First Mover Asia: FTX Debacle Might Change Hong Kong’s Approach to Retail Crypto Regulation; Bitcoin Shows Its Mettle

Good morning. Here’s what’s happening:

Prices: Bitcoin and other cryptos

Insights: The FTX debacle may alter Hong Kong's approach to regulating cryptocurrencies.

Bitcoin, Ether Inch Upward

By James Rubin

Bitcoin showed its mettle for a second consecutive day, inching upward even as the post FTX crypto world was falling apart.

Investors bit into encouraging inflation data – a Labor Department report, showing supplier pricing (PPI) arriving cooler than expected – to keep the largest cryptocurrency by market capitalization above $16,750, a gain of about 1% over the past 24 hours. BTC has been inching up since Monday even as fallout from crypto exchange FTX’s liquidity crisis and filing for Chapter 11 bankruptcy protection widens. On Tuesday, The Wall Street Journal reported that crypto lender BlockFi is preparing a potential bankruptcy filing because of its "significant exposure" to FTX.

This article was adapted from Market Wrap, CoinDesk’s daily newsletter diving into what happened in today's crypto markets. Subscribe to get it in your inbox every day.

“Bitcoin is showing resilience here but it is hard to imagine investors are ready to test the waters until we learn more of the full contagion risk associated with FTX,” Edward Moya, senior market analyst for foreign exchange market maker Oanda wrote, although he warned that “if more exchanges or crypto companies pause withdrawals or limit activity, that will likely bring back the pressure on cryptos.”

Ether was recently changing hands at about $1,250, up about 1% from Monday, same time. Other major altcoins spent much of Tuesday in the green with even FTX's FTT token climbing 20%. FTT was, nevertheless, recently trading at $1.81, a fraction of its near $36 highs earlier this year. SRM, another FTX-related casualty that had slumped more than 72% over the weekend, rose more than 3%. DeFi protocols across the Solana ecosystem unplugged from Serum's onchain exchange in recent days for fear that they didn't know who held control. FTX CEO Sam Bankman-Fried was a major supporter of Serum.

The CoinDesk Market Index, a broad-based index designed to measure the market capitalization weighted performance of the digital asset market, was about flat.

Equity markets rose slightly, buoyed by October's PPI, indicating that U.S. central bank monetary policies were staunching inflation. The tech-heavy Nasdaq was up 1.4%, while the S&P 500, which has a strong tech component, and Dow Jones Industrial Average (DJIA) climbed 0.8% and 0.1%, respectively.

Oanda’s Moya noted warily that a possible BlockFi bankruptcy could present crypto markets with their next big test. The lender denied rumors that a majority of its assets were held at FTX, but acknowledged on Monday that in addition to having deposits on the platform, it had an undrawn line of credit from FTX and obligations that FTX owed it.

“The next domino to fall appears to be BlockFi,” Moya wrote. “Contagion from FTX was widely expected to impact BlockFi despite their recent denial that a majority of their assets are custodied at collapsed crypto exchange FTX.”

Will FTX's Collapse Change Hong Kong's Approach to Retail Crypto Regulation?

By Sam Reynolds

FTX’s epic collapse comes at an awkward time for retail crypto traders in Hong Kong. In late October, only days before the current catastrophe unfolded, the Hong Kong government announced its ambitions to be a crypto hub once again and was considering relaxing the prohibition on retail crypto trading.

“The SFC has been actively looking to set up a regime to authorize ETFs [that] provide exposure to mainstream virtual assets with appropriate investment guardrails,” Securities and Futures Commission Deputy Chief Executive Officer Julia Leung said at Hong Kong FinTech Week, as CoinDesk previously reported.

Hong Kong Monetary Authority CEO Eddie Yue added that these new technologies could “develop very nicely in a healthy financial system like Hong Kong” with the right regulation.

But Hong Kong’s authorities didn’t announce specific regulations. That’s going to come after a consultation period with the regulators themselves and industry stakeholders.

Now, how do you think these conversations will go after the news broke that FTX has one million creditors in its bankruptcy proceedings? Local exchange AAX also is on the brink of failure, suspending operations until a new capital raise can be secured.

Some of the million creditors cited in FTX’s bankruptcy will include hedge funds, institutional investors, or crypto entities – but some will also include retail investors, including Hong Kongers. If AAX goes under, who knows how many retail traders in HK will also be affected.

The outcome of this will be a strict set of rules for the retail trading industry. There will be limitations on how the exchange operates. Some of them might be for the better, like the required use of licensed custodians, but some of them might deter traders, such as limitations on what tokens are available.

Hong Kong regulators will certainly be cognizant of the risks of having overly strict regulations: The exchanges will be ghost towns and people will continue to trade offshore. But any regulator knows that regulation is a balancing act. Let’s see what the outcome is – if Hong Kong still wants to have retail crypto trading, that is.

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In case you missed it, here is the most recent episode of "First Mover" on CoinDesk TV:

FTX Accounts Drainer Swaps Millions in Stolen Crypto; Journalism's Role in Crypto Industry

Whoever was behind last week’s $600 million exploit of crypto exchange FTX started moving millions of dollars in stolen funds. Plus, ConsenSys Head Economist Lex Sokolin weighed in on the crypto markets as bitcoin (BTC) flirts with $17,000. And CoinDesk Chief Content Officer Michael J. Casey discussed journalism's place in the crypto industry.

Crypto Lender BlockFi Preps for Possible Bankruptcy Filing After FTX's Woes, WSJ Reports: The company had previously suspended withdrawals in wake of the collapse of crypto exchange FTX last week.

ConsenSys Economist Still Has Hope for Crypto After FTX's Fall: Lex Sokolin said the sector can thrive if people develop useful applications based on blockchain technology.

On-Chain Data Shows Investors Waiting, Changing Custody Behavior: Trust in exchanges is understandably low after the collapse of Sam Bankman-Fried's FTX. Investors might trust the asset more than the entity that holds them.

Collapse of Crypto Exchange FTX Sees Long-Term Bitcoin Holders Shift to Distribution: A sustained decline in bitcoin owned by long-term holders may mean a widespread loss of conviction, Glassnode said.

Serum’s SRM Tokens Double in Price After Emergency Fork in Wake of FTX Hack: The Serum token price rose as high as 32 cents, from a low of 12 cents just two days ago, as community members of the decentralized exchange scrambled to implement an emergency fork in the wake of security concerns triggered by the hack of Sam Bankman-Fried's FTX exchange.