So, by now, most of you know about the implosion of FTX, the Bahamas-based world’s second-biggest cryptocurrency exchange that runs its operation from the US. A crypto exchange is in the business of helping customers buy and sell cryptocurrencies.
To begin with, what happened at FTX?
FTX collapsed after reports claimed that founder Sam Bankman-Fried’s Alameda owned massive FTT holdings in the company and used it to leverage to raise further debt.
In simpler terms, this meant if FTT value collapsed, it would have taken down FTX along with it. At least that was the fear. The news kicked off a full-blown crisis at FTX when Binance, the world's biggest crypto exchange, said it was selling FTT holdings.
People started withdrawing FTT holdings putting tremendous pressure on FTX. Binance then offered to bail out FTX but later backed out. This sealed the fate of FTX which filed for Chapter 11 bankruptcy protection on November 11.
The company's valuation plunged from $32 billion to bankruptcy in a matter of days, dragging down founder and Bankman-Fried's $16 billion net worth to near-zero.
Now, what happens to the customers of the bankrupt exchange?
FTX investors possibly risk losing their money or they have a long wait ahead.
According to reports, it may take years for account holders to get their money back. That’s because in bankruptcy, creditors are the first in line, then the investors and finally customers. According to a Reuters report at least $1 billion of customer funds have vanished from FTX.
What if it happens in India?
Now, what if an FTX-like incident happens in India where a large crypto currency exchange or any other entity dealing with crypto investors’ money goes bust? The chances of crypto investors or account holders getting their money back are even more remote here.
That’s because there are absolutely no regulations present at this point in Crypto industry. No major banks deal with crypto exchanges, fearing the regulator’s wrath. The government has not come out with any regulations pertaining to cryptocurrencies though it has begun taxing gains from crypto transactions.
The warning signs are everywhere. Most crypto exchanges operating in India have made risk disclosure on their websites about the lack of regulatory status of cryptocurrencies in India.
For instance, Wazirx—the largest crypto exchange In India—says on its website, “They (cryptocurrencies) are currently unregulated; India does not have a regulatory framework in place to regulate its functioning.”
Similarly, Coindcx—another leading crypto exchange—has a disclosure on its website that says crypto products and NFTs are unregulated and can be highly risky. “There may be no regulatory recourse for any loss from such transactions,” the disclosure says.
Also, Unocoin—another leading crypto exchange—says on its website, “Cryptoassets are not monitored or backed by any regulatory body, government or otherwise in India."
Yet, thousands of investors—especially youngsters—put their money on such assets hoping big returns.
RBI caution
The RBI has publicly expressed its displeasure multiple times. The central bank has been strongly advising retail investors against dealing in cryptocurrencies and one of RBI’s top officials even called for an outright crypto ban in India.
What does all this mean? In the event of a collapse of one of the many Indian crypto exchanges, investors will be left with nothing, as they cannot approach the RBI like they would if a bank failed.
The RBI has publicly said that cryptocurrencies are not regulated products and there are no investor protection norms in place.
“Investors who have acquired these instruments have done so with their eyes wide open, at their own risk and do not warrant any regulatory dispensation,” Deputy governor T Rabi Sankar said in February 2022.
The RBI has also said that unlike advanced economies like the US, where governments wield enough power to access the records of crypto companies, countries like India lacked such advantages.
To sum it up, Indian crypto investors will have nowhere to go in the event of a crypto-company collapse. There is a high probability of investors losing their money or having to wait for a long time in such a scenario.
The FTX crash is a wake-up call for Indian investors to exercise extreme caution while investing in crypto currencies.
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