Can your crypto trading platform offer proof-of-reserve and the support of going 1:1? Image Credit: Shutterstock

Dubai: Bitcoin prices are under renewed pressure in the final days of 2022 - but crypto investors in the UAE will be better off focussing on another number until such time these virtual assets regain some of their mojo.

And the number they should be focussing on? 1:1.

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What is 1:1 backing?

If they haven’t already done so over the past few weeks, investors - those with a risk threshold - should specifically opt for crypto exchanges that provide the 1:1 assurance. Which simply means that these exchanges have the ‘proof-of-reserve’ to cover all their investor exposure on a 1:1 basis.

And such exchanges, in principle, will not have the kind of liquidity shortfalls that played havoc with investor funds/deals parked on those platforms. Licensed crypto exchanges in the UAE are rushing to make that point clear with their users.

The FTX fiasco has made sure that ‘proof-of-reserve’ and the 1:1 ratio have become an integral part of the crypto trading universe - over and above where individual prices of the individual assets such as of Bitcoin.

Responsible crypto exchanges should always ensure to hold client assets 1:1 to settle transactions in real-time.

- Basil Al Askari, founder and CEO of MidChains

Bitter lessons from FTX

“When handling financial assets of clients, their trust in your company and services are not negotiable,” said Christopher Flinos, CEO of HAYVN. “Events like the LUNA implosion in May last and the FTX bankruptcy a month ago have shattered the trust of a lot of investors had in big exchanges.

"Going forward, we think that these unregulated exchanges with little to no disclosure will be replaced by regulated, smaller, financial institutions. At HAYVN, we believe trust is established through different factors - such as strong corporate governance - built upon a strong and effective Board of Directors, regulations and experienced management team with extensive backgrounds in traditional financial markets.”

What’s changed for crypto investors
After FTX, are crypto buyers making any changes on their deal flows?
"Investors are still looking for interesting companies in the crypto world. But they are now way more attentive on who they invest in and the team behind them to avoid a second FTX."

Bitcoin is again down from its yearly lows - do you reckon this is the last of the retail investors deciding to exit now at any price they can get?
"It very well could be. Uncertainty always plays a major role for retail investors."

What’s the current spread between buy and sell on most cryptos?
"We’ve reached a fairly stable situation. Unless something major happens, I don’t think we’ll have high swings in prices."

Stablecoins - any action happening on this score?
"Stablecoins like UST and Acala USD were always bound to fail. But the two biggest stablecoins, USDT and USDC, are still at the top of the industry."

- Daniele Servadei, CEO and co-founder of Sellix.

Winning back trust

According to the industry, rather than wait for a unified global response on crypto regulations, the agenda should be set by individual jurisdictions, which is exactly what the UAE has been pursuing right through this year. Abu Dhabi and Dubai have embedded a regulatory framework, the core of which is ensuring that investor rights are managed even as crypto exchanges and businesses have the leeway to pursue their models.

All within that tightly knit legal framework. And allied to a heightened investor awareness.

This is where crypto exchanges can help with that 1:1 formula. “Responsible crypto exchanges should always ensure to hold client assets 1:1 to settle transactions in real-time,” said Basil Al Askari, founder and CEO of MidChains, a digital currency trading platform. “Client assets should never be used for lending unless service provider is authorised to do so by their regulator and have received consent from clients.

STOCK FTX crypto
The FTX blowout was not about inefficient regulations, but of gross overreach from within.

Time crypto rules start thinking traditional “The only way out is for the (crypto) industry to embrace similar standards to traditional finance to bolster consumer trust. The exchanges that have been receiving the most negative attention present themselves as the most stable and secure - but are not legally required to conduct third-party audits and are not directly reporting to a regulator for the bulk of activities.

"Financial regulations exist to protect all stakeholders in the market.”

Mining into FTX’s problems

Even prior to the FTX crash, the crypto landscape had been through the wringer through the year. Terms like ‘crypto winter’ was coming to the fore each time Bitcoin and other cryptocurrency prices took another dive.

Investors are still looking for interesting companies in the crypto world. But they are now way more attentive on who they invest in and the team behind them to avoid a second FTX.

- Daniele Servadei, CEO and co-founder of Sellix

The crisis of investor confidence worsened with any crypto trading platform going bust - and which then immediately led others to curtail investors trying to cash out. All of which came to a head with FTX.

Flinos of HAYVN insists the FTX issue should not be clubbed into the wider concerns swirling around the crypto industry.

“FTX’s clients, investors and stakeholders knew they were broadly unregulated,” he added. “They knew there was no Board of Directors. No governance. Yet they kept their financial assets with them.

“FTX was not a regulatory problem – it was a corporate governance breach. Regulations, we strongly believe, are a critical component for all financial institutions. We support that with a corporate governance regime making it impossible for theft and fraud to occur.

"What we expect to see changing is customers, investors and stakeholders demanding corporate governance and regulation in cryptocurrency and taking business away from those players that do not meet this standard.”

It’s high time then that investors who want to continue on their crypto journeys keep looking out for that 1:1 promise. And make sure their trading platform of choice means what it says.