Many put faith in cryptocurrency but crash could lead to regulation and new consumer protections
Max Moulder is doing whatever he can to make ends meet.
He's taken a shot at being an Uber driver.
He's drawing on his life-long trade of cutting and selling gemstones.
But odd jobs are not earning him enough to keep up with the growing cost of living.
"I've done gemstone cutting and trading for a long, long time — since I was 10 years old — that's not paid off for me," he said.
"It's very difficult doing Uber driving with the cost of petrol. That's not working. And I can't do cabinet making anymore. So I'm running out of options really."
In his mind, there's just one option left: to invest in crypto.
"I feel like I've been forced into this," he told ABC News.
Mr Moulder only started investing three weeks ago when the market tanked. He's put in $1,000 so far and is willing to invest a lot more.
His view is that he's buying cheap and so "it can only go upwards from here".
"I feel I've only got six years to make some large gains, so, I'm jumping in," he said.
It is faith, rather than investment fundamentals, that has left Mr Moulder, and millions of other investors around the world, either already suffering or being vulnerable to massive losses.
Consumer advocacy group Choice has found that one in nine Australians have bought cryptocurrencies in the past year and that number is expected to keep rising.
Half of them see crypto as a long-term investment, rather than short term speculation and two in five see it as a diversification of their portfolio.
"People have really been harmed, and the system is really rigged against consumers," said Patrick Veyret, senior policy adviser for consumer group CHOICE.
"What we're seeing is widespread market manipulation, market rigging… a real rise in scams.
"And that's why we're calling for stronger consumer protections and strong obligations on cryptocurrency exchanges."
Since November (when Bitcoin hit a record high of $US69,000), about $US1.5 trillion has been wiped off the value of the entire cryptocurrency market. That's more than half its value erased in just six months.
Crypto has made some investors overnight millionaires but for others it's a fad propped up by celebrity endorsements.
Much like housing, cryptocurrencies were boosted by record low interest rates and by governments globally pumping trillions of dollars' worth of stimulus to fight off COVID.
But unlike the housing market, which is largely regulated and incentivised through tax perks and government grants, crypto operates without regulation and, some argue, little accountability.
It's a reality that's not lost on global policymakers, who have signalled new regulations are imminent.
Bitcoin, which came to life in 2008 as the financial system was imploding, was started by a growing class of tech-savvy dissatisfied citizens seeking an alternative to the mainstream financial system.
Now that utopian vision is under fire, and the question everyone is asking is, will a new era of regulation kill or strengthen cryptocurrencies?
In May, the collapse of popular cryptocurrency Luna and the so-called "stablecoin" TerraUSD showed such investments can wreak havoc on the lives of many.
Together, they were valued at about $60 billion just weeks ago. But now they are almost worthless.
Investors losing their life savings, people at risk of homelessness, and even stories of suicide surfaced on social media, causing people worldwide to question its legitimacy.
Stablecoins are cryptocurrencies that are usually pegged to a fiat currency, such as the dollar.
Most issuers claim by backing the coins with traditional assets that are safe and liquid, it protects against risk.
There are three main ways stablecoins remain pegged to a fiat currency.
First, it can be pegged to the dollar.
Second, it can be backed by reserves of cryptocurrencies.
Finally, as in the case of Terra, it can be backed by an algorithm.
The devastating effects of the crash of crypto "stablecoins" Terra and Luna are being felt by many but their crash may have been orchestrated in one massive piece of ethically questionable trading.
This algorithm adds tokens to the supply if the price is getting too high, to bring the price back down, or removes tokens from supply if the price falls below the peg.
But on May 9, Terra crashed. It is now worth just 3 US cents.
Its sister coin Luna, which was worth $US119 at its peak, is now worth nil.
Terra was being deposited by many investors via a platform called Anchor, which worked like a bank savings account. It allowed users to earn yields on Terra deposits and take out loans against holdings.
