Crypto Assets

The FTX collapse and its SMSF implications

cryptocurrency SMSF

Questions must be asked about how cryptocurrency can be allowed as an investment for retirement saving within an SMSF.

If you’ve heard about the collapse of the FTX cryptocurrency exchange recently and wondered what on earth it was all about, I would suggest most of the general public feel the same way too.

In simple terms, the FTX exchange was a trading platform to allow people to buy and sell cryptocurrency, similar to how traditional financial markets operate, with its collapse reportedly the result of a range of issues.

Most recent reports suggest the FTX owes more than US$3 billion to its 50 biggest creditors alone. Of the creditors not in the top 50, I wonder how many of them have just lost their life savings.

While the downfall of the exchange and its founder, Sam Bankman-Fried, raises myriad questions, perhaps one of the most urgent is: how can cryptocurrency, an asset within a famously unregulated and volatile market, be a permissible investment for retirement saving within an SMSF?

While the first and arguably most well-known cryptocurrency Bitcoin was launched in 2009, these types of digital assets have really only exploded in popularity in recent years.

What people may not realise, or perhaps they do but don’t care, is that cryptocurrency operates in a highly volatile and completely unregulated market lacking clear guidelines for traders.

It is with this background that I ask again: how and why can an unregulated asset, such as cryptocurrency, be allowed within the confines of an SMSF, which themselves are bound by tight rules and regulations, and subject to regular audits and compliance checks?

Regulation is vital to protect consumers and assist in preventing fraud, scams and other forms of financial crime. As an example, SMSFs are not allowed to rent residential investment property to related parties, even at arm’s length. And yet as it currently stands, unregulated cryptocurrency is considered an acceptable investment to enable retirement savings.

There is a stark disparity here that doesn’t make sense.

While we cannot blame regulators for every failure, how many financial disasters will it take to regulate the crypto market? Surely it’s time for our questions to start being asked and answered?

When auditing SMSFs, it is my experience some trustees can be hesitant when they are asked for information on any crypto assets held in the fund, a reticence that perhaps says something about the nature of these assets themselves.

It’s not for me to say whether cryptocurrency is a good or bad asset, however, I do suggest those looking to trade in crypto need to ensure they’re carrying out proper research and due diligence before handing over their money and I believe greater regulation will go some way to assisting in that process.

It will require a joint effort from global governments and it is possible we might start seeing action following any FTX-related investigations, which would be a positive start.

Until we see crypto markets take steps toward regulation and maturation, I would suggest we’re going to continue to see other collapses related to these digital assets and, unfortunately, more people watch their investments, and some their retirement nest eggs, evaporate before their very eyes.

Naz Randeria is managing director of Reliance Auditing Services.

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