The FTX Bankruptcy Crisis and Its Implications for Taiwan

In a shocking turn of events, FTX, which was once the world’s second-largest cryptocurrency exchange, filed for bankruptcy in November 2022. The company, formerly valued between USD30 and USD40 billion, collapsed after allegations of financial mismanagement and murky accounting practices came to light. As investors worldwide grapple with the fallout, the repercussions have been particularly acute in Taiwan, where an estimated 155,000 visits to the FTX website were recorded between January and October 2022. Taiwan's crypto-community faces devastating losses and regulatory challenges.

According to conservative estimates, the crisis has affected over 30,000 Taiwanese citizens, some of whom had dormant accounts but still had funds with FTX. Various local organisations present different figures; Taiwan Blockchain Academia (TBA), for instance, estimates that more than 500,000 Taiwanese have been impacted. The total loss for the Taiwanese community is estimated to exceed TWD16 billion (USD500 million). A survey conducted by Enlighten Law Group found that more than 90% of small-sum retail investors had less than USD10,000 invested in FTX, making the cost of legal action prohibitive for many.

In its survey, Enlighten Law Group collected around 1,400 responses from both corporate and individual crypto investors in FTX:

Given that a large proportion of Taiwanese users are young, tech-savvy individuals, the crisis has the potential to damage the emerging demographic's faith in cryptocurrencies and alternative investments. With limited savings and substantial losses, these individuals may find themselves severely set back in their financial goals, perpetuating a cycle of caution and reduced investment in the sector.

Until now, Taiwan's only significant legislation on cryptocurrency trading was focused on anti-money laundering (AML) and countering the financing of terrorism (CFT), enacted in June 2021. However, the FTX bankruptcy has ignited a conversation on consumer protection and the need for a more comprehensive regulatory framework.

Taiwan’s Financial Supervisory Commission (FSC) is now under immense pressure to enact regulations that can better protect investors without stifling innovation. The commission has announced its intention to observe the regulatory responses of international peers before releasing nine guiding principles that include aspects like “information disclosure”, “segregation of customer assets”, “customer rights protection”, “information security”, “operational system and digital wallet management” and “institutional auditing”, etc.

The FSC’s emphasis on a “rolling-basis” review of regulations echoes the approach of countries like the United Kingdom, Singapore and Japan, which have incrementally adapted their rules to accommodate the rapidly evolving cryptocurrency landscape. This acknowledgment indicates that Taiwan is likely to take a balanced approach, learning from both the successes and failures of other countries in shaping its regulatory environment.

Many Taiwanese investors worry about not being under the protection of the US court system. However, law firms with experience in international financial crises, such as the Lehman Bankruptcy in 2008, offer some hope. Taiwanese consumers have successfully fought for compensation before, so it is worthwhile for consumers to file their claims with the US court and to follow the bankruptcy proceedings closely.

Kroll, a company gathering customer claim data, has opened an online portal on which FTX users can file claims. However, its recent cybersecurity breach makes it less reliable. This situation underscores the importance of seeking legal advice. The creditors may still need professional legal services, particularly those with considerable investment sums. Class action lawsuits are also gaining momentum in the US, potentially offering another avenue for recovery.

The collapse of FTX serves as a cautionary tale for investors and regulators alike, and the reverberations have been profoundly felt in Taiwan. The crisis has not only highlighted the dangers of unregulated or poorly regulated crypto-markets but has also provided a wake-up call for Taiwanese regulators. The FSC’s forthcoming guidelines could set the stage for a more secure and consumer-friendly crypto landscape in Taiwan, potentially making it an attractive market for responsible crypto-businesses in the future.

As for investors, the situation underlines the need for due diligence and risk management, qualities that, once instilled, could create a more educated and cautious investment community. The FTX bankruptcy has indeed been a hard lesson for many, but it also offers Taiwan an invaluable opportunity to refine its crypto-market and regulatory framework.