Luna’s Collapse: A Cryptocurrency and Economic Reality Check for Singapore

More than greed, it’s financial insecurity that drives speculative investment behaviour.

Financial news headlines over the past week have been dominated by a spectacular meltdown in the cryptocurrency market. Within 24 hours, a South Korean-based cryptocurrency by the name of Luna, previously one of the most valuable cryptocurrencies in existence, suffered a 99% meltdown in value at the concluding end of a general domino-effect negative price correction in the cryptocurrency market.

This drop in cryptocurrency values within the market, particularly that of Bitcoin and TerraUSD (UST, the “stablecoin” whose value Luna is pegged to), has been fuelled by real-world stock market fears of a growing recession on the horizon, fuelled by rising stagflation and geopolitical upheavals such as the ongoing Russo-Ukrainian War and China’s increasing self-isolation from the global economy thanks to its zero-Covid policy.

None of this might look to have any relevance to Singapore, but a closer look at such news alongside publicly available knowledge of Singapore’s economic woes and proposed future direction would prove otherwise enlightening, if not increasingly disturbing.

“The value of Something depends on who believes in it.”

First, let us look at the news of Luna and UST’s collapse. In simple terms, UST is supposed to be a cryptocurrency that pegs its value to that of the actual real-world US Dollar. Unlike other cryptocurrencies such as Tether or USD Coin, UST does not have its value guaranteed and backed by any real-world assets such as bonds or official currency; its value is instead guaranteed and backed by its nonprofit organisation, the Luna Foundation Guard’s Bitcoin reserve worth $3.5 billion actual US dollars. Bitcoin itself does not have any intrinsic value either, and has its value range more akin to that of a speculative stock than a real-world currency backed by a state government.

Both the Luna Foundation Guard and Terraform Lab HQ (which creates and owns the Luna cryptocurrency) are owned by Do Kwon, a South Korean crypto entrepreneur who co-founded and became CEO of Terraform Labs in January 2018.

The relevance of Luna, UST, Terraform Labs, Luna Foundation Guard, and the general cryptocurrency industry to Singapore are down to two points.

Luna’s Singapore Ties

Firstly, according to its LinkedIn page and Singaporean corporate records, Terraform Labs (originally incorporated in South Korea back in Jan 2018) set up its Asia-Pacific headquarters in Singapore on April 23, 2018. Luna Foundation Guard was set up in Singapore only this year on Jan 20. We now have what some are already dubbing as the “Lehman Brothers of cryptocurrency” happening from two cryptocurrency organisations and a blockchain network that has a sizeable presence and business legitimacy accorded to them by their acceptance into the Singaporean financial technology (“fintech”) industry.

This does not bode confidence in the rigor and conduct of due diligence done by the Monetary Authority of Singapore (MAS) on cryptocurrency organisations based out of Singapore, especially when Terraform Labs itself had been under investigation by the US Security Exchange Commission (SEC) since Nov 2021 for violating US federal laws governing the offering and sales of financial products with unapproved “mirror” pegging to the US dollar, as well as being an unregistered and unrecognized financial broker in the US.

Small wonder that UST failed to hold its self-declared value peg to the US dollar once it came under market speculative attack, and no surprise that the Luna cryptocurrency’s value also got wiped out as a result.

Chasing Trends and Hot Money

Secondly, the attraction of cryptocurrency organisations to Singapore’s fintech industry has been a central focus of MAS and the Singapore government since 2018 and the cryptocurrency boom.

This has intensified especially during the past two years of the Covid-19 pandemic which saw a global spike in digital transactions and inflow of “hot” speculative money from institutional and retail investors seeking to grow their monetary wealth in the free-wheeling, unregulated global cryptocurrency market.

Singapore’s existing business-friendly regulatory regime and liberal (read: nonexistent) taxation regime on cryptocurrency and capital gains from stock market profits makes it very attractive for wealthy individuals and fintech companies to set up shop in the country, especially in the face of growing scrutiny and tightening regulations on cryptocurrency and fintech in other financial capitals worldwide.

This should be worrisome for Singaporean society, as this purported increase in international finance and business flooding Singapore with fintech investments and business operations is set to exacerbate the current imbalance in Singapore’s economy with its fixation on financial services as a future economic growth engine.

Unlike previous waves of foreign investments into Singapore directly creating demand for sizeable local skilled labour populations to operate foreign-owned businesses in Singapore, the fintech boom in Singapore has not and will not create the quantity of jobs one might expect from the amount of foreign business interest in Singapore, or the monies being invested.

Are Locals Poorer Investments than Foreigners?

Furthermore, this dependence on foreign investments and business finance in fuelling Singapore’s economic growth comes at the cost of stagnating the local SME business industries.

Singapore’s SME economic sector has long struggled with productivity issues as well as declining interest from the younger generation of Singaporean workers who are drawn to better paying but fewer jobs offered by foreign businesses, and also put off by persistent dogmatic corporate cultures existing in many local SMEs.

The government seems oblivious to the growing imbalance of local society’s workforce distribution between white- and blue-collar labour, their growing discrepancies in pay standards, and the reality that much of our glitzy and high-net value economy’s daily functioning is down to the existence and resilience of basic public goods-providing industries such as transport, logistics, sanitation, construction, and F&B. All of which are sorely lacking in a Singaporean workforce core, and taken for granted by both local society and the government’s blind assumptions that “we can always hire more foreigners to do the jobs we don’t want to do”, or that “we need to invest into future industries and technologies for higher economic growth”.

A Government’s Responsibility in Protecting the people’s Interests…

The ongoing saga of Luna and UST’s collapse should serve as a wake-up call to MAS and the government for better regulation and scrutiny on cryptocurrency/fintech organisations seeking to set up shop in Singapore, both for Singapore’s financial reputation internationally as well as safeguarding the interests of local retail investors in fintech and cryptocurrencies.

Simply repeating warnings about crypto trading as being “high risk” and not suitable for the general public is not enough, and should not be seen as a convenient “passing the buck” onto local society without understanding the fundamental reasons driving such speculative behaviour; more than greed, it’s financial insecurity/wage stagnation/ that drives such speculative investment behaviour.

As a wider point, if local Singaporeans cannot earn stable and progressive incomes, climb the socio-economic ladder, and secure financial independence/retirement for their later years without relying on speculative financial practices such as cryptocurrency investments, then it is pointless for the government to talk about Singapore’s continued GDP growth with its future fintech-focused economy.

A famous anecdote from 2017 had an economist heckled by an audience member at a forum with the words “that’s your bloody GDP, not ours”. Such a sentiment would not sound foreign to Singaporeans living in a society with increasing wealth inequality and rising inflation over the past two decades.

The cryptocurrency/fintech industry’s growth in Singapore is but the latest tip of the spear in this imbalance of economic growth, of wealth gain in Singapore that’s been enjoyed mainly by the rich, the middle income class rapidly shrinking, of general wages stagnating, and the growing speculation in cryptocurrencies by the local population as a ticket to wealth.