The team behind Terra were telling investors if they deposited Terra via Anchor they could get returns of around 20 per cent.
Sound too good to be true? That's because it was, said Henri Arslanian, a former PwC crypto leader and partner who is now an author and Adjunct Professor at the University of Hong Kong.
"What's important to understand is that there are different kinds of stablecoins," he said.
"For many, the riskiest stable coins are the algorithmic ones. Unfortunately, they are giving the stablecoin industry a bad name."
"Nothing malfunctioned with Luna or Terra. But the design didn't provide a solution in this black swan scenario that eventuated.
"It's like saying, you have built a building, but it's not built to withstand an earthquake. That means, if there was an earthquake, the building would collapse."
"This is what happened with Terra. The building (infrastructure) behind it did not have the right safeguards."
Some have theorised that an 'evil genius' may have caused Terra and Luna to crash.
At the time of the crash, many on social media speculated that the big US hedge funds and trading firms, BlackRock and Citadel Securities, were behind it.
The accusation was that they jointly borrowed 100,000 bitcoin from cryptocurrency exchange Gemini to purchase Terra, only to dump the assets, causing the market to collapse and wiping out more than $US25 billion in the underlying LUNA market value. Both firms have rejected that, saying they don't trade Terra.
Mr Arslanian said regulators and policy makers will now try to introduce new regulation over algorithmic stablecoins but that it will be difficult.
Do Kwon, who founded Terra creators Terraform Labs, did not respond to ABC News' request for comment.
He had tweeted at the time of Terra's collapse, in early May: "I understand the last 72 hours have been extremely tough on all of you — know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this".
But on Saturday, he attempted to resuscitate the Terra ecosystem by launching a new blockchain (Terra 2.0) and a new cryptocurrency (Luna 2.0).
The new version of Luna appears to be suffering a similar fate. Its value plunged by more than 70 per cent within hours of trading.
Mr Kwon has also been caught up in other controversies, including being directed by South Korea's National Tax Service to pay 100 billion won (roughly $US78 million) in taxes and is facing lawsuits from burnt investors.
Conor Bronsdon's is one of those, although he is not thinking of litigation.
His $US400,000 investment was wiped out when Terra/Luna crashed.
"It was the majority of my savings," said the 30-year-old investor, based in Seattle.
Crypto has been particularly popular with millennials across the globe — more than one quarter of Australian investors aged 18 to 34 have at least 10 per cent of their portfolios invested in cryptocurrency, according to eToro data.
Despite the personal loss, Mr Bronsdon is still an advocate of decentralised transactions.
He said, with the benefit of hindsight, he would not have put so much money into Terra and Luna.
"I saw it as a safer investment than it actually was — I didn't expect it to go to zero that quickly."
Henrik Andersson is the chief investment officer and co-founder of Apollo Capital.
He said his firm did have exposure to Terra and Luna and lost out because of it but said that won't stop them investing in crypto.
"It was not a catastrophic loss for us," he told ABC News.
The firm has been focusing its investments solely in crypto space for past 4.5 years, and he has been personally investing for almost a decade.
"Look, it's very risky – there's very high volatility, and all investors need to understand the risks.
"It's hard to find another asset class that's generated higher returns over the past few years and that's set to continue."
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However, other big investors disagree cryptocurrencies give higher returns – relative to the risk — and are steering away from crypto.
PGIM, a global $US1.5 trillion asset manager, recently released a report calling cryptocurrency "portfolio Kryptonite".
It says about 16 million Australian superannuation accounts could be exposed to cryptocurrency investments if institutional investors adopt it.
Its chief investment officer Taimur Hyat argued that crypto is not a quite currency and that there is little evidence that cryptocurrencies deliver diversification compared with mainstream financial assets.
He noted that with cryptocurrency like bitcoin "you get the same risk-adjusted returns as other asset classes, but you have far more volatility".
Mr Hyat said it does not act as effective hedge against fluctuation from factors like COVID.
