The role of a digital asset exchange is to serve as a marketplace where investors can buy and sell their cryptocurrencies and other digital assets, while the revenue of the exchange comes from a service fee. But somehow Zipmex operates also like a bank.

Currently, nine digital asset exchanges have got licenses from the Securities and Exchange Commission of Thailand (SEC). They are Bitkub, Zipmex, Stang Pro, ERX, Upbit, Z.comEX, SCBS, TDX and T-BOX.

Zipmex ran into trouble on July 20 when it suspended withdrawals for two hours that evening, citing financial difficulties faced by its partners.

Later its trading account came back online but its interest-bearing account, ZipUp, remains closed. ZipUp is a window that allows investors to deposit their cryptocurrencies and get returns from the deposit. Zipmex had promised 5 to 10 percent interest annually depending on different cryptos.

Akalarp Yimwilai, chief executive and co-founder of Zipmex (Thailand), defended the company, explaining that Zipmex Global in Singapore and its trade partners had liquidity problems, referring to Babel Finance and Celsius.

Zipmex deposited cryptocurrencies with Hong Kong-based Babel Finance, a crypto lending and crypto asset management platform, and US-based Celsius Network, a crypto-lending platform.

Zipmex says that as of July 21, it had deposited with Babel Finance US$48 million, and $5 million with Celsius Network, while total deposits amounted to 1.9 billion baht.

In June, Babel Finance temporarily suspended withdrawals and redemption of crypto assets on June 17 due to a liquidity crunch. Celsius suspended withdrawals on June 13 and filed a petition for bankruptcy protection on July 14, citing liquidity pressure.

Source of the trouble

In recent months, investors have dumped risky assets, fearing a global recession and inflation. The cryptocurrency industry has been hit hard and some big players have collapsed. Babel was accused of engaging in high-risk activity, aggressively betting on bitcoin and lending cryptocurrencies to bitcoin miners.

Celsius earlier filed a petition for bankruptcy protection, as it could not give money back to its depositors. The firm has suffered from the collapse of its crypto hedge fund — Three Arrow Digital (3AC). The collapse of 3AC was largely due to heavy investment in a stablecoin called terra USD, known as UST, which was a debacle.

UST was a stablecoin backed by a set of rules under its algorithm system that manages the demand and supply of the coin by using a sister coin called Luna as a key tool. During a popular period, the UST system was worth about US$60 billion (2.2 trillion baht). However, during market turmoil, people lost faith in the digital token and its business crashed to zero. This has ramifications on the crypto ecosystem, where big players collapse, dragging other players and investors down with it.

What is a stablecoin?

 It is a kind of cryptocurrency created to solve two key problems: the hassle of using real money to buy cryptocurrencies like bitcoin, and the high cost of the transaction. So stablecoin has been created to keep things simple. It is being used like a chip in a casino where gamblers use real dollars to buy chips and then use them for playing games and in the end they could exchange the chips back for real dollars. Stablecoin is cheap —one coin is worth a dollar.  It is easy to buy and it could be used to trade cryptocurrencies like bitcoin.

Secondly, stablecoin solves the problem of highly volatile cryptocurrencies such as Bitcoin, whose value has seen massive upward and downward swings of over 70 percent. For example, at its peak in November last year, Bitcoin was worth over US$68,000 but has plunged to below $18,000 in June this year.

In comparison, stablecoin’s value is pegged to real currencies, such as the US dollar — one stablecoin is worth a dollar.

To make it stable, issuers usually have to back the coin with a proportion of fiat money, like the dollar, US treasury bill, other governments’ bonds or gold and corporate bonds held in reserves.

So, when investors want their fiat money back, stablecoin issuers must have adequate liquidity available for redemption.

That is the first type of stablecoin. The second type of stablecoin has no real assets to back its value; issuers need not hold large cash, gold or US treasury bills in reserve.

The UST was not backed by traditional financial assets but it was algorithmic. This is a big sinkhole, which has swallowed the UST and those who invested in it.

The UST lost its value pegged to the dollar after stablecoin holders’ faith evaporated and its issuer had no real assets in hand, such as US dollar or US treasury bill, which could be converted into cash to return fiat money back to investors.

Very different from UST, Tether, the world’s largest stablecoin, has been backed by real assets, including US treasury bills. In May, its value, too, dropped below the dollar peg due to the repercussions of the UST debacle that month. Investors were skeptical on whether Tether had enough assets in reserve to support the currency.

Tether’s value has regained parity with the dollar after it was forced by the market to reveal its latest reserves and it had to increase its holding of risk-free US treasury bills and reduce high-risk corporate bond holdings in its reserves.

Unverified claims

When Zipmex’ troubles became obvious to the public, other digital exchanges rushed to announce that the assets of their platform users are safe. But the big question is who can verify those claims?

“There is a loophole in the system as how to make a cross-check of the claims made by those digital asset exchanges,” said a source in the financial community. In comparison, investors buy shares in the stock market, the Stock Exchange of Thailand (SET) can verify the transactions — there are real stocks traded.

The second question is: whose money has Zipmex deposited with Babel and Celsius? Does the money belong to its customers or is it Zipmex’ own fund?

“It is not clear yet,” said the informed source. He added that separating clients’ money from the platform’s own money is crucial in the role of exchange.

If it is clients’ money, and the clients do not know about Zipmex transferring it to Babel and Celsius, then Zipmex has to take responsibility and reimburse its clients, he said.

Some critics blamed the SEC for allowing Zipmex to transfer money to a country over which Thailand’s court has no jurisdiction.

Need for scrutiny

Anusorn Tamajai, former member of the Bank of Thailand’s audit committee, said “the SEC urgently needs to check every digital asset exchange to verify whether all clients’ assets are kept safe there”.

In response to Zipmex’s trouble, the SEC on July 26 ordered the second largest digital exchange to resume all its previous services including asset withdrawals within three days.

Outlook for Zipmex, crypto industry

Zipmex has a registered capital of 112 million baht while it has now suffered a loss of close to 2 billion baht.

The source said that “technically it has gone bankrupt and the challenge is to find new investors who are willing to assume the losses”.

The turmoil in the cryptocurrency market also suggests that crypto cannot be used as a means of payment due to its high volatility in value. They might be only speculative assets with no evidence of generating real economic returns.

The cryptocurrency business currently has been more or less like a Ponzi scheme.

“If stablecoin has potential, it should be regulated strictly, or stablecoin should be issued by central banks, then this comes back to a smart baht or dollar or yuan supervised by central banks,” added the source.

By Thai PBS World’s Business Desk