Tokocrypto CEO: Should crypto exchanges have a responsibility to protect investors from scams?

Over the last few years, scams and frauds have become increasingly prevalent in the crypto space, so much so that losing money to a ‘rug pull’ is almost a rite of passage for new investors. Mostly everyone has stories about getting burnt by meme coins or NFTs which have promised 100x returns.

After all, it’s easy to be tempted when you read about Dogecoin and Shiba Inu millionaires, but these cryptocurrencies were created as jokes and rallied for next to no reason.

It wasn’t long after that people started exploiting these irrational investing trends. The Squid Game token is, perhaps, one of the most infamous examples.

Riding on the coattails of the hit Netflix show, the token saw a meteoric rise in value — from less than US$1 to over US$2,000 in the span of two weeks. At that point, the creators decided to cash out — or ‘pull the rug’ — and sold all their holdings. They walked away with US$3.4 million, while other investors were left with worthless tokens.

Given the lack of regulations in the space, there was no legal recourse which these investors could turn to.

Would laws and regulations benefit the crypto space?

“Both legal recourse and consumer vigilance go hand in hand in keeping crypto scams from occurring regularly,” says Pang Xue Kai, the Singaporean entrepreneur who founded one of Indonesia’s largest crypto exchanges, Tokocrypto.

“We’ve seen the benefits of both in Indonesia, where crypto trading is allowed under the management of the Commodity Futures Trading Regulatory Agency (CFTRA).”

Although Indonesia has banned cryptocurrencies as a payment instrument, residents are allowed to invest in them as trading commodities. The CTFRA has released a list of over 200 cryptocurrencies which can legally be traded in the country.

Along with this, the CFTRA also has plans to launch its own Digital Futures Exchange this year.

As such, Indonesia has some of the most comprehensive crypto regulations in the world. These regulations haven’t deterred investors from participating in the space, and Indonesia ranks seventh in terms of cryptocurrency ownership.

Regulations are imposed not to limit the market, but to prevent the perceived downside risk of unregulated and volatile assets. In fact, regulations can do a great deal in improving the liquidity of the market, giving traders higher trust, prices, transparency and less volatility in turn.

Pang believes that regulations aren’t there to restrict access, but rather to create a safe environment for trading. This goes hand-in-hand with the consumer’s responsibility to safeguard their interests.

“In an ever-evolving market like crypto, staying updated and vigilant is of utmost importance,” says Pang. “Crypto education plays a key role in safeguarding the interests of traders.”

Should crypto exchanges compensate scam and fraud victims?

Crypto exchanges also share this responsibility to protect consumer interests. However, as Pang points out, it’s not yet an obligation.

Given the current state of regulations, any responsibility on the part of exchanges to compensate crypto investors who suffered financial losses as a result of a rug pull is more likely to be moral, as opposed to legal, in nature.

Pang emphasises the maxim caveat emptor, or ‘let the buyer beware’, which has manifested in the crypto domain as ‘do your own research (DYOR)’. He believes that the onus lies on investors to be able to identify red flags surrounding questionable assets.

That being said, it would be “grossly negligent” if a crypto asset listed on an exchange were to turn out to be a rugpull.

“Tokocrypto carries out a thorough screening exercise on the crypto assets which are proposed to be listed on our platform. We ensure that all the assets listed are legitimate projects undertaken by proprietors of sound integrity,” he adds.

“The issue of compensating investors who have suffered financial losses — as the result of a rug pull — only arises when an exchange has failed to discharge their standard duty of care to their investors.”

Pang believes that the rising trend of crypto insurance will help cover, or at least offset, such losses in the upcoming future. Binance is leading the way in this regard with a user insurance fund which reached a US$1 billion valuation this February.

Beyond vetting their listed assets, Pang also highlights other measures which crypto exchanges must take to protect investors.

“Regular vulnerability assessments and penetration testing (VA/PT) on IT systems must be carried out to pinpoint weak spots and divulge clear action plans to strengthen these areas. Enhancing security measures for end users — for example, enabling multi-factor authentication and end-to-end encryptions — can also help protect customer data and assets.”

Should everyone be allowed to invest in cryptocurrency?

In many countries, it’s easier for investors to purchase cryptocurrencies as compared to traditional financial instruments, even though the former can often be riskier. This calls to question the need for a higher barrier to entry.

“In Southeast Asia, over 70 per cent of the adult population is unbanked,” Pang argues. “Many do not have the necessary information needed to pass Know Your Customer (KYC) requirements which are needed to invest in traditional financial instruments.”

Pang believes that cryptocurrency is spurring financial inclusion in these markets.

By increasing the barrier of entry, regulators may risk limiting financial inclusion in their country. When designing frameworks for cryptocurrencies, it’s important for regulators to align compliances with inclusion.

Instead of restricting people from accessing crypto, Pang proposes education as the solution. “At Tokocrypto, we’ve launched our Toko Scholar programme and Kriptoversity platform in the hopes of empowering more crypto enthusiasts through knowledge sharing and support.”

Is cryptocurrency giving rise to financial crimes?

Although crypto assets allow a wider population to have access to investment opportunities, they also widen the scope for financial crimes. NFTs, in particular, have been criticised for being potential money laundering vehicles.

“Before crypto, international intermediaries stood as gatekeepers in the world’s global money laundering and terrorism financing system (AML/TF),” says Pang. “The very nature of crypto, however, has allowed crypto asset owners to bypass these gatekeepers, making it the go-to currency for hackers on the prowl for monetary gains.”

This is a problem which will be solved over time through governmental and regulatory efforts.

“Because crypto is still in its infancy, the state of regulation in the crypto space remains complex,” says Pang. “To hinder cybercriminals’ crypto spree, consistent regulations are needed across the region, to allow traders in different markets to access the same asset class, similar trading mechanisms, and ultimately liquidity.”

Featured Image Credit: Tokocrypto

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