"We asked, do they [peoples' investments in cryptocurrencies] absorb shocks over time? Crypto does not achieve that."
Mr Hyat said there is now the risk that increased regulation could see peoples' investments further tank as "there's uncertainty about what the regulations will be".
Aside from the investment fundamentals, there's also questions about the lack of consumer protections when investments fail.
Mr Veyret, from Choice, wants to see the same rules that apply to stock markets, apply to digital assets.
"Right now, conduct such as market manipulation, which is banned and Australian stock markets are actively promoted on cryptocurrency exchanges," he said.
The evidence now shows that stablecoins such as TerraUSD might not actually be that safe, he said.
"It's really concerning that these exchanges are advertising… terms like safe and also really high yield.
"Businesses and exchanges have an obligation to ensure that they're not engaging in misleading and deceptive conduct."
Consumer Action Law Centre (CALC) chief executive Gerard Brody is calling for new laws to be introduced, requiring crypto platforms to be obliged to detect, prevent and reimburse people from scams.
"We regularly hear from callers to our advice lines who have lost astounding sums of money — often their entire life savings — to scams occurring on crypto platforms," he said.
"The reality is that these platforms are a conduit for organised criminals and money launderers."
CALC is also advocating for restrictions on advertising and marketing of crypto to the general public, in its submission to Treasury's review of the sector.
"Crypto is intentionally complex and should not be advertised and marketed to the general public — the use of celebrity endorsement and association with sports teams is particularly worrying," Mr Brody said.
US Treasury Secretary Janet Yellen has stated that stablecoins are anything but stable, while flagging regulation of the wider digital assets market.
"Stablecoins raise policy concerns, including those related to illicit finance, user protection, and systemic risk," Dr Yellen said.
"And, they are currently subject to inconsistent and fragmented oversight," she said, adding that the broader ecosystem should governed in order to allow "responsible innovation".
From a local perspective, Australia's new Labor could impose tougher regulation. In the lead up to the election Labor's Stephen Jones had said that would consider crypto regulation as part of a broader overhaul of the digital payments system.
If that happens, corporate watchdog ASIC would be responsible for overseeing changes.
A spokesman for ASIC said the regulator does not currently regulate crypto assets unless they are legally considered as financial products, "and it is not always clear whether a particular crypto-asset product is within our jurisdiction".
"This means you may not be protected if a platform fails or is hacked," the ASIC spokesman said.
He said in the meantime, ASIC supervises products traded on the stock exchange, such as the recent ETFs with crypto as an underlying asset.
ASIC also investigates conduct breaches such as misleading or deceptive behaviour, where they involve crypto-assets that are financial products.
Joni Pirovich, a lawyer specialising in blockchain and digital assets, said crypto tokens are being used to experiment how to do financial transactions better, cheaper and faster.
"There are more than 10,000 of these tokens that people can purchase and trade, which is far beyond the current resources of any regulator to supervise meaningfully," she said.
"But there's a desire from policymakers around the world to make sure crypto tokens are brought into a supervised net."
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That policy conversation has been happening for the past six years, but the collapse of Terra (which trades under the code "UST") and Luna has people refocused on it.
"The average person had invested about $50,000 in UST and that investment has shrunk to nil," she said.
"There's new calls for consumer protections, but uncertainty about the best approach: whether mums and dads should maintain choice to access these risky tokens or whether to make the issuers responsible for preventing investment from mums and dads."
But the issuer is often not linked to one country. There is often a global team of people involved in coming up with the token, its features and what it can do.
She said the other option is to have new law, enforced by a regulator like ASIC, that requires an issuer to have controls that cap mum and dad investor crypto deposits to no more than, say, $5,000.
But she says caps and the ability to increase or decrease caps, are best left to the market, not law, to decide and compete on.
And a final option, which she does not recommend, is to ban these products for retail investors.
"You can't eliminate risks ever. Being informed of the risks and being educated is what supports choice and a growing economy."
