[INTERVIEW] 'Crypto party isn't over yet'

Lee Sirgoo, the CEO of Dunamu, which operates Korea's largest cryptocurrency exchange operator, Upbit, responds to questions about recent updates in the global cryptocurrency market after the collapse of Terra-Luna during a recent interview at its headquarters in Seoul. Korea Times photo by Choi Won-suk

Blowup of Terra's stablecoin raises credibility concerns for industry, forcing crypto investors to wait longer for price rebound

By Kim Yoo-chul

Things are changing rapidly in the world of crypto.

Very recently, the global cryptocurrency market saw an extension of volatility even to stablecoins, mostly due to the huge collapse of the TerraUSD, a UST or algorithmic stablecoin, and its sister token, Luna ― which should theoretically maintain a 1:1 peg to a currency and commodity. Plus, because inflation remains too much of a force on central banks around the world, pressuring them to move expeditiously to bring the level back down by raising the benchmark rate sharply, more than 40 percent of crypto holders are now underwater in terms of their investments, according to analysts.

All of the numbers are just bad. The price of bitcoin, the benchmark cryptocurrency in the industry, has fallen below $21,000, data shown by market tracker investing.com said. This fall is a major break from the $31,000-to-$32,000 price range bitcoin had gotten into since the collapse of Terra's UST back in early May. This year, Bitcoin's prices have been slashed by over 50 percent of its all-time high of around $69,000 back in November 2021. The crypto market's total market capitalization has crashed to under $1 trillion, according to data from CoinMarketCap.com.

Cryptocurrency analysts have no big fears that the growing inflation or elevated uncertainty regarding the economic climate could persist in the market as core dragging factors. Additionally, the belief that crypto assets offer a hedge against inflation is weakening as recent years' price increases have been thanks to excess market liquidity, which also led to the rise of the major tech stocks listed on the Nasdaq.

The point is that both technology stocks and cryptocurrencies are exposed to the U.S. Federal Reserve's and other central banks' monetary tightening concerns. Investors are required to have more patience if they want to give their investments the best chance for profit-taking.

Lee Sirgoo, one of the influential figures in the global crypto industry, as he is the chief executive at Dunamu, the operator of the country's largest cryptocurrency operator, Upbit, didn't deny that the crypto market is heading towards being more bearish than bullish. Institutional investors, who have kept their crypto assets in "cold wallets," a type of digital wallet that stores cryptocurrency offline, have started unloading their holdings due to the worsening macro-economic conditions.

"Normally, big institutional investors don't store their cryptocurrency assets in exchanges, the amount of which is huge but out of circulation, as they use cold wallets. Amid higher crypto demand, this practice led to the increase in cryptocurrency prices. But they want to prepare for the risks associated to the additional fall in cryptocurrencies by reducing their crypto holdings, resulting in more supply and price fall," Lee said in a recent interview at its headquarters in Seoul.

The CEO viewed that the cryptocurrency industry is facing "credibility problems" because risk contagion in the market is closely connected to such external shocks, which could lead to a "butterfly effect." But Lee omitted saying that the continued market tumble could also lead the industry itself to face a structural downturn.

"When it comes to blockchain technology, making reward systems visible really matters. For example, if stocks could be issued as a type of coin, imminent transactions could happen 365 days a year and 24 hours a day. I just want to highlight that the technology behind cryptocurrencies is the most efficient way. Yes, it's still very necessary for blockchain network participants to consider a host of issues including the legal structure and governance model of a blockchain. We have three to five years or even more until standards mature and settle. However, everyone is talking about the price trend, which I don't think is desirable, given the potential of blockchain technology in many industrial areas," Lee said.

While views are mixed over the validity of cryptocurrencies as some are saying that cryptocurrencies and even stablecoins are structurally flawed, as they won't replace normal money, the CEO said he disagrees with this view. Today's expanded role of "smart contracts," tools that can automatically execute transactions once specific conditions are met without requiring the help of an intermediary. They are usually associated with Ethereum, a type of blockchain.

"Well, I would say there are some fundamental issues regarding the blockchain transition to the proof of the stake consensus algorithm. But the usage of smart contracts linked to ethereum is being widened and I can see conditions are becoming favorable as an improvement of reward systems is allowing market players to get involved with the release of blockchain-based services such as non-fungible tokens (NFTs), some of them are currently used in culture and arts industries," according to the chief executive. NFTs are the latest cryptocurrency phenomenon to go mainstream.

