As insolvency rumors soar among crypto firms such as Celsius and Three Arrows Capital, investors couldn’t help but ask a simple question: what happened to all the funds that were supposed to be in “safe custody”? It turns out that a small fraction of crypto firms have started to mine customer deposits to offer high APY returns on supposed fixed income instruments. Things worked out well when you add that the market had infinite potential.
However, as token prices plunged, these companies simultaneously suffered heavy losses on their positions and increased withdrawal requests as investors rushed to protect their capital. The combination of selling pressures has resulted in the price of coins falling and investors’ initial principal likely being wiped out as companies come in allegedly insolvent.
Not all asset custodians took huge risks with customer deposits during the bull market in an attempt to attract more capital. At the European Blockchain Convention in Barcelona, Cointelegraph Editor-in-Chief Aaron Wood spoke with Bit.com Business Development Manager Leslie Hsu. Bit.com is a centralized crypto exchange launched in March 2020 in Seychelles. Here is what Hsu had to say:
“So at Bit.com we actually use a third-party custodial service. Once all assets are in custody, the exchange will not use your money or client assets for tasks such as margin trading.
, Hsu explained that due to a concept known as regulatory arbitrage, it would be difficult for administrative bodies to crack down on supposedly bad-actor custodians who take unreasonable risks with clients’ capital. “Different countries all have different regulations. For example, like in the United States, they only allow entities domiciled in the United States to trade there. Currently, there is no single international law that covers all potential crypto-related issues. In some jurisdictions, gambling laws even take precedence over administrative rules when it comes to regulating digital assets.
On another panel, Cointelegraph Editor-in-Chief Alex Cohen spoke with Michael Lau, Global Head of Sales at Bullish, a regulated crypto exchange. For Lau, the question of trust does not only come from the ability to create services but also from the way one executes them, explaining:
“From our point of view, we decided that we would be regulated one day. So there is an element of accountability, isn’t there? Someone hasn’t actually done our inner workings and makes sure we can actually deliver on the promises we make.
Lau shared that when he first joined the industry in February 2020 after a career in traditional finance, he was surprised by the high level of retail involvement in digital assets. “I remember the New York Stock Exchange is only about 20% of the retail and the Chinese exchanges about 40% of the retail, but I really looked at crypto, and it was all retail with very few institutions.
But Lau said he was quite happy with the continued demand for regulation in the industry. “There is a certain level of professionalism and accountability required of fund managers. As an investor, I want to know that I will be protected. I want to know that the fund manager follows the rules. I want to make sure there is proper segregation of assets. So we’ve noticed a lot more demand for regulation lately. »
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Are Crypto Custodial Funds Risky? Industry Veterans Explain
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