raised since the FTX collapse is why MAS had not made a move to stop the company from collecting funds from Singapore-based investors, when it had done so against Binance.

WHAT DOES THIS MEAN FOR TEMASEK?

Maybank economist Chua Hak Bin said that while the loss to Temasek is painful, it represents less than 0.1 per cent of Temasek’s total assets, which are estimated to be about S$403 billion in 2022.

Mr Chia agreed, saying that such losses are part and parcel of investing and that it is common for institutional investors such as Temasek to diversify their portfolios to include all sorts of asset classes.

“As an investor you have to take risks to get returns, and historically Temasek has been able to generate good returns,” he said.

The analysts noted that while it seemed as though Temasek has invested in an asset that is considered speculative, such as cryptocurrency, institutional investors typically do not invest in the digital currency itself but the ecosystem and the technology behind it.

Cryptocurrencies are all based on the same basic structure: A publicly available “blockchain” that records ownership without having any central authority in control.

CIMB economist Song Seng Wun said: “It is less so about putting money in the asset but the operation of the system and the dominant players in the industry.

“So they’re not investing in the cryptocurrency — that can go up and down — but the companies that make money from the trading, such as FTX.” 

IS IT WISE TO STILL INVEST IN CRYPTO?

Analysts said that there are many institutional investors here that park their money in firms that offer promise in the area of blockchain technology and should continue to do so.

Singapore sovereign wealth fund GIC, for example, invested about S$230 million in blockchain data platform Chainalysis earlier this year. The firm also invested in digital currency exchange Coinbase and digital asset bank Anchorage, among others.

In response to TODAY’s queries on the amount it has invested on such firms and whether it will keep its investments given the FTX situation, GIC said: “GIC does not comment on individual investments. Our focus is on the development of blockchain technology and business models over the long term. In the short term, we expect volatility to remain high.”

The collapse of FTX also reveals very little about the technological shortcomings of blockchain technology or design of cryptocurrencies, said analysts. 

Rather, it underlined the need for a more comprehensive regulatory framework in the space. 

Dr Julian Hosp, chief executive officer and co-founder of crypto technology company Cake DeFi, said: “This will push exchanges and other players in this space to be more accountable and transparent, which has the potential to protect long-term investors from fraud and other risks."

When investing in blockchain, institutional investors such as Temasek should also put a lot of value on companies that value transparency, he said, adding that this is perhaps a “strong reflection point” that the firm will have to make following the loss it suffered with FTX.

Mr Chia said the blockchain space is very promising, likening it to the next internet.

“When the internet started, no one expected an entire digital economy to be running on it. Now, companies are depending on it, the whole world is depending on it,” he said. “And blockchain will be next.”