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Consumer advocacy group Choice has found that one in nine Australians have bought cryptocurrencies in the past year and that number is expected to keep rising.

Source : PortMac.News | Retail :

Source : PortMac.News | Retail | News Story:

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crypto crash could lead to regulation & consumer protection
Consumer advocacy group Choice has found that one in nine Australians have bought cryptocurrencies in the past year and that number is expected to keep rising.

News Story Summary:

One in nine Australians bought crypto in the past year.

Consumer advocacy group Choice has found that one in nine Australians have bought cryptocurrencies in the past year and that number is expected to keep rising.

Half of them see crypto as a long-term investment, rather than short term speculation and two in five see it as a diversification of their portfolio.

"People have really been harmed, and the system is really rigged against consumers," said Patrick Veyret, senior policy adviser for consumer group CHOICE.

"What we're seeing is widespread market manipulation, market rigging... a real rise in scams.

"And that's why we're calling for stronger consumer protections and strong obligations on cryptocurrency exchanges."

Since November (when Bitcoin hit a record high of $US69,000), about $US1.5 trillion has been wiped off the value of the entire cryptocurrency market. That's more than half its value erased in just six months.

Much like housing, cryptocurrencies were boosted by record low interest rates and by governments globally pumping trillions of dollars' worth of stimulus to fight off COVID.

But unlike the housing market, which is largely regulated and incentivised through tax perks and government grants, crypto operates without regulation and, some argue, little accountability.

It's a reality that's not lost on global policymakers, who have signalled new regulations are imminent.

Bitcoin, which came to life in 2008 as the financial system was imploding, was started by a growing class of tech-savvy dissatisfied citizens seeking an alternative to the mainstream financial system.

Now that utopian vision is under fire, and the question everyone is asking is, will a new era of regulation kill or strengthen cryptocurrencies?

Are stablecoins actually stable?

In May, the collapse of popular cryptocurrency Luna and the so-called "stablecoin" TerraUSD showed such investments can wreak havoc on the lives of many.

Together, they were valued at about $60 billion just weeks ago. But now they are almost worthless.

Investors losing their life savings, people at risk of homelessness, and even stories of suicide surfaced on social media, causing people worldwide to question its legitimacy.

Stablecoins are cryptocurrencies that are usually pegged to a fiat currency, such as the dollar.

Most issuers claim by backing the coins with traditional assets that are safe and liquid, it protects against risk.

There are three main ways stablecoins remain pegged to a fiat currency.

First, it can be pegged to the dollar.

Second, it can be backed by reserves of cryptocurrencies.

Finally, as in the case of Terra, it can be backed by an algorithm.

This algorithm adds tokens to the supply if the price is getting too high, to bring the price back down, or removes tokens from supply if the price falls below the peg.

But on May 9, Terra crashed. It is now worth just 3 US cents.

The team behind Terra were telling investors if they deposited Terra via Anchor they could get returns of around 20%.

Sound too good to be true? That's because it was, said Henri Arslanian, a former PwC crypto leader and partner who is now an author and Adjunct Professor at the University of Hong Kong.

Terra's sister coin Luna, which was worth $US119 at its peak, is now worth nil.

Terra was being deposited by many investors via a platform called Anchor, which worked like a bank savings account. It allowed users to earn yields on Terra deposits and take out loans against holdings.

"What's important to understand is that there are different kinds of stablecoins," he said.

"For many, the riskiest stable coins are the algorithmic ones. Unfortunately, they are giving the stablecoin industry a bad name."

"Nothing malfunctioned with Luna or Terra. But the design didn't provide a solution in this black swan scenario that eventuated.

"It's like saying, you have built a building, but it's not built to withstand an earthquake. That means, if there was an earthquake, the building would collapse."

"This is what happened with Terra. The building (infrastructure) behind it did not have the right safeguards."

Some have theorised that an 'evil genius' may have caused Terra and Luna to crash.

At the time of the crash, many on social media speculated that the big US hedge funds and trading firms, BlackRock and Citadel Securities, were behind it.

The accusation was that they jointly borrowed 100,000 bitcoin from cryptocurrency exchange Gemini to purchase Terra, only to dump the assets, causing the market to collapse and wiping out more than $US25 billion in the underlying LUNA market value.

Both firms have rejected that, saying they don't trade Terra.

Mr Arslanian said regulators and policy makers will now try to introduce new regulation over algorithmic stablecoins but that it will be difficult.

The investors who lost money by believing Do Kwon:

Do Kwon had tweeted at the time of Terra's collapse, in early May: "I understand the last 72 hours have been extremely tough on all of you — know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this".

But on Saturday, he attempted to resuscitate the Terra ecosystem by launching a new blockchain (Terra 2.0) and a new cryptocurrency (Luna 2.0).

The new version of Luna appears to be suffering a similar fate. Its value plunged by more than 70% within hours of trading.

Mr Kwon has also been caught up in other controversies, including being directed by South Korea's National Tax Service to pay 100 billion won (roughly $US78 million) in taxes and is facing lawsuits from burnt investors.

Conor Bronsdon's is one of those, although he is not thinking of litigation.

His $US400,000 investment was wiped out when Terra/Luna crashed.

"It was the majority of my savings," said the 30-year-old investor, based in Seattle.

Crypto has been particularly popular with millennials across the globe — more than one quarter of Australian investors aged 18 to 34 have at least 10 per cent of their portfolios invested in cryptocurrency, according to eToro data.

Despite the personal loss, Mr Bronsdon is still an advocate of decentralised transactions.

He said, with the benefit of hindsight, he would not have put so much money into Terra and Luna.

"I saw it as a safer investment than it actually was — I didn't expect it to go to zero that quickly."

Is crypto a good investment?

Henrik Andersson is the chief investment officer and co-founder of Apollo Capital.

He said his firm did have exposure to Terra and Luna and lost out because of it but said that won't stop them investing in crypto.

"It was not a catastrophic loss for us," he told ABC News.

The firm has been focusing its investments solely in crypto space for past 4.5 years, and he has been personally investing for almost a decade.

"Look, it's very risky – there's very high volatility, and all investors need to understand the risks.

"It's hard to find another asset class that's generated higher returns over the past few years and that's set to continue."

Australians losing out because crypto is not regulated

Aside from the investment fundamentals, there's also questions about the lack of consumer protections when investments fail.

Mr Veyret, from Choice, wants to see the same rules that apply to stock markets, apply to digital assets.

"Right now, conduct such as market manipulation, which is banned and Australian stock markets are actively promoted on cryptocurrency exchanges," he said.

The evidence now shows that stablecoins such as TerraUSD might not actually be that safe, he said.

"It's really concerning that these exchanges are advertising... terms like safe and also really high yield.

"Businesses and exchanges have an obligation to ensure that they're not engaging in misleading and deceptive conduct."

Consumer Action Law Centre (CALC) chief executive Gerard Brody is calling for new laws to be introduced, requiring crypto platforms to be obliged to detect, prevent and reimburse people from scams.

"We regularly hear from callers to our advice lines who have lost astounding sums of money — often their entire life savings — to scams occurring on crypto platforms," he said.

"The reality is that these platforms are a conduit for organised criminals and money launderers."

CALC is also advocating for restrictions on advertising and marketing of crypto to the general public, in its submission to Treasury's review of the sector.

"Crypto is intentionally complex and should not be advertised and marketed to the general public — the use of celebrity endorsement and association with sports teams is particularly worrying," Mr Brody said.

Story By | Nassim Khadem & David Chau


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