Helping hand: Crypto firms like Hodlnaut, Zipmex are in crisis – should central banks step in?

Disclaimer: Opinions expressed below belong solely to the author.

As the crypto winter ripples through companies worldwide, Singapore has not been spared — several companies have announced layoffs, and in the more extreme cases, forced to look towards acquisitions and bailouts. 

The most recent casualty in the chain of dominoes has been Hodlnaut, a Singapore-based crypto lending platform. On Monday, Hodlnaut announced that it has halted withdrawals, token swaps, and deposits with immediate effect, citing market conditions. 

But unlike many other companies, Hodlnaut has been a relatively ‘safe’ company — it does not offer the insane interest rates of Celsius, nor does it deride regulation and oppose it. In fact, Hodlnaut has actually applied for a licence with the Monetary Authority of Singapore (MAS), though it has withdrawn its application in light of the recent trouble.

Hodlnaut, in other words, is what most would consider a safe company, with modest offerings and a solid business model. What then, can be the reason for the crisis? 

As it turns out, Hodlnaut was a client of Celsius and as we all know, Celsius clients are not exactly able to access their funds right now. 

Hodlnaut is not the only company to be facing liquidity issues during this time. Zipmex has also filed for bankruptcy protection, and was also forced to halt withdrawals, though these withdrawals were later partially resumed. 

Again, the reason for this was that they were involved in the fallout from the Celsius crash.

Hodlnaut’s crisis raises an issue — what happens when companies are exposed to market crashes, and fail as a result?

Extending Central Bank function to the crypto ecosystem

To answer this, it is helpful to consider something similar: what happens when equivalent conditions exist within the world of fiat currency?

What happens when banks dealing with fiat currencies do not have enough liquidity to cover their daily operations? These banks go to a lender of last resort, which provides the bank with a temporary loan to operate with. 

This means that the banks do not have to enter a full blown crisis and halt withdrawals — consumers can withdraw money as per usual, and when the bank manages to obtain their own liquidity further down the line, the loan to the lender of last resort is paid back in full.

Many central banks already fulfil this responsibility — when banks suffer from a shortage of liquidity, especially during a bank run, they borrow from central banks, and repay the amount when their investments reach maturity.

This prevents unnecessary contagion between banks. If one bank fails, it may cause panicking consumers to withdraw from other banks as well.

At the same time, banks will be unwilling or unable to fulfil all these withdrawal orders even though they have made sound investments. By going to a lender of last resort, these banks can be kept afloat, while customers get the assurance that the banks will not go under. 

What this would mean in the crypto ecosystem is that crypto exchanges, who function in a similar fashion to fiat currency banks, can receive such liquidity support when they encounter unpredictable market conditions. 

Not only will this allow crypto exchanges to continue operating during downturns like the current crypto winter, it will also mean that unnecessary losses from public panic can be avoided.

To save or not to save?

Central banks such as MAS have a vested interest in keeping good companies afloat. Companies that suffer losses through exposure to other companies’ poor management may ultimately still be building something useful, and it is essential that these companies are supported on their journey.

This is especially so when companies encounter crises because of force majeure.

Under extreme circumstances, it is not unexpected that companies may face unforeseen circumstances and face liquidity issues. But these crises should not take away the fact that the companies may be providing a valuable service, and that if all companies are allowed to fail, there may be negative repercussions in the long run for all parties — including consumers and the government.

In such cases, central banks should support companies, perhaps with a short-term liquidity injection. 

That being said, not every company deserves to be saved. Companies that fail due to their own incompetence should not receive help.

Terraform Labs is a case in point: the company was not regulated, and failed because it was fundamentally flawed. Why should MAS cover losses from Terraform Labs, when the company has repeatedly ignored warnings that a crash might be possible? 

At the end of the day, the point is not that central banks operate as guarantors of value, but rather, a vote of confidence in an institution.

If central banks like MAS unquestioningly provide aid to every company that runs into trouble, there will be no end to MAS’ responsibility to protect companies and customers — and companies will continue to be reckless because they are safe in the knowledge that losses will be covered by taxpayers.

This is more a question of discretion rather than of concept. There is still value to be found in helping companies through tough times — the problem is how to do so while ensuring that companies do not become dependent on the aid. 

An important distinction to be made is that this aid is a loan. It must be repaid in the future, as opposed to a grant, which does not have to be repaid. 

One possible solution is to mandate that companies who wish to receive aid must present a viable plan for their recovery. Tthis can mean getting their house in order — no more risky bets on which coins will go to the moon, diversified portfolios, and the likes.

The purpose of this is to ensure that aid is not going towards a lost cause. If a company is facing long-term problems due to a failing product, is there really a point in helping them?

At the end of the day, companies that receive aid should not assume that this aid is a right. Instead, it is a privilege that only a select few companies that have demonstrated their strength and business model should receive.

Crypto businesses have a part to play as well

Of course, this means that more than ever, companies have to prove that they are worthy of receiving such aid, and that their troubles are a temporary issue.

MAS is, after all, under no obligation to take up the mantle. However, the crypto world is increasingly in need of such an institution; and if Singapore is to truly become the crypto hub of Asia and the world, its support system must improve as well.

We are already well-known for stringent regulations and tough checks to ensure that only good companies come to Singapore. 

What is lacking for Singapore is the support for businesses that face crises as part of a wider ripple effect. In an interconnected ecosystem like the cryptocurrency world, all it takes is for one large company to sneeze for the rest of the ecosystem to catch a cold. 

However, this support is not something that can be given freely. At the end of the day, Singapore has a reputation to maintain, and the government has taxpayers to answer.

Businesses must also do their part and match MAS’ efforts to ensure a stable and healthy ecosystem in Singapore by doing their own due diligence.

For Singapore to have a healthy crypto ecosystem, strong government regulation must be paired with strong government support, especially for businesses who are building something valuable for the ecosystem. 

Temporary setbacks like those currently facing Hodlnaut and Zipmex are not indictments of their performance. Instead, the endurance that these companies have had to last months before needing to take any action should show how solid their foundations really are. 

Let us not forget that Terraform Labs collapsed almost overnight, and Celsius collapsed within a month. Companies like Zipmex and Hodlnaut still managed to hold on because of their diversified portfolios and other sources of revenue which have supported them. 

These are the types of companies that should be rewarded; at the very least, with the trust that they do have a solid business plan.

Featured Image Credit: Hodlnaut / ZIpmex