Terra-Luna crash can't compare to dotcom bubble

Could any "good things" emerge from TerraUSD's crash? Lee believes so.

While he said that the collapse of the Terra stablecoin had caused the industry to see a rapid deterioration of investor sentiment, wiping out more than $200 billion, the downfall is part of the cryptocurrency world's "growing pains."

Regarding questions as to whether he views Terra-Luna event as a "Ponzi scheme," he didn't clearly communicate a definitive yes or no answer. However, he stressed that the Terra-Luna crash would have a limited impact on the market. "This assessment is based on my belief that the crypto industry will continue to evolve as is it has been doing all along."

"The top noticeable point for the Terra-Luna project is that it doesn't require deposits as it uses a peg approach, which won backing from investors, as this development was viewed as an alternative way to 'stay in cash' without relying on the fiat financial system. Its algorithm design was very creative. But the Terra-Luna crash awakened the need for the industry to have systems in terms of factoring in unpredictability to keep the crypto ecosystem working."

Experts said that the Terra-Luna collapse might prove the catalyst for possible tougher regulation of the industry and may accelerate the new Korean government's efforts to regulate stablecoins. Lee wants to keep lots of communication channels open with authorities handling the crypto-related issues.

"I don't think the Terra-Luna crash will play out like the dotcom bubble back in late 1990s and early 2000s. In the dotcom era, attention had too much focused on negative factors. Yes, there were lots of schemes, plots and lies in the early age of the internet business. But these were steps in creating companies that could never be done before. Think about Naver, Kakao and NC. Blockchain technology will also produce new business models. In terms of regulatory framework, I was hoping for regulations to focus more on positive aspects of the industry," he said.

A photo of Elon Musk is displayed on a smartphone placed on top of representations of the cryptocurrency, Dogecoin, in this illustration taken June 16. Reuters-Yonhap

South Korea, a hotbed for crypto trading activity, is being inclined to tighten regulations on listings and make it even more difficult for foreign tokens to list on Korean exchanges, a move which is raising some concerns from the crypto industry, as doing so can discourage projects from even being tried. "I hope authorities don't remain hawkish regarding the cryptocurrency industry just because of concerns brought about by the Terra-Luna crash."

He suggested the idea of having a "grace period," which lets the industry self-regulate and self-monitor to protect investors from a Terra-like repeat. "Based on analysis of an experimental session, we can begin talks on how to better set up regulatory frameworks. But do we actually need a 'control tower' to oversee regulating the industry? Regulators should combat activities via anti-money laundering (AML) because money laundering is a criminal act. However, that doesn't mean that the industry should constantly be checked."

ICOs should be permitted

Regarding initial coin offerings (ICOs), which the country banned in 2017, Lee said Korea should approve ICOs as early as possible. "Now, the country doesn't have an issuance market, as it only has a distribution market resulting in investors seeking ICOs in Switzerland and others. I believe ICOs should be permitted and we have to have the methodology and principles regarding the issuance of coins."

According to Lee, the desirable path toward ICO regulations would require a thorough examination of applicable financial reporting and investment requirements. But it's debatable whether or not to view cryptocurrency as securities or commodities.

"We have a lot of digital coins and that means we need to have different rules according to different functions of digital coins available." Views are that crypto is more like securities as people invest them for return on investment; however, some were saying bitcoin is a commodity as it's a form of value in the same way that gold is a form of value, in the same way that oil is a form of value.

ICO is the crypto version of an IPO in the stock market. Unlike the stock market, due to the lack of regulation, ICOs are considered as very risky

"Because crypto exchanges have their own standard in evaluating business projects, ICOs will be the custom way to sort out 'bad ideas' and to help investors invest in applicable ideas at the very beginning. Yoon administration has a positive stance toward ICOs. The ICO issue is a matter of methodology." The financial authorities are considering mandating ICO hopefuls to submit investor prospectuses, security declarations, detailed information on transaction risks, associated taxes and fees with the money raised from the ICO should be deposited to a bank for the release of detailed accounting reports.

The chief executive said despite such challenging factors, which led to what some crypto investors are dubbing as a "crypto winter," the market's high volatility won't be permanent.

Lee ended the interview with a reassuring note for digital coin investors: "The cryto party isn't over yet."