Meanwhile, US lawyer Moe Vela believes crypto needs to be regulated but urged the current US administration to not fall into the trap of a regulatory environment that will stifle growth under the guise of protecting consumers.
Mr Vela was director of administration for US President Barack Obama, where he worked closely with Joe Biden.
He also worked with former Vice-President Al Gore in the Clinton White House, and is a director at Unicorn Hunters, the company building a cryptocurrency called Unicoin.
"Regulation can be healthy if written in the spirit of fostering innovation and creating an inviting environment to new and existing investors," he said.
"I am optimistic that the regulations that are inevitably forthcoming will be of a nature that will bring more confidence and security to the industry and thus spur more investment."
Tony Richards was head of payments at the Reserve Bank for 10 years.
He said too many people are speculating on digital currencies, unaware of the risk that its value "can fall sharply or even to zero".
He warned that anyone buying cryptocurrency should be mindful that even bellwether cryptocurrencies like bitcoin are not yet considered by corporate watchdog ASIC to be a financial product, meaning it's not regulated under the Corporations Act.
While cryptocurrency millionaires allegedly abound, the real future for digital currencies looks far more conventional and state-controlled.
"Bitcoin only gets its value from the hope that someone else tomorrow will give you value for it," Dr Richards said.
"It's a thing that people can trade they can buy and sell between each other, but it's, it's not a financial product."
But he also noted that cryptocurrencies, like any other goods or services in the economy, could be subject to Australian Consumer Law protections.
He said the consensus from central banks and others in the international organisations like the International Monetary Fund (IMF) or the Bank of International Settlements (BIS) are that the links between the cryptocurrency universe and the traditional financial sector are weak.
"You could have significant further falls in in cryptocurrency prices without having major effects on the traditional financial system… on financial stability, but obviously that could change.
He said there may be a world where digital currencies, distributed ledger technology and smart contracts are a major part of financial system, but that "cryptocurrencies might be very much a sideshow".
In early April, several weeks before Terra (UST) collapsed, the cryptocurrency exchange Binance released an online advertisement claiming that stablecoin was a "safe" investment.
Binance also promoted it as a "safe and happy" opportunity to earn a very high return — up to 19.63 per cent.
When asked about the ad, Binance Australia's CEO, Leigh Travers, said: "It's not the language that I think we'd use again if that advertisement were to be considered by the marketing team".
Binance is also warning its customers in real time trade that "the price of a token is subject to high volatility" and that "Binance will not be held responsible for any trading losses".
Like many others in the industry, Mr Travers welcomes increased scrutiny in the crypto industry.
By improving the standards and better protecting consumers, crypto exchanges can get access to things like banking and financial services, including insurance, he said.
He explained that Binance currently has a pool of more than $1 billion in capital to protect users in the event of exchange malfunction. However, it is made up of bitcoin and other cryptocurrencies, as opposed to actual cash.
While he noted the industry may have got a bad reputation following last month's crash, he did not believe there was widespread market manipulation.
"If there happened to be excessive manipulation on one platform, that's simply… smaller exchanges that don't have the same liquidity don't have the same consumer protections," Mr Travers said.
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But he said the sector also had the potential to drive growth.
"There is true value here. There could be a major industry with… tens of thousands or potentially hundreds of thousands of jobs — high paying jobs in an exciting industry.
"So let's work together and make sure that Australia has an opportunity to compete on a global scale here."
Meanwhile, Mr Bronsdon believes there is a need to protect individuals who invest in crypto – having lost $US400,000 when Terra and Luna collapsed.
But he said that "we want to be careful about how those regulations are put into place".
"We don't want to stifle the innovation that's happening, the space and some of the incredible things that are being built, but at the same time normal people need to be protected.
"When an event like this happens, it is the kind of scale of the Enron crash or Bear Stearns (collapse that led to the global financial crisis).
"It has affected hundreds of thousands, if not millions, of people worldwide. There are opportunities for protections."
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